Unit study guide · NISM Series I
Accounting and Taxation
11 questions in this unit
What this unit covers
- For 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 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 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?
- An 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?
- An 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?
- An 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?
- For 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?
- An 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?
- Under 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?
- In 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?
- An 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?
Key ideas
From the practice bank · 1
For 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?
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. 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 Common mistake: Interpreting nil STT as zero overall cost or applying GST to the wrong base.
I-037From the practice bank · 2
A 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?
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 Common mistake: Using cash settlement as the only test, or carrying forward an old section reference without checking the applicable Act.
I-038From the practice bank · 3
A 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?
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 Common mistake: Recognising every derivative gain only on cash settlement or automatically sending it to other comprehensive income.
I-048From the practice bank · 4
An 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?
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 Common mistake: Assuming a successful economic hedge can automatically be labelled as hedge accounting after the event.
I-072From the practice bank · 5
An 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?
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 Common mistake: Treating a notional figure or a point forecast as a substitute for a sensitivity disclosure.
I-073From the practice bank · 6
An 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?
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 Common mistake: Waiting for cash settlement to recognise the reporting-date exchange difference or treating the liability increase as a gain.
I-096From the practice bank · 7
For 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?
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 Common mistake: Using an annual profit statement to stand in for the required transaction-level contract note.
I-097From the practice bank · 8
An 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?
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 Common mistake: Using one year-end exchange rate for every foreign-currency-related balance on the balance sheet.
I-145From the practice bank · 9
Under 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?
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 Common mistake: Assuming a forecast automatically qualifies for hedge accounting once management buys a derivative.
I-146From the practice bank · 10
In 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?
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 Common mistake: Putting every derivative gain into the hedge reserve, or treating all ineffectiveness as a loss.
I-147From the practice bank · 11
An 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?
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 Common mistake: Recognising the full inception-to-settlement difference again after a previous year has already recorded part of it.
I-148Securities Transaction Tax (STT) is a statutory tax the Government of India levies on purchases and sales of securities.
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