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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Anand Pharma Ltd has a hybrid contract with a non-asset host. It contains two embedded derivatives: an embedded price-linked feature relating to commodity price risk, and an embedded feature relating to foreign currency risk. Both are readily separable and independent of each other. How are they accounted for under Ind AS 109?

They are accounted for separately. Multiple embedded derivatives are normally treated as one compound derivative, but where they relate to different risk exposures and are readily separable and independent of each other, Ind AS 109 requires separate accounting for each.

  1. ASeparately from each other, since they relate to different risk exposures and are readily separable and independentCorrect
  2. BAs a single compound embedded derivative, because multiple embedded derivatives are always combined
  3. CNeither is separated, since only one derivative can be separated from a hybrid contract
  4. DBoth are combined with the host and measured at amortised cost

Explanation

B4.3.4 generally treats multiple embedded derivatives as one compound derivative, but if they relate to different risk exposures and are readily separable and independent, they are accounted for separately. Here both conditions hold. Combining them ignores this exception.

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