Problem
On 1 December 2022, H&B enters into a fixed price forward contract to buy 2 million kgs of iron, with delivery at 15 January 2023. Entering such contracts only involves the payment of insignificant transaction costs.
The contract permits H&B to either take physical delivery of the iron at 15 January 2023 (i.e. to buy 2 million kgs of iron at the agreed price) or to pay or receive a net amount in cash, based on the difference between the market price of iron at 15/1/2023 compared to the agreed price.
H&B's history with such transactions demonstrates that the company has never taken physical delivery of the iron.
The directors of H&B wish to receive advice on how to account for the above transaction in the company's financial statements of 31 December 2022.