Accounting and Taxation

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More units in NISM Series I

• Introduction to Currency Markets16
• Foreign Exchange Derivatives13
• Exchange Traded Currency Futures15
• Exchange Traded Currency Options20
• Strategies Using Exchange Traded Currency Derivatives19
• Trading Mechanism in Exchange Traded Currency Derivatives13
• Clearing, Settlement and Risk Management in Exchange Traded Currency Derivatives18
• Regulatory Framework for Exchange Traded Currency Derivatives12
• Codes of Conduct and Investor Protection Measures13

Practise all of NISM Series I

Exam format

All 11 questions on Accounting and Taxation, with answers

1. Q1For a currency-futures cost calculation, assume STT is nil, brokerage is ₹40, exchange charges are ₹10 and other levies are ₹2. Assume GST is 18% of brokerage plus exchange charges only. What is the total transaction cost?

   • A

     Option A. ₹52.00

     Why it is wrong: ₹52 adds the three listed charges but omits the ₹9 GST.

   • B

     Option B. ₹61.00 — Correct answer

   • C

     Option C. ₹9.00

     Why it is wrong: ₹9 is GST alone. Brokerage, exchange charges and the other levies must also be included.

   • D

     Option D. ₹61.36

     Why it is wrong: ₹61.36 applies GST to ₹52, including the ₹2 other levies despite the narrower tax base specified.

   Answer: B. The charges total ₹52 and GST adds ₹9, giving ₹61. The stated GST base is brokerage plus exchange charges: ₹40 + ₹10 = ₹50. GST = 18% × ₹50 = ₹9. STT contributes zero under the question’s explicit assumption. Total cost = ₹40 + ₹10 + ₹2 + ₹9 = ₹61. This is an assumed-cost exercise, not a certification of a current market-wide tax schedule. Remember: Calculate each levy on its stated base, then add all components once.

   Hint, shown before you answer in practice mode: Common mistake: Interpreting nil STT as zero overall cost or applying GST to the wrong base.

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2. Q2A resident individual carries on a currency-derivatives trading business. The exchange trades satisfy all conditions for a specified derivative transaction under the Income-tax Act, 2025. How are the profits classified for this business?

   • A

     Option A. Speculative business income solely because settlement is in cash

     Why it is wrong: The statutory exclusion for a qualifying specified derivative transaction prevents this cash-settlement-only conclusion.

   • B

     Option B. Short-term capital gains solely because the contracts are exchange traded

     Why it is wrong: Exchange trading alone does not turn the stated business profits into capital gains.

   • C

     Option C. Non-speculative business income, subject to the applicable tax provisions — Correct answer

   • D

     Option D. Exempt income solely because no foreign currency is physically delivered

     Why it is wrong: The absence of physical currency delivery does not create an income-tax exemption for these business profits.

   Answer: C. The stated business character and statutory exclusion lead to non-speculative business income. The scenario states that the individual carries on a trading business. The Act brings business profits under the business-income head. Section 66(31) excludes a specified derivative transaction, as defined in section 66(33), from the definition of speculative transaction. Given that all specified-transaction conditions are met, the business profits are non-speculative business income. This conclusion does not determine the person’s tax rate or every deduction. Remember: Apply the statutory derivative exclusion before labelling a cash-settled trading business speculative.

   Hint, shown before you answer in practice mode: Common mistake: Using cash settlement as the only test, or carrying forward an old section reference without checking the applicable Act.

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3. Q3A company accounts for a standalone currency derivative at fair value through profit or loss. Its carrying value rises from zero to an asset of ₹70,000 at the reporting date. No cash is settled. Ignoring tax, which entry records the change?

   • A

     Option A. Debit derivative asset ₹70,000 and credit other comprehensive income ₹70,000

     Why it is wrong: This puts the gain in other comprehensive income despite the explicitly stated profit-or-loss basis.

   • B

     Option B. Debit derivative asset ₹70,000 and credit gain in profit or loss ₹70,000 — Correct answer

   • C

     Option C. Debit loss in profit or loss ₹70,000 and credit derivative liability ₹70,000

     Why it is wrong: This records an adverse movement and a liability, the opposite of the positive asset stated.

   • D

     Option D. Record no entry until the derivative is settled in cash

     Why it is wrong: Waiting for cash settlement ignores the fair-value measurement and recognition required by the question’s stated basis.

