Classification of Cash Flows related to Variation Margin Calls on “Collateralised-to-market” Contracts (IAS 7)

The request submitted to the Committee related to how an entity should present, in the statement of cash flows, the cash flows related to variation margin call payments made on contracts to purchase or sell commodities at a predetermined price.  

The fact pattern specified that: 

• The contracts, which have a maturity of up to three years, are entered into by entities trading commodities on regulated markets with the following purposes and measurement approaches 
  • Own use: receipt of physical commodities in accordance with the entity’s requirements, accounted for as an executory contract outside the scope of IFRS 9; 
  • Hedging: net cash settlement under hedge accounting (CFH) of exposure to fluctuations in commodity prices; 
  • Trading: short-term profit objective involving measurement at fair value through profit or loss (FVPL). 
• For settlement via a central counterparty (CCP), each contract is novated by the CCP and clearing members guarantee these contracts towards the CCP. The novation creates contracts between each of the original counterparties and the clearing members, which in turn hold contracts subject to the same conditions with the CCP. 
• The contracts are “collateralised-to-market” (CTM), involving daily margin calls between the parties that reflect fluctuations in the fair value of the contract, but do not constitute partial settlement of the fair value of the contract (unlike “settled-to-market” / STM contracts). 
• At maturity, the contract is settled in cash or physically between the entity and the clearing member. The amount of the cash collateral accumulated over the life of the contract is reimbursed, where appropriate by offsetting against payment of the fair value of the contract if the contract is settled in cash. 

The issue was whether classifying these margin calls as financing cash flows complied with IAS 7. Such a classification would mean that, on settlement of the contract, the entity would present the cash flows from reimbursement of the cash collateral as financing cash flows, and the cash flows representing payment of the fair value of the contract, when the contract is settled in cash, as operating cash flows. 

After noting that the request submitted concerns only a limited number of entities, the Committee decided not to add a standard-setting project to its work plan.