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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Himgiri Ltd acquires Zenith Ltd in a business combination under Ind AS 103. Zenith has a supply contract containing an embedded derivative, entered into years ago. Himgiri's finance team asks whether the paragraph on reassessing embedded derivatives (which normally applies when contract terms change) governs this acquired contract. What does Ind AS 109 say?

The reassessment paragraph does not apply. Ind AS 109 paragraph B4.3.12 excludes embedded derivatives in contracts acquired in a business combination, a common control combination or the formation of a joint venture from the reassessment requirement, with Ind AS 103 addressing such acquisitions.

  1. AThe reassessment paragraph does not apply to embedded derivatives in contracts acquired in a business combinationCorrect
  2. BReassessment is mandatory every reporting date for such contracts
  3. CThe embedded derivative must be reassessed only if it is an equity-classified derivative
  4. DReassessment applies only to contracts acquired in common control combinations

Explanation

Paragraph B4.3.12 states that the reassessment requirement in B4.3.11 does not apply to embedded derivatives in contracts acquired in a business combination, a common control combination or the formation of a joint venture. Ind AS 103 addresses the acquisition of such contracts. The option limiting it to common control is wrong, since business combinations are also excluded.

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