Derivative Financial Instruments - Ind AS - Indian Accounting Standards - Companies Law

Derivative Financial Instruments What are Derivatives Financial Instruments? Meaning It is a contract between two parties for purchase sale of an underlying asset on a certain future price. Underlying asset can be shares, currency etc. Example - Derivatives such as Options, Interest Rate Swaps, Currency Swaps and Futures Forwards. Following condition should be satisfied to be classified as Derivative: Its value changes in response to change in underlying assets. It requires no initial or very less investment than it would be required otherwise to enter into contract in normal course. It is settled at future date. Derivative Contract are settled as follows: - Forward Option contracts it can be settled in cash or by physical delivery. Future Contracts these contracts can be settled in cash only. Accounting for Derivative Financial Instruments If it is potentially favourable for the entity Recognise as Derivative Financial Asset If it is potentially unfavourable for the entity Recognise as Derivative Financial Liability Measurement of Derivatives they are measured at Fair value through profit or loss. Recognition of Derivative Contract At Initial recognition/Commitment Date - When an entity becomes a party to a forward contract, the fair values of the right and obligation are often equal, so that the net fair value of the forward is ZERO. If the net fair value of the right and obligation is not zero, the contract is recognised as an asset or liability At each Balance Sheet Date Difference between price of underlying asset on Contract Date Balance Sheet Date to be recognise. If Field rate is also given, then consider Present Value of above amount as Fair Value. Journal Entries On Commitment Date Generally, No entry as Fair Value is Zero. But in case some cost or premium paid then (Amount Paid) - Derivative Financial Asset Dr. XXX To Bank XXX On Each Balance Sheet Date Derivative Financial Asset or Derivative Financial Liability to be shown at fair value. So, if any difference on amount recognised initially and Fair Value of DFA/DFL on Balance HSeet Date then such difference to shown in Profit or Loss A/c. Potentially Favourable - Derivative Financial Asset Dr. XXX To Profit or Loss A/c XXX Potentially Unfavourable Profit or Loss A/c XXX To Derivative financial Liability A/c XXX On Settlement Date If Derivative Contract is settled by physical delivery (Forward/Option Contract) If Contract is for purchase of Underlying Asset Underlying Asset (Fair Value) Dr. XXX Derivative Financial Liability (if any) Dr. XXX To Bank (Initial payment amount) XXX To Derivative Financial Asset (if any) XXX If Contract is for sale of Underlying Asset Bank A/c (Receipt of Initial Amount) Dr. XXX Derivative Financial Asset (if any) XXX To Underlying Asset (Fair Value) XXX To Derivative Financial Liability (if any) XXX *Difference in Journal entry will be recognised in Profit or Loss A/c as Fair Value Gain/Loss.