   Answer: B. This answer records both the positive derivative asset and the corresponding gain in profit or loss. The derivative changes from a zero carrying value to a positive ₹70,000 asset. Record an increase in the derivative asset of ₹70,000. The question expressly assigns value changes to profit or loss. Credit a ₹70,000 gain there rather than in other comprehensive income. No bank entry is made because there is no cash settlement. The entry balances an asset debit against a gain credit. Remember: Distinguish a change in a derivative’s recognised value from the later receipt or payment of cash.

   Hint, shown before you answer in practice mode: Common mistake: Recognising every derivative gain only on cash settlement or automatically sending it to other comprehensive income.

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4. Q4An entity applying Ind AS 109 enters an eligible FX derivative that economically offsets a currency exposure. It makes no formal hedge designation or documentation at inception. Can economic effectiveness alone justify applying hedge accounting retrospectively from that inception date?

   • A

     Option A. Yes, provided the derivative and exposure later show opposite gains and losses.

     Why it is wrong: Offset in outcomes is not a substitute for the separately required designation and documentation.

   • B

     Option B. Yes, provided management intended a hedge when it entered the derivative.

     Why it is wrong: An internal intention without the required formal designation and documentation is insufficient.

   • C

     Option C. Yes, provided the derivative’s notional equals the exposure’s notional.

     Why it is wrong: Matching notionals does not establish compliance with every qualifying condition.

   • D

     Option D. No, economic offset does not replace the required inception designation and documentation. — Correct answer

   Answer: D. The missing inception requirement prevents the proposed conclusion based on economic effectiveness alone. Ind AS 109 paragraph 6.4.1 includes formal designation and documentation at the inception of the hedging relationship among its qualifying conditions. The scenario expressly lacks that requirement. Later evidence of offset, matched notionals or an undocumented intention cannot by itself repair the missing inception condition. The answer concerns retrospective treatment from the stated inception. It does not rule out a properly assessed and documented prospective designation from a later date. Remember: Do not infer hedge-accounting eligibility solely from the fact that a derivative reduces economic risk.

   Hint, shown before you answer in practice mode: Common mistake: Assuming a successful economic hedge can automatically be labelled as hedge accounting after the event.

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5. Q5An entity applying Ind AS 107 is exposed to material currency risk and uses paragraph 40 rather than the paragraph 41 alternative. Which disclosure most directly meets the sensitivity-analysis requirement?

   • A

     Option A. Only the gross notional value of all its open currency forwards and swaps at the reporting date

     Why it is wrong: Gross notional alone does not show the impact of changing the exchange rate on profit or loss and equity.

   • B

     Option B. How reasonably possible exchange-rate changes affect profit or loss and equity, with methods and assumptions — Correct answer

   • C

     Option C. Only the contractual dates on which its foreign-currency loans and trade payables fall due for payment

     Why it is wrong: Contractual maturity information concerns timing and liquidity. Alone, it does not provide the specified currency-risk sensitivity.

   • D

     Option D. A single most-likely exchange-rate forecast for next year, with the methods and assumptions behind it

     Why it is wrong: A single most-likely forecast is not a sensitivity analysis of reasonably possible changes at the reporting date, even when its methods and assumptions are given.

   Answer: B. This answer identifies both the sensitivity result and the supporting methods and assumptions. Paragraph 40 addresses sensitivity to market-risk variables at the reporting date and the methods and assumptions used. Currency rates are the relevant variable in this scenario. A notional amount or a maturity schedule gives useful but different information. A single forecast describes an expected outcome rather than the required sensitivity to possible changes. Remember: Distinguish risk exposure size, payment timing and sensitivity of results to a risk-variable change.

   Hint, shown before you answer in practice mode: Common mistake: Treating a notional figure or a point forecast as a substitute for a sensitivity disclosure.

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6. Q6An entity applying Ind AS has INR as its functional currency. An unhedged short-term USD 30,000 trade payable was initially recorded at ₹82 per USD and remains unpaid at year-end, when the closing rate is ₹83.20. With no applicable exception, what exchange difference is recognised in profit or loss?

   • A

     Option A. A gain of ₹36,000

     Why it is wrong: An increase in the INR amount owed on a payable is a loss, not a gain.

   • B

     Option B. A loss of ₹36,000 — Correct answer

   • C

     Option C. A loss of ₹18,000

     Why it is wrong: This uses the average of the transaction and closing rates rather than the required closing rate for the monetary payable.

   • D

     Option D. No exchange difference until payment

     Why it is wrong: An unpaid monetary item is retranslated at the reporting date. Payment is not required before the stated exchange difference is recognised.

