Financial instruments: embedded derivatives
In December 2008 the Board published the exposure draft Embedded Derivatives (ED) proposing amendments to IAS 39 and to IFRIC 9 Reassessment of Embedded Derivatives.
At this meeting the Board discussed the responses to the ED and tentatively decided:
- as proposed in the ED, to require an entity to assess whether an embedded derivative is required to be separated from a host contract when the entity reclassifies a hybrid (combined) financial asset out of the fair value through profit or loss category.
- that the assessment shall be made on the basis of the circumstances that existed when the entity first became a party to the contract or, if later, the date of a change in contractual terms (with a significant effect on cash flows). If an entity cannot make the assessment, the entire hybrid (combined) financial asset remains in fair value through profit or loss.
- as proposed in the ED, that if an entity is unable to measure separately an embedded derivative that would have to be separated, the entire hybrid (combined) financial instrument must remain in the fair value through profit or loss category.
- to require entities to apply the final amendments for annual periods ending on or after 30 June 2009.
The Board directed the staff to draft the final amendments for written ballot.
The staff also provided an update to the Board on the accounting for synthetic collateralised debt obligations (CDOs) and credit derivatives that are embedded in such instruments. The financial crisis section of the IASB website includes more information on this topic.