CA Final · Financial Reporting · Derivatives and Embedded Derivatives
Himalaya Metals Ltd issues a hybrid instrument for ₹100 crore. The embedded option-based derivative (a call option) is separated and valued at ₹12 crore on the basis of the stated terms of the option feature. What is the initial carrying amount of the host instrument?
The host's initial carrying amount is the residual after separating the derivative: ₹100 crore less ₹12 crore equals ₹88 crore. The option is valued on its stated terms and the host takes whatever remains.
- A₹112 crore
- B₹100 crore
- C₹88 croreCorrect
- D₹12 crore
Explanation
The initial carrying amount of the host is the residual after separating the embedded derivative: 100 - 12 = ₹88 crore. ₹112 crore wrongly adds the derivative instead of deducting it. ₹100 crore ignores separation altogether.
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