Example IFRS 9 – Applying the ‘own use’ scope exemption

[IFRS 9.2 Scope]

The case:

Entity XYZ enters in to a contract to buy 100 tonnes of copper for CU200/tonne. The Coppercontract permits XYZ to take physical delivery of the copper at the end of 12 months or to settle net in cash, based on the difference between the spot price in 12 months’ time and CU200/tonne. Entity XYZ has a practice of settling net in cash (i.e. if the copper price at the end of year 1 is CU250/tonne, then Entity XYZ will receive CU50/tonne).

Question: Does the ‘own use’ scope exemption apply?

Analysis: Example IFRS 9 – Applying the ‘own use’ scope exemption

The entity has a practice of settling the contract net therefore the ‘own use’ scope exemption does not apply. Consequently, the contract is within the scope of IFRS 9. The contract contains a derivative because:

  • Fair value of the contract changes in response to changes in the copper price;
  • No initial net investment (no initial cash paid upfront); and
  • Settled at a future date – in 12 months’ time.

Conclusion: Entity XYZ applies derivative accounting for this contract and accounts for the contract at fair value through profit or loss.

Two changes, Entity XYZ:

  • Is a company that manufactures copper wire; and
  • Has a practice of taking delivery of the copper and using it to manufacture copper wires.

Question: Does the ‘own use’ scope exemption apply?

Analysis: Example IFRS 9 – Applying the ‘own use’ scope exemption

The ‘own use’ scope exemption applies because:

  • Entity XYZ is an entity that manufactures copper wires and has a practice of taking delivery of copper and using it for manufacture, so the contract is for its own use requirements;
  • Entity XYZ does not have a practice of settling net.

Conclusion: Therefore the contract is not within the scope of IFRS 9 and derivative accounting is not applied.

Three changes, Entity XYZ:

  • Usually has sufficient stock of copper to last 3 or 4 months for manufacturing copper wires;
  • Has a practice of settling net when the contract is ‘in the money’ i.e. if the spot copper price is more than the fixed price of CU200 e.g. CU250, it will settle the contract net and receive CU5,000 [(CU250-CU200)X100]; and
  • Has a practice of taking delivery of the copper at CU200/tonne when the contract is out of the money (i.e. if the spot copper price is less than CU200), because the profit margin on the sale of copper wire more than covers the cost of copper.

Question: Does the ‘own use’ scope exemption apply?

Analysis: Example IFRS 9 – Applying the ‘own use’ scope exemption

The ‘own use’ scope exemption does not apply because although Entity XYZ is an entity that uses copper to manufacture wires, Entity XYZ has a practice of settling net when the contract is in the money.

Conclusion: Therefore the contract is within the scope of IFRS 9; and Entity XYZ accounts for the contract as a derivative.

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