TUNKU PUTERI INTAN SAFINAZ SCHOOL OF ACCOUNTANCY

BKAR 3033 FINANCIAL ACCOUNTING AND REPORTING III

First Semester 2021/2022（A211）
Group N

Comprehensive Case 2

Prepared For：
Dr. Faisol B Elham

Prepared By：
Group 2
No Name Matric No.
1. Gui Xue Ching 277223
2. Ahmad Afiq Irfan Bin Ahmad Kamal 280468
3. Siti Sholehah Binti Johar 280544
4. Adeleen Farhani binti Ahmad Fauzi 281508
5. Mazlina Binti Muhammad 281603

Submission Date:

12th December 2021

Table of Contents
SECTION A ........................................................................................................................................ 1
(a) Show the necessary journal entries for the derivative instruments during 2020
and 2021. ........................................................................................................................................ 1
(b) 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. ......................................................................... 2
(c) Explain how to test hedge effectiveness under MFRS 9 and its accounting
treatment in hedge accounting ................................................................................................. 3
SECTION B ........................................................................................................................................ 5
a. Explain the disclosure requirement of fair value measurement of the
companies’ assets (Investment properties, biological assets and financial
instruments) as per MFRS13. .................................................................................................... 5
b. Explain the disclosure of fair value measurements related to assets (Investment
Properties, financial instruments and biological assets) of the companies. ................ 6
c. Summarize the key finding(s) of the application of the disclosure of fair value
measurement from part (b) above. ........................................................................................ 12
References....................................................................................................................................... 14
Appendices...................................................................................................................................... 15
SECTION A

(a) Show the necessary journal entries for the derivative instruments during

2020 and 2021.

Date Account Title Debit (USD) Credit (USD)

2020
April 1 No Journal Entry - -

June Forward Contract – Aluminium 1,229,382

30
Cash Flow Hedge Reserve (OCI) 1,229,382

Dec Cash Flow Hedge Reserve (OCI) 1,769,641.20

31
Forward Contract - Aluminium 1,769,641.20

Cash Flow Hedge Reserve (OCI) 412,596

Forward Contract -Foreign Currency 412,596

(USD4,380,000 X 0.942 X (4.18-4.08))
2021
June Forward Contract - Aluminium 2,932,800
30
Cash Flow Hedge Reserve (OCI) 2,932,800

Cash 2,392,540.80
Forward Contract – Aluminium 2,392,540.80
(USD1,229,382 -USD 1,769,641.20
+USD 2,932,800)
Forward contract-Foreign currency 350,400
Cash Flow Hedge Reserve [(4.16- 350,400
4.08) x USD 4,380,000]
Forward contract-Foreign currency 62,196
Cash (USD 412,596 - USD 350,400) 62,196
Inventory – raw material 20,592,000
Cash (3000 x USD 1650 x 4.16) 20,592,000
Transportation Cost 20,800
Cash (4.16 x USD5,000) 20,800

1
30 June 2020
Change in FV of forward contract = (USD 1570 – USD 1460) x 3000 MT = USD
330,000
The discount rate on 30 June 2020 = USD 330,000 x 0.887 = USD 292,710
The exchange rate on 30 June 2020 = USD 292710 X 4.20 = USD 1,229,382

31 Dec 2020
Change in FV of forward contract = (USD 1570 – USD 1415) x 3000 MT = USD
465,000
The discount rate on 30 June 2020 = 465000 X 0.942 = USD 438,030
The exchange rate on 30 June 2020 = USD 438030 X 4.04 =USD 1,769,641.20

30 June 2021
Change in FV of forward contract = (USD 1650 – USD 1415) x 3000 MT = USD
705,000
The exchange rate on 30 June 2020 = USD 705000 x 4.16 = USD 2,932,800

(b) 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.

SP Bhd aware that their company need to be in line with its risk management

objective and strategy as they purchased the aluminium in US Dollar (USD).

Therefore, on 1 April 2020, SP Bhd entered a foreign currency forward contract. The

hedge was classified as fair value hedge and only intrinsic value was designated as

hedging instrument as allowed in MFRS 9 Financial Instrument.

