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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Sundaram Textiles Ltd holds a hybrid contract whose host is a purchase contract for cotton (not a financial asset within the scope of Ind AS 109). The contract contains two embedded derivatives: (i) a price-escalation feature linked to the cotton index and (ii) a foreign-currency feature linked to USD. Both relate to different risk exposures and are readily separable and independent of each other. How should they be accounted for, based on paragraph B4.3.4?

The two embedded derivatives are accounted for separately from each other. Although multiple embedded derivatives in one hybrid contract are generally treated as a single compound derivative, an exception applies when they relate to different risk exposures and are readily separable and independent, as commodity and currency risks are here.

  1. ATreated as a single compound embedded derivative because they sit in one hybrid contract
  2. BAccounted for separately from each otherCorrect
  3. CIgnored, since the host is not a financial asset
  4. DCombined with the host and measured at amortised cost

Explanation

Paragraph B4.3.4 says multiple embedded derivatives are generally treated as a single compound derivative. However, if they relate to different risk exposures and are readily separable and independent of each other, they are accounted for separately. Here the commodity and currency risks differ, so the single-compound option is wrong.

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