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CA Final · Financial Reporting · Financial Instruments: Scope and Definitions

Lakshmi Steels Ltd signs a contract to buy 500 tonnes of iron ore from a miner at a fixed price in three months. The contract has no net settlement clause. Lakshmi has, however, repeatedly sold similar contracts to other parties before delivery date and received or paid the price difference in cash. Lakshmi's plant needs the ore, but it often covers needs through spot purchases. How should the contract be treated for scope purposes?

The contract falls within Ind AS 109. Even though its terms do not allow net settlement, Lakshmi's practice of settling similar contracts net in cash means it is treated as not entered into for expected usage requirements, so the own-use exemption is lost.

  1. AWithin Ind AS 109, because the practice of settling similar contracts net in cash means it is not held for expected usage requirementsCorrect
  2. BOutside Ind AS 109, because the contract terms do not permit net settlement
  3. COutside Ind AS 109, because iron ore is a non-financial item and the plant needs it
  4. DWithin Ind AS 109 only if iron ore is not readily convertible to cash

Explanation

Para 2.6(b) says that where net settlement is not explicit but the entity has a practice of settling similar contracts net in cash, the contract is not for expected purchase, sale or usage requirements. Such a contract is within the scope of the Standard. The second option ignores this practice test.

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