On 1st January, 2023, Joe & Co Ltd., an Indian company which prepares its financial statements on a quarterly basis has entered into a written…

(a) Assessment of the arrangement using the definition of derivative included under Ind AS 109 Derivative is a financial instrument or other contract within the scope of this Standard with all three of the following characteristics: (a) its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the 'underlying'). (b) it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. (c) it is settled at a future date. The contract meets the definition of a derivative as follows: (a) the value of the contract to purchase USD at a fixed price changes in response to changes in foreign exchange rate. (b) the initial amount received to enter into the contract is zero. A contract which would give the holder a similar response to foreign exchange rate changes would have required an investment of USD 40,000 on inception. (c) the contract is settled in future The derivative liability is a written put option contract. As per Ind AS 109, derivatives are measured at fair value upon initial recognition and are subsequently measured at fair value through profit and loss. Accounting on 1st January, 2023 As there was no consideration paid and without evidence to the contrary the fair value of the contract on the date of inception is considered to be zero. Accordingly, no accounting entries shall be recorded on the date of entering into the contract. Accounting on 31st March, 2023 The value of the derivative put option contract shall be recorded as a derivative financial liability in the books of Joe & Co. Ltd. by recording the following journal entry: Particulars Dr. (₹) Cr. (₹) Profit and loss A/c Dr. 50,000 To Derivative financial liability 50,000 (Being mark to market loss on the put option contract recorded) Accounting on 30th June, 2023 The change in value of the derivative put option contract shall be recorded as a derivative financial liability in the books of Joe & Co. Ltd. by recording the following journal entry: Particulars Dr. (₹) Cr. (₹) Derivative financial liability A/c Dr. 20,000 To Profit and loss A/c 20,000 (Being partial reversal of mark to market loss on the put option contract recorded) Accounting on 30th September, 2023 The change in value of the derivative option contract shall be recorded at zero in the books of Joe & Co. Ltd. by recording the following journal entry: Particulars Dr. (₹) Cr. (₹) Derivative financial liability A/c Dr. 30,000 To Profit and loss A/c 30,000 (Being gain on mark to market of put option contract booked to make the value of the derivative liability as zero) Accounting on 31st December, 2023 The settlement of the derivative put option contract by actual purchase of USD 40,000 shall be recorded in the books of Joe & Co. Ltd. upon exercise by Box Ltd. by recording the following journal entry: Particulars Dr. (₹) Cr. (₹) Bank (USD Account) (@40,000 x 76) Dr. 30,40,000 Profit and loss A/c Dr. 80,000 To Bank (@40,000 x 78) 31,20,000 (Being loss on settlement of put option contract booked on actual purchase of USD)