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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Himalaya Power Ltd issues a bond for ₹10,00,000 (fair value at issue) with an embedded put option. The option is required to be separated, and its fair value on the basis of the option's stated terms is ₹60,000 at initial recognition. Which is the correct initial carrying amount of the host instrument?

The host's initial carrying amount is ₹9,40,000. The embedded option is separated at its fair value of ₹60,000 based on its stated terms, and the host takes the residual amount, which is ₹10,00,000 less ₹60,000.

  1. A₹10,60,000
  2. B₹10,00,000
  3. C₹9,40,000Correct
  4. D₹60,000

Explanation

Per B4.3.3, the option is separated on its stated terms and the host carrying amount is the residual after separating the embedded derivative. Residual = 10,00,000 − 60,000 = ₹9,40,000. Adding the option (₹10,60,000) gets the sign wrong.

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