CFM50240 - Derivative contracts: accounting conditions: commodity contracts
CTA09/S579(2)(a)
| The definition of a derivative contract requires that it is a {relevant contract | CFM50300}, meets the accounting conditions and does not have excluded underlying subject matter. |
Contracts deemed to satisfy the accounting conditions: commodity contracts
The third leg of the accounting conditions deals with contracts that are deemed to satisfy the accounting conditions, even though they are not accounted for as derivatives. The third alternative within the accounting conditions will be satisfied by any relevant contract whose underlying subject matter is commodities.
Contracts to buy or sell goods which can only be settled by physical delivery of the goods (and which contain no unusual terms are) outside the scope of Section 12 of FRS102. 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 company has entered into a commodity future or option in order to buy or sell goods as part of its normal business, or whether it intends the contract as a hedge (or holds it speculatively). Accordingly, there could be some uncertainty as regards treatment of commodity contracts. This is resolved by a special rule at S579(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 contracts to buy or sell goods for trade purposes 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 the example at CFM50250.
If a company entered into a commodity contract for a purpose which was not among the business or other commercial purposes of the company, the unallowable purposes provisions in S690 see CFM56020 may apply. S690 would only be relevant if the contract were a derivative contract.