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Contact us
Business Bay, Opal tower, Office 1301, Dubai, United Arab Emirates.
Office time: 9:00 – 18:00
+ 971 58 515 7428
Provisionally priced contracts, in which the final price is determined at the date of physical delivery at the final destination, are common in commodity markets (e.g., trading of platinum, copper, oil, and petroleum products). These contracts are typically used for transactions in which the final sale price is tied to future market quotations and cannot be set on the date the buyer obtains control of the goods.
Accounting for these contracts under International Financial Reporting Standards (IFRS) can be complex, as it requires the concurrent application of multiple standards - IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments.
Key considerations for accounting for provisionally priced contracts:
Provisionally priced contracts are used when the price of goods is not determined at the moment of sale but is instead set some period later, based on specific market indicators like commodity indices or quoted prices. For example, in the mining industry, the price of exported ore may depend on the average market price over a specific period after delivery.
Example:
Company A sells 1,000 tonnes of copper to Company B. The contract sets a provisional price of $8,000 per tonne at the time of delivery, but the final price will be based on the average copper price on the London Metal Exchange for three months after the sale.
The primary reason for using such contracts is to align the buyer’s payment with the market value at the time when he actually receives the goods. Typically, legal title and associated risks pass to the buyer two to three months before the goods are physically delivered.
On the date when control of the goods is transferred to the buyer, the seller must estimate the final price using all reasonably available information. Based on this estimate, the seller recognizes both revenue and a corresponding receivable. Under IFRS 15, revenue is recognized based on the best estimate of the expected consideration at the time of recognition and is not remeasured afterwards.
In practice, the following can be used as the best estimate of expected consideration at the time control is transferred:
It is important to note that the provisional contract price doesn’t always qualify as the transaction price under IFRS 15. Since it is typically set when the contract is signed, it may be used only as a reference point and might not reflect the best estimate of revenue at the time control of goods is transferred.
The market price at the sale date can be used if it better reflects the expected amount of consideration.
The forward price usually provides the best estimate of the expected final payment. However, in some cases, information about forward prices may not be available.
Once control has passed to the buyer, any changes in the receivable resulting from market price fluctuations fall within the scope of IFRS 9.
Because the value of the receivable fluctuates based on market movements, these contracts are considered to contain embedded derivative features. Such receivables do not meet the “solely payments of principal and interest” (SPPI) criterion under IFRS 9. Therefore, they cannot be measured at amortized cost or at fair value through other comprehensive income 1. Instead, they must be measured at fair value through profit or loss (FVTPL).
The difference between the initial receivable (recognized when control of goods is transferred) and the receivable based on the final price is reported as a fair value adjustment. This adjustment can be presented in financial statements in one of the following ways:
Such adjustments must not be included in revenue from contracts with customers, as they do not meet the definition of revenue under IFRS 15.
Example
Company A signs a contract to sell 1,000 tonnes of copper to Company B. According to the contract, ownership and risks are transferred to the buyer at the time of loading the shipment at the port of departure. The contract includes a provisional price of $7,800 per tonne, but the final price will be determined three months later based on the average copper price on the London Metal Exchange. At the time of loading, the three-month forward price for copper is $8,000 per tonne.
Accounting at the point of control transfer (IFRS 15)
On the shipment date, Company A recognizes revenue and receivable based on the best estimate of expected consideration.
If the forward price is available, it is used as the transaction price.
Thus, revenue at date of the control transfer is:
1,000 tonnes × $8,000 = $8,000,000
Company A records this amount as revenue and recognizes an equal amount in receivables.
Adjustments after transfer of control (IFRS 9)
Three months later, when the final price is known, the receivable is remeasured. Assume the average market price of copper at that time is $8,200 per tonne.
Revalued receivable amount: 1,000 tonnes × $8,200 = $8,200,000
Adjustment: $8,200,000 − $8,000,000 = $200,000
The difference of $200,000 is recognized in profit or loss.
Disclosure
Company A must separately disclose:
Revenue under the contract with the customer at the date of transfer of control: $8,000,000
Fair value adjustment to receivables: $200,000
As noted above, the adjustment should be presented either as a separate line in revenue disclosure or in other income and expenses.
This level of disclosure ensures that users of financial statements can clearly identify the impact of market fluctuations on the company’s financial results.
1 para 4.1.2, 4.1.2.А, 4.1.4 IFRS 9 ↑
