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

Which of the following is the usual accounting treatment of the initial margin paid in cash by a client to the clearing member for equity derivatives positions?

Initial margin paid in cash is shown as a deposit, which is an asset, and is not charged to profit and loss. It is refundable when positions are closed, so only realised or marked-to-market losses are recognised in the profit and loss account.

  1. AShown as a deposit (asset) and not charged to profit and lossCorrect
  2. BCharged to profit and loss as an expense
  3. CTreated as a liability of the client
  4. DAdded to the cost of the underlying shares

Explanation

Initial margin is a deposit that is returned on closing positions, so it is an asset, not an expense. Only the actual losses on MTM are recognised in profit and loss. It is not a liability of the client or part of share cost.

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