The own-use exemption as an option for optimising purchasing

Options for optimising purchasing

Source: KPMG Corporate Treasury News, Edition 42, April 2015 - The pronounced fluctuations in energy prices on the energy and commodity exchanges in recent months have prompted many companies to examine their purchasing strategies for optimisation potential.


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To date, purchasing strategies have been limited to concluding forward purchase contracts to hedge volumes and prices in order to cover demand in future periods, but the current economic conditions are clearly highlighting a desire for greater flexibility in response to economic developments. When optimising purchasing strategies, however, companies are often wary of the consequences of violating the “own-use exemption” and having to recognise such contracts as derivatives within the meaning of IAS 39 as a result. At the same time, they are also put off by the work involved in officially designating any derivative contracts for hedge accounting and the requirement to take ineffectiveness to profit or loss. The upshot is that the existing purchasing strategies remain untouched.

However, increasing the flexibility of the purchasing process for companies’ energy requirements does not necessarily mean having to account for derivatives in accordance with IAS 39. Under specific circumstances, for example, it is possible to purchase an expected future volume of energy using forward contracts then use sales contracts to perform price optimisation up until delivery has been taken of the fixed purchase volumes. Above all, preventing a violation of the own-use exemption requires precise contract wording and defined process flows within the purchasing process. IAS 39 and IDW RS HFA 25 both establish strict requirements for companies in terms of successfully demonstrating their compliance with the relevant criteria in order to avoid derivative accounting.

Even if a purchase contract is classified as a derivative, however, hedge accounting can be applied in order to prevent fluctuations in gains and losses with reasonable effort. Designation as an “all-in-one hedge” means the contract is defined as a price hedge for the agreed volume, thereby simplifying the documentation of the designation and the measurement of effectiveness.

Our finance and treasury management experts will be happy to answer any questions you may have concerning the optimisation of purchasing strategies in the energy sector and will guide you safely through the relevant accounting requirements.

Author: Ralph Schiling, Manager,

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