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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Kaveri Power Ltd purchases a hybrid contract whose host is not an asset within the scope of Ind AS 109. It contains an embedded option-based derivative (a cap) that must be separated. The entity needs to determine the initial carrying amount of the host. Which statement is correct under Ind AS 109?

An embedded option such as a cap is separated on the basis of its stated option terms, and the host instrument's initial carrying amount is the residual after separating the derivative. The zero-fair-value approach is for non-option derivatives such as embedded forwards or swaps.

  1. AThe cap is separated on the basis of its stated terms, and the host's initial carrying amount is the residual after separating the derivativeCorrect
  2. BThe cap is separated so that it has a fair value of zero at initial recognition, and the host takes the full contract price
  3. CThe host is measured first at fair value, and the cap takes the residual amount
  4. DThe cap is separated using implied terms of the contract, with the host carried at nil

Explanation

An embedded option-based derivative is separated on the basis of the stated terms of the option feature, so it may have a non-zero initial fair value. The host is the residual amount. The zero-fair-value approach applies only to non-option derivatives such as forwards and swaps.

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