IAS 39 — Unit of account for forward contracts with volumetric optionality

Date recorded:

The IFRIC considered a request to add to its agenda a project to clarify unit of account for forward contracts with volumetric optionality. The IFRIC discussed the forward contracts to buy and sell a fixed quantity of a specified commodity at a fixed price over the term of a contract that grants the buyer the flexibility to purchase quantities of the same commodity also at this fixed price.

The IFRIC was told that such contracts are common for business reasons in a variety of industries. From the perspective of the selling entity these contracts could be seen as a forward contract and a written option. The issue discussed was whether the forward and the written option should be analysed as two separate contracts for accounting purposes even though they are in a single contract and how this interacted with the 'own use' scope exception from IAS 39 in IAS 39.5.

The IFRIC discussed four accounting alternatives:

  1. a single contract outside of scope of IAS 39
  2. a single contract in of scope of IAS 39 (the whole contract accounted in its entirety as a derivative at fair value through profit or loss)
  3. two units of account, the own use exception applied to the forward contracts and written option component accounted as a derivative
  4. accounting policy choice between Alternative 2 and Alternative 3

The IFRIC noted that any of these four alternatives might be a reasonable interpretation of IAS 39. For this reason, some IFRIC members concluded that the issue should be referred to the Board for consideration.

Nonetheless, a majority of the IFRIC members felt that more study is needed to understand how these requirements are applied in practice and directed the staff to investigate a variety of industries (not just utilities). Few members of IFRIC indicated that, from their experience, the full contract is treated as outside of IAS 39 (Alternative 1) as they are treated under the 'own use' exception (for instance, securing of capacity).

In addition, the Chairman noted that in the meantime, he would find out the plans of the Board regarding scope of IAS 39 in the context of its current fast-track project to replace IAS 39.

The IFRIC agreed to rediscuss this issue at its next meeting.

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