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 companys 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 1 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	3,000 mt
Contract price	Spot price on 30 June 2021
Transportation cost	USD5,000
Delivery date	30 June 2021
Settlement date	30 June 2021
NET SETTLED ALUMINIUM FORWARD CONTRACT
Volume	3,000 mt
Forward price in USD	USD4,380,000
Start date	1 April 2020
Maturity date	30 June 2021
Settlement date	30 June 2021
FOREIGN CURRENCY FORWARD CONTRACT
Amount purchased (USD)	USD4,380,000
Amount sold (RM)	RM18,308,400
Forward rate	RM4.18/USD
Start date	30 June 2020
Maturity date	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.

Note:

Make your own assumption, if necessary, with regard to information required for measuring the derivative instruments.

REQUIRED:

1. Show the necessary journal entries for the derivative instruments during 2020 and 2021.
2. Determine the information (i.e., asset/liability and revenue/expense) to be reported in the financial statements for the year ended 31 December 2020 with regard to the use of derivative instruments.