Take-or-pay contracts

Gas fields, LNG plants and pipelines cost billions, and lenders want certainty that someone will pay for the output. Take-or-pay clauses give it: the buyer carries the volume risk. For accountants, they raise questions on both sides of the contract: when is cash for undelivered gas revenue, and when is the buyer's commitment an asset, a liability, a lease or a derivative? This guide covers both sides with a three-year example.

By Hamza Fida, Chartered Accountant. Reviewed by Mirza Fahad Baig, Chartered Accountant. 4 minute read.

Short answer

Take-or-pay contracts oblige a buyer, typically of gas or LNG, to pay for a minimum quantity each year whether or not it takes delivery, often with a right to take the paid-for volumes later, known as make-up. Under IFRS 15, the seller recognises revenue when it delivers. A payment for volumes not taken is a contract liability while the buyer can still take them, and is recognised as revenue when the make-up gas is delivered or the right expires unused. The buyer records a prepayment if it expects to use the make-up right, and assesses whether the contract is for its own use, contains a lease or an embedded derivative, or has become onerous. In this guide's example, a buyer that takes 70 units of a 90-unit minimum pays US$ 450 million, of which the seller recognises 350 million as revenue and defers 100 million.

At a glance

Seller revenue
When gas is delivered
Paid but not taken
Contract liability
Make-up expires
Revenue, as breakage
Buyer
Prepayment if make-up will be used
Own use
Outside IFRS 9 if for own needs
Dedicated asset
May contain a lease
Take-or-pay contractsSeller revenue: When gas is delivered; Paid but not taken: Contract liability; Make-up expires: Revenue, as breakage; Buyer: Prepayment if make-up will be used; Own use: Outside IFRS 9 if for own needs; Dedicated asset: May contain a lease.KEY FACTS AT A GLANCETake-or-pay contractsSeller revenueWhen gas is deliveredPaid but not takenContract liabilityMake-up expiresRevenue, as breakageBuyerPrepayment if make-upwill be usedOwn useOutside IFRS 9 if for ownneedsDedicated assetMay contain a leaseTax BakersTake-or-pay contractsSeller revenue: When gas is delivered; Paid but not taken: Contract liability; Make-up expires: Revenue, as breakage; Buyer: Prepayment if make-up will be used; Own use: Outside IFRS 9 if for own needs; Dedicated asset: May contain a lease.KEY FACTS AT A GLANCETake-or-pay contractsSeller revenueWhen gas is deliveredPaid but not takenContract liabilityMake-up expiresRevenue, as breakageBuyerPrepayment if make-up will be usedOwn useOutside IFRS 9 if for own needsDedicated assetMay contain a leaseTax Bakers
Key facts at a glance, as set out in this guide.

How do take-or-pay contracts work?

A long-term sales agreement sets an annual contract quantity, say 100 units, and a take-or-pay level, say 90%. If the buyer takes less than 90 units, it still pays for 90. The payment for the shortfall usually buys a make-up right: in later years, once the buyer has taken that year's minimum, further volumes are drawn against the prepaid shortfall without further payment, until the right expires.

How does the seller account for take-or-pay contracts?

The seller's performance obligation is to deliver gas. A payment for volumes not delivered is consideration for gas the buyer can still demand, so it is a contract liability, not revenue. Revenue is recognised when the make-up gas is delivered. If some make-up rights are expected never to be used, the seller applies IFRS 15's breakage guidance: it recognises the expected breakage in proportion to the pattern of rights the buyer does exercise, if it can estimate it without a significant risk of reversal; otherwise when the chance of the buyer using the right becomes remote, at the latest when it expires.

Take-or-pay contracts: three years of a gas sale

The minimum is 90 units a year at US$ 5 million a unit, with make-up rights lasting to the end of year 3. The seller cannot estimate breakage reliably, so it recognises unused rights on expiry.

Year 1: from cash received to revenue (US$ million)Year 1: from cash received to revenue (US$ million)450Paid for90 units-100Make-up rightsdeferred350Revenue for70 units
Cash for undelivered gas waits in a contract liability.
US$ millionUnits takenPaidRevenueContract liability at year end
Year 170450350100
Year 29545047575
Year 390450525 (incl. 75 on expiry)0

In year 1 the buyer pays for 90 units but takes 70, so 100 million is deferred. In year 2 it takes 95 units: 90 paid for in the year and 5 drawn from the make-up balance, recognised as revenue from the liability. At the end of year 3 the remaining make-up rights expire unused and the balance becomes revenue. Over the three years, revenue equals the cash received.

How does the buyer account for the shortfall payment?

If the buyer expects to use the make-up right, the payment is a prepayment for future gas, an asset. If it does not, because its demand has fallen or the right will expire first, the payment is an expense. A buyer committed to taking more gas than it needs at prices above the market may also have an onerous contract under IAS 37, recognised as a provision for the unavoidable costs. See onerous contracts.

Is a take-or-pay contract a derivative?

A contract to buy or sell a commodity that can be settled net is within IFRS 9 as a derivative, unless it was entered into and continues to be held for the company's expected purchase, sale or usage requirements, the own use exemption. Most take-or-pay contracts for physical delivery to a buyer's own plants or customers meet it and are executory contracts. Selling unwanted volumes on to others regularly, or settling shortfalls in cash, can taint the exemption for similar contracts. See commodity hedging and own use.

Can the contract contain an embedded derivative?

Yes. Long-term gas and LNG prices are often linked to an index such as oil prices or an electricity price. If the pricing formula is not closely related to the gas itself, for example a link to an unrelated index or a leverage feature, the embedded derivative is separated and measured at fair value through profit or loss, even though the host contract is an own-use executory contract.

Can a take-or-pay contract contain a lease?

It can, when the buyer takes substantially all the output of a specified asset, such as a dedicated pipeline, processing plant or LNG train, and directs how and for what purpose it is used. The buyer then recognises a right-of-use asset and lease liability for the lease component under IFRS 16, and the seller has a lessor's position. See identifying a lease.

How does US GAAP compare?

ASC 606 treats unexercised rights in the same way, recognising breakage in proportion to rights exercised or when remote. ASC 815 has a similar normal purchases and normal sales scope exception, which must be elected and documented. Upfront payments for future metal in mining raise related questions; see streaming and royalty arrangements. See variable consideration and oil and gas accounting.

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Questions people ask

How does a seller account for take-or-pay payments for gas not taken?

As a contract liability while the buyer can still take the gas, recognised as revenue when the make-up gas is delivered or the right expires unused.

When is breakage on make-up rights recognised?

In proportion to the rights exercised if it can be estimated reliably; otherwise when exercise becomes remote, at the latest on expiry.

Is a take-or-pay contract a derivative for the buyer?

Not if it is held for the buyer's own expected usage and settled by physical delivery; then it is an executory contract outside IFRS 9.

Can a take-or-pay contract contain a lease?

Yes, if the buyer takes substantially all the output of a specified asset and directs its use.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 15 Revenue from Contracts with Customers
  2. IFRS Foundation: IFRS 9 Financial Instruments
  3. IFRS Foundation: IFRS 16 Leases

Rules and fees change. If you are reading this long after October 7, 2026, confirm the figures with the source before you rely on them.

Oil and gasOil and gas accounting: the key IFRS issuesManufacturingCommodity purchases, hedging and own useIFRS 15Variable consideration and the constraint under IFRS 15

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