Unit study guide · NISM Series IV
Accounting and Taxation of Interest Rate Derivatives
4 questions in this unit
What this unit covers
- Under paragraph 6(ii) of the current RBI IRD Directions, which approach governs accounting for derivative contracts?
- For this question, a non-hedge derivative is measured at fair value through profit or loss. Its opening carrying amount is a ₹12,000 asset and its closing amount is a ₹7,000 liability. There are no intervening settlements. What is the period’s fair-value P/L?
- An entity’s stated policy records refundable cash margin as a collateral asset, separate from derivative P/L. It transfers ₹50,000 from its bank account as initial margin and no gain, loss or fee has yet arisen. Which entry follows that policy?
- For this hypothetical tax computation only, all realised IRD trading gains are taxable, all realised trading losses and the stated expenses are deductible in the same period, and no other adjustments apply. Gains are ₹2,40,000, losses ₹90,000 and deductible expenses ₹10,000. What amount enters taxable income?
Key ideas
From the practice bank · 1
Under paragraph 6(ii) of the current RBI IRD Directions, which approach governs accounting for derivative contracts?
The RBI direction points to notified applicable accounting standards and instructions from the entity’s respective regulator. Where the specified sources do not prescribe a standard, ICAI guidance, if any, is the fallback identified. The correct method therefore cannot be chosen solely from the product’s label or the trader’s preference. Remember: Identify the entity’s applicable accounting framework before choosing the treatment.
Hint Common mistake: Assuming one simple accounting entry is mandatory for every entity and every derivative.
IV-141From the practice bank · 2
For this question, a non-hedge derivative is measured at fair value through profit or loss. Its opening carrying amount is a ₹12,000 asset and its closing amount is a ₹7,000 liability. There are no intervening settlements. What is the period’s fair-value P/L?
Under the expressly supplied policy, the derivative’s signed carrying amount changes from +12,000 to −7,000. With no cash settlements to reconcile, the fair-value change is −7,000 − 12,000 = −₹19,000. This tests signed accounting arithmetic. It does not claim that every derivative, including a designated hedge, must use this treatment. Remember: A move from an asset to a liability crosses zero and includes both magnitudes in the loss.
Hint Common mistake: Subtracting unsigned balances when the nature of the carrying amount changes.
IV-142From the practice bank · 3
An entity’s stated policy records refundable cash margin as a collateral asset, separate from derivative P/L. It transfers ₹50,000 from its bank account as initial margin and no gain, loss or fee has yet arisen. Which entry follows that policy?
The question explicitly supplies the accounting presentation. Bank cash falls by ₹50,000 and refundable collateral rises by the same amount, so the transfer alone does not change profit. Subsequent variation payments, impairment, release or other events would require their own treatment under the applicable framework and are not assumed here. Remember: Distinguish collateral transfers from fees, derivative valuation changes and realised losses.
Hint Common mistake: Automatically expensing every cash outflow connected with a trade.
IV-143From the practice bank · 4
For this hypothetical tax computation only, all realised IRD trading gains are taxable, all realised trading losses and the stated expenses are deductible in the same period, and no other adjustments apply. Gains are ₹2,40,000, losses ₹90,000 and deductible expenses ₹10,000. What amount enters taxable income?
The assumed taxable result is ₹2,40,000 − ₹90,000 − ₹10,000 = ₹1,40,000. This is not a statement about statutory classification, turnover, loss carry-forward or a tax rate. Those depend on applicable law and facts and were not independently established for this question. No tax payable is calculated because no rate is supplied. Remember: Compute a tax result only after identifying the rules or explicit assumptions governing deductions.
Hint Common mistake: Confusing a stipulated practice calculation with verified current statutory tax treatment.
IV-144