Firms have to declare details of derivative instruments

Companies will now be required to make detailed disclosures regarding derivatives instruments in their financial statements beginning this financial year, according to the guidelines issued by the Institute of Chartered Accountants of India (ICAI)

All enterprises have to disclose category-wise quantitative data regarding derivative instruments like futures and options outstanding with the enterprise on the balance sheet date.

Firms would also be required to disclose the purpose for which the derivatives were bought, if they were bought as hedging instruments or for speculation purpose. They are also required to disclose the amount of foreign currency exposures that were not hedged by a derivative instrument or otherwise.

The firms would also be required to disclose the accounting policy regarding the value at which the derivative instruments were recorded. The requirements are applicable for financial statements for periods ending on or after March 31, 2006.

The guidelines have been issued as an interim measure as ICAI would issue separate Accounting Standards (AS) dealing with presentation, disclosure and recognition and measurement of all financial instruments including derivative instruments.

The guidelines have been issued to ensure disclosure of the extent of risks to which an enterprise was exposed on account of its dealings in derivatives instruments and unhedged positions in foreign currency exposures.

ICAI has amended AS 29 dealing with provisions, contingent liabilities and contingent assets applicable to "onerous contracts". In such a contract the unavoidable costs incurred to meet the obligations are more than the benefits expected.

The unavoidable costs, which reflect the minimum cost of exiting, are measured as the cost of fulfilling the contract or any compensation arising from failure to fulfill it, whichever is lower.

ICAI has also decided to revise AS 4 whereby firms would be required to recognise and carry forward losses under the head "Capital Gains" only to the extent to which there is "virtual certainty" supported by evidence that sufficient future taxable income would be available as capital gains to set-off the losses, irrespective of whether the enterprise had unabsorbed depreciation or carry forward of business losses or not.