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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Orchid Ltd issues a hybrid instrument whose embedded derivative is a non-option forward-type feature that must be separated from the host. Which statement about measuring this embedded derivative at initial recognition is correct under Ind AS 109?

The non-option embedded derivative is separated on its stated or implied substantive terms so that its fair value at initial recognition is zero. Only option-based derivatives are separated on the stated terms of the option feature, and the host takes the residual amount.

  1. AIt is separated on its stated or implied substantive terms so that its fair value at initial recognition is zeroCorrect
  2. BIt is separated on the basis of the stated terms of the option feature so that it has a positive fair value
  3. CIt is separated at the fair value of the whole hybrid contract
  4. DIt is measured at zero only if the host is a financial asset

Explanation

Under B4.3.3 an embedded non-option derivative such as a forward or swap is separated on its stated or implied substantive terms so that its fair value at initial recognition is zero. Stated option terms apply only to option-based derivatives. The residual then goes to the host.

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