The accountancy implications of commodity derivatives: A South African agricultural sector case study

Agricultural companies and commodity processors trade commodity derivatives on the SAFEX Commodity Derivatives market to hedge themselves and their producers against commodity price risk. Agricultural companies have to adhere to International Financial Reporting Standards (IFRS) of which International Accounting Standard (IAS) 39, Financial Instruments: Recognition and Measurement, forms part. The objective of the study was to establish a standard methodology for the interpretation of IAS 39 to serve as a benchmark and best practice for South African agricultural companies and commodity processors. The research found that there is no consistent interpretation or application of IAS 39 by the respondents. The recommended standard methodology to follow includes that agricultural companies holding grain inventory for trading should fair value such inventory and that the classification of transactions as derivative contracts, as defined per IAS 39, depends on whether hedge accounting is applied or not.