Ind AS 109: Classification of embedded derivatives closely related to host purchase & installation contract
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- Last Updated on 3 November, 2021
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An embedded derivative can only be regarded as closely related to the host contract if it is denominated in a currency that is commonly used in the economic environment in which the transaction takes place, according to Ind AS 109 Financial Instruments. Furthermore, it must first assess whether the transaction is a local business transaction or an exterior trade in order to decide the currency frequently used in local business transactions or external trade. In addition, INR is a widely utilised currency in Indian contracts.
In one of such example, A Ltd. is engaged in the generation of hydro power, coal mining and oil & gas exploration, etc. The company has entered into contracts to purchase and install the power plant & equipment. The contract is denominated in both functional and foreign currency. For both contacts, the company has made the accounting for foreign currency as embedded derivatives. Whether the foreign currency embedded derivative contracts entered by the company with both the parties would be considered as closely related to the host contract?
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