Rising demand for commodities from developing countries has resulted in unparalleled volatility in commodity prices over the last five years. In 2030, 83 billion tonnes of minerals, metals and biomass will be extracted — 55 per cent more than in 2010. It is clear that over the next 20 years, demand for commodities will soar while supplies will tighten. In such a scenario, mitigating commodity price risk will be a key challenge for businesses.

A few sectors such as mining, metals and FMCG appear to have the highest exposure to the risk. However, its impact is sector-agnostic as every company is either a producer, processor or consumer of commodities. So how does it impact companies?

Uncertainty or volatility in cash flows/ earnings

May impact liquidity/ sustainability/ solvency/ existence

Impacts the competitive edge

Massive volatility in the performance of companies

Potential to erode shareholder value

Companies are adopting various strategies to mitigate commodity price risk. These include:

Fixed pricing: Companies enter into a long-term purchase contract with suppliers for a fixed price. However, this exposes them to counterparty and default risks.

Market–based pricing: Transparent and available barometers, such as market indices, are used to monitor and set prices of commodities.

Derivative instruments: Use of derivatives such as futures or option contracts to hedge the exposure. This is considered the best strategy in periods of uncertainty.

Studies have shown that a majority of Indian businesses do not have a focused or structured hedging strategy to manage volatility in commodity prices. This could be due to the underdeveloped commodity market in the country. However, the Government is making efforts to develop a vibrant commodity market. The RBI’s recent move to liberalise norms related to hedging of commodity price risks on international commodity exchanges/ markets is a case in point.

XBRL — continuing saga

The Ministry of Corporate Affairs has broadened the use of eXtensible Business Reporting Language (XBRL) through a recent circular, which requires cost auditors and certain companies to file cost audit reports and cost records compliance reports from 2011-12, including pending reports of previous years, in XBRL format.

Consistent with the reporting requirements of statutory financial statements, the proposed use of XBRL for cost audit reports does not necessitate any change in the preparation of such reports but reflects a change from the existing PDF mode of filing. The XBRL presentation enables automation, cost saving, faster, more reliable and more accurate handling of data, improved analysis and decision-making by the regulators and other data users.

An exposure draft (open for public comments) of the taxonomy comprising elements in line with cost audit reports and annexures has been designed by the CA Institute to capture the data. Additionally, a list of business rules, filing deadlines and opening of the filing gateway is awaited.

Companies that now come under the purview of XBRL reporting should:

Understand the taxonomy and provide suggestions/ insights, if any, within the prescribed timelines;

Evaluate and consider the various software platforms available to tag their financial statements/ cost audit reporting requirements and check whether these softwares are compatible with the mandated modifications; and

Organise and train teams to comply with various XBRL reporting requirements.

Although a success, XBRL saw many companies struggling to meet deadlines for filing in the previous reporting cycle. To avoid such pitfalls companies should plan and prepare ahead and seek timely assistance. Most importantly, early and timely filings would help avert last-minute challenges such as IT glitches, as happened the last time round.

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