The purpose of this section is to introduce students to accounting principles and techniques in preparing financial reporting related to financial instruments. Presented below is a scenario of business transactions that SP Bhd involves during the financial year 2020 and 2021. SP Bhd is a Malaysian company with a Malaysian Ringgit (RM) functional currency. Its reporting dates are 30 June and 31 December. SP Bhd produces aluminium cans for the soft drinks industry. Based on the production plan for the third quarter of 2021, it was estimated that aluminium consumption would be 3,000 metric tonnes (mt). The company's risk management objective and strategy is to hedge the commodity price risk based on the expected consumption up to 15 months before delivery. In line with its risk management objective and strategy, on ! April 2020 the company entered into a net-settled aluminium forward contract with a commodity broker to purchase 3.000 mt aluminium with a maturity of 30 June 2021. Aluminium forward prices for a contract maturing 30 June 2021 at various dates during the hedge are as follows: 1 April 2020 30 June 2020 31 Dec 2020 30 June 2021 Aluminium forward price USD1.460/mt USD1,570/mt USD1,415/mt. USD1,650/mt In May 2020, the company ordered 3.000 mt aluminium for delivery on 30 June 2021. The price is based on the spot price on the delivery date (30 June 2021) 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). On 30 June 2020 the company entered into a foreign currency forward contract with a local merchant bank to purchase USD with a maturity of 30 June 2021 The spot and forward exchange rates maturing 30 June 2021 at various dates during the hedge are as follows: 1 April 2020 30 June 2020 31 Dec 2020 30 June 2021 RM/USD: Spot rate 4.35 4.20 4.04 4.16 Forward rate 4.18 4.08 The relevant discount rates for discounting a cash flow at various dates during the hedge are as follows: 30 June 2020 31 Dec 2020 Discount rate 0.887 0.942 The transactions are summarized as follows: PHYSICAL PURCHASE OF ALUMINIUM Volume Contract price Transportation cost Delivery date Settlement date 3,000 mt Spot price on 30 June 2021 USD5,000 30 June 2021 30 June 2021 NET SETTLED ALUMINIUM FORWARD CONTRACT Volume Forward price in USD Start date Maturity date Settlement date FOREIGN CURRENCY FORWARD CONTRACT Amount purchased (USD) Amount sold (RM) Forward rate Start date Maturity date 3,000 mt USD4,380,000 1 April 2020 30 June 2021 30 June 2021 USD4,380,000 RM18.308,400 RM4,18/USD 30 June 2020 30 June 2021 The aluminium forward contract and the foreign currency forward contract are settled on 30 June 2021. The aluminium also is delivered to SP Bhd on 30 June 2021. The price on the delivery date is USD1,650 per tonne and the exchange rate is 4.16. The company is able to demonstrate that all the requirements for hedge accounting as per MFRS 9 Financial Instruments are met and therefore it classifies the hedging of aluminium price risk and foreign exchange risk as cash flow hedges. The purpose of this section is to introduce students to accounting principles and techniques in preparing financial reporting related to financial instruments. Presented below is a scenario of business transactions that SP Bhd involves during the financial year 2020 and 2021. SP Bhd is a Malaysian company with a Malaysian Ringgit (RM) functional currency. Its reporting dates are 30 June and 31 December. SP Bhd produces aluminium cans for the soft drinks industry. Based on the production plan for the third quarter of 2021, it was estimated that aluminium consumption would be 3,000 metric tonnes (mt). The company's risk management objective and strategy is to hedge the commodity price risk based on the expected consumption up to 15 months before delivery. In line with its risk management objective and strategy, on ! April 2020 the company entered into a net-settled aluminium forward contract with a commodity broker to purchase 3.000 mt aluminium with a maturity of 30 June 2021. Aluminium forward prices for a contract maturing 30 June 2021 at various dates during the hedge are as follows: 1 April 2020 30 June 2020 31 Dec 2020 30 June 2021 Aluminium forward price USD1.460/mt USD1,570/mt USD1,415/mt. USD1,650/mt In May 2020, the company ordered 3.000 mt aluminium for delivery on 30 June 2021. The price is based on the spot price on the delivery date (30 June 2021) 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). On 30 June 2020 the company entered into a foreign currency forward contract with a local merchant bank to purchase USD with a maturity of 30 June 2021 The spot and forward exchange rates maturing 30 June 2021 at various dates during the hedge are as follows: 1 April 2020 30 June 2020 31 Dec 2020 30 June 2021 RM/USD: Spot rate 4.35 4.20 4.04 4.16 Forward rate 4.18 4.08 The relevant discount rates for discounting a cash flow at various dates during the hedge are as follows: 30 June 2020 31 Dec 2020 Discount rate 0.887 0.942 The transactions are summarized as follows: PHYSICAL PURCHASE OF ALUMINIUM Volume Contract price Transportation cost Delivery date Settlement date 3,000 mt Spot price on 30 June 2021 USD5,000 30 June 2021 30 June 2021 NET SETTLED ALUMINIUM FORWARD CONTRACT Volume Forward price in USD Start date Maturity date Settlement date FOREIGN CURRENCY FORWARD CONTRACT Amount purchased (USD) Amount sold (RM) Forward rate Start date Maturity date 3,000 mt USD4,380,000 1 April 2020 30 June 2021 30 June 2021 USD4,380,000 RM18.308,400 RM4,18/USD 30 June 2020 30 June 2021 The aluminium forward contract and the foreign currency forward contract are settled on 30 June 2021. The aluminium also is delivered to SP Bhd on 30 June 2021. The price on the delivery date is USD1,650 per tonne and the exchange rate is 4.16. The company is able to demonstrate that all the requirements for hedge accounting as per MFRS 9 Financial Instruments are met and therefore it classifies the hedging of aluminium price risk and foreign exchange risk as cash flow hedges