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CA Final · Financial Reporting · Derivatives and Embedded Derivatives

Sunrise Textiles Ltd issues a hybrid contract that has a host liability (not an asset within the scope of Ind AS 109) and contains one embedded derivative. The CFO wants to avoid the work of identifying and separating the embedded derivative and measuring it at fair value separately. Under Ind AS 109, which course is permitted?

The entire hybrid contract may be designated as at fair value through profit or loss. Ind AS 109 permits this because separating embedded derivatives can be more complex or less reliable than measuring the whole instrument at fair value. Ignoring the derivative or carrying it at cost is not permitted.

  1. ADesignate the entire hybrid contract as at fair value through profit or lossCorrect
  2. BDesignate only the host contract as at fair value through other comprehensive income
  3. CIgnore the embedded derivative because the host is not a financial asset
  4. DMeasure the embedded derivative at cost until the hybrid contract is settled

Explanation

Ind AS 109 recognises that separating embedded derivatives can be complex or yield less reliable measures than measuring the whole instrument at fair value. It therefore permits the entire hybrid contract to be designated at fair value through profit or loss. Ignoring the derivative or carrying it at cost is not allowed, and a host-only FVOCI designation does not exist for this purpose.

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