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Forward Contracts Accounting Ind as

Forward contracts are an important financial tool used by businesses to hedge risks associated with price fluctuations in commodities or currencies. In the context of accounting, the treatment of forward contracts has undergone a significant change with the introduction of Indian Accounting Standard (Ind AS) 109.

Forward contracts are agreements to buy or sell a specified asset, such as a commodity or currency, at a predetermined price on a future date. These contracts are used by businesses to hedge against price movements that could potentially harm their operations. In the past, companies accounted for forward contracts using the ‘mark-to-market’ method, which required them to record the fair value of the contract at the end of every reporting period.

However, Ind AS 109 introduced a new standard for the accounting of forward contracts. According to this standard, forward contracts are classified into two categories: those used for hedging and those used for trading. Forward contracts used for hedging are known as ‘hedging instruments,’ while those used for trading are known as ‘non-hedging instruments.’

Under the new standard, companies using forward contracts as hedging instruments need to follow a strict set of accounting rules. They must document the hedging relationship and provide evidence of the effectiveness of the hedge. These requirements ensure that companies do not manipulate their financial statements and provide a more accurate representation of their financial position.

On the other hand, companies using forward contracts as non-hedging instruments need to follow a different set of accounting rules. These contracts are treated as ‘fair value through profit or loss’ and are marked to market at every reporting period. This means that any changes in the value of the contract are recorded in the company’s profit and loss statement.

In conclusion, Ind AS 109 has changed the way forward contracts are accounted for in India. The new standard ensures that companies accurately reflect their financial position by following strict accounting rules for hedging instruments. For non-hedging instruments, companies must mark to market the contracts at every reporting period. By following these rules, companies can better manage their risk exposure and make informed business decisions.