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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Kaveri Industries Ltd holds a hybrid contract with a non-asset host containing an embedded put option. The contract is acquired for ₹10,00,000, and the embedded put is valued at ₹1,80,000 on the basis of the stated terms of the option feature. If the put must be separated, what is the initial carrying amount of the host?

The host is carried at ₹8,20,000. The embedded put is separated at its fair value of ₹1,80,000 based on its stated option terms, and the initial carrying amount of the host is the residual: ₹10,00,000 less ₹1,80,000.

  1. A₹8,20,000, being the residual after separating the putCorrect
  2. B₹10,00,000, because the host is carried at the full price
  3. C₹11,80,000, because the put value is added to the host
  4. D₹1,80,000, because only the derivative is recognised initially

Explanation

For an option-based embedded derivative, separation uses the stated terms of the option and the host is the residual amount (B4.3.3). Host = 10,00,000 − 1,80,000 = 8,20,000. Adding the put value to the price would overstate the total.

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