Embedded derivativesEmbedded derivatives

Embedded derivatives

4.6 An embedded derivative is a component of a hybrid contract that also includes a non-derivative host – with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. A derivative that is attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty, is not an embedded derivative, but a separate financial instrument.

4.7 If a hybrid contract contains a host that is within the scope of this Standard, an entity shall apply the requirements in paragraphs 4.1-4.5 to the entire hybrid contract.

4.8 If a hybrid contract contains a host that is not within the scope of this Standard, an entity shall apply the requirements in paragraphs 11-13 and AG27-AG33B of AASB 139 to determine whether it must separate the embedded derivative from the host. If the embedded derivative must be separated from the host, the entity shall:

(a) classify the derivative in accordance with either paragraphs 4.1-4.4 for derivative assets or paragraph 9 of AASB 139 for all other derivatives; and

(b) account for the host in accordance with other Australian Accounting Standards.