NISM Series 8 Chapter 9: Accounting and Taxation

9.1 Accounting

AS-11 Accounting for Forward Contracts

• Premium/Discount: Amortized over the contract life.
• Exchange Differences: Recognized in P&L for changes in exchange rates from inception or previous reporting date.
• Cancellation/Renewal: Profit or loss recognized in P&L.

• Premium/Discount: Not recognized.
• Gains/Losses: Recognized in P&L based on the difference between contract rate and year-end forward rate.
• Cancellation/Renewal: Profit or loss recognized in P&L.

Accounting for Equity Index and Stock Futures

• Paid by the client to the clearing member and debited to an "Initial Margin" account.
• Not recorded as a contract entry unless the margin is paid.

• Daily margin payments/receipts debited/credited to a "Mark-to-Market Margin" account.
• At year-end, balances are disclosed under "Current Assets" or "Current Liabilities."

• Debit balance in Mark-to-Market account for potential losses shown as a provision in P&L.
• Credit balance (profits) not recognized.

• Profits/losses from final settlement recognized in P&L.
• Margin payments are released and debited to the "Initial Margin Account."

• Unpaid amounts netted off against the initial margin.
• Profit or loss recognized in P&L.

• Bank guarantees and securities disclosed for margins.
• Details of open contracts and positions disclosed.

Accounting for Equity Index Options (Cash Settled)

• Sellers/ Writers pay margin, debited to the "Option Margin Account."
• Buyer pays a premium, debited to "Options Premium Account."

• Option premium balance disclosed under "Current Assets" or "Current Liabilities."
• Provision for loss created based on the market value of options.

• Buyer: Premium recognized as an expense. Gain/loss from exercise recognized as income.
• Seller: Premium received as income. Loss from exercise is recognized as an expense.

4. Squaring-off: Profit/loss on option squaring-off transferred to P&L.

5. Default: Same treatment as futures contracts in the event of default.

6. Disclosure: Accounting policies, initial margin amounts, and outstanding option details are disclosed.

Equity Stock Options (Cash & Delivery Settled)

• (a) Buyer: Purchases shares for call options or sells for put options.
• (b) Seller: Sell shares for call options or buy-for put options.
• (c) Premium: received/paid transferred to P&L.

9.2 Taxation of derivative transaction in securities

• Under Section 43(5) of the Income-tax Act, they were speculative.
• Such transactions were allowed to be set off only against other speculative income and not against any other type of income.

• The amendment excluded any derivative transactions on a recognized stock exchange from consideration as speculative.
• Losses on derivatives are now permissible to be set off against any other income (eg, salary, business income) in the same year or carried forward for 8 years.
• STT paid on such transactions is also allowable.

Securities Transaction Tax (STT):-

• Sale of an option: 0.017% (Payable by seller)
• Sale of an option (if exercised): 0.125% (Payable by purchaser)
• Sale of futures: 0.01% (Payable by seller)

• Option Sale: The option premium.
• Option Exercise: The settlement price (if the option is exercised).

• STT is leviable on sell transactions in both futures and options contracts.
• Clearing members collect STT from trading members on a pass-through basis based on the aggregate STT liability from clients.