Question : Cloud, a public limited company, regularly purchases steel from a foreign supplier and designates a future purchase of steel as a hedged item in a cash flow hedge. The steel was purchased on 1 May 2014 and at that date, a cumulative gain on the hedging instrument of $3 million had been credited to other comprehensive income. At the year end of 30 April 2015, the carrying amount of the steel was $8 million and its net realisable value was $6 million. The steel was finally sold on 3 June 2015 for $6·2 million.
The treatment of the cumulative gain given in the suggested answer is confusing. It says we should reclassify he $2 million gain from equity to profit or loss. The gain remaining in equity of $1 million will affect profit or loss(reclassify to P/L) when the steel is sold on 3 June 2015.
Quote “6.5.11(d)(i) if a hedged forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the entity shall remove that amount from the cash flow hedge reserve and include it directly in the initial cost or other carrying amount of the asset or the liability. This is not a reclassification adjustment (see IAS 1) and hence it does not affect other comprehensive income.”
My question is , isn’t steel a non-financial asset? I mean instead of just include the Cash flow hedge reserve(equity) directly in the carrying amount of inventory
Dt/Dr cash flow hedge reserve(Equity) $3 million
Ct/Cr Inventory $3 million
and left the inventory carried at amount of $5 million ,why should we reclassify the amount to P/L only when the value in the book changes? Isn’t the suggested answer goes against the accounting standard?