Own use exemption as per the Accounting Standard
What is meant by own use exemption as per the Accounting Standard?
Contracts that are entered into for the purpose of the receipt or delivery of a non-financial item for the entity’s own use is excluded from the scope of Accounting Standards for financial instruments. However, contracts that an entity designates as measured at fair value through profit or loss are not excluded even when such contracts are meant for own use.
A contract to buy or sell a non-financial item that is settled net in cash or by exchanging another financial instrument is within the scope of the standard relating to financial instruments. For example, where a contract is normally settled by an entity net in cash, even though the terms of the contract are not explicit or where an entity has established a practice of taking delivery with the intention of selling it within a short period so as to generate profit from short term fluctuations in price are not regarded as contracts entered into for the purpose of receipt or delivery of such non-financial item. As such, these contracts are within the scope.
Similarly, a written option to buy or sell a non-financial item that can be settled net in cash or another financial instrument is within the scope; hence, such a contract cannot be entered into for the purpose of the receipt or delivery of a non-financial item.
In other words, if an entity deals with a non-financial item for its own use, then the derivative in the form of say futures or bought options that ultimately results in delivery are outside the scope of financial instruments standards. The implications of this is that such contracts need not be treated as a derivative and the entity need not fair value such contracts on a periodical basis. The accounting standard Ind AS 109, however, permits the entity to designate such contracts as measured at FVTPL provided the same is done at the inception of the contract and is also expected to reduce accounting mismatch. Written option contracts should be treated as derivative and as such, the entity is required to classify it as FVTPL in spite of the fact that such option contracts may result in delivery or receipt of a non-financial item. The logic for such treatment is that the entity has no right of not accepting such delivery or receipt as the entity has only obligation to either deliver or receive the non-financial item.
