Guiding principle in guidance note on accounting for derivatives?
What is the main guiding principle in the guidance note on accounting for derivatives?
The main accounting principle enshrined in this guidance note is that all derivative contracts should be accounted for in the books of accounts and the same should be measured at fair value irrespective of whether it is part of hedging relationship or not. If a derivative contract is not part of any hedging relationship, then such a derivative is entered into for speculative purposes and the fair value changes of such derivative should be recognised in the profit and loss account on a continuous basis, not merely on liquidation of the same as it is currently being done. However, where the derivative contract is used for hedging purposes and the entity adheres to proper hedge accounting, the fair value changes of the hedging instrument should not be recognised in the profit and loss account but should be dealt with depending upon whether it is a fair value hedge or a cash flow hedge or a net investment in foreign operation hedge. This guidance note enumerates the principles an entity should follow while treating the fair value changes of the derivative that is part of a hedging relationship.