Commodity purchases, hedging and own use

How does the own use exemption work?

IFRS 9 applies to contracts to buy or sell non-financial items, such as copper or gas, that can be settled net in cash or another financial instrument, as if they were financial instruments. It excludes them if they were entered into and continue to be held for the receipt or delivery of the item in line with the company's expected purchase, sale or usage requirements. A manufacturer's fixed-price contract to buy the copper it will use in production next quarter, delivered to its plant, is the typical own use contract: it is an executory contract, not recognised until delivery, when the copper goes into inventory at the contract price.

What can take a contract out of own use?

• A practice of settling similar contracts net in cash, or of closing them out with offsetting contracts.
• A practice of taking delivery and selling shortly afterwards to profit from price changes or a dealer's margin.
• Buying more than the business expects to use.
• Written options to buy or sell the item, which cannot be own use contracts.

Once a practice like this exists for a type of contract, other similar contracts may no longer qualify either, so procurement and trading activities are often kept in separate books with documented purposes.

An own use exemption and commodity hedging example

A cable manufacturer will need 1,000 tonnes of copper in six months and buys it from its usual supplier at the market price on delivery. To fix the cost, it buys 1,000 tonnes of exchange copper futures at 8,000 a tonne and designates them as a cash flow hedge of the forecast purchase. On delivery, copper costs 8,400 a tonne.

The futures gain of 400,000 is effective, so it is held in the cash flow hedge reserve until the copper is bought. IFRS 9 then requires it to be removed from equity and included in the cost of the copper inventory, a basis adjustment, so the copper is carried at 8,000,000: the price the manufacturer locked in. Without hedge accounting, the 400,000 gain would hit profit when the futures were revalued, and the higher copper cost would hit cost of sales months later when the cables were sold.

Can own use contracts be measured at fair value?

Yes, if it eliminates or significantly reduces an accounting mismatch. A manufacturer that hedges its fixed-price sales contracts with futures may designate its own use purchase contracts at fair value through profit or loss at inception, so gains and losses on both sides offset in profit without formal hedge accounting.

Can a manufacturer hedge just part of a price?

Yes. IFRS 9 allows a risk component to be hedged if it is separately identifiable and reliably measurable, such as the copper element in a supplier's price formula that adds a fixed processing fee to the exchange price. This makes hedge accounting possible for many supply contracts that IAS 39 could not accommodate. Airlines hedge the crude oil component of jet fuel in the same way; see airline fuel hedging.

What about renewable power purchase agreements?

Amendments to IFRS 9 effective for periods beginning on or after 1 January 2026 change how the own use requirements apply to contracts for electricity that depends on nature, such as wind or solar, and allow hedge accounting for virtual power purchase agreements, because manufacturers often cannot use all the power when it is generated and must sell the surplus. See power purchase agreements.

How does US GAAP differ?

US GAAP has a similar normal purchases and normal sales scope exception in ASC 815, but it is an election that must be documented for each contract, whereas the IFRS own use exemption applies automatically when the conditions are met. See IFRS 9 hedge accounting, hedge accounting for banks, oil price hedging, take-or-pay contracts and manufacturing accounting.

This guide is general information. It is not tax or legal advice for your situation.