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CA Final · Financial Reporting · Financial Instruments: Scope and Definitions

Veda Textiles Ltd holds 30% of the equity shares of Kaveri Dyes Ltd, which it accounts for as an associate under Ind AS 28 using the equity method. Veda also holds a call option on a further 10% of Kaveri's shares. The option is a derivative and does not meet the definition of an equity instrument of Veda. How does the scope of Ind AS 109 apply to the option?

Ind AS 109 applies to the call option. Although the associate interest itself is outside the Standard, derivatives on an interest in an associate are brought back into its scope unless the derivative meets the Ind AS 32 definition of the entity's own equity instrument, which this option does not.

  1. AInd AS 109 applies to the option, because derivatives on an interest in an associate are within its scope unless they are equity instruments of the entityCorrect
  2. BInd AS 109 does not apply, because every interest in an associate is outside its scope, including derivatives on that interest
  3. CInd AS 109 applies only if Veda intends to exercise the option within twelve months
  4. DInd AS 28 alone governs the option, since it relates to an associate

Explanation

Ind AS 109 excludes interests in associates accounted for under Ind AS 28, but it states that entities shall also apply it to derivatives on an interest in a subsidiary, associate or joint venture unless the derivative is an equity instrument of the entity under Ind AS 32. The option does not meet that equity definition, so it is within scope. The second option ignores this carve-back.

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