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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Kaveri Industries Ltd issues a debt instrument whose redemption value is linked to a commodity index, and which also carries an issuer call option. The index-linked feature and the call option relate to different risk exposures and are readily separable and independent of each other. How should the two embedded derivatives be treated, assuming separation is otherwise required for both?

They are accounted for separately from each other. Although multiple embedded derivatives in a hybrid are generally treated as one compound derivative, Ind AS 109 requires separate accounting where they relate to different risk exposures and are readily separable and independent of each other.

  1. AAccounted for separately from each other, because they relate to different risks and are readily separable and independentCorrect
  2. BAlways combined into a single compound embedded derivative
  3. CIgnored, as only one embedded derivative per hybrid contract can be separated
  4. DCombined with the host and measured at amortised cost

Explanation

Generally multiple embedded derivatives in one hybrid are treated as a single compound derivative. The exception applies where they relate to different risk exposures and are readily separable and independent of each other; then they are accounted for separately. Hence the 'always combined' option is wrong here.

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