Hedge Accounting Example: Fortescue Ltd & Drills-R-US Ltd - AASB9 Journal Entries

1. Journal entries from 1 April through to final settlement on 30 September 20X6:

1 April 20X6: No journal entry required as no transaction has taken place yet.

31 July 20X6: Equipment account Dr. CNY300,000,000 Accounts payable account Cr. CNY300,000,000 To record the purchase of equipment from Drills-R-US Ltd.

Forward contract account Dr. A$900,000 Cash account Cr. A$900,000 To record the gain on the fair value of the forward contract.

30 September 20X6: Accounts payable account Dr. A$58,500,000 Cash account Cr. A$58,500,000 To record the settlement of the purchase of equipment with Drills-R-US Ltd.

Forward contract account Dr. A$1,500,000 Gain on cash flow hedge account Cr. A$1,500,000 To record the loss on the fair value of the forward contract.

2. Journal entries for the year ended 30 June 20X7:

Depreciation expense account Dr. A$15,000,000 Accumulated depreciation account Cr. A$15,000,000 To record the depreciation expense for the year on the equipment purchased from Drills-R-US Ltd. (CNY300,000,000/10 years)

Gain on cash flow hedge account Dr. A$300,000 Equity reserve account Cr. A$300,000 To record the effective portion of the gain on the cash flow hedge transferred from the gain on cash flow hedge account to the equity reserve account. (A$1,500,000 x 1/5)

Note: The fair value of the forward contract on 30 June 20X6 is a loss of A$200,000. As the loss is within the 80-125% range of the expected cash flows, it is considered an effective hedge and no journal entry is required to adjust the carrying amount of the forward contract.