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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Himalaya Metals Ltd enters into a hybrid contract with a non-financial-asset host and an embedded forward. The contract price is ₹50,00,000. The embedded forward is separated on its implied substantive terms. What is the initial fair value of the embedded forward and the initial carrying amount of the host respectively?

The embedded forward has an initial fair value of zero and the host is carried at ₹50,00,000. A non-option embedded derivative is separated on its implied substantive terms to give zero fair value at inception, and the host is the residual amount.

  1. A₹50,000 and ₹49,50,000
  2. BZero and ₹50,00,000Correct
  3. C₹50,00,000 and zero
  4. DZero and ₹25,00,000

Explanation

An embedded non-option derivative such as a forward is separated on its stated or implied substantive terms so that its fair value at initial recognition is zero. The host is the residual, so it equals the full ₹50,00,000. Any positive value assigned to the forward would contradict the requirement.

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