Provisionally priced arrangements, where the final price is determined at a later date, are common in commodity markets (for example, trading in platinum, copper, crude oil, and petroleum products). Such contracts are used for the sale of goods when the final contract price depends on future market quotations and cannot be determined at the date when control of the goods transfers to the buyer.
Accounting for these arrangements under IFRS often presents challenges, as it requires the combined application of two standards:
IFRS 15 “Revenue from Contracts with Customers”, and
IFRS 9 “Financial Instruments.”
When accounting for provisionally priced contracts, the following key aspects should be considered sequentially:
determination of the transaction price at the date control transfers to the customer;
subsequent measurement of trade receivables after initial recognition.
Provisionally priced arrangements are used when the price of goods is not fixed at the time of sale but is determined later based on specified market indicators, such as market quotations or indices. For example, in the mining industry, the export price of ore may depend on the average market price over a defined period after shipment.
Company A sells 1,000 tonnes of copper to Company B. The contract provides for a provisional price of USD 8,000 per tonne at the shipment date. The final price will be determined three months later, based on the average copper price on the London Metal Exchange (LME).
The primary reason for entering into provisionally priced contracts is the buyer’s preference to pay a market-based price at the time of actual economic settlement. In many such contracts, legal title and related risks transfer to the buyer two to three months earlier than the physical delivery, making price fixation at a later date commercially justified.
At the date control of the goods transfers to the customer, the seller must estimate the expected final price using all available information and recognize revenue and a trade receivable in the corresponding amount. Revenue under contracts with customers is recognized based on the best estimate of expected consideration at initial recognition and is not subsequently remeasured under IFRS 15.
Based on established industry practice, the best estimate of expected consideration at the date control transfers may be:
the provisional price stated in the contract;
the spot market price at the date of sale;
the forward price for the relevant quotation period.
It should be noted that the provisional price specified in the contract is not always the transaction price for the purposes of IFRS 15. This is because the provisional price is set at contract inception, is indicative in nature, and may not represent the most reliable estimate of revenue at the date control transfers.
The spot market price at the date of sale may be used if it best reflects the entity’s expectation of the consideration to which it will be entitled.
The forward price for the commodity over the quotation period specified in the contract most accurately reflects the expected consideration. However, such information may not always be available in practice.
After control of the goods has transferred to the customer, subsequent changes in the trade receivable resulting from movements in market prices fall within the scope of IFRS 9.
Because the amount of the receivable varies with changes in commodity prices, provisionally priced arrangements contain an embedded derivative. As a result, the trade receivable fails the SPPI test (“solely payments of principal and interest on the principal amount outstanding”) under IFRS 9 and cannot be classified as measured at amortized cost or at fair value through other comprehensive income.
Accordingly, such trade receivables must be measured at fair value through profit or loss (FVTPL).
The effect of changes in the fair value of the receivable — i.e. the difference between:
the receivable recognized at the date control transfers, and
the receivable measured based on the final price — may be presented in the financial statements as:
other revenue (separately from revenue from contracts with customers), or
other income or expenses.
Presentation within revenue from contracts with customers is not permitted, as these changes do not meet the definition of revenue under IFRS 15.
Company A enters into a contract to sell 1,000 tonnes of copper to Company B. Under the contract terms, legal title and risks transfer to the buyer upon loading at the port of shipment. The provisional price is USD 7,800 per tonne, while the final price will be recalculated three months later based on the average LME copper price. The three-month forward price for copper at the date control transfers is USD 8,000 per tonne.
At the date the copper is loaded onto the vessel, Company A recognizes revenue and a trade receivable based on the best estimate of expected consideration. If the forward price is available at that date, it is used as the transaction price.
Revenue recognized at the date control transfers:
1,000 tonnes × USD 8,000 = USD 8,000,000
Company A recognizes USD 8,000,000 as revenue and records the same amount as a trade receivable.
Three months later, when the final price becomes known, the trade receivable is remeasured. Assume that the average market price of copper for the quotation period is USD 8,200 per tonne.
Revised trade receivable:
1,000 tonnes × USD 8,200 = USD 8,200,000
Fair value adjustment:
USD 8,200,000 − USD 8,000,000 = USD 200,000
The USD 200,000 difference is recognized in profit or loss.
Company A is required to disclose separately:
Revenue from contracts with customers recognized at the date control transfers: USD 8,000,000;
Change in the fair value of the trade receivable: USD 200,000, presented as a separate line item within other revenue or other income/expenses.
Such disclosure enables users of financial statements to assess the impact of commodity price volatility on the company’s financial performance.
