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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Accounting and Taxation

A trader writes (sells) one lot of 100 shares of a call option at a premium of Rs 15 per share. At the balance sheet date the option's premium (market price) is Rs 22 per share and the option is still open. Following the ICAI guidance on accounting for equity index and stock options, what is the correct treatment of the position?

The anticipated loss on the written call is (22-15) x 100 = Rs 700. Following prudence, this is provided for by debiting the profit and loss account at the balance sheet date. Unrealised gains are ignored, so the position cannot simply be left alone or the premium booked as income.

  1. AIgnore the position; no entry is required until expiry
  2. BRecognise a provision for the anticipated loss of Rs 700 by debiting profit and loss accountCorrect
  3. CRecognise the unrealised loss of Rs 700 as a deferred asset
  4. DRecognise a gain of Rs 1,500 as premium income immediately

Explanation

The writer received Rs 15 but the option now costs Rs 22 to close, so the anticipated loss is (22-15) x 100 = Rs 700. Under prudence, the provision for loss is recognised in the profit and loss account at the balance sheet date, whereas unrealised gains are not recognised. Deferring the loss or booking the premium as income is wrong.

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