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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Mehta Steel Ltd holds a hybrid contract with a host that is not an asset within the scope of Ind AS 109 and finds that separating its embedded derivative would be complex. Which statement is correct under Ind AS 109?

The entire hybrid contract may be designated as at fair value through profit or loss, whether or not separation of the embedded derivative is required. This is permitted because separation can be complex or less reliable, but the designation is not justified in the cases set out in paragraph 4.3.5(a) and (b).

  1. AThe entire hybrid contract may be designated as at fair value through profit or loss, whether or not separation of the derivative is requiredCorrect
  2. BDesignation is allowed only if the embedded derivative is required to be separated
  3. CDesignation is never allowed for hybrid contracts
  4. DDesignation is allowed even where the embedded derivative does not significantly modify the cash flows, because it reduces complexity

Explanation

Ind AS 109 permits the whole hybrid contract to be designated as at fair value through profit or loss because separation can be complex or less reliable. This designation may be used whether separation is required or prohibited. It is not justified in the cases in paragraph 4.3.5(a) and (b), where it would not reduce complexity or increase reliability, so the last option is wrong.

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