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Two Indian companies (lessor and lessee in India) sign a lease whose contingent rentals are linked to a US INFLATION INDEX. Under Ind AS 109, the inflation-linked feature is:
ANot closely related to the host lease — it must be separated from the host contract and accounted for as a stand-alone derivative
BClosely related — leases between Indian companies are scoped out of separation requirements
CClosely related — inflation indices in any economy are deemed closely related to lease contracts
DOutside Ind AS 109 because inflation indices are non-financial variables
Answer & Solution
Correct answer: A. Not closely related to the host lease — it must be separated from the host contract and accounted for as a stand-alone derivative
Inflation-linked features in a lease are CLOSELY RELATED to the host only if the index is for inflation in the entity's OWN economic environment. Here, the entities and the asset are Indian but the index is US inflation — the feature is NOT closely related and must be separated as a stand-alone derivative.
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