Bina Auto (BA) is a Malaysian company that produces components for automotive industry. The production of the components requires electronic parts produced by the manufacturer in China. Purchases of the electronic parts are in Chinese yuan (CNY). The management of BA is aware that the company is exposed to foreign currency risk as purchases are denominated in CNY. Should the Chinese yuan become stronger again the ringgit , BA has to pay more for the purchase of the electronic parts. Hence, the management adopts a risk management policy that requires the company to hedge the foreign currency risk arising from its highly probable forecast purchase In December 2018, the production manager estimated that 200,000 electronics parts would be required for the production in the third quarter of 2020. Purchase of the electronic parts was expected to be made in carly 2020. BA had negotiated with the manufacturer in China to secure a purchase price of CNY25 per unit. Therefore, the cost of the purchase would be CNY5,000,000 (200,000 X CNY25). The trend in foreign exchange rate had shown that CNY had been strengthening. BA believed that CNY strengthening would affect its income. Therefore, on 1 January 2019, BA purchased a call option to purchase CNY against RM to protect against the risk of CNY strengthening, The purchase of foreign currency call option to hedge the highly probable forecast purchase was as follows: Amount purchase CNY5,000,000 Strike price RM0.6189/CNY Spot rate on 1 January 2019 RM0.6189/CNY Intrinsic value of option on 1 January 2019 Option premium RM154.725 Start date 1 January 2019 Maturity date 31 July 2020 0 2019 RM928 0 O 0 0 BMW0 676 RMO.5584 The fair value of the option and the exchange rates during the hedging period were as follows: 1 January 30 June 31 30 June 31 July 2019 December 2020 2020 2019 Fair value of option RM154,725 RM318,728 RM16,092 Intrinsic value of 278.500 0 option Time value of option 154.725 40.228 16,092 928 Spot rate BM0,689 RM0 59 36 RM10. 5698 Strike rate RM0 6189 BM0 6189 RM40,6189 RM0,689 RM0,6 189 * At maturity date the fair value of option is zero as the option expired out of money Intrinsic value is computed as the difference between the strike rate and the spot rate multiplied by the nominal amount In January 2020, BA placed order with the manufacturer in China to purchase 200,000 electronic parts at a price of CNY25 per unit. The delivery date was scheduled on 30 June 2020 and payment was made on 31 July 2020. All the electronic parts were used in the production in the third quarter of 2020. The finished goods were sold to customers in November 2020. Cost of goods sold was recorded in profit or loss in November 2020. BA applied hedge accounting to account the hedge of foreign currency risk. It was able to demonstrate that it met all the requirements for hedge accounting. The hedge was classified as cash flow hedge. Only the intrinsic value was designated as hedging instrument as allowed by MFRS9. The intrinsie value was discounted at 6% to reflect time value of money. The purpose of this assignment is to introduce students to accounting principles and techniques in preparing financial reporting. Presented below is the business transactions that Bina Auto involves during the financial year 2019 and 2020. Your task is to prepare a report on how the transactions should be reported by Bina Auto. Complete the following assignment: (b) 1) Determine the information (1.e. asset/liability, revenue/expense and disclosure) to be reported in the financial statements for the year ended 31 December 2019 with regard to the use of derivative instrument. Bina Auto (BA) is a Malaysian company that produces components for automotive industry. The production of the components requires electronic parts produced by the manufacturer in China. Purchases of the electronic parts are in Chinese yuan (CNY). The management of BA is aware that the company is exposed to foreign currency risk as purchases are denominated in CNY. Should the Chinese yuan become stronger again the ringgit , BA has to pay more for the purchase of the electronic parts. Hence, the management adopts a risk management policy that requires the company to hedge the foreign currency risk arising from its highly probable forecast purchase In December 2018, the production manager estimated that 200,000 electronics parts would be required for the production in the third quarter of 2020. Purchase of the electronic parts was expected to be made in carly 2020. BA had negotiated with the manufacturer in China to secure a purchase price of CNY25 per unit. Therefore, the cost of the purchase would be CNY5,000,000 (200,000 X CNY25). The trend in foreign exchange rate had shown that CNY had been strengthening. BA believed that CNY strengthening would affect its income. Therefore, on 1 January 2019, BA purchased a call option to purchase CNY against RM to protect against the risk of CNY strengthening, The purchase of foreign currency call option to hedge the highly probable forecast purchase was as follows: Amount purchase CNY5,000,000 Strike price RM0.6189/CNY Spot rate on 1 January 2019 RM0.6189/CNY Intrinsic value of option on 1 January 2019 Option premium RM154.725 Start date 1 January 2019 Maturity date 31 July 2020 0 2019 RM928 0 O 0 0 BMW0 676 RMO.5584 The fair value of the option and the exchange rates during the hedging period were as follows: 1 January 30 June 31 30 June 31 July 2019 December 2020 2020 2019 Fair value of option RM154,725 RM318,728 RM16,092 Intrinsic value of 278.500 0 option Time value of option 154.725 40.228 16,092 928 Spot rate BM0,689 RM0 59 36 RM10. 5698 Strike rate RM0 6189 BM0 6189 RM40,6189 RM0,689 RM0,6 189 * At maturity date the fair value of option is zero as the option expired out of money Intrinsic value is computed as the difference between the strike rate and the spot rate multiplied by the nominal amount In January 2020, BA placed order with the manufacturer in China to purchase 200,000 electronic parts at a price of CNY25 per unit. The delivery date was scheduled on 30 June 2020 and payment was made on 31 July 2020. All the electronic parts were used in the production in the third quarter of 2020. The finished goods were sold to customers in November 2020. Cost of goods sold was recorded in profit or loss in November 2020. BA applied hedge accounting to account the hedge of foreign currency risk. It was able to demonstrate that it met all the requirements for hedge accounting. The hedge was classified as cash flow hedge. Only the intrinsic value was designated as hedging instrument as allowed by MFRS9. The intrinsie value was discounted at 6% to reflect time value of money. The purpose of this assignment is to introduce students to accounting principles and techniques in preparing financial reporting. Presented below is the business transactions that Bina Auto involves during the financial year 2019 and 2020. Your task is to prepare a report on how the transactions should be reported by Bina Auto. Complete the following assignment: (b) 1) Determine the information (1.e. asset/liability, revenue/expense and disclosure) to be reported in the financial statements for the year ended 31 December 2019 with regard to the use of derivative instrument