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

Sagar Agro Ltd regularly buys wheat under forward contracts and, as a practice, takes delivery and sells the wheat within days to earn profit from short-term price changes. It has now entered into a similar forward contract to buy wheat. Under Ind AS 109, how is this contract treated?

The contract is within Ind AS 109 because Sagar has a practice of taking delivery and selling the wheat shortly afterwards to profit from short-term price movements. Under paragraph 2.6(c) such a contract is treated as not for own use, so physical delivery does not remove it from scope.

  1. AOutside scope, because wheat is a non-financial item
  2. BOutside scope, because delivery of wheat is physically taken
  3. CWithin scope, because Sagar has a practice of taking delivery and selling within a short period to profit from price fluctuationsCorrect
  4. DWithin scope only if the contract is settled net in cash at maturity

Explanation

Paragraph 2.6(c) covers a practice, for similar contracts, of taking delivery of the underlying and selling it shortly after to generate profit from short-term price fluctuations or dealer's margin. A contract to which (c) applies is not entered into for expected purchase, sale or usage requirements, so it is within scope. Physical delivery therefore does not take it out of scope.

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