ICAI Guidance Note explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
An entity that does not follow Ind AS has no notified Accounting Standard on derivatives other than AS 11 for foreign exchange forward contracts. The ICAI Guidance Note on Accounting for Derivative Contracts fills that gap with recommended accounting: every derivative on the balance sheet at fair value, changes in profit or loss, and hedge accounting only where the entity opts in and documents it. This guide sets out what the note says, with paragraph numbers, and works an invented currency option both ways. The edition used is the Revised 2021 edition, July 2021; later changes should be checked on icai.org. Planning and reporting of such exposures is part of our virtual CFO services.
The Guidance Note is recommendatory guidance of ICAI, not law and not a standard. It applies to entities that do not apply Ind AS (paragraph 6) and to derivative contracts not covered by an existing notified standard, so it leaves out forward exchange contracts within AS 11 (paragraph 8). All derivatives are recognised at fair value (paragraph 14(i)); without hedge accounting, changes go to the statement of profit and loss (paragraph 14(ii)). Hedge accounting is permitted but not required and demands documentation at inception (paragraphs 18 and 42).
Scope and key terms
| Paragraphs | Point |
|---|---|
| 6 | Applies to all entities that do not apply Ind AS |
| 7, 10 | Gives accounting where the hedged item falls under notified standards such as AS 2, AS 10 and AS 13, which are silent on hedge accounting; describes itself as an interim measure |
| 8 | Does not apply to foreign exchange forward contracts covered by AS 11, or to derivatives covered by sector-specific regulation |
| 9 | Banks, NBFCs, housing finance companies and insurers follow what their regulator prescribes; where the regulator is silent, this note applies |
| 11, 12 | Covers, for example, hedges of highly probable forecast transactions and firm commitments by forwards, currency options, swaps and futures, and commodity derivatives; a forward hedging a recognised debtor or creditor stays in AS 11 |
| 13, 15 | A derivative has three features (value follows an underlying, little or no initial net investment, future settlement); synthetic accounting is not permitted |
See our guide to AS 11 for the forward contracts that stay outside this note. Companies on Ind AS follow Ind AS 109; see our guides on derivatives under Ind AS 109 and hedge accounting under Ind AS 109.
The accounting, head by head
| Paragraphs | What the note recommends | What it means in the books |
|---|---|---|
| 14, 16, 17 | All derivatives on the balance sheet at fair value, the exit price, including credit risk | Derivative asset or liability, remeasured at each reporting date |
| 18-20 | Hedge designation is permitted but not required; minimum: risk objective, how the derivative meets it, measurement plan, documentation at inception and every reporting period, highly probable cash flows, risk that could affect profit or loss | No documentation, no hedge accounting: profit or loss absorbs the change |
| 26-31 | Fair value hedge: hedging instrument at fair value through profit or loss; hedged item also remeasured for the hedged risk; the two offset except for ineffectiveness | Used for recognised assets, liabilities or unrecognised firm commitments |
| 32-37 | Cash flow hedge: effective portion goes to equity (a hedge reserve) and is recycled when the hedged item affects profit or loss; for a forecast purchase of a non-financial asset, either recycle as depreciation or cost of sales, or adjust the asset's cost (basis adjustment) as a consistent policy | Reserve now, profit or cost later |
| 38-41 | Net investment hedge: effective portion in equity, ineffective part in profit or loss; reserve released on disposal | Works with AS 11 on non-integral operations |
| 44-57 | Effectiveness: economic relationship, credit risk not dominant, hedge ratio as actually used; assessed at inception and at least each reporting date; ineffectiveness recognised immediately; no single test is prescribed | Keep a test file |
| 58-61 | Hedge accounting is not stopped voluntarily unless the objective is no longer met; on discontinuation the reserve is held until the hedged item affects profit, or released at once if the forecast is no longer probable | Track the reserve |
| 63, 64 | Current or non-current classification by purpose, hedged item or maturity; gross presentation, no netting except for a basis adjustment | Do not net assets and liabilities |
| 65-69 | Disclose risk management objectives, the method of fair value, amounts in profit or loss and equity, hedge details, the hedge reserve movement and the break-up of the reserve | Notes to accounts |
| 71, 72 | Cumulative transition impact in reserves, no retrospective hedge accounting; applies to periods beginning on or after 1 April 2016 | Past hedges are not restated |
Worked example: Vishal Auto Imports Private Limited
The entity and all figures in this example are invented for illustration.
Vishal Auto Imports expects, with high probability, to import a press on 30 June 20X7 for USD 50,000. On 1 October 20X5 it buys a call option to buy USD 50,000 at 84 rupees per dollar on that date, paying a premium of 60,000. Its year ends on 31 March. The option's fair value (invented) is 1,10,000 at 31 March 20X6 and 1,70,000 at 31 March 20X7. On 30 June 20X7 the spot rate is 88, so the intrinsic value is (88 - 84) x 50,000 = 2,00,000; the company exercises, pays 42,00,000 for the dollars and settles the supplier, whose bill is 50,000 x 88 = 44,00,000 in rupees at spot. The option is outside AS 11 because it hedges a forecast purchase, not a recognised monetary item (paragraphs 11 and 12). Treat the whole option as the hedging instrument, fully effective, for simplicity.
