Skip to content

CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Kaveri Industries Ltd holds a hybrid contract that has two embedded derivatives. One relates to a commodity price exposure and the other to a foreign currency exposure. The two are readily separable and independent of each other. Under Ind AS 109, how are they accounted for if both must be separated and both are classified as assets or liabilities?

They are accounted for separately from each other. Although multiple embedded derivatives in one hybrid contract are generally treated as a single compound derivative, the exception applies when they relate to different risk exposures and are readily separable and independent, as in the commodity and currency case here.

  1. ACombined as one compound embedded derivative because they sit in one contract
  2. BAccounted for separately from each other because they relate to different risk exposures and are readily separable and independentCorrect
  3. CIgnored, as only one embedded derivative per contract can be separated
  4. DAccounted for as equity components together with the host

Explanation

B4.3.4 says multiple embedded derivatives are generally treated as a single compound derivative. However, where they relate to different risk exposures and are readily separable and independent of each other, they are accounted for separately. The facts fit this exception, so combining them is wrong.

Did you get it right without looking?

One question tells you little. A timed set on Derivatives and Embedded Derivatives shows your real accuracy, how long you take and where you lose marks.

Practise Derivatives and Embedded DerivativesFree diagnostic mock

More Derivatives and Embedded Derivatives questions