IFRIC 9 Reassessment of Embedded Derivatives

Interpretation on the Reassessment of Embedded Derivatives

The International Financial Reporting Interpretations Committee (IFRIC) issued IFRIC 9, “Reassessment of Embedded Derivatives” to make clear the specific aspects of the treatment of embedded derivatives under IAS 39 Financial Instruments: Recognition and Measurement.

IAS 39 describes an embedded derivative as a component of a hybrid (combined) instrument that also includes a non-derivative host contract—with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. With certain exceptions, IAS 39 requires embedded derivatives to be separately recognized and measured when the entity first becomes a party to the contract.

The IFRIC was asked whether the treatment of an embedded derivative has to be reassessed subsequently if certain events occur. IFRIC 9 concludes that reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required.

This Interpretation was welcomed by entities holding contracts with embedded derivatives. In reaching its conclusions the IFRIC was anxious to avoid a ruling that would have required continual reassessment whenever market prices or other external events affected the value of these instruments. Instead it has remained faithful to the spirit of IAS 39 in not permitting reclassification unless the terms of the instrument themselves are changed in a significant way.

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