excluding amounts collected on behalf of third parties (e.g. some sales taxes). When
determining the transaction price, an entity should consider the effects of all of the
following:
• variable consideration (including any related constraint);
• a significant financing component (i.e. the time value of money);
• non-cash consideration; and
• consideration payable to a customer.
In many cases, the transaction price is readily determinable because the entity will
receive payment at or near the same time as it transfers the promised good or service
and the price is fixed for the minimum committed purchases. However, determining the
transaction price may be more challenging when it is variable in amount, when payment
is received at a time that is different from when the entity provides the goods or services
and the effect of the time value of money is significant to the contract, or when payment
is in a form other than cash. See Chapter 28 at 6 for more information.
For a fixed price contract, this step will be relatively straightforward. For variable price
contracts, determining the transaction price may appear to be significantly more complex
than for a fixed price contract. Many commodity sales contracts contain market-based or
index-based pricing terms that create variable consideration. After separating out any
parts of the transaction price that are within the scope of another standard (e.g. IFRS 9 –
see 12.8 above), an entity will need determine whether it should partially or fully constrain
the portion of the variable transaction price. Chapter 28 at 6.2 discusses variable
consideration and, in particular, the requirements relating to the constraint.
12.15.4 Allocate the transaction price
The next step is to allocate the transaction price to the performance obligations,
generally in proportion to their stand-alone selling prices (i.e. on a relative stand-alone
selling price basis), with two exceptions relating to the allocation of variable
consideration and discounts. See Chapter 28 at 7 for detail. With commodity-based
sales contracts, there are a number of things to consider depending on whether the
transaction price is variable (or contains a variable component), fixed and/or whether
there is a discount. Some factors to consider with variable and fixed consideration are
discussed below, while the allocation of a discount is discussed in Chapter 28 at 7.4.
12.15.4.A Variable
consideration
If certain criteria are met, an entity will need to allocate variable consideration (e.g.
the market- or index-based price) to one or more, but not all, performance obligations
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(i.e. the distinct commodities transferred in that period) or distinct goods or services
in a series (where relevant), instead of using the relative stand-alone selling price
allocation approach to allocate variable consideration proportionately to all
performance obligations. See Chapter 28 at 7.3 for detail on these criteria.
12.15.4.B Fixed
consideration
Entities that have fixed-price commodity-based sales contracts that call for deliveries
over multiple periods need to determine the stand-alone selling price of the
performance obligations to allocate the transaction price if they do not qualify to be
combined into a single performance obligation as a series of distinct goods (discussed
further at 12.15.2 above). IFRS 15 states that the stand-alone selling price is the price at
which an entity would sell a promised good or service separately to a customer.
[IFRS 15 Appendix A]. This is best evidenced by the observable price of a good or service
when the entity sells it separately in similar circumstances and to similar customers. In
other cases, it must be estimated. Estimating the stand-alone selling price may require
judgement in long-term fixed-price commodity-based sales contracts, particularly
when forward prices are available for the commodity being sold in a location with an
active market.
If stand-alone selling prices are not directly observable, entities should consider all
information (including market conditions, entity-specific factors and information about
the customer or class of customer) that is reasonably available to determine the stand-
alone selling price for each performance obligation. An entity may consider a number of
factors in making this estimate, such as the forward curve, spot prices, expectations of
market supply and demand shifts that are not represented in the forward curve or spot
prices and expected transportation and storage capacity constraints that lead to premiums
or discounts. Entities should maximise the use of observable inputs and apply similar
estimation methods consistently in similar circumstances. The standard sets out a number
of different approaches for doing this. See Chapter 28 at 7 for further discussion.
12.15.5 Recognise
revenue
Finally, an entity will recognise revenue once each performance obligation is satisfied
which will occur when control of the good transfers to the customer. As discussed earlier,
for long-term commodity-based sales arrangement, the performance obligations are likely
to be satisfied at a point in time. See Chapter 28 at 8 for more information on how to
determine when a performance obligation is satisfied. The precise timing of when control
transfers to a customer may be impacted by the shipping terms associated with each
contract. See 12.12 above and Chapter 28 at 8.3.1 for further discussion on shipping.