   Answer: B. The INR liability rises by (83.20 − 82.00) × 30,000 = ₹36,000. Initial INR carrying amount = 30,000 × 82.00 = ₹24,60,000. Closing INR carrying amount = 30,000 × 83.20 = ₹24,96,000. The liability increases by 24,96,000 − 24,60,000 = ₹36,000. The entry increases the payable and recognises an exchange loss in profit or loss. The question specifies an unhedged short-term trade payable and excludes exceptions. The absence of payment does not postpone reporting-date translation. Remember: A rise in INR per foreign-currency unit increases an unhedged foreign-currency payable’s INR amount.

   Hint, shown before you answer in practice mode: Common mistake: Waiting for cash settlement to recognise the reporting-date exchange difference or treating the liability increase as a gain.

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7. Q7For an otherwise qualifying exchange derivative transaction, which document is expressly required by the contract-note condition in section 66(33)(b) of the Income-tax Act, 2025, as amended by Finance Act, 2026?

   • A

     Option A. An annual broker ledger showing total profit and PAN but no time-stamped contract note

     Why it is wrong: An annual ledger does not substitute for the transaction document expressly required by this condition.

   • B

     Option B. A bank statement showing margin transfers and the client’s account number

     Why it is wrong: A funding record is not the required time-stamped contract note with client identity and PAN.

   • C

     Option C. A time-stamped contract note containing the unique client identity number and PAN — Correct answer

   • D

     Option D. An income-tax return acknowledgement reporting the aggregate trading result

     Why it is wrong: Reporting the annual result does not by itself satisfy the transaction-document condition.

   Answer: C. This is the prescribed document and identifying information in the tested condition. Section 66(33)(b) identifies a time-stamped contract note issued to the client, with the unique client identity number and Permanent Account Number. The other documents may be useful records, but they do not replace the document required by this particular condition. The stem assumes the other qualifying conditions. Possession of a contract note alone does not prove every condition, the taxpayer’s final tax liability or the treatment of every derivative trade. Remember: Read the exact documentary condition rather than treating any trading record as an equivalent substitute.

   Hint, shown before you answer in practice mode: Common mistake: Using an annual profit statement to stand in for the required transaction-level contract note.

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8. Q8An INR-functional-currency entity applying Ind AS 21 buys inventory for USD 15,000 at ₹80 per USD. At year-end, the unpaid invoice remains USD 15,000 and the closing rate is ₹82. The inventory remains at historical cost with no impairment or hedge. What are the inventory and payable amounts, respectively?

   • A

     Option A. ₹12,30,000 and ₹12,30,000

     Why it is wrong: This retranslates the historical-cost inventory at the closing rate as though it were a monetary balance.

   • B

     Option B. ₹12,00,000 and ₹12,00,000

     Why it is wrong: It leaves the unpaid monetary payable at its initial rate instead of using the closing rate.

   • C

     Option C. ₹12,00,000 and ₹12,30,000 — Correct answer

   • D

     Option D. ₹12,30,000 and ₹12,00,000

     Why it is wrong: This reverses the treatment of the non-monetary inventory and monetary payable.

   Answer: C. Inventory retains its historical INR cost, while the fixed-USD payable is translated at the closing rate. Initial inventory cost and payable = USD 15,000 × ₹80 = ₹12,00,000. The inventory is a non-monetary item kept at historical cost under the stated facts, so it retains the transaction-date exchange rate. The fixed USD payable is monetary. It is translated at the closing rate: 15,000 × ₹82 = ₹12,30,000. The ₹30,000 exchange loss on the payable is separate from the inventory’s historical cost in this uncomplicated case. Remember: Classify each balance as monetary or non-monetary before choosing its translation rate.

   Hint, shown before you answer in practice mode: Common mistake: Using one year-end exchange rate for every foreign-currency-related balance on the balance sheet.

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9. Q9Under Ind AS 109, what likelihood condition must a forecast transaction meet to be eligible as a hedged item, assuming all other relevant conditions are met?

   • A

     Option A. It must be highly probable — Correct answer

   • B

     Option B. It only needs to be a possible future transaction

     Why it is wrong: Mere possibility falls short of the condition in the standard.

   • C

     Option C. It must already have been settled in cash

     Why it is wrong: A forecast transaction concerns a future event, so prior cash settlement is not its required condition.