According to MFRS 9, changes in fair value of derivatives that are designated

and qualify as fair value hedges are recorded in profit or loss, together with any

changes in the fair value of the hedged asset or liability that are attributable to the

2
hedged risk. Financial instruments are initially recognized in the statement of financial

position at cost and are carried as assets when fair value is positive and as liabilities

as fair value is negative. Changes in fair value of derivatives are included in the income

statement.

SP Bhd entered an aluminium forward contract on 1 April 2020 at USD

4,380,000 (USD 1,460x3000) and there are changes in the fair value on 30 June 2020

which is USD 330,000. Meanwhile on 31 December 2020, there are changes in the

fair value with the amount of USD 465,000 and there are also changes in the fair value

on 30 June 2021 which is USD 705,000. The differences between the fair value will

be recorded in the Other Comprehensive Income (OCI) as expenses.

The information that needs to be reported in the financial statements for the

year ended 30 June 2020 in SP Bhd is an asset (forward contract) at amount USD

4,710,000 in financial position as the fair value is higher than contract price. While in

the financial statements for the year ended 31 December 2020 in SP Bhd is a liability

(forward contract) at amount USD 4,245 ,000 in financial position as the fair value is

lower than contract price and forward contract is asset in the financial statement for

the year ended 30 June 2021 at USD 4,950,000.

(c) Explain how to test hedge effectiveness under MFRS 9 and its accounting

treatment in hedge accounting

MFRS 9 requires that hedge effectiveness be reviewed by prospective testing

at the start of the hedge and on an ongoing basis, as well as through retrospective

testing on a regular basis to establish how efficient the hedging relationship is. The

Standard under MFRS9, on the other hand, does not define a single approach for

3
determining whether a hedging relationship fulfils hedge effectiveness standards. As

a result, the approach used to evaluate hedge effectiveness is determined by an

entity's risk management strategy, which includes the key aspects of the hedging

relationship, including the causes of hedge ineffectiveness. Depending on such

criteria, the approach might be either qualitative or quantitative. Ratio analysis, which

compares previous changes in the fair value or cash flows of the hedged item

attributable to the hedge risk with past changes in the fair value or cash flows of the

hedging instrument, is one approach that may be utilised. A company may also utilise

statistical methods such as regression analysis to show the statistical association

between the hedged item's fair value or cash flow and those of the hedging instrument.

If the cash flow hedge fulfils the qualification requirements, the hedging

relationship is accounted for as recognising the gain or loss on the hedging

instruments that are found to be an effective hedge in other comprehensive income

under the heading 'cash flow hedge reserve.' Furthermore, any remaining gain or loss

on the hedging instrument as a result of hedge ineffectiveness must be included in

profit or loss.

4
SECTION B

a. Explain the disclosure requirement of fair value measurement of the

companies’ assets (Investment properties, biological assets and financial

instruments) as per MFRS13.

According to MFRS13, fair value is the price that would receive to sell an asset

or paid to transfer a liability in an orderly transaction between market participants at

the date of measurement. The assumptions that market participants would use will be

used by a company to price the asset or liability under current market conditions,

including assumptions about risk in measuring fair value. The company is required to

disclose information in order to help the users of financial statements to get to know

the assets and liabilities that are measured at fair value either on a recurring basis or

non-recurring basis in the Statement of Financial Position after initial recognition, the

valuation technique as well as inputs that need to be used to develop those

measurements. Besides that, the disclosure of information also includes the fair value

measurement that applied significant unobservable inputs (Level 3), the effect of the

measurements on profit or loss or other comprehensive income for the period.

In determining the appropriate classes of assets and liabilities for disclosure of

fair value measurement, the nature, characteristics and risks of the asset or liability,

and the level of the fair value hierarchy. The fair value measurements are classified

as Level 1, Level 2 and Level 3. For the amounts of any transfers of assets and

liabilities between Level 1 and Level 2 of the fair value hierarchy, the reasons for those

transfers between levels are deemed to have occurred, separately disclosing and

discussing transfers into and out of each level. For fair value measurements classified

within Level 2 and Level 3 of the fair value hierarchy, valuation techniques and the

5
inputs used in the fair value measurement should be described, any change in the

valuation techniques and the reason for making such change. However, for fair value

measurements categorized within Level 3 of the fair value hierarchy, quantitative

information about the significant unobservable inputs used in the fair value

measurement. The company should also disclose the reason a non-financial asset is

being used to differ from its highest and best use if the highest and best use of a non-

financial asset differs from its current use.

b. Explain the disclosure of fair value measurements related to assets

(Investment Properties, financial instruments and biological assets) of

the companies.