12.16 Take-or-pay contracts
A take-or-pay contract is a specific type of long-term commodity-based sales
agreement between a customer and a supplier in which the pricing terms are set for a
specified minimum quantity of a particular good or service. The customer must pay the
minimum amount as per the contract, even if it does not take the volumes. There may
also be options for additional volumes in excess of the minimum.
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We discuss some of the broader accounting considerations associated with these
contracts further at 17.2 below. When applying IFRS 15, in addition to the issues outlined
at 12.15 above, the matters outlined below may also need to be considered.
12.16.1 Volumes paid for, but not taken
A feature unique to take-or-pay contracts is the terms relating to payments made for
volumes not taken, as explained further at 17.2.1 below. The requirements of IFRS 15
may result in different accounting considerations and possibly different conclusions
depending on the specific facts and circumstances of each arrangement.
12.16.1.A
Payments cannot be applied to future volumes
If payments received for unused volumes cannot be applied to future volumes, the seller
has no obligation to deliver the unused volumes in the future. Such amounts can
generally only be recognised as revenue once the seller’s obligations no longer exist
(i.e. once the customer’s right to volumes has expired unused).
For most take-or-pay contracts, such an assessment may only be possible at the end of
a pre-defined period (e.g. the end of each contract year). This is because the customer’s
rights have technically
not expired and the entity is still obliged to deliver volumes if
the customer requests them, until the end of the stated period. This treatment is
consistent with current practice.
The standard does, however, consider whether it may be possible to recognise revenue
in relation to a customer’s unexercised rights earlier through the requirements relating
to breakage. This is discussed in more detail at 12.16.2 below.
12.16.1.B
Payments can be applied to future volumes
If payments received for unused volumes can be applied to future volumes, the seller
has received consideration in advance for some future unsatisfied performance
obligations (i.e. the delivery of the unused volumes at some point in the future). This
amount represents a contract liability.
In this situation, an entity will need to determine how such future volumes can be taken.
That is, whether the timing of the future transfer of those volumes is at the discretion of
the customer or is determined by the entity itself. This determination will be important
as it may require an assessment of the time value of money (i.e. the existence of a
significant financing component). See Chapter 28 at 6.5 for further discussion.
It will also be necessary for an entity to understand whether the customer is likely to
take its unused volumes as this may require an assessment of the requirements relating
to unexercised customer rights or breakage (see 12.16.2 below for further information).
This could impact the amount and timing of revenue recognised.
Such determinations will need to be made in light of the contract terms and an
assessment of the expected customer behaviours. For example, such an assessment may
involve considering whether the make-up volumes:
• will be the first volumes taken at the start of the following period;
• can only be taken after the minimum volumes have been satisfied in the following
periods; or
• can only be taken after a certain amount of time or at the end of the contract period.
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12.16.2 Breakage (customers’ unexercised rights)
The standard requires that when an entity receives consideration that is attributable to
a customer’s unexercised rights, the entity is to recognise a contract liability equal to the
amount prepaid by the customer (because the entity has not yet satisfied the
performance obligations to which the payment relates). However, IFRS 15 discusses the
situation where, in certain industries, customers may pay for goods or services in
advance, but may not ultimately exercise all of their rights to these goods or services –
either because they choose not to or are unable to. IFRS 15 refers to these unexercised
rights as ‘breakage’. [IFRS 15.B44-47].
IFRS 15 states that when an entity expects to be entitled to a breakage amount, the
expected breakage will be recognised as revenue in proportion to the pattern of rights
exercised by the customer. Otherwise, breakage amounts will only be recognised when
the likelihood of the customer exercising its right becomes remote. See Chapter 28
at 8.10 for more information.
This may apply to take-or-pay contracts, for which payments are received in relation
to make-up volumes and the customer’s rights remain unexercised. Such breakage
provisions may be applicable if:
• a customer is unable to use the make-up volumes in other areas of its own
operations;
• a customer is unable to store the make-up volumes and use them after the take-
or-pay contract has expired;
• a customer is unable to take delivery of the make-up volumes and sell them into
the market; or
• there are limitations (physical or contractual) that prevent the customer from
taking all of the make-up volumes.
For take-or-pay contracts, this may mean that an entity may be able to recognise
revenue in relation to breakage amounts in an earlier period, provided it can
demonstrate it is not required to constrain its estimate of breakage. This could
potentially occur in several ways:
• At contract inception, the mining entity or oil and gas entity may be able to reliably
estimate the amount of breakage and would include that amount in the transaction
price and allocate that to expected actual usage.
• If the entity cannot estimate an amount of breakage, it will recognise the revenue
associated with those unexercised rights when it becomes remote that they will be
exercised. This could occur during a make-up period after the initial term of the
contract or when the deficiency make-up period expires outright (which would be
consistent with current accounting).
It is also possible that, given the nature of these arrangements and the inherent
uncertainty in being able to predict a customer’s behaviour, it may be difficult to satisfy
the requirements relating to constraint because the entity’s experience may not be
predictive of the outcome at this level of certainty (i.e. highly probable).
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13 FINANCIAL
INSTRUMENTS
13.1 Normal purchase and sales exemption
Contracts to buy or sell non-financial items generally do not meet the definition of a
financial instrument because the contractual right of one party to receive a non-
financial asset or service and the corresponding obligation of the other party do not
establish a present right or obligation of either party to receive, deliver or exchange a
financial asset. For example, contracts that provide for settlement only by the receipt
or delivery of non-financial items (e.g. forward purchase of oil or a forward purchase of
copper) are not financial instruments. However, some of these contracts are traded in a
standardised form on organised markets in the same way as derivative financial
instruments. The parties buying and selling the contract are, in effect, trading the
underlying commodity. The ability to buy or sell a commodity contract for cash does
not alter the characteristics of the contract and make it into a financial instrument.
Nevertheless, some contracts to buy or sell non-financial items that can be settled net
or by exchanging financial instruments, or in which the non-financial item is readily
convertible to cash, are within the scope of the IAS 32 and IFRS 9 as if they were
financial instruments. [IAS 32.8, IAS 32.AG20].
IAS 32 and IFRS 9 should generally be applied to those contracts to buy or sell a non-
financial item that can be settled net as if the contracts were financial instruments,
whether this be in cash, another financial instrument, or by exchanging financial
instruments, unless the contracts were entered into and continue to be held for the
purpose of the receipt or delivery of a non-financial item in accordance with the entity’s
expected purchase, sale or usage requirements. [IAS 32.8, IFRS 9.2.4].
There are various ways in which a contract to buy or sell a non-financial item can be
settled net, including:
(a) the terms of the contract permit either party to settle it net;
(b) the ability to settle the contract net is not explicit in its terms, but the entity has a
practice of settling similar contracts net (whethe
r with the counterparty, by entering
into offsetting contracts or by selling the contract before its exercise or lapse);
(c) for similar contracts, the entity has a practice of taking delivery of the underlying
and selling it within a short period after delivery for the purpose of generating a
profit from short-term fluctuations in price or dealer’s margin; and
(d) the non-financial item that is the subject of the contract is readily convertible to
cash, e.g. precious metals or base metals quoted on the London Metal Exchange
are considered to be readily convertible to cash. [IAS 32.9, IFRS 9.2.6].
There is no further guidance in IFRS 9 explaining what is meant by ‘readily convertible
to cash’. Typically, a non-financial item would be considered readily convertible to cash
if it consists of largely fungible units and quoted spot prices are available in an active
market that can absorb the quantity held by the entity without significantly affecting the
price. Further discussion on the net settlement criteria can be found in Chapter 41 at 4.1.
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Commodity-based contracts that are excluded from IAS 32 and IFRS 9 are contracts
that were entered into and continue to be held for the purpose of the receipt or delivery
of a non-financial item in accordance with the entity’s expected purchase, sale or usage
requirements. Contracts that fall within this exemption, which is known as the ‘normal
purchase or sale exemption’, ‘executory contract exemption’ or ‘own-use exemption’,
are accounted for as executory contracts. An entity recognises such contracts in its
statement of financial position only when one of the parties meets its obligation under
the contract to deliver either cash or a non-financial asset. [CF 4.46].
The IASB views the practice of settling net or taking delivery of the underlying and
selling it within a short period after delivery as an indication that the contracts are not
normal purchases or sales. Therefore, contracts to which (b) or (c) apply cannot be
subject to the normal purchase or sale exception. Other contracts that can be settled net
are evaluated to determine whether this exemption can actually apply. [IAS 32.9,
IFRS 9.2.6, BCZ2.18].
A written option to buy or sell a non-financial item that can be settled net in cash or
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 657
