Page 124 - HRC_AR2020

122 I 2020 ANNUAL REPORT I financial reports

NOTES TO THE FINANCIAL STATEMENTS

FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2020 (CONTINuED)

19 DeriVatiVe financial assets/(liaBilities) (continued)
Derivatives designated as hedging instrument
(a) refining margin swap contracts
The Company purchases crude on an ongoing basis as the Company requires continuous supply of crude to produce
petroleum products. As a result of the volatility in crude price, the Company held refining margin swaps designated
as hedge of highly probable forecast crude purchases or firm commitments and sales of petroleum products to reduce
the volatility of cash flows.
The contracts are intended to hedge the volatility of the refining margin (differences between purchase price of crude
oil and sales price of petroleum products) for a period between 1 to 12 months (2019: 1 to 24 months). There was no
forecast transactions for which hedge accounting had previously been used, but which is no longer expected to occur.
The cash flow hedges of the highly probable forecast crude purchases or firm purchase commitments and
sales of petroleum products were assessed to be highly effective. The net unrealised gain of RM75,099,000
(2019: RM201,691,000), with a related deferred tax liability of RM18,024,000 (2019: RM48,406,000) was included
in other comprehensive income in respect of these contracts for the financial year. There is no ineffectiveness portion
of hedge accounting during the current and previous financial year.

The effects of the refining margin swap contracts on the Company’s financial position and performance are as follows:
2020 2019
Carrying amount asset, net (RM’000) 75,099 201,691
Notional value (USD’000) 43,844 331,174
Maturity date January 2021 to January 2020 to
December 2021 June 2021
Hedge ratio (%) 100 100
Change in fair value of designated hedging instruments (RM’000) 78,334 249,916
Change in value of hedged item used to determine
hedge effectiveness (RM’000) (78,334) (249,916)
Gross margin per barrel (USD) 2.05 to 23.05 5.50 to 23.05

(b) interest rate swap contracts
The Company enters into interest rate swap contracts to hedge cash flow interest rate risk arising from floating rate
term loans (Note 26). This interest rate swap receives floating interest equal to LIBOR, pays a fixed rate of between
2.96% to 3.03% and has the same maturity terms as the term loans.
The management considers the interest rate swaps as an effective hedging instrument as the term loans and the
swaps have identical critical terms. The net unrealised loss of RM15,886,000 (2019: RM12,759,000), with a related
deferred tax asset of RM3,813,000 (2019: RM3,062,000) was included in other comprehensive income in respect
of these contracts for the financial year. There was no ineffectiveness recognised in the current and previous
financial year.