NISM VIII Derivatives Accounting and Taxation — Practice Questions
Practise how derivative positions are recorded and taxed: accounting for futures and options in the books, treatment of margins and premiums, and the income-tax treatment of derivative gains as business income.
29 questions on Accounting and Taxation in the ScoreSetu bank — each with a detailed explanation and, where useful, a memory hook.
What this topic covers
- Accounting for futures and options
- Treatment of margin and premium
- Derivative income as business income
- Set-off and carry-forward
Free sample questions
1. On final settlement, the buyer/holder of the option will recognise the favourable difference received from the seller/writer as ______ in the profit and loss account.
- A. Income ✅
- B. Expense
- C. Loan
- D. Amortization
Answer: A — Income
Why: On exercise of the option, the buyer/ holder will receive favourable difference, between the final settlement price as on the exercise/expiry date and the strike price, which will be recognised as INCOME.
💡 Option buyer's favourable settlement difference -> booked as INCOME in P&L.
2. How is the forward contract, which is for hedging purpose, accounted for in books of accounts?
- A. The premium or discount will be shown in the Profit and Loss Account
- B. The premium or discount will be ignored for accounting
- C. The premium or discount will be amortized over the life of contract ✅
- D. No premium or discount will be recognised in the books of accounts
Answer: C — The premium or discount will be amortized over the life of contract
Why: Accounting for Forward Contract as per Accounting Standard - 11 When forward contract is for hedging - The premium or discount (i.e., difference between the value at spot rate and forward rate) should be amortized over the life of contract. - Exchange difference (difference between the value of settlement date/ reporting date and value at previous reporting date/ inception of the contract) is recognized in Profit & Loss statement of the year. - Profit/ loss on cancellation/ renewal of forward contract are recognized in P&L of the year.
💡 Hedge forward (AS-11): premium/discount AMORTIZED over contract life.
3. A loss which is incurred on derivatives transactions and which are carried out in a recognized stock exchange can be carried forward for a period of
- A. 5 assessment years
- B. 7 assessment years
- C. 8 assessment years ✅
- D. 10 assessment years
Answer: C — 8 assessment years
Why: Loss on derivative transactions can be set off against any other income during the year (except salary income). In case the same cannot be set off, it can be carried forward to subsequent assessment year and set off only against any other non-speculative business income of the subsequent year. Such losses can be carried forward for a period of 8 assessment years.
💡 Derivative (non-speculative business) losses carry forward 8 assessment years.
Practise all 29 Accounting and Taxation questions
Plus the full 697-question NISM VIII bank and real-feel mock exams.