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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Arjun Pharma Ltd issues a hybrid contract containing three embedded derivatives. Derivatives A and B relate to the same risk exposure. Derivative C relates to a different risk exposure and is readily separable and independent of A and B. None are classified as equity. How should they be accounted for under Ind AS 109?

A and B, relating to the same risk, are treated as one compound embedded derivative, while C is accounted for separately because it relates to a different risk exposure and is readily separable and independent of the others.

  1. AA, B and C all as a single compound embedded derivative
  2. BA and B as a single compound embedded derivative, and C separately from themCorrect
  3. CA, B and C each separately, since there is more than one derivative
  4. DOnly C separated; A and B stay in the host

Explanation

Multiple embedded derivatives in a single hybrid contract are generally treated as a single compound derivative. However, if they relate to different risk exposures and are readily separable and independent, they are accounted for separately. So A and B combine, while C is separate. Treating all three as one ignores the exception.

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