Fair Value Through Profit or Loss

A derivative is a promise about the future, and its value changes every day the underlying moves. Accounting has to decide when those daily changes hit the profit and loss account. For most derivatives, under Ind AS 109, the answer is: immediately.

That default treatment is called Fair Value Through Profit or Loss, or FVTPL. Unless a derivative qualifies for a specific alternative — hedge accounting — its gains and losses are recognised in profit and loss as they happen, not deferred or smoothed.

Ind AS 109's rule, as the workbook states it: derivatives are recognised on the balance sheet at fair value when the entity enters the contract, where fair value is the price in an orderly transaction between market participants. Then: "Default measurement (Fair Value Through Profit or Loss—FVTPL): Derivatives, unless in a hedging relationship, are measured at FVTPL, with gains or losses recognized immediately in the profit and loss."

The only escape from this default is hedge accounting, which requires formal documentation, an identifiable economic relationship, confirmation that credit risk is not dominant in that relationship, and a consistent hedge ratio. Even then, hedge accounting is not automatic across the board: Ind AS 109 recognises three types — a fair value hedge (gains/losses to profit and loss), a cash flow hedge (effective portion to Other Comprehensive Income, ineffective portion to profit and loss), and a net investment hedge (treated like a cash flow hedge). Anything that does not qualify for one of these three stays on the FVTPL default.

FVTPL also has a role inside embedded derivatives: where a derivative embedded in a non-derivative host contract is not closely related to that host, it must be separated and accounted for as a standalone derivative — which, absent hedge accounting, again means FVTPL. If the separated derivative cannot be measured reliably, Ind AS 109 does not leave it half-done: the entire hybrid contract, host and embedded component together, is designated at FVTPL.

A bond house dealing in Exchange Traded Interest Rate Derivatives enters a 6.10% GOI 2031 bond futures position on 1 October, buying 10 lots at Rs 98.40, purely as a trading position with no designated hedging relationship.

Under FVTPL, this futures position is recognised on the balance sheet at its fair value — its market price — from day one. If the price moves to Rs 98.90 by the next reporting date, the resulting gain of (98.90 − 98.40) × 2,000 units × 10 lots = Rs 10,00,000 is recognised immediately in profit and loss, even though the position has not been closed out and no cash has actually been received yet.

Had the same firm instead designated this futures position as a formally documented hedge of a specific bond holding, with an established economic relationship and a consistent hedge ratio, the accounting would follow the relevant hedge-accounting model instead — deferring the effective portion to Other Comprehensive Income for a cash flow hedge, for instance — rather than hitting profit and loss immediately. Without that documentation, FVTPL is where it lands by default.

Chapter 9 (Accounting and Taxation of IRD), section 9.1 (Accounting under Ind AS 109), sets out FVTPL as the default derivative measurement immediately after the recognition and initial-measurement rule, and immediately before the three types of hedge accounting and the embedded-derivative rule. Expect a question asking what a derivative is measured at absent a qualifying hedge relationship, and a question on the embedded-derivative fallback to FVTPL.

• FVTPL is the default, not an election. A derivative lands here automatically unless hedge accounting is separately documented and qualifies.
• There are three types of hedge accounting, not two — fair value, cash flow and net investment hedge. Forgetting the net investment hedge is a common slip.
• The embedded-derivative fallback applies to the whole hybrid contract, not just the embedded piece, when the separated derivative cannot be reliably measured.
• Do not confuse this with fair value in the futures-pricing sense — that page is about the theoretical price of a futures contract; this page is about an accounting measurement category under Ind AS 109. Same two words, two different meanings in this paper.
• Gains and losses under FVTPL are recognised as they occur, not deferred — the whole point of the "default" label is that nothing softens the profit and loss impact.