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90 I 2020 ANNUAL REPORT I financial reports

NOTES TO THE FINANCIAL STATEMENTS

FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2020 (CONTINuED)

2 sUMMarY of siGnificant accoUntinG policies (continued)
2.8 DeriVatiVes anD HeDGinG actiVities
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently
remeasured to their fair value at the end of each reporting period.
The accounting for subsequent changes in fair value depends on whether the derivative is designated as hedging
instrument, and if so, the nature of the item being hedged. The Company designates its derivatives as hedges of
a particular risk associated with the cash flows of recognised assets and liabilities and highly probable forecast
transactions (cash flow hedges).

The Company documents at the inception of the hedge relationship, the economic relationship between hedging
instruments and hedged items including whether changes in the cash flows of the hedging instruments are expected
to offset changes in the cash flows of the hedged items. The Company documents its risk management objective and
strategy for undertaking its hedge transactions.
The fair values of various derivative financial instruments used for hedging purposes are disclosed in Note 19.
Movements in the hedging reserve in shareholders’ equity are shown in Note 23. The full fair value of a hedging
derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than
12 months; it is classified as current asset or liability when the remaining maturity of the hedged item is less than
12 months. Trading derivatives are classified as a current asset or liability.
(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 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.
• 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.
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.