Page 112 - HRC_Annual_Report_2023

110 About HRC Value Creation Management Discussion Leadership
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NOTES TO THE FINANCIAL STATEMENTS
FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2023

2 SUMMARY OF MATERIAL ACCOUNTING POLICY INFORMATION (continued)
2.9 DERIVATIVES AND HEDGING ACTIVITIES (continued)
(a) Cash flow hedge reserve

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges
is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the
ineffective portion is recognised immediately in profit or loss within “other operating gains/losses”.
Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit
or loss, as follows:
• The gain or loss relating to the effective portion of refining margin swaps hedging the volatility in refining
margin is recognised in profit or loss within purchases in the same period as the forecast purchases of crudes and
sale of petroleum products took place.
• The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowing is
recognised in profit or loss within finance cost at the same time as the interest expense on the hedged borrowings.
There are no outstanding interest rate swap contracts for the financial year ended 31 December 2023 and
31 December 2022.

When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge
accounting, any cumulative gain or loss and deferred cost of hedging in equity is reclassified to profit or loss in the
same period that the hedged cash flows affect profit or loss. When hedged future cash flows or forecast transaction
is no longer expected to occur, the cumulative gain or loss and deferred cost of hedging that was reported in equity
is immediately reclassified to profit or loss.
(b) Cost of hedging reserve
MFRS 9 introduces the concept of “cost of hedging” which is seen as cost of achieving the risk mitigation inherent
in the hedge. When refining margin swap contracts are used to hedge forecast transactions, the Company generally
designates only the change in fair value of the refining margin swap contracts related to the spot component as
the hedging instrument. Gains or losses relating to the effective portion of the change in the spot component of
the refining margin swap contracts are recognised in other comprehensive income and accumulated in cash flow
hedge reserve within equity. The change in the swap basis spread of the contract that relates to the hedged item is
recognised in other comprehensive income and accumulated in costs of hedging reserve within equity. The deferred
cost of hedging will be recycled from equity and recognised in profit or loss in the same period that the hedged cash
flows affect profit or loss.
(c) Hedge effectiveness

Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective
effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging
instrument.

For refining margin swap hedges, the Company enters into hedge relationships where the critical terms of the
hedging instrument match exactly with the terms of the hedged item. The Company therefore performs a qualitative
assessment on the effectiveness. If changes in circumstances affect the terms of the hedged item such that the
critical terms no longer match exactly with the critical terms of the hedging instrument, the Company uses the
hypothetical derivative method to assess effectiveness.
In refining margin swap hedges, ineffectiveness may arise if there is a change in delivery date of crude oil, change
in volume of hedged items or if there is a change in credit risk of the Company or the derivative counterparty.
As all critical terms matched in the current and previous financial year, the economic relationship was highly effective.