**Classification of derivative instruments**

## How are derivative instruments classified?

Derivative instruments are a subset of financial instruments. In the definition of financial asset, we have the following phrase, viz, *“to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity” *and in the definition of financial liability *“to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity”. *This means that depending upon the net present value (fair value) of the derivative instrument it will either be shown as a financial asset or as a financial liability. As per Ind AS 109, all derivatives are deemed to be held for trading. The fair value changes of the derivative instruments are always recorded in the profit and loss account. Hence, all derivative instruments irrespective of whether it represents a financial asset or a financial liability are classified as FVTPL only. An entity cannot elect to present the changes in fair value of derivatives in OCI as the derivative instruments fall within the definition of assets held for trading as per Ind AS 109.