The given Guidance Note “GN” highlights on recognition, measurement, presentation and disclosure for derivative contracts so as to bring uniformity in their accounting and presentation in the financial statements.
This GN covers all derivative contracts that are not covered by an existing notified Accounting Standard; hence, it does not apply to the following:
If any entity decides not to use Hedge Accounting, then it should account for its derivatives at fair value with changes in fair value being recognized in the P&L.
If an entity decides to apply hedge accounting it should be able to clearify the following:-
Note: Hedging is a risk reduction technique whereby an entity uses a derivative instrument to offset future changes in the fair value or cash flows of an asset or liability.
The said GN requires that all derivatives are recognized on the balance sheet and measured at fair value since a derivative contract represents a contractual right or an obligation.
Note: Fair value represents the ‘exit price’ i.e. the price that would be paid to transfer a liability or the price that would be received when transferring an asset to a knowledgeable, willing counterparty.
Derivative assets and liabilities recognized on the balance sheet at fair value should be presented as current and non-current based on the following considerations:
|FAIR VALUE HEDGE ACCOUNTING||CASH FLOW HEDGE ACCOUNTING||NET INVESTMENT IN FOREIGN OPERATIONS|
|Changes in fair value of
· Recognised asset or liability
· unrecognised firm commitment,
· identified portion of asset/ liability/ commitment,
|Variability in cashflows associated to a component of
· recognized asset or liability
· highly probable forecast transaction
|Net investment in foreign Branch, as the investor in a non-integral foreign operation is exposed to changes in the carrying amount of the net assets of the foreign operation arising from the translation of those assets into the reporting currency of the investor.|
|Attributable to a particular risk and could affect P&L.|
|Example : Hedging of a fixed rate bond with an interest rate swap,
changing the interest rate from fixed to floating
|Example : Hedging of future highly probable sales in a foreign currency using a forward exchange contract.
July 2016: received order for export to USA in the month of January 2017 & realise USD 100,000 in April 2017.
Entered futures in the month of April @ Rs. 65 (Spot Rate:.64.50 Rs/USD).
January 2017: 61 Rs/USD, and forward rate 61.20 Rs./USD.
March 2016: the 60.50 Rs/USD and forward rate 60.60 Rs./USD.
Realization 60 Rs/USS
|January 2017||Recognises the revenue @ Spot Rate
Debtors 61,00,000To Sales 61,00,000Account the MTM effect [(65 – 61.20)*10000]:
Forward entered @ 65 & similar Forward trading @ 61.20.
Forward contract Receivable 3,80,000
To Cash Flow Hedge Reserve 3,80,000
Cash Flow Hedge Reserve 3,80,000
To Profit and loss. 3,80,000 (Recognition of hedging gain as the revenue is booked)
|Forward rate 60.60 Rs/USD, Spot rate Rs. 60.50 Rs/USD
Restatement of Debtors (60.50 – 61)
Forex Loss (P&L)…………50,000
To Debtors 50,000
MTM Effect of Forward Cover (60.60 – 61.20)
Forward Contract Receivable 60,000
To Forex Gain (P&L) 60,000
|April 2017||Spot rate : 60.00 Rs/USD
Realisation of Debtors
Forex Gain/Loss (P&L) 50,000
To Debtors 60,50,000
Maturity of Forward Contract
To Forward Contract Receivable 4,40,000
To Forex Gain/Loss (P&L) 60,000