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ACCA Strategic Professional · Strategic Business Reporting (International) · Financial instruments

Zeta Co holds a contract to buy 10,000 tonnes of copper in six months at a fixed price of $8,000 per tonne. Zeta does not intend to take delivery and has a history of settling similar contracts net in cash. At the reporting date the forward price for the remaining term is $8,300 per tonne (ignore discounting). How should Zeta account for the contract under IFRS 9?

The contract is a derivative at fair value through profit or loss, because Zeta's history of net settlement removes the own-use exemption. The gain is 10,000 tonnes x $300 = $3,000,000, recognised in profit or loss as no hedge accounting applies.

  1. AAs an executory contract, with no entry until delivery
  2. BAs a derivative at fair value through profit or loss, recognising a gain of $3,000,000Correct
  3. CAs a derivative at fair value, with the gain of $3,000,000 recognised in other comprehensive income
  4. DAs a derivative at amortised cost, with the gain recognised on settlement

Explanation

Because Zeta has a practice of net settlement, the own-use exemption is unavailable and the contract falls within IFRS 9. Derivatives are measured at fair value through profit or loss unless designated in a hedge. Gain = 10,000 x ($8,300 - $8,000) = $3,000,000. Treating it as executory ignores the net-settlement history.

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