Published On - Jun 18, 2024
An entity enters in derivative contracts, potentially applying hedge accounting based on the situation and chosen accounting. Derivatives may lead to regular cash flows, a final exchange at maturity (like currency swaps and futures), or daily settlements (such as settled-to-market derivatives). Due to their daily settlement, settled-to-market derivatives are typically presented as current, assuming they have a fair value to present on the balance sheet. In certain scenarios as stated below the derivative in question is not settled through market.
In what circumstances are derivative assets and liabilities are classified as current or non-current in the balance sheet?
An asset and a liability are separated into current and non- current portions based on the guidance in paragraphs 66 and 69 of Ind AS 1 Presentation of Financial Statements and the applicable Division II of Schedule III of the Companies Act, 2013 (as amended).
Appendix A to Ind AS 109 Financial Instruments defines ‘held for trading’ as including a financial asset or financial liability that is a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument).
Paragraphs 66 and 69 of Ind AS 1 require instruments held primarily for the purposes of trading being classified as current assets or liabilities. Similar requirements for current/ non-current classification are contained in Division II of Schedule III. This holds true regardless of the derivative’s classification per Appendix A of Ind AS 109.
International Accounting Standards Board (IASB) clarified in paragraphs BC38I-J (Basis for conclusion) of IAS 1 that:
“The Board expects the criteria set out in paragraph 69 to be used to assess whether a financial liability should be presented as current or non-current. The ‘held for trading’ category in Appendix A of IFRS 9 is for measurement purposes and includes financial assets and liabilities that may not be held primarily for trading purposes”.
The IASB reaffirmed that if a financial liability is held primarily for trading purposes it should be presented as current regardless of its maturity date. However, a financial liability that is not held for trading purposes, such as a derivative that is not a financial guarantee contract or a designated hedging instrument, should be presented as current or non-current on the basis of its settlement date.
The above IASB clarification is issued in the context of IFRS. Since Ind AS is converged with IFRS, it is applicable for Ind AS as well.
An entity must determine whether a derivative, or separated embedded derivative, is held primarily for the purpose of trading based on the purpose for which the derivative is being held. If an instrument is held primarily for the purpose of trading, it is classified as current (irrespective of the timing of future cash flows). A derivative that is not held with the primary purpose of trading is split between current and non- current if there are any partial settlements/realizations within 12 months.
Thus, the below presentation is applied scenarios stated above: