In June 2024, the IFRS Interpretations Committee (the Committee) published a tentative agenda decision regarding how an entity presents cash payments and receipts related to variation margin calls on contracts to purchase or sell commodities at a predetermined price at a specified time in the future, within the statement of cash flows.
Our Financial Instruments team delves deeper into the tentative agenda decision and its implications below.
Commodity contracts are entered into for various purposes, such as receiving commodities in accordance with expected usage requirements, hedging against price fluctuations, and trading for profit. When used to receive commodities in accordance with expected usage, contracts are settled physically and accounted for under the 'own-use' exemption in IFRS 9.
When used for hedging, contracts are settled net in cash and treated as hedging instruments in a cash flow hedging relationship. For trading purposes, contracts are classified as financial assets or liabilities and subsequently measured at fair value through profit or loss according to IFRS 9.
Commodity contracts typically have a maturity of up to three years and can be centrally cleared, where each counterparty assigns the contract to a central entity for settlement.
Additionally, they can be collateralised-to-market, where counterparties exchange daily payments based on the contract's fair value fluctuations, acting as cash collateral rather than partial settlement. These contracts can be settled either physically or net in cash. At settlement, the cumulative collateral from variation margin call payments is used for partial settlement of the contract.
If settled net in cash, the final payment reflects the difference between the fair value at the last variation margin call and the fair value at settlement.
The focus of the Committee’s agenda was to address the classification of cash flows related to variation margin calls, not on the classification or measurement of the contract or variation margin itself, nor their presentation in financial statements.
Two alternative views were identified:
The Committee's responses indicated that the matter was not widespread, leading to the conclusion that it did not meet the criteria for adding a standard-setting project to the work plan. Specifically, it did not satisfy the 'widespread and material' criterion set out in their ‘Due Process Handbook’, which sets out the principles that apply to the IASB and IFRS Interpretations Committee, requiring the matter to have a significant and expected material effect on those affected.
At its November 2024 meeting, the Committee decided not to add a standard-setting project to the work plan concerning the presentation of cash payments and receipts related to variation margin calls on contracts to purchase or sell commodities at a predetermined price at a specified time in the future, within the statement of cash flows.
The European Securities and Markets Authority (ESMA) agreed with the Committee's decision not to add a standard-setting project to the work plan but disagreed with the exclusion of explanatory material. ESMA emphasised the significance of responses to the information request, noting that most respondents observed such contracts. They also highlighted that entities generally do not provide detailed disclosures on these contracts.
ESMA suggested that the Committee should clarify how entities classify cash flows related to variation margin calls on bilateral contracts with different maturities and consider whether specific factors could impact the classification of these cash flows.
The Committee emphasised its role in responding to specific application questions and not extending to other fact patterns or providing further explanatory material when the ‘widespread and material’ criterion is not met.
KPMG’s Financial Instruments (KFI) team consists of forty people who provide expert and business-orientated independent valuation services, tailored to the unique requirements of our clients. The KFI team can assist in interpreting the new guidelines and ensuring your financial statements are compliant with the updated standards.
This includes the accurate presentation of cash flows in the statement of cash flows as per IAS 7, while also providing specialised knowledge and insights into the classification and measurement of financial instruments to ensure compliance with IFRS 9.
The KFI team is readily available and eager to engage with you to identify the right solution for your business. Reach out to our team below to discuss this further; we look forward to hearing from you.
