The Institute of Chartered Accountants of India (ICAI) released the Guidance Note on Accounting for Derivative Contracts.
The objective of this Guidance Note is to provide guidance on recognition, measurement, presentation and disclosure for derivative contracts so as to bring uniformity in their accounting and presentation in the financial statements. This Guidance Note also provides accounting treatment for such derivatives where the hedged item is covered under notified Accounting Standards, e.g., a commodity, an investment, etc., because except AS 11, no other notified Accounting Standard prescribes any accounting treatment for derivative accounting. This Guidance Note, however, does not cover foreign exchange forward contracts which are within the scope of AS 11.
This Guidance Note is an interim measure to provide recommendatory guidance on accounting for derivative contracts and hedging activities considering the lack of mandatory guidance in this regard with a view to bring about uniformity of practice in accounting for derivative contracts by various entities.
The Research Committee of ICAI issued the Guidance Note on Accounting for Derivative Contracts to establish uniform accounting principles for accounting of derivative contracts. In view of global developments in respect of Interbank Offered Rates (IBORs), the same has been revised. A report on “Reforming Major Interest Rate Benchmarks” was issued by the Financial Stability Board (FSB). Consequently, some major interest rate benchmarks will cease to be published across the globe after December 2021. The ongoing reform in IBORs, will impact the way financial information is accounted for in the financial statements. Therefore, Guidance Note has been revised primarily to address replacement issues relating to hedge accounting arising from Interest Rate Benchmark Reforms.
“I congratulate the Accounting Standards Board in taking this initiative and coming out with a revised Guidance Note. I appreciate CA. M P Vijay Kumar, Chairman, Accounting Standards Board and CA. (Dr.) Sanjeev Singhal, Vice-Chairman, Accounting Standards Board and all members of the Accounting Standards Board including other colleagues in the Council who have contributed immensely towards bringing out this publication. I am confident that this Guidance Note would be of immense use to the professionals and other stakeholders for fulfilling their financial reporting requirements,” the ICAI President, CA. Nihar N Jambusaria said.
Business transactions involving derivatives contracts is a novel concept. Such transactions are complex and are ever evolving. In the absence of any authoritative comprehensive literature on the subject, a diversity of practices with regard to accounting for derivatives was being noticed resulting in lack of uniformity in presentation of operating results and financial conditions of various enterprises.
The Research Committee, of the Institute, which is entrusted with the task of formulating Guidance Notes on Accounting, decided to formulate a ‘Guidance Note on Accounting for Derivative Contracts’ as an interim measure so as to bring uniformity in accounting of derivatives contracts. Accordingly, this Guidance Note has been formulated to provide guidance on derivative accounting until Accounting Standards on the subject are formulated and/or enforced.
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