ACCOUNTING FOR DERIVATIVES

Last updated: 31 March 2008

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Certain issues have been raised with regard to the foreign currency derivative exposures of various corporates that are not being fully accounted for. These exposures may translate into heavy losses due to fluctuations in the foreign exchange rates. The matter was considered by the Council of the ICAI at its meeting held on March 27-29, 2008. The Council decided to clarify the best practice treatment to be followed for all derivatives, which is contained in the following paragraphs.
It may be noted that although the ICAI has issued AS 30, Financial Instruments: Recognition and Measurement, which contains accounting for derivatives, it becomes recommendatory from 1.04.2009 and mandatory from 1.04.2011. In this scenario, the Council expressed the view that since the aforesaid Standard contains appropriate accounting for derivatives, the same can be followed by the entities, as the earlier adoption of a standard is always encouraged.
In case an entity does not follow AS 30, the entity should mark-to-market all the outstanding derivative contracts on the balance sheet date. The resulting mark-to-market losses should be provided for keeping in view the principle of prudence as enunciated in AS 1, Disclosure of Accounting Policies.
The entity needs to disclose the policy followed with regard to accounting for derivatives in its financial statements.
In case AS 30 is followed by the entity, a disclosure of the amounts recognised in the financial statements should be made.
In case AS 30 is not followed, the losses provided for as suggested in paragraph 3 above should be separately disclosed by the entity.
The auditors should consider making appropriate disclosures in their reports if the aforesaid accounting treatment and disclosures are not made.

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