Disclosures regarding Derivative Instruments

1. In recent years, derivative instruments are increasingly being used for trading as well as hedging purposes. A 'derivative' is a financial instrument or other contract with all three of the following characteristics:

(a) its value changes in response to the change in price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the 'underlying');

(b) it requires no initial net investment or an initial net investment that is smaller than would he required for other types of contracts that would be expected to have a similar response to change in market factors; and

(c) it is settled at a future date.

2. Accounting Standard (AS) 1, Disclosure of Accounting Policies, requires that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. In view of the aforesaid requirement of AS 1, an enterprise should disclose the criteria applied for recognition and measurement of the derivative instruments which are used by the enterprise for hedging or for other purposes and the criteria applied for recognition and measurement of income and expenses arising from such instruments.

3. The Accounting Standards Board of Institute of Chartered Accountants of India is in the process of developing Accounting Standards on (i) 'Financial Instruments: Presentation', (ii) 'Financial Instruments: Disclosures' and (iii)'Financial Instruments: Recognition and Measurement' which would deal with the presentation, disclosure and recognition and measurements aspects of all financial instruments including derivative instruments. Pending the issuance of the said Accounting Standards, the Institute is of the view that with a view to provide information regarding the extent of risks to which an enterprise is exposed, it should, as a minimum, make following disclosures in its financial statements:

(a) category-wise quantitative data about derivative instruments that are outstanding at the balance sheet date,

(b) the purpose, viz., hedging or speculation, for which such derivative instruments have been acquired, and

(c) the foreign currency exposures that are not hedged by a derivative instrument or otherwise.

Effective Date

4. This Announcement is applicable in respect of financial statements for the accounting period(s) ending or on after March 31, 2006.



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