BCZ2.18 Before the amendments in 2003, IAS 39 and IAS 32 were not consistent with respect to the circumstances in which a commodity-based contract meets the definition of a financial instrument and is accounted for as a derivative. The IASB concluded that the amendments should make them consistent on the basis of the notion that a contract to buy or sell a non-financial item should be accounted for as a derivative when it (i) can be settled net or by exchanging financial instruments and (ii) is not held for the purpose of receipt or delivery of the non-financial item in accordance with the entity’s expected purchase, sale or usage requirements (a ‘normal’ purchase or sale). In addition, the IASB concluded that the notion of when a contract can be settled net should include contracts:

(a) where the entity has a practice of settling similar contracts net in cash or another financial instrument or by exchanging financial instruments;

(b) for which the entity has a practice of taking delivery of the underlying and selling it within a short period after delivery for the purpose of generating a profit from short-term fluctuations in price or dealer’s margin; and

(c) in which the non-financial item that is the subject of the contract is readily convertible to cash.