ACCOUNTING AT THE INCEPTION 0f THE CONTRACT
Every client is required to pay to the trading member/ clearing member, the initial margin determined by the clearing corporation as per the bye-laws/regulations of the exchange for entering into an equity index futures contracts. Such initial margin paid/payable should be debited to “Initial Margin – Equity Index futures account”. Additional margins, if any, should also be accounted for in the same manner. It may be mentioned that at the time when the contract is entered into for purchase/sale of equity index futures, no entry is passed . for recording the contract because no payment is made at that time except for the initial margin. At the balance sheet date, the balance in the “Initial Margin – Equity Index futures account” should be shown separately under the head ‘ current assets ‘. In those cases where any amount has been paid in excess of the initial/additional margin, the excess should be disclosed separately as a deposit under the head ‘current assets’. In cases where instead of paying initial margin in cash, the client provides bank guarantees or lodges securities with the member, a disclosure should be made in the notes to the financial statements of the client.
ACCOUNTING AT THE TIME OF DAILY SETTLEMENT
This involves the accounting of payment/receipt of mark- to-market margin money. Payments made or received on account of daily settlement by the client would be credited/debitedtothe bank account and the corresponding
debit or credit for the same shouldbe made to an account titled as “Mark-to-Market margin-Equity Index futures account”
Some times the client may deposit a lump sum amount with the broker/trading member in respect of mark to market margin money instead of receiving/paying mark to market margin money on daily basis. The amount so paid is in the nature of a deposit and should be debited to an appropriate account, say, “Deposit for mark to market margin account”. The amount of mark to market margin received/paid from such account should be credited/debited to “Mark-to-Market Margin – Equity Index futures account” with a corresponding debit/credit to “deposit for mark-to-market margin account”. At the year end, any balance in the “Deposit for mark to market margin account” should be shown as a deposit under the head “Current Assets”.
ACCOUNTING FOR OPEN POSITIONS
Position left open on the balance sheet must be accounted for. Debit/credit balance in the “mark-to-market margin – Equity Index futures account”, maintained on global basis, represents the net amount paid/received on the basis of movement in the prices of index futures till the balance sheet date. Keeping in view of ‘prudence’as a consideration for preparation of financial statements, provision for anticipated loss, which may be equivalent to the net payment made to the broker (represented by the debit balance in the mark to market equity index futures account) should be created by debiting the profit and loss account. Net amount received being anticipated profit should be ignored and no credit for the same should be taken in the profit and loss account. The debit balance in the said ‘mark to market margin equity index futures account’ i.e., net payment made to the broker, may be shown under the head ‘current account, loans and advances’ in the balance sheet and the provision created there against should be shown as a deduction there from. On the other hand, the credit balance in the said account, i.e., the net amount received from the broker, should be shown as a current liability under the head ‘current liabilities and provisions in the balance sheet.’
ACCOUNTING AT THE TIME OF FINAL SETTLEMENT
This involves accounting at the time of final settlement or squaring up of the contract. At the expiry of a series of equity index futures, the profit/loss, on final settlement of the contracts in the series, should be calculated as the difference between final settlement price and contract prices of all the contracts in the series. The profit or loss so computed, should be recognized in the profit and loss account by corresponding debit/credit to ‘mark to margin – equity index futures account’. However, where a balance exists in the provision account created for anticipated loss, any loss arising on such settlement should be first charged to such provision account to the extent of the balance available in the provision account, and the balance of loss, if any should be charged to the profit and loss account. Same accounting treatment should be made when a contract is squared up by entering into a reverse contract. If more than one contract in respect of the series of equity index futures contracts to which the squared up contract pertains is outstanding at the time of the squaring of the contract, the contract price of the contract so squared up should be determined using the weighted average method for calculating profit or loss on squaring up. On the settlement of an equity index futures contract, the initial margin paid in respect of the contract is released which should be credited to ‘Initial Margin – Equity Index futures account’ and a corresponding debit should be given to the bank account or the deposit account (where the amount is not received).
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