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Sir,
Just to clarify, if contracts are entered into for the purpose of receipt, delivery of a non financial item to meet operating requirements, are they are not considered financial instruments? does this include derivatives?
What about hedging instruments? since they hedge firm commitments which are for operating requirements.
Thank you.
Hi
Yes, if we enter into a commitment to purchase a specific quantity of a non-financial asset then it is a normal trading contract and not a financial instrument. We are receiving a physical asset and not a financial asset.
With derivatives there is a difference because with a derivative we do not take delivery of the physical asset, we merely exchange cash on the basis of the change in value of the derivative. It will therefore be treated as a financial instrument.
Hedging is effectively the combination of the above and has its separate rules. We will recognise the gain/loss on the derivative in OCI until we receive the goods and then recycle the gains.
Hope that helps, it’s a very tricky topic.
Thanks
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