1.Harn Len Corporation Bhd

The fair value of the investment properties as of 31 December 2020 has been

determined based on valuations carried out at year-end by independent valuers having

appropriate recognized professional qualification and recent experience in the location

and category of the properties being valued, and not related to the company. The fair

value was determined based on the comparison approach that reflects recent

transaction prices for similar properties and adjusts to reflect the conditions and

locations of the subject properties. In estimating the fair value of the properties, the

highest and best use of the properties is their current use. Harn Len Corporation Bhd

classified their investment properties such as freehold land and building and long-term

leasehold land and building are using a fair value hierarchy that reflects the nature and

complexity of the significant inputs used in making the disclosure. At the end of the

6
reporting period, the fair value measurement of the company’s properties is classified

within Level 3 (RM 135,920,000) of the fair value hierarchy.

For financial instruments, the carrying amounts of financial assets of the Harn

Len Corporation Bhd as at the reporting date are approximately at their fair values due

to their short-term nature, the insignificant impact of discounting or they are floating

rate instruments that are re-priced to market interest rates on or near the reporting

date. The company uses fair value hierarchy to measure the assets for financial

instruments. They make an analysis of financial instruments that are measured after

initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which

the fair value is observable. In level 1, the fair value is RM 3,892,023 and increased in

level 3 which is RM 2,500,000. At level 1 of fair value, the fair value of other

investments in quoted shares that are quoted in an active market at the end of the

reporting period and at level 3, the fair value of other investments in unquoted shares

is estimated based on adjusted net asset method.

2. Parkson Holdings Berhad

For financial instruments, financial assets of Parkson Holdings Berhad are

measured at amortized cost, fair value through other comprehensive income (FVOCI)

and fair value through profit or loss (FVPL) whereas financial liabilities are measured

at FVPL and at amortised cost. Both financial asset unquoted equity securities at

FVOCI and wealth management products at FVPL are measured by level 3 of fair

value hierarchy with the amount of RM 16,697,000 and RM 142,977,000 respectively.

Financial liabilities are recognized initially at fair value and in the case of loans and

borrowings and payables, net of direct transaction cost. Financial liabilities that held

7
for trading are measured at FVPL whereas other financial liabilities which are trade

and other payables, lease liabilities, loans and borrowings including bank overdraft,

financial guarantee contracts are measured at amortised cost. Derivatives are

measured at fair value at each reporting date. The fair values of long-term loans and

borrowings, deposit receivables or payables and non-current lease liabilities are

estimated by discounting expected future cash flows and lease payment at market

incremental lending rates for similar types of lending, borrowings or leasing

arrangements at reporting date.

The investment properties of Parkson Holdings Berhad are measured initially

at cost, including transaction costs. The investment properties are measured based

on market values determined by an accredited independent firm of professional

valuers on direct comparison method or market approach. The fair values of the

completed investment properties are categorized as Level 3 under the fair value

hierarchy. The total amount of investment properties by using level 3 of the fair value

hierarchy in 2020 is RM 1,995,176,000. The significant unobservable inputs are selling

price per square foot of comparable properties adjusted for location, accessibility, size,

title conditions and restrictions, land tenure, zoning or designated use, building,

improvements and amenities and time element. Under the market approach, a

property’s fair value is estimated based on comparable transactions. This approach is

based upon the principle of substitution under which a potential buyer will not pay more

for the property than it will cost to buy a comparable substitute property.

8
3. TH Plantation Berhad

For financial assets of TH Plantation Berhad which is unquoted share, is

measured by level 3 of fair value hierarchy with the amount of RM 1,825,000. The

valuation technique for the unquoted price is by calculating the net assets value at the

entity reporting date. While all financial liabilities are measured at carrying amount, not

at fair value within Level 3. Financial liabilities, the amount due to related companies

not carried at fair value because discounted cash flows using a rate based on the

current market of borrowing of the group at the entities reporting date while the amount

due from subsidiaries (SUKUK Murabahah Medium Term Notes and Commodity

Murabahah Term Financing-i) is because of discounted cash flows using a rate based

on the current market of borrowing of the subsidiaries at the entities reporting.

