``A company should clearly disclose the accounting policies followed for equity index futures contract if they are distinct from the established accounting policies,'' the guidance note prepared by ICAI on recognition, disclosure and measurement of equity index derivatives said.

Index futures contract is a contract designed for futures trading by a stock exchange where the underlying asset is an index, that is a benchmark constituted of a set of securities to reflect price movement on any recognised stock exchange.

ICAI has also recommended that information relating to index futures should appear in the results published periodically and the company's annual report.

The company should clearly give objectives of dealing in derivatives and include comments on the effectiveness of internal control systems andprocedures set up as part of financial risk management efforts to manage derivatives trading.

The need for a separate set of accounting guidelines for derivatives follows wide use of new financial instruments by corporates and presentation of these investments on the balance sheets.

The move is also aimed at adoption of best international accounting practices for recognition, disclosure and measurement for financial instruments and for derivatives instruments in particular.

Detailing the measurement and recognition of investment in equity index futures, the guidance note has said that they (index futures) should not be recognised on the balance sheet. However, details such as notional value of contracts and maximum exposure taken should appear as notes to accounts.

For initial margins collected by stock exchanges for derivatives trading from companies, these margins (collected in cash) should be treated as deposits in the balance sheet under the head current assets, loans and advances.

While initialmargin deposited by companies in the form of bank guarantees be recorded in the books as contingent liability and shall appear as not a note under the contingent liabilities along with the balance sheet.

The note says that settlement in futures contract is marked-to-market on daily basis and the differential on the contract (gain or loss) should be reflected in the profit and loss account for the relevant period.

Mark-to-market of future contracts is a process where by future contracts are revalued using their current market prices in order to determine the profit or loss made.

The gains accrued on marking-to-market of derivatives but not realised should be accounted in the balance sheet under the head current assets while losses not paid should be accounted in the balance sheet as current liabilities.