Skip to content

CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Sharma Textiles Ltd enters into a hybrid contract whose host is not an asset within the scope of Ind AS 109 and which contains an embedded derivative. Under Ind AS 109, what is the accounting requirement when the embedded derivative is required to be separated from the host?

A separated embedded derivative is measured at fair value at initial recognition and subsequently, with fair value changes recognised in profit or loss. It is not carried at cost or frozen at its initial value, because Ind AS 109 requires ongoing fair value measurement through profit or loss.

  1. AMeasure the embedded derivative at fair value at initial recognition and subsequently, with changes through profit or lossCorrect
  2. BMeasure the embedded derivative at cost and test it annually for impairment
  3. CMeasure the embedded derivative at fair value at initial recognition and carry it at that value thereafter
  4. DIgnore the derivative and disclose it only in the notes

Explanation

Where a hybrid contract has a host outside the scope of Ind AS 109, the entity must identify the embedded derivative and assess whether it must be separated. A derivative that is separated is measured at fair value at initial recognition and subsequently at fair value through profit or loss. Carrying it at initial fair value without remeasurement, or at cost, is wrong.

Did you get it right without looking?

One question tells you little. A timed set on Derivatives and Embedded Derivatives shows your real accuracy, how long you take and where you lose marks.

Practise Derivatives and Embedded DerivativesFree diagnostic mock

More Derivatives and Embedded Derivatives questions