Integrated Reports Senwesbel Consolidated Financial Statements 2018 - Page 76

2.10.2.2. COMMODITY FINANCE LOANS Finance is obtained from banks where inventory serves as security. Senwes can enter into two types of commodity finance transactions: Non-executory contracts: A commodity finance loan is obtained on inventory where the delivery month on Safex is in the current month. Commodity finance loans are initially recognised at the fair value of the inventory less location differential, including directly attributable transaction costs. After initial recognition, commodity finance loans are subsequently measured at amortised cost using the effective interest rate method. Interest expense is included in finance cost in profit or loss. Executory contracts: Commodity finance loan is obtained on inventory which delivery month on Safex is in future months. Commodity finance loans are initially recognised at the fair value of the inventory less location differential. After initial recognition, commodity finance loans are subsequently measured at fair value taking in to account the movement in the commodity markets. The fair value movements is included in profit or loss. Interest expense is included in finance costs in profit or loss. DERECOGNITION A financial liability is derecognised when the obligation under the liability is discharged or cancelled, or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in profit or loss. OFF-SETTING Where a legal right to set off assets and liabilities exists and where it is intended to settle the relevant assets and liabilities simultaneously or on a net basis, the amounts are set off. Financial instruments to which the group is a party are disclosed in note 21. 2.11 DERIVATIVE FINANCIAL INSTRUMENTS Derivative instruments are used by the group in the management of business risks. They are initially recognised in the statement of fi- nancial position at cost (which is the fair value on that date) and are thereafter remeasured to fair value. The method of recognising the resultant profit or loss depends on the type of item being hedged. The group allocates certain financial instruments as: β€’ A hedge of the exposure to changes in fair value of a recognised asset or liability or, an unrecognised firm commitment (fair value hedge); or β€’ A hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge). Changes in the fair value of derivative instruments which have been allocated, and which qualify as fair value hedges, that are highly effective, are accounted for in profit or loss together with any change in the fair value of the hedged asset or liability that is attributable to the hedged risk, and are therefore effectively set off against one another. Changes in the fair value of derivative instruments which have been allocated and qualify as cash flow hedges, that are also highly effective, are accounted for in other comprehensive income. The ineffective portion of a cash flow hedge is recognised immediately in profit and loss. If the forward transaction results in the recognition of an asset or liability, the profit or loss that was deferred earlier to other comprehensive income, is transferred from other comprehensive income and included in the initial determination of the cost of the asset or liability. 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