CA Sahil Singla.. (Service Tax ) (3746 Points)
10 August 2011
Plz refer Question No 5(b) given on page 13 of attached file relating to AS 30
My doubt is on part(ii) of question in case when contract is net settled by physical delivery. In this case,why then entry is of Rs. 2000
Instead it should be Equity .....106000
To Cash................2000
To Valuation Resrve....104000
bcoz fair value of asset is 106000 only & not 2000(wich is the fair value of Forward Contact)
CA SOURAV KUMAR GANDHI
(B.com (H), CA )
(133 Points)
Replied 11 August 2011
Dear Sahil, This is a case of Futures Contract. I am explaining you the entire sum from both approaches:
01.02.2009 When Future Ltd. entered into Futures Contract -- NO ENTRY --
31.12.2009 When the Price per share of Future Ltd. was 104 + 6300/1000 = 110.30 Bank A/c Dr. 6300
To MTMDM 6300
Recognition of Derivative Financial Instrument (DFI) DFI (Futures)A/c Dr. 6300
To P/L A/c 6300
31.12.2009 When the Price per share of Future Ltd. was 104 + 2000/1000 = 106.00 MTMDM A/c Dr. 4300
To Bank A/c 4300
Recognition of Derviative Financial Instrument (DFI) P/l A/c Dr. 4300
To DFI(futures) A/c 4300
(A) IF NET SETTLED IN CASH: MTMDM A/c Dr. 2000
To DFI (Futures) A/c Dr. 2000
(B) IF SETTLED THROUGH PHYSICAL DELIVERY:
NOTE: The entries before (A) and (B) are general that is applicable for both type of settlements. Usualy at the end of futres contract one can opt for :
SETTLEMENT IN CASH or PHYSICAL SETTLEMENT: One can opt for physical delivery i.e. purchasing the underlying assets only if they expect future increase in price which can gain them more as futures contract is already matured, and they have enough cash to purchase that.
MTMDM: Marked to Market Daily Margin. This is among one of the feature of Exchange traded derivatives. This feature is known as Daily pricing.
DFI (Futures): Derivative Financial Instruments
You should note a trick in this question that Futures Ltd. is about to purchase its own shares through futures contract.
Hope I succeed in solving your query.
Thanks & Regards
Sourav
CA Sahil Singla..
(Service Tax )
(3746 Points)
Replied 11 August 2011
waaoooo...such a nice explaination...can't ever expect frm anyone..thanks again
But i have doubt.Plz help.
1. Did u saw the suugested answer of ICAI..it's conceptually different in case settlement is physical..they r just giving 1st & 3rd enrty given by..i also talked to Mr. DS Rawat on this issue..he too was agreed with ICAI solution
But according to me entries given by u r correct
CA SOURAV KUMAR GANDHI
(B.com (H), CA )
(133 Points)
Replied 11 August 2011
Thanks Sahil,
I think you should talk to or confirm with CA Parveen Sharma, actualy I have taken my clases from him.
CA Sahil Singla..
(Service Tax )
(3746 Points)
Replied 11 August 2011
i also took classes frm parveen sir in Nov 2010 satellite batch...but m not having notes for this question..that's y problem arise
CA SOURAV KUMAR GANDHI
(B.com (H), CA )
(133 Points)
Replied 11 August 2011
ooo i c, i can assure you this question is solved by me conceptually, for instance, you think yourself you have forward contract i.e. you have to pay 104000 if not settled in cash, then how can you record investments of 2000, ?
your preparations over for nov 11
CA Sahil Singla..
(Service Tax )
(3746 Points)
Replied 11 August 2011
i told u earlier also that i agreed with ur solution...the problem is ICAI...look at their solution...really a typical situation...
in nov m giving 1st grp only....
CAclubindia
