Hi,
I have a couple of questions regarding the accounting treatment in part (c)(iii) of the Colat Co question.
1. Assumption that hedge accounting has been adopted
The question mentions that Colat Co hedges its aluminium price risk, but I cannot see any explicit mention that the company has formally adopted hedge accounting or that the qualifying criteria under IFRS 9 have been satisfied.
My understanding is that simply entering into a hedging transaction does not automatically mean that hedge accounting has been adopted. Hedge accounting requires the relevant designation, documentation and qualifying criteria to be met.
Could someone please explain why the model answer assumes that cash flow hedge accounting was being applied and consequently concludes that the accumulated gain or loss in the cash flow hedge reserve should be reclassified from OCI to profit or loss when the forecast purchases are no longer expected to occur?
2. Accounting treatment if hedge accounting has not been adopted
Suppose we assume that hedge accounting has not been adopted. I understand that the accounting treatment would then depend on the nature of the contract involved.
Colat Co is described as a manufacturer of aluminium products, so I wondered whether the aluminium purchase contract could qualify for the own-use exemption under IFRS 9, assuming the contract meets the relevant conditions and is intended to be settled through physical delivery for the company's own manufacturing requirements.
If the own-use exemption applies, would the purchase contract be treated as an executory contract rather than as a derivative measured at fair value through profit or loss? In that case, provided the contract is not onerous, would there be no liability recognised for the purchase contract itself?
I would be grateful if someone could clarify the intended interpretation of the question and explain why the model answer applies cash flow hedge accounting.
Thank you.