ABSTRACT
This study analyzes the pricing structure of aluminum import transactions referenced to the London Metal Exchange (LME) by examining both commodity price risk and foreign exchange risk dimensions. It further evaluates hedging strategies, hedge accounting practices, and accounting processes from a comparative and critical perspective within the framework of TFRS 9 and the Turkish Tax Procedure Law (VUK).
The financial statement implications of provisionally priced purchase transactions—where the final price is determined after delivery—are analyzed through a practical numerical example, ratio analysis, effectiveness assessment, and corporate governance considerations.
INTRODUCTION
Aluminum is a strategic raw material widely used in Turkey across several industries, including automotive, defense, white goods, packaging, energy, and construction. Due to Turkey’s position as a net importer, aluminum prices are largely determined by reference to prices quoted on the London Metal Exchange (LME).
The LME functions as a global benchmark pricing platform for industrial metals and provides risk management opportunities through both physical delivery transactions and derivative contracts (London Metal Exchange [LME], 2023).
In LME-based contracts, the final price is often determined after delivery at the end of a specified pricing period. As a result, companies temporarily carry an open price position for the commodity physically received into inventory. In the literature, this structure is referred to as a “provisionally priced purchase” (IFRS 9, 2023).
Such transactions can make profitability projections uncertain, particularly during periods of high price volatility.
PRICING MECHANISM AND MULTI-DIMENSIONAL FINANCIAL RISK
In LME-referenced purchases, the final price is generally determined according to the following formula:
Final Price = Average LME Price + Premium
The premium includes quality differentials, freight, insurance, financing, and processing costs.
During the period in which the price remains unsettled, fluctuations in LME prices directly affect inventory costs. In addition, since import transactions are typically conducted in U.S. dollars, firms are also exposed to foreign exchange risk.
Consequently, commodity price risk and currency risk simultaneously influence the firm’s cost structure, gross profitability, cash flow projections, and financial ratios.
The literature suggests that commodity price risk and exchange rate risk should be evaluated jointly, and that integrated risk management models generally produce more reliable outcomes.
HEDGING STRATEGIES AND THE HEDGE ACCOUNTING FRAMEWORK
To mitigate price risk, companies commonly use LME futures, forwards, or swap contracts.
These transactions represent economic hedges, the primary objective of which is to limit the impact of price fluctuations on a firm’s financial performance.
Under TFRS 9, the following conditions must be satisfied in order to apply hedge accounting (TFRS 9, 2023):
- The hedge relationship must be formally documented at inception.
• The hedged risk must be clearly identified.
• The existence of an economic relationship must be demonstrated.
• The hedge ratio must be consistent with the entity’s risk management strategy.
In effectiveness assessments, the previous 80–125 percent threshold used in earlier standards has been removed and replaced with an economic relationship approach.
In practice, methods such as the dollar-offset method, regression analysis, or sensitivity analysis may be used. For example, a high correlation between the value changes of the hedged item and the hedging instrument is considered evidence of hedge effectiveness.
This approach strengthens the alignment between risk management practices and financial reporting.
PRACTICAL NUMERICAL EXAMPLE – ALUMINUM IMPORT TRANSACTION
Assume that 500 tons of aluminum are imported.
At the delivery date, the LME price is USD 2,350 per ton, while the premium is USD 120 per ton.
At the end of the pricing period, the average LME price is realized as USD 2,420 per ton.
It is assumed that the premium remains constant.
Provisional inventory value (based on the delivery date price):
(2,350 + 120) × 500 = USD 1,235,000
Final inventory cost (based on the pricing period average):
(2,420 + 120) × 500 = USD 1,270,000
Accordingly, the price difference affecting inventory cost amounts to USD 35,000.
Hedge Transaction
To manage price risk, the company entered into a futures contract at USD 2,340 per ton and closed the position at USD 2,420 per ton.
The gain from the futures transaction is calculated as follows:
(2,420 − 2,340) × 500 = USD 40,000
If Hedge Accounting Is Not Applied
The USD 40,000 gain arising from derivative transactions is recognized in the income statement.
