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Forward sale agreements are a common tool used by businesses to manage risk and plan for the future. In the world of accounting, these agreements are subject to strict guidelines and requirements under International Financial Reporting Standards (IFRS). In this article, we will explore the basics of forward sale agreements under IFRS and how they can impact a company`s financial statements.

First, let`s define what a forward sale agreement is. Essentially, it is a contract between two parties in which one party agrees to sell a particular asset to the other party at a predetermined price and date in the future. These agreements are typically used to lock in a future price for a commodity or other asset that is subject to price volatility.

Under IFRS, forward sale agreements are considered derivatives and are subject to specific accounting rules. Specifically, they are classified as financial instruments and accounted for at fair value through profit or loss (FVTPL). This means that any changes in the fair value of the agreement must be recorded in the company`s income statement.

There are a few key considerations to keep in mind when accounting for forward sale agreements under IFRS. First, the fair value of the agreement must be determined at the end of each reporting period. This can be a challenging task, as the fair value may fluctuate based on changes in market conditions or other factors.

Secondly, any gains or losses related to the forward sale agreement must be recorded in the income statement in the period in which they occur. This can have a significant impact on a company`s financial statements, particularly if the value of the agreement fluctuates significantly over time.

Finally, it`s important to note that forward sale agreements can have a significant impact on a company`s cash flow. If the company is required to settle the agreement at a loss, it may have to use cash reserves or take on additional debt to meet its obligations.

In summary, forward sale agreements are an important tool for managing risk and planning for the future. When accounting for these agreements under IFRS, it`s important to consider the impact they may have on a company`s financial statements and cash flow. By following the proper accounting rules and guidelines, companies can ensure that they are accurately reflecting the impact of these agreements on their financial performance.