Recognising expected losses on non-cancellable purchase commitments under TFRS for NPAEs
29 October 2025
In practice, many non public entities enter into purchase contracts where they commit to buying goods at a fixed price. If market conditions deteriorate before delivery, these arrangements may create an expected loss that must be recognised in the financial statements.
Under Section 16.6 of TFRS for NPAEs, if an entity has a present obligation arising from a past event and it is probable that an outflow of resources will be required to settle it, a provision should be recognised. This includes cases where non cancellable purchase commitments will result in a loss because the contracted price exceeds the net realisable value (NRV) of the goods to be received.
The core principle
Where a purchase contract cannot be cancelled without penalty and the price agreed is higher than the NRV of similar goods at the reporting date, the expected loss must be recognised immediately as:
- An expense in profit or loss (classified under cost of sales), and
- A liability (provision) for the expected loss.
This ensures that the financial statements do not overstate assets or understate liabilities before delivery of the goods.
Illustration from TFAC Q&A
On 1 December 20X4, a company entered into a non cancellable purchase commitment to buy goods for THB 100,000, with delivery on 15 January 20X5. At the reporting date, 31 December 20X4, the NRV of comparable goods was THB 80,000.
The company must recognise the expected loss of THB 20,000 at 31 December 20X4 as follows:
Journal entry on 31 December 20X4:
Dr. Loss on non cancellable purchase commitment 20,000
Cr. Provision for purchase commitment 20,000
When the goods are received on 15 January 20X5, the accounting depends on the actual NRV at that date:
Case 1 – NRV falls further
If the NRV on delivery drops to THB 65,000, the inventory should be recorded at THB 65,000, and an additional loss of THB 15,000 should be recognised so that inventory is not carried above its NRV.
Journal entries on 15 January 20X7:
Dr. Purchase / inventory 65,000
Dr. Loss on inventory valuation 15,000
Dr. Provision for purchase commitment 20,000
Cr. Accounts payable / cash 100,000
Case 2 – NRV recovers
If instead, the NRV on delivery rises back to
THB 100,000, the inventory is recorded at
THB 100,000, and the previously recognised loss of
THB 20,000 is reversed.
Journal entries on 15 January 20X7:
Dr. Purchase / inventory 100,000
Dr. Provision for purchase commitment 20,000
Cr. Loss on non cancellable purchase commitment 20,000
Cr. Accounts payable / cash 100,000
Practical guidance
- Identify non cancellable purchase contracts at each reporting date.
- Compare the contracted price with the NRV of the goods.
- Recognise a provision and loss immediately when the contracted price exceeds NRV.
- Adjust the loss or reverse it when the goods are received, depending on actual NRV.
- Disclose the accounting policy and the nature and amount of such provisions in the notes.
References (in Thai):
- TFRS for Non Publicly Accountable Entities (Revised 2022). Retrieved from Thai Federation of Accounting Professions (TFAC).
- Q&A on TFRS for NPAEs (March 2025): Expected losses on non cancellable purchase commitments. Retrieved from Thai Federation of Accounting Professions (TFAC).
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