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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Meera Foods Ltd issues a hybrid instrument with a non-asset host and an embedded derivative. Management finds separation complex and wants to designate the entire hybrid contract as at fair value through profit or loss. Which statement is consistent with Ind AS 109?

Designation of the entire hybrid contract at fair value through profit or loss is permitted whether separation is required or prohibited. The exceptions are the cases in paragraph 4.3.5(a) and (b), where designation would not reduce complexity or increase reliability.

  1. ADesignation is permitted whether or not separation is required or prohibited, except in the cases in paragraph 4.3.5(a) and (b), where it would not reduce complexity or increase reliabilityCorrect
  2. BDesignation is permitted only where separation of the embedded derivative is required
  3. CDesignation is permitted only where separation of the embedded derivative is prohibited
  4. DDesignation is never permitted, and the embedded derivative must always be separated

Explanation

B4.3.10 allows the designation whether 4.3.3 requires or prohibits separation, but 4.3.5 does not justify it in the cases in 4.3.5(a) and (b) since complexity would not be reduced or reliability increased. B4.3.9 explains that separation can be complex or less reliable, hence the permission.

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