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

Narmada Power Ltd, an electricity generator, enters into a contract to buy 5,000 tonnes of coal from a mine owner. The contract does not permit net settlement. However, for similar coal contracts, Narmada has a practice of taking delivery and selling the coal within a short period to earn profit from short-term price fluctuations. Which treatment is correct under Ind AS 109?

The contract is within Ind AS 109. Narmada's practice, for similar contracts, of taking delivery and selling shortly afterwards to profit from short-term price fluctuations means the contract is not entered into for expected usage requirements, so it is treated as capable of net settlement.

  1. AThe contract is outside Ind AS 109 because coal is a non-financial item and the contract does not allow net settlement
  2. BThe contract is outside Ind AS 109 as long as Narmada eventually takes physical delivery
  3. CThe contract is within Ind AS 109, because the practice of taking delivery and selling shortly after for short-term profit means it is not held for expected usage requirementsCorrect
  4. DThe contract is within Ind AS 109 only if the coal is not readily convertible to cash

Explanation

Para 2.6(c) treats a practice of taking delivery and selling within a short period to profit from short-term price changes as a way of net settlement. Such a contract is not for expected purchase, sale or usage requirements and is within scope. Option A fails because the absence of an explicit net settlement term is not decisive.

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