The biological assets of TH Plantation Berhad are measured initially at fair values

with less cost to sell and the changes in fair value shall be recognised in profit or loss

for the period. The main biological asset of the company is Fresh Fruit Bunches (FFB).

The company used fair value hierarchy as fair value measurement of the company’s

biological asset. The total amount of biological assets of the Group by using level 3 of

the fair value hierarchy in 2020 is RM 41,664,000.

4. Globetronics Technology Berhad

Globetronics Technology Berhad employs quoted pricing for its financial

instruments held at fair value, which include quoted bonds/funds and quoted shares.

The fair value of financial instruments held at fair value hierarchy comprises of Level

1 and Level 2 fair value hierarchy for assets under financial instruments. The present

value of future principal and interest cash flows, discounted at the market rate of

9
interest at the end of the reporting period, is used to establish fair value for disclosure

reasons. Globetronics Technology Berhad discloses that the fair value of an asset to

be transferred between levels is calculated as of the date of the event or change in

circumstances that precipitated the transfer. The financial accounts reflect that there

was no transfer between Level 1 and Level 2 fair values throughout the year.

Globetronics Technology Berhad's investment property consists of a factory

building leased to a group affiliate. The company designated its investment properties

as level 3 fair value by estimating the investment property's fair value using

unobservable inputs. Because relevant inputs are not visible, they must be designed

to represent the assumptions that market participants would make when calculating a

suitable price for the assets. The Directors' appraisal for the fair value of the Group's

investment property is based on the most current available market information as well

as recent experience and expertise in the region and type of property being assessed.

The Group's investment property's fair value as of 31 December 2020 is classed as

level 3 fair value, with an estimated at approximately RM14.6 million utilizing the

investment property's unobservable inputs. The Directors evaluate the fair value of the

Group's investment property using the major assumptions listed below:

• Comparison of the Group's investment property with similar properties that

have been advertised for sale in the same or other comparable areas.

• Enquiries from relevant property valuers and real estate agents on market

conditions and changing market trends.

The company discloses that the fair value of an asset to be transferred between levels

is assessed as of the date of the occurrence or change in circumstances that produced

the transfer.

10
5. SMRT Holdings Berhad

Fair value of an asset or a liability, except for share-based payment and lease

transactions, is determined as the price that would be received to sell an asset or paid

to transfer a liability in an orderly transaction between market participants at the

measurement date. Fair value is categorized into different levels in a fair value

hierarchy based on input used in the valuation technique. The carrying amounts of

cash and bank balances, trade and other receivables, trade and other payables and

short-term borrowings, are reasonable approximation of fair value due to the relatively

short-term nature of these financial instruments. In respect of the long-term borrowings

with variable interest rates, the carrying amounts approximate fair values as they are

repriced to market interest rates for liabilities with similar risk profiles. The fair value

measurement hierarchy of the Group’s financial instrument is RM3,372. There has

been no transfer between Level 1 and Level 2 during the financial year (2019: no

transfer in either direction).

Investment properties are leasehold land and buildings which are held either to

earn rental income or capital appreciation or for both and are not substantially

occupied by the Group. Such properties are measured initially at cost, including

transaction costs. After the initial recognition, investment properties are stated at cost

less accumulated impairment losses, if any. Investment property measured at fair

value, which continues to be measured in accordance with the Group’s accounting

policies. Any gains and losses on the retirement or disposal of investment properties

are recognized in the profit or loss in the financial year in which they arise. Transfers

are made to or from investment property only when there is a change in use. For a

transfer from investment property carried at fair value to owner-occupied property, the

deemed cost for subsequent accounting is the fair value at the date of change in use.

11
 c. Summarize the key finding(s) of the application of the disclosure of fair

value measurement from part (b) above.

