Own Use Exception

Ind AS 109 is applicable to commodity contracts / contracts to buy or sell non-financial items that may be settled net. What is the meaning of “net settlement”? In accordance with Ind AS 109, there are various ways in which an entity may be able to net settle a contract to buy or sell a non-financial item. These include:

a) The terms of contract permit either party to settle it net.

b) The contract does not contain any specific terms permitting parties to settle it net. However, the entity has a past practice of settling similar contracts net. For example, net settlement may occur either with the counterparty, or by entering into an offsetting contract or by selling the contract before it is exercised or lapses. Infrequent historical incidences of net settlement in response to events that could not have been foreseen at inception of a contract would not taint an entity’s ability to apply the own-use exception to other contracts; for example, an unplanned break-down in a power plant. However, any regular or foreseeable events leading to net settlements would taint the entity’s ability to apply the own-use exception to other contracts.

c) For similar contracts, the entity has a practice of taking delivery of the underlying and selling it within a short period after delivery to generate a profit from short-term fluctuations in pri