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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Kaveri Industries Ltd issues a hybrid contract with a host that is not an asset within the scope of Ind AS 109 and which contains an embedded non-option forward. The forward's stated terms are not at-market, but the implied substantive terms can be determined. At initial recognition, on what basis is the embedded forward separated from the host?

An embedded non-option derivative like a forward is separated on its stated or implied substantive terms so that its fair value is zero at initial recognition. Stated-terms separation is the rule for option-based derivatives, not for forwards or swaps.

  1. AOn the stated terms of the forward, even if it gives a non-zero fair value
  2. BOn its stated or implied substantive terms so that it has a fair value of zero at initial recognitionCorrect
  3. CAt the amount that gives the host a fair value equal to the transaction price, with the forward at any value
  4. DOn the basis that the forward is always recorded at its notional amount

Explanation

Paragraph B4.3.3 states an embedded non-option derivative such as a forward or swap is separated on the basis of its stated or implied substantive terms so that its fair value is zero at initial recognition. The stated-terms basis applies to option-based derivatives, so the first option is wrong.

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