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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Mahalaxmi Infra Ltd acquired a subsidiary in a business combination. Among the acquired contracts is a hybrid contract containing an embedded derivative. The finance team asks whether the reassessment guidance in B4.3.11 applies to it. What does Ind AS 109 say?

Paragraph B4.3.11 does not apply to embedded derivatives in contracts acquired in a business combination; Ind AS 103 addresses them. The same exclusion covers common control combinations and the formation of a joint venture, so no reassessment under B4.3.11 is made.

  1. AIt applies, so the acquirer reassesses only if the terms change after the acquisition
  2. BIt does not apply to embedded derivatives in contracts acquired in a business combination, and Ind AS 103 addresses their treatmentCorrect
  3. CIt applies only if the business combination is between entities under common control
  4. DIt applies to the contract but not to the embedded derivative

Explanation

B4.3.12 states that B4.3.11 does not apply to embedded derivatives in contracts acquired in a business combination (and also in common control combinations or the formation of a joint venture). The footnote notes that Ind AS 103 addresses the acquisition of contracts with embedded derivatives in a business combination. Option C is wrong because common control combinations are also excluded.

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