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

Mehta Agro Ltd regularly enters into contracts to buy cotton. For similar contracts, it has a practice of taking delivery and selling the cotton within a few days to profit from short-term price movements. The contracts do not explicitly allow net settlement. Which statement is correct for a new cotton purchase contract of this kind?

The contract is within the scope of Ind AS 109. Mehta's practice of taking delivery and selling shortly afterwards to earn profit from short-term price changes means the contract is not held for the entity's expected purchase, sale or usage requirements, even though net settlement is not written into the terms.

  1. AThe contract is within Ind AS 109 because the practice of taking delivery and quickly selling for short-term profit means it is not for expected purchase or usage requirementsCorrect
  2. BThe contract is outside Ind AS 109 because net settlement is not explicit in its terms
  3. CThe contract is outside Ind AS 109 because cotton is not readily convertible to cash
  4. DThe contract is within Ind AS 109 only if Mehta designates it at fair value through profit or loss

Explanation

Where, for similar contracts, an entity has a practice of taking delivery and selling within a short period to generate profit from short-term price fluctuations or dealer's margin, the contract is deemed not entered into for expected purchase, sale or usage requirements (paragraph 2.6(c)). It is therefore within scope. Option 2 is wrong because net settlement need not be explicit.

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