SP Bhd is a Malaysian company with a Malaysian Ringgit (RM) functional currency. Its reporting dates are
Question:
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 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.
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.
Assets | USD 1,229,382 |
Liability | USD 2,348,971.20 |
Equity | - USD 1,119,589.20 |
Revenue | USD 1,229,382 |
Expense | USD 2,348,971.20 |
Asset
Forward Contract (Aluminium)
= (USD 1,570 - USD 1,460) X 3000 mt X 0.887 X 4.20
= USD 1,229,382
Total Asset = USD 1,229,382
Liability
Forward Contract (Aluminium)
= (USD 1,415 - USD 1,570) X 3,000 mt X 0.942 X 4.04
=USD 1,769,641.20
Forward Contract (Foreign Currency)
= (USD 2,050 X 3,000 mt) X 0.942 X (4.18 - 4.08)
= USD 579,330
Total Liability
= USD 1,769,641.20 + USD 579,330
= USD 2,348,971.20
Total Equity = Total Assets - Total Liability
= USD 1,229,382 - USD 2,348,971.20
= - USD 1,119,589.20
Total Revenue = Total Asset
= USD 1,229,382
Total Expense = Total Liability
= USD 2,348,971.20
REQUIRED:
- Show the necessary journal entries for the derivative instruments during 2020 and 2021.
