Page 191 - SBR Integrated Workbook STUDENT S18-J19

Financial instruments

Example 13

Fair value hedge

On 1 July 20X1, Coffee buys inventories of oil for $12 million. By 1 October
20X1, these inventories had a fair value of $15 million. To protect the value of
the oil, Coffee enters into futures contracts to sell the oil for $15 million in six
months’ time. The fair value of the futures contracts at inception was nil.

By 31 December 20X1, the fair value of the inventories had fallen to $14.1
million and the fair value of the futures contracts had risen to $1 million.

Explain how the above would be accounted for at 31 December 20X1 if:

 Coffee did not apply hedge accounting

 Coffee designated the above relationship as a fair value hedge.

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