Dear friends, I have doubt regarding commodity swap accounting.
One of m client who is a whole sale gold dealer regularyl enters into commodity swap transaction to hedge against unfavourable price chnages.
For eg if he be huys 100kg gold, then he will same quanity gold with a financial institution (commodity swap) and carries over the position until he is able to sell the physical gold or if he incurs beyond tolerable loss in position.
My doubt is about accounting entries to be passed when sells the gold through OTC and when he closes the position. Also how to show open positions in balance sheet
Commodity swap accounting
Re: Commodity swap accounting
I think it's a cash flow hedge.
1. At inception, nothing to do
2. Between date of the Swap contract and date of the purchase of gold, the differences goes to OCI.
3. At the purchase date, record the gold in inventory at the market price, against cash, and write off the hedge instrument from the balance sheet against cash.
4. At the sale date, write off the inventory against cost of sales, and recycle the OCI reserves against cost of sales.
1. At inception, nothing to do
2. Between date of the Swap contract and date of the purchase of gold, the differences goes to OCI.
3. At the purchase date, record the gold in inventory at the market price, against cash, and write off the hedge instrument from the balance sheet against cash.
4. At the sale date, write off the inventory against cost of sales, and recycle the OCI reserves against cost of sales.
Re: Commodity swap accounting
well, the OP didn't say the client used hedge accounting
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Re: Commodity swap accounting
Sir is it cashflow hedge or fair value hedge as they are hedging against change in value of of the inventoryLeo wrote: ↑31 May 2022, 16:11 I think it's a cash flow hedge.
1. At inception, nothing to do
2. Between date of the Swap contract and date of the purchase of gold, the differences goes to OCI.
3. At the purchase date, record the gold in inventory at the market price, against cash, and write off the hedge instrument from the balance sheet against cash.
4. At the sale date, write off the inventory against cost of sales, and recycle the OCI reserves against cost of sales.
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- Joined: 31 May 2022, 13:36
Re: Commodity swap accounting
Did you mean hedged transactions which are the purchase of the commodities or hedge transactions which are only related to the variation of the derivative ?
If your company hasn't opted this transaction as hedge accounting, then, the movements should go directly to the P&L, as financial results.
If your company hasn't opted this transaction as hedge accounting, then, the movements should go directly to the P&L, as financial results.
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- Posts: 5
- Joined: 31 May 2022, 13:36
Re: Commodity swap accounting
If they buy gold and keep it as stock then they sell gold (no physical delievry) for the same quantity through a broker at current market price and later he closes the position by buying gold (no physical delivery). There is net settlement, no actual delievry of gold.
Re: Commodity swap accounting
Yes, that's a derivative, if you don't apply hedge accounting, then, you just record the variations in the P&L.