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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Sunrise Textiles Ltd issues a 5-year debenture of ₹10,00,000 (a financial liability host) with an embedded equity-index-linked return and a separate, unrelated embedded foreign-currency feature. Both are readily separable and independent of each other and relate to different risk exposures. Under Ind AS 109, how should the two embedded derivatives be accounted for?

The two embedded derivatives are accounted for separately from each other. Ind AS 109 normally treats multiple embedded derivatives as one compound derivative, but not when they relate to different risk exposures and are readily separable and independent of each other.

  1. ATreated as a single compound embedded derivative in every case
  2. BAccounted for separately from each other, because they relate to different risk exposures and are readily separable and independentCorrect
  3. CIgnored, since a liability host can never contain an embedded derivative
  4. DAlways combined with the host and measured at amortised cost

Explanation

Multiple embedded derivatives in one hybrid contract are generally treated as a single compound derivative. The exception is where they relate to different risk exposures and are readily separable and independent of each other, in which case they are accounted for separately. Option A ignores that exception.

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