Page 166 - MSM_AR2020

CHAIRMAN’S DELIVERING MSM MANAGEMENT DISCUSSION GROUP FINANCIAL
STATEMENT VALUE OVERVIEW & ANALYSIS REPORT

NOTES TO THE FINANCIAL STATEMENTS
FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2020

3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(ab) Derivative financial instruments and hedging activities
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently
re-measured at their fair value.

The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging
instrument, and the nature of the item being hedged. The Group designates certain derivatives as hedges of a particular
risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge).
The Group documents at the inception of the transaction the relationship between hedging instruments and hedged
164 items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group
also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are
MSM MALAYSIA HOLDINGS BERHAD Annual Report 2020
used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.
The fair values of various derivative instruments used for hedging purposes are disclosed in Note 27 to the financial
statements. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining
hedged item is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item
is less than 12 months.
Cash flow hedge
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. The gain or loss relating to the ineffective portion is recognised immediately
in profit or loss within ‘finance income/(costs)’ and ‘foreign exchange losses’.

Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or
loss (for example, when the forecast sale that is hedged takes place). The gain or loss relating to the effective portion
of interest rate swaps hedging variable rate borrowings is recognised in profit or loss and presented separately after
net operating profit.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting,
any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction
is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain
or loss that was reported in equity is immediately transferred to profit or loss within ‘finance income/(costs)’ (Note 10).

4 FINANCIAL RISK MANAGEMENT
(a) Financial risk management policies
The Group is exposed to market risk (including foreign currency exchange risk, commodity price risk and finance rate
risk), credit risk and liquidity risk arising from its business activities. The Group’s overall risk management strategy
seeks to minimise adverse effects from the unpredictability of financial markets on the Group’s financial performance.
The Group uses relevant derivative financial instruments to hedge the risk of such commercial exposure and ensure the
implementation risk action plans to effectively mitigate the risks.
The Board of Directors has overall responsibility for the oversight of financial risk management which includes risk
identification, operational or strategic, and the subsequent action plans to manage these risks. Management is responsible
for identifying, monitoring and managing the Group’s risk exposures.