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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Narmada Chemicals Ltd holds a hybrid contract with a host that is not an asset within Ind AS 109 and an embedded derivative that would otherwise require separation. Management finds separation complex and wants a more reliable measure. Which treatment is permitted?

The entity may designate the entire hybrid contract as at fair value through profit or loss. Ind AS 109 allows this because separating embedded derivatives can be complex or less reliable than measuring the whole instrument at fair value.

  1. ADesignate the entire hybrid contract as at fair value through profit or lossCorrect
  2. BMeasure only the host at fair value through profit or loss and ignore the derivative
  3. CDesignate the embedded derivative alone at amortised cost
  4. DDefer all gains and losses on the derivative in equity

Explanation

Ind AS 109 permits designation of the entire hybrid contract as at fair value through profit or loss, because separation can be more complex or less reliable. This may be used whether separation is required or prohibited. It does not apply where doing so would not reduce complexity or increase reliability.

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