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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Sagar Steel Ltd acquired a business in a business combination under Ind AS 103. The acquired entity has a contract with a non-asset host and an embedded derivative. Sagar Steel's CFO claims that the reassessment rule in B4.3.11 applies to this contract at the acquisition date, because the entity became a party to it at that time. Which statement is correct under Ind AS 109?

The CFO is wrong. Ind AS 109 states that the reassessment paragraph B4.3.11 does not apply to embedded derivatives in contracts acquired in a business combination, a common control combination, or the formation of a joint venture, and Ind AS 103 addresses the acquisition of such contracts.

  1. AB4.3.11 does not apply to embedded derivatives in contracts acquired in a business combination; Ind AS 103 addresses themCorrect
  2. BB4.3.11 applies fully, and reassessment is required each reporting date after acquisition
  3. CB4.3.11 applies only if the acquired contract is in a joint venture, not a business combination
  4. DB4.3.11 applies only if the host contract is a financial asset

Explanation

B4.3.12 states that the reassessment paragraph does not apply to embedded derivatives in contracts acquired in a business combination, a common control combination or formation of a joint venture. Ind AS 103 deals with such acquired contracts. The joint venture option is wrong because business combinations are expressly excluded as well.

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