Accounting Guideline and Disclosure Requirements

The Securities and Exchange Board of India (SEBI) mandates that all entities dealing in currency derivatives must follow the accounting guidance issued under Ind AS 109 (Financial Instruments) and Ind AS 115 (Revenue from Contracts with Customers). These standards align Indian practice with IFRS but contain specific Indian nuances, especially around hedging disclosures.

Ind AS 109 requires initial recognition of a derivative at fair value and subsequent measurement at fair value through profit or loss (FVTPL), unless the contract qualifies for hedge accounting. SEBI’s circulars further require that brokers disclose the gross notional amount, the fair‑value amount and the net position on a periodic basis.

For the NISM exam, remember that the term “fair value” always means the market price at the reporting date, and that SEBI expects the same figure to appear in both the balance sheet and the accompanying notes. Failure to report either figure is a common cause of answer‑key mismatches.

Currency derivative contracts are classified either as hedging instruments or as trading (speculative) instruments. Hedging instruments are eligible for hedge accounting only when the entity demonstrates a formal hedging relationship, effectiveness testing and documentation as per Ind AS 109.

Trading derivatives are measured at fair value through profit or loss on every reporting date. The fair‑value change is recognised immediately in the income statement, and no offsetting is allowed on the balance sheet unless the contract is settled.

Exam candidates must be able to state that the classification determines whether gains/losses go to the profit and loss account directly (trading) or may be routed to other comprehensive income (effective cash‑flow hedge).

On the balance sheet, each currency derivative is shown either as a current asset, a non‑current asset, a current liability or a non‑current liability depending on its fair‑value sign and the contract's maturity. The contract’s fair value is presented gross, without netting against other contracts, unless the entity has a legally enforceable right to offset.

SEBI requires a separate line item titled “Currency Derivative – Fair Value” with the aggregate amount for assets and another for liabilities. The net position (assets minus liabilities) must be disclosed in the notes, together with the gross notional exposure.

Typical exam questions ask you to identify the correct line‑item placement and whether offsetting is permissible. Remember: offsetting is allowed only when the entity has a legally enforceable right and intends to settle on a net basis.

All changes in fair value of trading currency derivatives flow directly to the profit and loss (P&L) statement as “Realised/Unrealised Gain (Loss) on Currency Derivatives”. For hedging instruments qualifying for cash‑flow hedge accounting, the effective portion of the gain or loss is first recognised in Other Comprehensive Income (OCI) and later re‑classified to P&L when the hedged item affects earnings.

The P&L note must break down the total derivative gain/loss into realised and unrealised components, and further into hedging‑reserve and non‑hedging items where applicable. This breakdown helps regulators assess the impact of market movements on the entity’s earnings.

In the exam, a common distractor is to place the entire fair‑value change in OCI for all contracts. Only effective cash‑flow hedges qualify; speculative contracts always affect P&L.

The notes to financial statements must contain a narrative description of the entity’s risk management strategy, the types of currency derivatives used, and the purpose of each contract (hedging vs trading). It should also disclose the accounting policy adopted for measurement.

Sensitivity analysis is mandatory under SEBI guidelines. The entity must show how a 1% change in the underlying exchange rate would affect the fair‑value of the derivative portfolio. This is usually presented as a table with “Increase 1%” and “Decrease 1%” columns.

Exam candidates should memorise the three‑part structure of the notes: (1) risk management objective, (2) accounting policy, (3) quantitative sensitivity. Missing any part leads to loss of marks.

Before answering any accounting‑disclosure question, verify the classification of the contract (hedge vs trading) and the applicable measurement basis (FVTPL or hedge accounting). This determines where the gain or loss appears.

Next, ensure you have the three disclosure pillars: (1) Balance‑sheet line items with gross fair value, (2) P&L line items separating realised/unrealised and hedging‑reserve components, (3) Notes covering risk strategy, accounting policy and sensitivity analysis.

Finally, remember the numeric thresholds for SEBI reporting – disclose the notional amount, the fair‑value amount and the net position. If any of these figures are missing, the answer is incomplete.