Case A: no hedge accounting. Fair value changes go to profit or loss.
| Date | Entry | Debit | Credit |
|---|---|---|---|
| 1 Oct 20X5 | Derivative asset (option) Dr | 60,000 | |
| To Bank (premium) | 60,000 | ||
| 31 Mar 20X6 | Derivative asset Dr | 50,000 | |
| To Gain on derivative (profit or loss) (1,10,000 - 60,000) | 50,000 | ||
| 31 Mar 20X7 | Derivative asset Dr | 60,000 | |
| To Gain on derivative (profit or loss) (1,70,000 - 1,10,000) | 60,000 | ||
| 30 Jun 20X7 | Derivative asset Dr | 30,000 | |
| To Gain on derivative (profit or loss) (2,00,000 - 1,70,000) | 30,000 | ||
| 30 Jun 20X7 | Plant Dr | 44,00,000 | |
| To Bank (42,00,000 for the dollars to the supplier) | 42,00,000 | ||
| To Derivative asset (option settled) | 2,00,000 |
The derivative asset ends at nil: 60,000 + 50,000 + 60,000 + 30,000 = 2,00,000 = the credit on exercise. Profit or loss recognises gains of 50,000, 60,000 and 30,000 in three different periods, 1,40,000 in all, while the plant stands at 44,00,000, so profit moves before the plant is even bought.
Case B: cash flow hedge, documented at inception, with a basis adjustment.
| Date | Entry | Debit | Credit |
|---|---|---|---|
| 1 Oct 20X5 | Derivative asset Dr / To Bank | 60,000 | 60,000 |
| 31 Mar 20X6 | Derivative asset Dr | 50,000 | |
| To Cash flow hedge reserve (equity) | 50,000 | ||
| 31 Mar 20X7 | Derivative asset Dr | 60,000 | |
| To Cash flow hedge reserve (equity) | 60,000 | ||
| 30 Jun 20X7 | Derivative asset Dr | 30,000 | |
| To Cash flow hedge reserve (equity) | 30,000 | ||
| 30 Jun 20X7 | Plant Dr | 44,00,000 | |
| To Bank | 42,00,000 | ||
| To Derivative asset | 2,00,000 | ||
| 30 Jun 20X7 | Cash flow hedge reserve Dr | 1,40,000 | |
| To Plant (basis adjustment) | 1,40,000 |
The reserve builds to 50,000, then 1,10,000, then 1,40,000, and is released in full into the plant's cost under paragraph 35. Plant is carried at 44,00,000 - 1,40,000 = 42,60,000. Had the entity chosen to recycle through depreciation instead, the reserve would be released over the life of the plant.
Check. Plant cost in Case B: 50,000 x 84 = 42,00,000 plus the premium of 60,000 = 42,60,000, which agrees. In both cases the derivative asset closes to nil and, in Case B, the hedge reserve closes to nil (50,000 + 60,000 + 30,000 = 1,40,000 credited and 1,40,000 debited). No amount is recognised in profit or loss in Case B before the plant is depreciated.
Common mistakes
- Treating a forward contract on a recognised creditor under this note when AS 11 covers it.
- Claiming hedge accounting without documentation at inception.
- Netting derivative assets and liabilities, which paragraph 64 does not permit.
- Taking the ineffective portion to the reserve rather than to profit or loss.
Need help with derivative accounting?
If your business uses forwards, options or swaps and you need the accounting policy, the hedge documentation and the disclosures set up, our team can prepare them. See our virtual CFO services and tell us the contracts you hold.
Key takeaways
- The Guidance Note is recommendatory ICAI guidance for entities not on Ind AS.
- All derivatives are recognised at fair value; without hedge accounting, changes go to profit or loss.
- Hedge accounting is optional and needs documentation at inception.
- Cash flow hedges use a reserve; for a forecast asset purchase the cost may be adjusted.
- Present gross and make the disclosures in paragraphs 65 to 69.
Read next
- Independent and foreign branches: translation under AS 11
- ICAI Technical Guide on Bullion (Gold) Borrowing and Lending
- AS 11 Effects of Changes in Foreign Exchange Rates
Disclaimer: Based on the Accounting Standards issued by the Institute of Chartered Accountants of India as on 1 April 2025, the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026, the Companies Act, 2013 and the ICAI guidance named in the article, as consulted on 4 October 2026. The worked example uses invented figures. Later amendments should be checked on icai.org and mca.gov.in. This article is general information, not legal advice; check the official text before acting.