   • D

     Option D. It becomes eligible solely because a derivative has been purchased

     Why it is wrong: Designating or buying a derivative does not replace the eligibility test for the hedged item.

   Answer: A. Highly probable is the stated eligibility condition for the forecast transaction. Ind AS 109 paragraph 6.3.3 requires a forecast transaction designated as a hedged item to be highly probable. Merely expecting that something might occur is not the same condition. A derivative purchase does not make the underlying forecast highly probable by itself. This is an accounting criterion. It is not permission to enter a product for which a separate RBI rule requires contracted exposure. Remember: Apply the forecast-transaction eligibility test separately from the hedge instrument’s existence.

   Hint, shown before you answer in practice mode: Common mistake: Assuming a forecast automatically qualifies for hedge accounting once management buys a derivative.

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10. Q10In a qualifying Ind AS 109 cash flow hedge, the cumulative gain on the hedging instrument is ₹1,20,000. The absolute cumulative present-value change in the hedged item is an offsetting loss of ₹1,00,000. The reserve was initially zero and the forecast cash flow has not occurred. With no excluded components, tax or reclassification, how is the instrument’s gain split?

    • A

      Option A. ₹1,20,000 in other comprehensive income and none in profit or loss

      Why it is wrong: This puts the excess ₹20,000 instrument gain into the reserve despite the lower-amount adjustment.

    • B

      Option B. ₹1,00,000 in other comprehensive income and a ₹20,000 loss in profit or loss

      Why it is wrong: It finds the correct effective amount but reverses the sign of the remaining gain.

    • C

      Option C. None in other comprehensive income and a ₹1,20,000 gain in profit or loss

      Why it is wrong: It ignores the qualifying cash flow hedge treatment expressly given in the question.

    • D

      Option D. ₹1,00,000 in other comprehensive income and a ₹20,000 gain in profit or loss — Correct answer

    Answer: D. The lower cumulative amount is ₹1,00,000, and the remaining ₹20,000 instrument gain is ineffectiveness in profit or loss. Compare the absolute cumulative amounts: ₹1,20,000 on the instrument and ₹1,00,000 on the hedged item. The lower amount is ₹1,00,000. This effective portion of the instrument’s gain is recognised in other comprehensive income for the cash flow hedge reserve. The remaining instrument gain is 1,20,000 − 1,00,000 = ₹20,000. It is a gain from ineffectiveness in profit or loss, not a loss. No later reserve transfer is required by the facts because the forecast transaction has not occurred and reclassification is excluded. Remember: For this cash flow hedge calculation, apply the lower-absolute-amount test and then preserve the sign of the residual.

    Hint, shown before you answer in practice mode: Common mistake: Putting every derivative gain into the hedge reserve, or treating all ineffectiveness as a loss.

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11. Q11An INR-functional-currency entity records a USD 20,000 receivable at ₹85 per USD. At the previous year-end it correctly translates the receivable at ₹86. In the current year it collects the full amount at ₹84.50. Under Ind AS 21, with no hedge or exception, what exchange difference arises in the current year on settlement?

    • A

      Option A. A loss of ₹10,000

      Why it is wrong: ₹10,000 is the loss across the full life of the receivable, not the current-year loss after the prior translation.

    • B

      Option B. A loss of ₹30,000 — Correct answer

    • C

      Option C. A gain of ₹20,000

      Why it is wrong: ₹20,000 is the gain already recognised in the previous year and is not the current settlement result.

    • D

      Option D. A loss of ₹50,000

      Why it is wrong: This adds the prior ₹20,000 gain to the current ₹30,000 loss as though both were current-year losses.

    Answer: B. The current-year comparison is cash of ₹16,90,000 against the opening carrying amount of ₹17,20,000. The receivable entered the current year at 20,000 × ₹86 = ₹17,20,000. Cash received on settlement = 20,000 × ₹84.50 = ₹16,90,000. Current-year exchange difference = 16,90,000 − 17,20,000 = −₹30,000. The previous year already recognised a ₹20,000 gain from 85 to 86. Across both periods, +20,000 − 30,000 = −₹10,000, which reconciles to settlement versus the original ₹17,00,000. Remember: For a new reporting period, calculate the exchange movement from its opening translated carrying value.

    Hint, shown before you answer in practice mode: Common mistake: Recognising the full inception-to-settlement difference again after a previous year has already recorded part of it.

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Codes of Conduct and Investor Protection Measures

13 questions on Codes of Conduct and Investor Protection Measures. Its quiz opens on that unit.