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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Sagar Textiles Ltd issues a hybrid contract. The host is a non-financial-asset contract outside Ind AS 109 scope and it contains an embedded option-based derivative. At initial recognition, how should the entity determine the carrying amount of the host after separating the embedded derivative, as per Ind AS 109 Appendix B?

The host contract is carried at the residual amount left after the embedded derivative has been separated. The embedded option is measured first, on the basis of the stated terms of the option feature, and the host takes the balance of the hybrid contract's initial amount.

  1. AHost is measured at its stated contract price and the derivative is recorded in addition to it
  2. BHost is carried at the residual amount after separating the embedded derivativeCorrect
  3. CHost is carried at zero and the derivative at the whole contract price
  4. DHost is measured at fair value and the derivative at the residual amount

Explanation

Ind AS 109 B4.3.3 states that the initial carrying amount of the host instrument is the residual amount after separating the embedded derivative. The option is separated on the basis of its stated terms. Valuing the host at fair value and deriving the derivative as the residual reverses the prescribed order.

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