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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Rohan Chemicals Ltd issues a hybrid contract with an embedded forward that is a non-option derivative. For separation purposes, on what basis should the embedded forward be separated under Ind AS 109 Appendix B?

An embedded non-option derivative such as a forward is separated on its stated or implied substantive terms so that it has a fair value of zero at initial recognition. Only option-based derivatives are separated on the stated terms of the option feature.

  1. AOn its stated or implied substantive terms so that its fair value is zero at initial recognitionCorrect
  2. BOn the stated option terms so that its fair value equals the premium paid
  3. COn market terms so that the host has a zero carrying amount
  4. DOn management's estimate so that the derivative has the same value as the host

Explanation

B4.3.3 says an embedded non-option derivative, such as a forward or swap, is separated on the basis of its stated or implied substantive terms so that it has a fair value of zero at initial recognition. Option B describes the treatment of option-based derivatives, which use stated terms of the option feature.

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