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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Gupta Pharma Ltd holds a hybrid contract with two embedded derivatives. One relates to foreign currency risk and the other to commodity price risk. Both are readily separable and independent of each other, and neither is classified as equity. How does Ind AS 109 require them to be accounted for?

They are accounted for separately from each other. Ind AS 109 normally combines multiple embedded derivatives into one compound derivative, but where they relate to different risk exposures and are readily separable and independent, as with the currency and commodity features here, separate accounting applies.

  1. AAs a single compound embedded derivative, because they sit in one contract
  2. BSeparately from each other, because they relate to different risk exposures and are readily separable and independentCorrect
  3. CNot separated, because the host contract is a financial asset
  4. DOnly the larger one is separated and the other is merged into the host

Explanation

The general rule treats multiple embedded derivatives as one compound derivative. The exception applies when the derivatives relate to different risk exposures and are readily separable and independent of each other. Here both conditions hold, so they are accounted for separately.

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