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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Sundaram Textiles Ltd issues a hybrid contract that contains two embedded derivatives: an equity-linked feature and a commodity-price feature. They relate to different risk exposures, and each can be readily separated from the other and operates independently. Both are required to be separated from the host. Under Ind AS 109, how should the two embedded derivatives be accounted for?

The two embedded derivatives are accounted for separately. Although multiple embedded derivatives are generally treated as one compound derivative, Ind AS 109 requires separate accounting when they relate to different risk exposures and are readily separable and independent of each other.

  1. AAs a single compound embedded derivative, because multiple embedded derivatives are always combined
  2. BSeparately from each other, because they relate to different risk exposures and are readily separable and independentCorrect
  3. CNot separated at all, because a hybrid contract never has more than one embedded derivative
  4. DOnly the derivative with the higher fair value is separated and the other is ignored

Explanation

Ind AS 109 (B4.3.4) says multiple embedded derivatives are generally treated as one compound derivative. However, if they relate to different risk exposures and are readily separable and independent of each other, they are accounted for separately. Option A states only the general rule and ignores this exception.

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