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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Sundaram Textiles Ltd issues a hybrid contract with a host that is not an asset within the scope of Ind AS 109, and the contract contains an embedded derivative. Which statement correctly describes what Ind AS 109 requires the entity to do on becoming a party to the contract?

The entity must identify the embedded derivative, assess whether it needs to be separated from the host, and, if separated, measure it at fair value at initial recognition and afterwards, with changes going to profit or loss.

  1. AIdentify the embedded derivative, assess whether it must be separated, and measure any separated derivative at fair value initially and subsequently through profit or lossCorrect
  2. BAlways separate the embedded derivative and measure it at amortised cost
  3. CIgnore the embedded derivative until it is exercised, then recognise it
  4. DMeasure the embedded derivative at fair value through other comprehensive income without assessment

Explanation

Where the host is not an asset within the scope of Ind AS 109, the entity identifies embedded derivatives, assesses whether separation is required, and measures separated derivatives at fair value at initial recognition and subsequently through profit or loss. Amortised cost is wrong because derivatives are carried at fair value.

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