During the same period, inventory cost increases by USD 35,000 due to the change in the commodity price.
As a result, the derivative gain and the change in inventory cost may not be matched in the same accounts or periods, potentially creating earnings volatility.
If Cash Flow Hedge Accounting Is Applied
Under cash flow hedge accounting:
- The effective portion of the gain arising from the futures transaction is recognized in equity (Other Comprehensive Income – OCI).
• When the inventory is sold, the accumulated amount is reclassified to cost of goods sold (COGS).
Through this mechanism, the derivative gain and the inventory cost impact are recognized in the same period, thereby reducing volatility in gross profit margins.
In this example, however, the physical price change and the futures transaction do not perfectly offset each other.
Physical price change: 2,420 − 2,350 = USD 70 per ton
Futures gain: 2,420 − 2,340 = USD 80 per ton
Difference: 10 USD per ton × 500 tons = USD 5,000
This amount represents hedge ineffectiveness, which is generally recognized directly in the income statement when hedge accounting is applied.
FINANCIAL RATIO ANALYSIS AND THE INVESTOR PERSPECTIVE
The application of hedge accounting plays a significant role in maintaining the stability of financial ratios.
When hedge accounting is not applied, gross profit margins and operating profitability may fluctuate significantly across periods. Indicators such as EBITDA and inventory turnover ratios may therefore produce misleading signals.
Through hedge accounting, the performance of economic risk management is reflected more consistently in financial statements, thereby enhancing the quality of information available to investors in their decision-making processes.
This also facilitates risk assessment for creditors and lending institutions.
STRUCTURAL DIFFERENCES BETWEEN VUK AND TFRS
Under the Turkish Tax Procedure Law (VUK), inventories are measured at historical cost, and the fair value approach is not adopted (Tax Procedure Law [VUK], 1961).
Derivative transactions are recognized based on the realization principle.
As a result, temporary differences arise between financial statements prepared under TFRS and accounting records maintained under VUK, leading to deferred tax effects.
These differences require companies to maintain parallel accounting systems and establish additional control mechanisms within their reporting processes.
CORPORATE GOVERNANCE, INTERNAL CONTROL AND REPORTING TRANSPARENCY
LME-based import transactions require a high degree of coordination among procurement, finance, and accounting departments.
Failure to document hedge relationships in a timely manner or incorrectly determining hedge ratios may increase financial statement volatility.
For this reason, companies are encouraged to:
- establish formal risk management policies,
• implement limit mechanisms,
• conduct regular hedge effectiveness tests, and
• transparently disclose hedge relationships in financial statement notes.
Transparent reporting is a key indicator of high-quality corporate governance.
GENERAL EVALUATION AND CONCLUSION
LME-priced aluminum imports represent not merely a procurement process but a multidimensional management area encompassing integrated risk management, financial planning, and accounting practices.
Properly implemented hedge accounting under TFRS 9 ensures that economic risk management activities are consistently reflected in financial statements.
In contrast, the realization-based approach of VUK creates structural differences between financial reporting and tax reporting.
Therefore, it is critically important for firms to develop strong internal control mechanisms, disciplined risk management policies, and effective accounting practices.
REFERENCES
IFRS Standards and Amendments
International Accounting Standards Board. (2023). IFRS 9: Financial Instruments.
International Accounting Standards Board. (May 2024).
Amendments to the Classification and Measurement of Financial Instruments: Amendments to IFRS 9 and IFRS 7 (Effective for annual reporting periods beginning on or after 1 January 2026).
Turkish Accounting Standards
Public Oversight Accounting and Auditing Standards Authority. (2019). TFRS 9: Financial Instruments.
Public Oversight Accounting and Auditing Standards Authority. (2023). TMS 2: Inventories.
Tax Legislation
Republic of Türkiye Official Gazette. (1961).
Tax Procedure Law (Law No. 213).
Commodity Market and LME Rules
London Metal Exchange. (March 2025).
LME Rulebook: Rules and Contract Specifications (Release No. 130).
Senior Accounting Manager
