Accounting for Derivatives: Advanced Hedging under IFRS 9, 2nd Edition

Chapter 11Hedging Commodity Risk

This chapter focuses on the accounting challenges faced by entities when hedging commodity risk. For many industries, commodity contracts are an integral part of day-to-day business. For example, for companies in the oil, gas, utilities, mining and airline sectors, prices of certain commodities have a significant impact on their profitability and competitive position. Whilst each of these industries has its own accounting peculiarities, in this chapter I try to cover the most common accounting issues arising from their hedging of commodity risks.

11.1 MAIN COMMODITY UNDERLYINGS

The world of commodities includes a large number of different products. Underlyings of the most common commodity derivatives contracts can be grouped into the following categories:

• oil products – crude oil, diesel, fuel oil, gas oil, gasoline, jet fuel and naphtha;
• natural gas;
• coal;
• power;
• carbon emissions;
• base metals – aluminium, copper, lead, nickel, steel, tin and zinc;
• precious metals – gold, silver, palladium and platinum;
• agricultural (or soft commodities) – corn, soy complex, sugar and wheat.

11.2 LEASE, DERIVATIVE AND OWN-USE CONTRACTS

A contract to purchase or sell a commodity brings together a breadth of accounting standards – leases, derivatives, revenue recognition, and consolidation – which are individually among the most complicated areas of accounting. For example, a gas company may manage its gas on an integral basis, buying, storing and selling ...