Transportation costs
Entity A holds a physical commodity measured at fair value in its warehouse in Europe. For this commodity, the London exchange is determined to be the principal market as it represents the market with the greatest volume and level of activity for the asset that the entity can reasonably access.
The exchange price for the asset is CU25. However, the contracts traded on the exchange for this commodity require physical delivery to London. Entity A determines that it would cost CU5 to transport the physical commodity to London and the broker”s commission would be CU3 to transact on the London exchange.
Since location is a characteristic of the asset and transportation to the principal market is required, the fair value of the physical commodity would be CU20 the price in the principal market for the asset CU25, less transportation costs of CU5. The CU3 broker commission represents a transaction cost that would not adjust the price in the principal market.
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