The purpose of this assignment is to expose students to accounting principles and treatments on fair value measurement and financial instruments (derivatives and hedging). Damai Bhd (DB) is a newly listed company in Malaysia focusing in hotel and recreational activities. Presented below is two scenarios of business transactions that DB and its subsidiary company, MKM Berhad, involves during the financial year 2019.

A.

As of December 2019, DB has already operated a chain consisting of nine 4-star hotels across Malaysia. DB is considering to establish the tenth hotel in the vicinity of Kulim, Kedah by acquiring and refitting an existing budget hotel. The Board of DB has identified a potential acquisition target, Lesa Sdn Bhd, located in Kulim, Kedah. Lesa Sdn Bhd is an unlisted, family-run company that owns and operates budget hotel business since 2010. After several months of discussion and negotiations, the owners of Lesa Sdn Bhd expressed interest to sell their business and hope to raise RM40 million for the equity plus another RM18 million to pay off all borrowings.

Lesa Sdn Bhd reported a total assets value of RM25 million in its recent 2019s statement of financial position. Most of its assets were in cash and equivalents except for property, plant and equipment which had a carrying value of RM10 million as at December 2019. Based on authorised expert opinion, the value of Lesa Sdn Bhds property, plant and equipment could reach up to RM30 million for its land and new buildings are in the middle of the business centre of Kulim. Lesa Sdn Bhd has 2 million shares outstanding.

DB decided to upscale Lesa Sdn Bhd to support the new image, adhere to brand integrity and to keep up with up-to-date technology developments. All renovation works will be completed before the launching of the new upgraded hotel. To properly determine the fair value of Lesa Sdn Bhd, the chief financial controller of DB prepared a three-year cashflow forecast for Lesa Sdn Bhd. The following table presents the relevant cash flows regarding Lesa Sdn Bhd and PV factor:

	Year 1	Year 2	Year 3
Cash flows before tax (RM)	4,840,000	6,940,000	9,960,000
PV factor	0.909	0.826	0.751

Net cash flows beyond year 3 is expected to sustain indefinitely. The estimated weighted average cost of capital for DB is 8% although a similar non-listed company as Lesa Sdn Bhd is expected to incur additional premium of 2% for added risks and volatility. Assume the effective tax rate for Lesa Sdn Bhd remains unchanged at 24% for all years.

B.

MKM Bhd is DB wholly-owned subsidiary that produces aluminium cans for the soft drinks industry. MKM Bhd is a Malaysian company with a Malaysian Ringgit (RM) functional currency. Its reporting dates are 30 June and 31 December.

Based on the production plan for the third quarter of 2020, it was estimated that aluminium consumption would be 1,500 metric tonnes (mt). The companys risk management objective and strategy is to hedge the commodity price risk based on the expected consumption up to 15 months before delivery. As purchases of aluminium are denominated in US dollar (USD), the company also hedges its foreign exchange risk.

In line with its risk management objective and strategy, on 1 April 2019 the company entered into a net-settled aluminium forward contract with a commodity broker to purchase 1,500 mt aluminium with a maturity of 30 June 2020.

Aluminium forward prices for a contract maturing 30 June 2020 at various dates during the hedge are as follows:

	1 April 2019		30 June 2019		31 Dec 2019		30 June 2020
Aluminium forward price	USD2,050/mt		USD2,030/mt		USD2,150/mt		USD2,300/mt

In May 2019, the company ordered 1,500 mt aluminium for delivery on 30 June 2020. The price is based on the spot price on the delivery date (30 June 2020) and is to be settled immediately. As the purchase of aluminium required settlement in USD, the company decided to hedge the cash flow into Malaysian Ringgit (RM).

The spot and forward exchange rates maturing 30 June 2020 at various dates during the hedge are as follows:

	1 April 2019		30 June 2019		31 Dec 2019		30 June 2020
RM/USD: Spot rate	4.40		4.20		4.31		4.35
Forward rate			4.18		4.28

The relevant discount rates for discounting a cash flow at various dates during the hedge are as follows:

	30 June 2019		31 Dec 2019
Discount rate	0.887		0.942

The company is able to demonstrate that all the requirements for hedge accounting as per MFRS 9 Financial Instrumentsare met and therefore it classifies the hedging of aluminium price risk and foreign exchange risk as cash flow hedges.

REQUIRED:

Determine the information (i.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 instruments.