Derivative Disclosure 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.
Division III requires derivatives to be disclosed in two parts. Part I covers all derivative financial instruments held by the company. Part II analyses those same instruments into the categories of hedge accounting specified in Ind AS 109 and by risk management purpose. For each category and sub-category, the notional amounts and the fair value assets and fair value liabilities must be disclosed.
Why two parts
Part II is not a different set of instruments. It is an analysis of the derivatives included in Part I, re-presented by hedge accounting category and risk management purpose.
The two cuts answer different questions. Part I answers what instruments does the NBFC hold? — by product type. Part II answers why does it hold them, and how are they accounted for? — cash flow hedge, fair value hedge, net investment hedge, or not designated at all.
Because the two parts cover the same population, they must reconcile. A Part II total that does not agree to Part I is a preparation error that a reader can spot immediately.
What is disclosed for each category
For each category and sub-category of derivative financial instrument, the following are disclosed:
- Notional amounts;
- Fair value – assets; and
- Fair value – liabilities.
Note that fair value assets and liabilities are shown separately, not netted. A portfolio with Rs 400 crore of derivative assets and Rs 380 crore of derivative liabilities is a materially different risk position from one with Rs 20 crore of net assets and nothing else, and the presentation preserves that distinction.
Part I — the product categories
The guidance note structures Part I by derivative type, beginning with:
| Category | Sub-categories |
|---|---|
| (i) Currency derivatives | Spot and forwards; currency futures |
with further categories following the same pattern of category and sub-category, each carrying notional and both fair value legs.
Part II — the hedge accounting analysis
Part II requires the Part I instruments to be analysed into the different categories of hedge accounting specified in Ind AS 109 and risk management purposes.
That covers designated hedges by type, and — importantly — the derivatives that are not in a designated hedge relationship but are held for risk management. Economic hedges that fail the Ind AS 109 designation requirements still serve a risk management purpose, and Part II is where that distinction becomes visible.
Embedded derivatives
Where an embedded derivative is separated from the host contract and accounted for separately as per Ind AS 109 requirements, it should be disclosed under the relevant heading.
This catches derivatives that do not exist as standalone contracts and therefore do not appear in a treasury system's derivative register — a conversion feature, an interest rate floor, an FX-linked payment term. Identifying them is an accounting analysis of contracts, not a treasury reporting exercise, and they belong in the derivative disclosure once separated.
What the disclosure tells a reader
- Scale — the notional amounts show how much exposure the contracts cover, which the fair values alone do not.
- Current position — the separate asset and liability fair values show the gross position and its direction.
- Purpose — Part II shows whether the NBFC is hedging or taking positions.
- Accounting consequence — the hedge accounting categories determine where gains and losses go, and therefore how much earnings volatility the portfolio produces.
Compliance checklist
- Ensure Part II reconciles to Part I — same population, different cut.
- Disclose notional, fair value assets and fair value liabilities for every category and sub-category.
- Do not net derivative assets against liabilities in the disclosure.
- Include derivatives held for risk management but not designated as hedges.
- Identify and disclose separated embedded derivatives under the relevant heading.
- Review contracts, not just the treasury register, for embedded derivatives.
Common mistakes
- Part II covering only designated hedges, so it does not reconcile to Part I.
- Netting fair value assets and liabilities.
- Omitting notional amounts and disclosing fair values alone.
- Missing embedded derivatives because they are not in the derivative system.