ICAI Guidance Note

A commodity futures position is a contract. It is a right, or an obligation, and it has a value. So it has to show up in the accounts.

The ICAI Guidance Note is the rulebook that says how. ICAI is the Institute of Chartered Accountants of India, and it issued a revised note in 2021.

It applies to accounting periods beginning on or after 1 April 2021.

Its central rule is one sentence. Every derivative position must be recognised on the balance sheet and measured at fair value.

Fair value here has a precise meaning. It is the exit price — what you would pay to hand a liability to somebody else, or receive for handing them an asset.

And it applies whether or not the derivative is a hedge. A purely speculative position sits on the balance sheet at fair value just like a hedge does.

Scope. The note applies to four kinds of contract, whether or not used as hedging instruments:

1. foreign exchange forward contracts that are hedges of highly probable forecast transactions and firm commitments;
2. other foreign currency derivative contracts, such as cross currency interest rate swaps, foreign currency futures, options and swaps;
3. other derivative contracts, such as traded equity index futures, traded equity index options, traded stock futures and option contracts; and
4. commodity derivative contracts.

Measurement. All derivative positions are recognised on the balance sheet and measured at fair value, because a derivative contract represents a contractual right or an obligation. Fair value is the exit price — the price that would be paid to transfer a liability, or received when transferring an asset, to a knowledgeable, willing counterparty. The extent and availability of collateral must be factored in while arriving at it.

Presentation, current or non-current. Four rules, and they are examined as a set:

Exchange-traded positions need proof of purpose. For futures and options traded on stock exchanges, it must first be demonstrated that the exposures are taken for hedging or risk management purposes. If that is established, the principles of hedge accounting can be used. Nothing about being exchange-traded earns hedge accounting automatically.

Effectiveness. The Guidance Note prescribes no specific testing methodology. It offers examples — regression analysis, the dollar offset test, critical item matching, an economic relationship between the underlying and the hedging instrument, negligible impact of credit risk, and a review of the sources of ineffectiveness. The tests themselves are mandatory: prospective testing at inception and each reporting date, needing an expected offset of nearly 100%, and retrospective testing at each reporting date, needing actual results within 80% to 125%.

A count that does not agree with itself. Section 9.1 says that from the accounting point of view there are three types of hedge — fair value, cash flow and net investment — and section 9.2.3 requires disclosures separately for all three. Section 9.2.2, listing what the Guidance Note recognises, names only two: the fair value hedge model and the cash flow hedge model. Two figures in the workbook means two figures on the page; answer three if asked about accounting hedge types generally, and know that section 9.2.2's list is the shorter one.

Pratap Metals Ltd closes its books on 31 March 2026. Four derivative positions are open, and the Guidance Note decides where each one sits.

Where the zinc figure comes from. The workbook's zinc contract has a lot of 5 MT and is quoted per kilogram. Forty lots is 200 MT, or 2,00,000 kilograms. Zinc has risen Rs 6 per kilogram since the short was placed, so the mark-to-market loss is:

2,00,000 x 6 = Rs 12,00,000

That Rs 12,00,000 goes on the balance sheet as a derivative liability at fair value. Note what is not used: neither the price at which the futures were sold, nor the day's traded price. It is the exit price — what it would cost to hand the position over.

One more adjustment the note requires. Pratap has placed Rs 15,00,000 of collateral with the clearing corporation against these positions. The extent and availability of that collateral must be factored in when arriving at fair value, so the liability is not measured as though the counterparty were unsecured.

Finally, purpose has to be proved. The crude oil longs cannot get hedge accounting at all, because Pratap has no crude exposure to demonstrate. They stay at fair value with every movement passing straight through profit and loss.

Chapter 9 (Accounting and Taxation), section 9.2, which is a stated learning objective of the chapter — knowing the key elements of the guidance note issued by ICAI on the accounting treatment of derivative transactions.

The chapter's own sample question is on this page almost word for word: ICAI's guidance note requires that all derivatives are recognized on the ______ and measured at fair value — the balance sheet. Beyond it, expect the revision year (2021), the effective date (accounting periods beginning on or after 1 April 2021), fair value defined as the exit price, the four-way scope list, and the current-versus-non-current presentation rules, of which the interest rate swap rule is the least intuitive.

• 2021 is the revision; 1 April 2021 is the effective date. Two dates in one sentence, and either can be asked.
• Balance sheet, not income statement. The workbook's own sample question turns on precisely this word.
• It applies whether or not the derivative is a hedging instrument. A speculative position is not outside the Guidance Note; it is simply always current.
• Fair value is the exit price, adjusted for collateral. Not the entry price, not the last traded price, and the extent and availability of collateral must be factored in.
• A multi-settlement derivative is not split. An interest rate swap is classified whole, on the predominant portion of its cash flows — not carved into current and non-current pieces.
• Hedge accounting for an exchange-traded position must be earned. It must first be demonstrated that the exposure was taken for hedging or risk management purposes.
• The note prescribes no testing methodology, only examples such as regression, dollar offset and critical item matching. But the prospective and retrospective tests are themselves mandatory, at nearly 100% and 80-125%.
• The workbook counts the hedge types twice and gets two answers. Section 9.1 and section 9.2.3 say three — fair value, cash flow and net investment. Section 9.2.2 names only two. State three for accounting hedge types generally.