Assume that the background is the same as in example A in FAQ 4.4.1. However, for simplicity, assume that the contract is a two-year contract instead of a 14-year contract, and that entity B will obtain the right to receive 10,000 carbon offsets on 31 December 20X2 (in one delivery). The key background facts are reproduced below:

Assume, for the purposes of the example, that:

Similar to FAQ 4.114.4 in the PwC Manual of accounting, the accounting at the date of delivery is less clear. One approach is that the contract continues to be accounted for as a contract within the scope of IFRS 9 and not within the scope of IFRS 15 (see para 5(c) of IFRS 15), and so it does not give rise to ‘revenue from contracts with customers’ or related cost of sales.

It can, however, also be argued that, although the contract is within the scope of IFRS 9, it is nevertheless a contract with a customer to sell carbon offsets which are an output of entity A’s ordinary activities. In particular, Appendix A to IFRS 15 defines a customer as “a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration”.

Under this view, the accounting reflects that, at delivery, two transactions take place: the settlement of a liability to deliver a fixed number of carbon offsets (valued at C1,400,000, the spot price, at delivery date); and the delivery of carbon offsets (for which the carrying amount is C1,400,000).

In March 2019, the IFRS® Interpretations Committee issued an agenda decision ‘Physical Settlement of Contracts to Buy or Sell a Non-financial Item’. This guidance applies to a contract that will be physically settled by delivering an underlying non-financial item and fails the ‘own use’ exception in paragraph 2.4 of IFRS 9. Consistent with this agenda decision, entity A is neither permitted, nor required, to 'undo' the subsequent accounting of the liability (including the effective interest on the liability and the remeasurement of liability in accordance with para B5.4.6 of IFRS 9), and so revenue must be measured based on the value of the related liability, representing the transaction price, at delivery date.Even though this agenda decision only refers to not reversing derivative gains and losses, and the contract described in the background does not meet the definition of a derivative, the guidance should be applied to the other potential subsequent measurement outcomes under IFRS 9. This is because reversing the subsequent measurement entries would negate the subsequent measurement requirements in IFRS 9 without any basis to do so.²

¹ For simplicity, the illustrative journal entries do not include the journal entries for purchase of any carbon offsets. It is assumed that inventory is measured close to fair value at the spot price of C1,400,000 on delivery date.

² Depending on entity A’s accounting policy for interpreting ‘as if the contracts were financial instruments’ in paragraph 2.4 of IFRS 9 (refer to FAQ 41.22.1 in the PwC Manual of accounting), the measurement of the contract in accordance with IFRS 9 might be different. For example, the contract might be assessed to include a debt host contract and an embedded derivative that must be separated from the host contract. Alternatively, entity A might elect to apply the fair value option in accordance with paragraph 4.2.2 of IFRS 9 to the entire contract. Regardless of which of these measurement outcomes applies under IFRS 9, it is considered acceptable for entity A to recognise revenue based on the value of any related instruments representing the transaction price.