Contracts intended to result in the physical delivery of a
commodity do not come within the FRS13 definition of derivative
financial instrument. This is explained in an example at
CFM13084a.
But cash-settled commodity contracts are very similar to the
sorts of contract which are financial instruments within the terms
of FRS13, and they are used by companies to hedge or speculate in
very similar ways. For this reason, FRS13 provides that the
disclosure requirements for financial instruments also (in most
cases) apply to cash-settled commodity contracts.
Similarly, contracts to buy or sell goods, which can only be
settled by physical delivery of the goods, are outside the scope of
FRS 26. If, however, the contract is capable of being settled in
cash, it becomes necessary to know whether or not the company holds
it for the purpose of obtaining or selling goods in accordance with
its expected business requirements.
For tax purposes, it is not always easy to ascertain whether
a contract was intended to result in delivery or not. So there is a
special rule at
FA02/SCH26/PARA3(2)(a) which ensures
that all commodity contracts pass the accounting test. This applies
whether they are cash settled or not.
This will mean that some commercial contracts will come
within the derivative contract regime. Normally, this will have no
effect on the company's taxable profits and companies will not be
expected to identify such contracts separately in their
computations.
See example at
CFM13084b
There will be a very few cases in which it does make a
difference whether a commodity contract does come within the
derivative contract regime or not. An example would be if a company
entered into such a contract for a purpose which was not among the
business or other commercial purposes of the company, so that the
unallowable purposes provisions in
FA02/SCH26/PARA23 (see
CFM13610+) potentially applied. Para 23
would only be relevant if the contract were a derivative
contract.
