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

Narmada Metals Ltd enters into a contract to buy 500 tonnes of copper from a trader at a fixed price for use in its own factory. The contract does not permit net settlement. However, for similar earlier contracts, Narmada Metals has regularly taken delivery of copper and sold it within days to earn profit from short-term price movements. How should the contract be treated under Ind AS 109?

The contract is within Ind AS 109 scope. Narmada Metals has a practice, on similar contracts, of taking delivery and selling shortly afterwards to profit from short-term price changes, so the contract is deemed not held for expected usage requirements, even without an explicit net settlement clause.

  1. AWithin scope, because the entity has a practice of taking delivery and selling shortly after for short-term profit, so it is not for expected usage requirementsCorrect
  2. BOutside scope, because the contract has no explicit net settlement term
  3. COutside scope, because the copper will be physically delivered
  4. DOutside scope, because the entity states that it intends to use the copper in its factory

Explanation

Net settlement can arise where the entity has a practice, for similar contracts, of taking delivery and selling within a short period to generate profit from short-term price fluctuations or dealer's margin. Such a contract is treated as not entered into for expected purchase, sale or usage requirements and is within scope. The absence of an explicit net settlement clause does not prevent this.

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