The application of each company to the disclosure of fair value measurements

to their Investment Properties, Biological assets and Financial Instruments can be

seen from the discussion in part (b) above. Each company must act in accordance

with the disclosure requirement and provide users information on fair value

measurement, such as valuation techniques and inputs used, as well as significant

unobservable inputs.

According to MFRS 13 Fair Value Measurement, when determining the fair

value, each company is expected to disclose the valuation technique and inputs used.

There are three ways that can be applied by companies in general which are the

market approach, the income approach, and the cost approach. The approach applied

by each company must be stated in the annual report notes.

Based on the information in part (b) above, all companies that use level 2 or

level 3 of the fair value hierarchy will declare the valuation technique that they use.

For example, Harn Len Corporation and others 4 companies that have been stated in

part (b) above has used level 3 for investment properties that has specified the

valuation technique they use, which is a combination of the comparison method and

the cost method, based on significant unobservable inputs.

Aside from that, each corporation must publish the level of the fair value

hierarchy it used, whether it was level 1, level 2, or level 3. A company must first

identify and analyze the inputs that they will use to calculate the fair value of their

assets and liabilities before calculating the fair value. If there is a quoted price for

equivalent assets or liabilities in an active market, the corporation can apply level 1

12
and measure the fair value without making any adjustments. However, if there is no

readily available quoted price, the company can choose level 2 or level 3. When the

asset or liability has inputs other than the quoted price that are observable, the

corporation must use level 2. When the inputs are unobservable, they must use level

3.

Based on the findings in part (b) above, all five companies report that they utilize

level 1 for their assets or liabilities only when there is a quoted price in an active market

that they may use to determine fair value. In level 1, the assets always identified as

current assets. The company should disclose inputs used for level 2 or unobservable

inputs used for level 3 when measuring fair value using level 2 or level 3. In part (b)

above, most companies disclose their fair value of the assets in level 3 fair value

hierarchy. For example, Globetronics Technology Berhad and Parkson Holdings

Berhad that using level 3 to disclose their investment properties, the company has

identified and reveal that investment property's unobservable inputs that will be utilize

in order to evaluate fair value of their assets.

13
 References

Web Source：
Parkson Holdings Berhad. (2020). Annual Report 2020. Retrieved December 4, 2020,
from https://www.bursamalaysia.com/marketinformation/announcements/com
pany_announcement/announcement_details?ann_id=3099672

Announcement details (TH Plantation Berhad). (2020). Annual Report 2020

Retrieved December 9, 2021, from
https://www.bursamalaysia.com/market_information/announcements/compan
y_announcement/announcement_details?ann_id=3153083

Bhd, H. L. (2021, April 30). Annual Report Harn Len Corporation Bhd 2020. 、
Retrieved from Bursa Malaysia:
https://www.bursamalaysia.com/market_information/announcements/compan
y_announcement/announcement_details?ann_id=3153547

SMRT Holdings Berhad (2020). Annual Report 2020. Retrieved December 12, 2021,
from
https://www.bursamalaysia.com/market_information/announcements/company_announc
ement/announcement_details?ann_id=3162347

Globetronics Technology Berhad (2020) Annual Report 2020. Retrieved December 12,
2021, from
https://www.bursamalaysia.com/market_information/announcements/company_annou
ncement/announcement_details?ann_id=3145964

14
 Appendices

Figure 1: Parkson Holdings Berhad Fair Value Measurement

Figure 2: Parkson Holdings Berhad Investment Properties

15
Figure 3: Parkson Holdings Berhad Investment Properties

Figure 4: Parkson Holdings Berhad Financial Instruments

16
Figure 5: Harn Len Corporation Bhd Financial Instrument

Figure 6: Harn Len Corporation Bhd Investment Properties

17
Figure 7: TH Plantation Berhad Financial Instrument

Figure 8: TH Plantation Berhad Biological Asses

18
Figure 9: SMRT Holdings Berhad Financial Instruments

Figure 10: SMRT Holdings Berhad Financial Instruments

19
 Figure 11: SMRT Holdings Berhad Investment Properties

Figure 12: Globetronics Technology Berhad Investment Properties

20
Figure 13: Globetronics Technology Berhad Financial Instruments

Figure 14: Globetronics Technology Berhad Financial Instruments

21