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Illustration

70.            Examples illustrating the accounting treatment of important aspects of Equity Derivative Instruments are given in the Appendix to this Guidance Note.

Appendix

(This appendix, which is illustrative only and does not form part of the Guidance Note, provides examples to illustrate application of the principles explained in this Guidance Note.)

ILLUSTRATION 1: Accounting for INITIAL margin

Suppose Mr. X enters into certain Equity Derivative Instruments contracts on March 28, 20x3.  The Initial Margin on these contracts, calculated as per the SPAN, is Rs. 30,000.  The Margin for the subsequent days, calculated as per the SPAN, is as follows:

On 29^th March, 20x3                Rs. 35,000

On 30^th March, 20x3                Rs. 25,000

On 31^st March, 20x3                Rs. 27,000

Suggested Accounting Treatment

1.         The following entries may be passed for the payment/receipt of the Initial Margin:

2.         The Initial Margin paid on Equity Derivative Instruments will be disclosed in the balance sheet as follows:

Extracts from the Balance Sheet

Current Assets

Initial Margin - Equity Derivative Instruments A/c                   Rs. 27,000

3.         In respect of initial margin, the following disclosure may be made in the notes to accounts:

'Initial Margin on Equity Derivative Instruments contracts has been paid in cash only.'

ILLustration 2: Accounting for Equity index futures

(A)            Accounting for payment/receipt of Mark-to-Market Margin

1.            Suppose Mr. A purchases the following units of Equity Index Futures:

2.         Daily Settlement Prices of the above units of Equity Index Futures are as follows:

Suggested Accounting Treatment

1.         The amount of Mark-to-Market Margin Money received/paid due to increase/decrease in Daily Settlement Prices is as below:

2.         The amount of Mark-to-Market Margin Money received/paid will be credited/debited to 'Mark-to-Market Margin - EIF A/c' by passing the following entries:

3.         On the above basis, 'Mark-to Market Margin - EIF A/c' for the year will appear as follows in the books of Mr. A:

Mark-to-Market Margin - EIF A/c

(B)            Accounting for Open Interests on the Balance Sheet date

Suggested Accounting Treatment

1.            Continuing Illustration 2(A) above, on 31^st March, 20x3, Mark-to-Market (MTM) Margin Money received/paid on all the contracts in each of the indexes is as follows:

Amount paid on the contracts in respect of EF1 Rs. 4,400

Amount received on the contracts in respect of EF2 Rs. 500

2.            Keeping in view the consideration of prudence, a provision should be created for anticipated loss on open contracts in respect of EF1, equivalent to the amount paid, by passing the following entry, whereas the amount received in open contracts in respect of EF2 would be ignored:

Profit & Loss A/c                                  Dr.                   Rs. 4,400

            To Provision for Loss - EIF A/c                               Rs. 4,400

(Being provision created for the amount paid to Clearing Member/Trading Member on account of movement in the prices of the contracts in respect of EF1)

3.         In the balance sheet, the debit balance of 'Mark-to-Market Margin - EIF A/c' and 'Provision for Loss - EIF Account' would be shown as follows:

Extracts from the Balance Sheet

4.         In respect of open equity index futures contracts, the following disclosures should be made in the notes to accounts:

Detail of Open Interests in Equity Index Futures contracts

(C)            Accounting at the time of squaring-up/final settlement of the contracts

Continuing Illustration 2(A) above, the following further facts are provided:

1.         Equity Index Futures contracts are squared-up at the Daily Settlement Price of the day on the following dates:

• EF2 June Series on 1st April, 20x3
• 200 Units of EF1 May Series on 2nd April, 20x3
• 200 Units of EF1 May Series on 3rd April, 20x3

2.         Daily Settlement Prices of the units of Equity Index Futures, till squaring-up of the contracts, are as follows:

 Suggested Accounting Treatment

1.         The amount of Mark-to-Market Margin Money received/paid due to increase/decrease in Daily Settlement Prices is as below:

2.         The amount of profit/loss arising on squaring-up is calculated, using Weighted Average method, as follows:

3.         On the above basis, the following entries will be passed for the amount of Mark-to-Market Margin Money received/paid and profit/loss arising on the squaring-up:

4.         In this case, 'Mark-to-Market Margin - EIF A/c' for the year will appear as follows in the books of Mr. A:

Mark-to-Market Margin - EIF A/c

5.         In case the contracts as above are not squared-up, but are settled on the final settlement date, the same entries as have been passed on squaring-up of the contracts, will be passed at the time of final settlement.

Illustration 3: Accounting FOr Equity Stock futures

Accounting for Equity Stock Futures which are settled in cash

The accounting treatment for Equity Stock Futures settled in cash would be the same as that in the case of Equity Index Futures. This is because in both the cases the settlement is done otherwise than by delivery of the underlying assets.

Accounting for Equity Stock Futures which are settled by delivery

Accounting for payment/receipt of Mark-to-Market Margin and for Open Interests on the balance sheet date will be the same as that in case of cash-settled futures.  The accounting at the time of final settlement of delivery-settled Equity Stock Futures contracts might be explained with the help of example given hereunder.

1.            Suppose Mr. A purchases the following units of Equity Stock Futures (ESF):

2.         The contracts are settled through physical delivery of shares on the Settlement Date, i.e., both the contracts for shares of XYZ Limited (May 20x3 Series) are settled by purchasing the shares on the Settlement Date, viz., May 29, 20x3.  Similarly, the contract for shares of PQR Limited (June 20x3 Series) is settled by purchasing the shares on the Settlement Date, viz., June 26, 20x3.

3.         Net Mark-to-Market Margin received in respect of the contracts for shares of XYZ Limited (May 20x3 Series) till the Settlement Date is Rs. 4,000.  Net Mark-to-Market Margin paid in respect of the contract for shares of PQR Limited (June 20x3 Series) till the Settlement Date is Rs. 3,500.

Suggested Accounting Treatment

At the time of final settlement, the shares are required to be purchased/sold against the payment/receipt of the contract price.  The amount paid/received earlier in the form of Mark-to-Market Margin will be adjusted against the amount payable/receivable.  Accordingly, the following entries will be passed for purchase of shares on the final settlement of the contract:

Illustration 4: Accounting for equity index options

(A)            Accounting for Payment/Receipt of Premium and for Final Settlement of the Contracts

1.            Suppose Mr. A buys the following equity index options and the seller/writer of these options is Mr. B: