Accruals and cost estimates play an important role in commodity trade and risk management. Commodity contracts are usually contracts over a longer period of time where at inception it is not possible to know the exact costs to be made for the execution of these contracts. This is in particular important when a contract contains multiple shipments or deliveries. For a good contract valuation these execution costs needs to be estimated and accrued to facilitate a reliable unrealized P&L.
There are also various cost types such as commissions, freight, insurance, inspection, financing etcetera. Cost estimates can be complicated as they can be build up out of different rules, e.g. a cost per delivered unit, lump sums, percentages over amounts etcetera. During the (partial) execution of a contract costs become better known as more accurate quotes are provided by the service suppliers or for example logistics rates are getting fixed.
Cost estimates in Agiblocks CTRM
Agiblocks facilitates the mechanisms to register all the different cost types and support complex rules on a contract, and goes even a step further when it comes to cost management. Agiblocks CTRM allows a two level estimation during the contract lifecycle. The first estimate can be captured at the moment the trader enters into the trade and a second estimate can be captured at the start of the logistic execution of the contract. Both estimates remain stored in Agiblocks which allows the analysis between the two estimates and thus allows to create transparency on the performance of contract execution. At the registration of estimates Agiblocks creates cost accruals which are used for valuation and accounting purposes.
Once finally actual transactional invoices are received they can be registered and then allocated to their underlying contacts offsetting the accruals made. This two level estimate and accrual mechanism provides both, insight on contract value or profitability and an excellent tool for the
analysis of execution performance. It ensures continuous measurement of value and an accurate view upon unrealized and realized P&L.