FAQs – Embedded derivatives

Gains and losses on assets measured at FVOCI How are gains and losses on assets measured at fair value through other comprehensive income recognised? A gain or loss on a financial asset measured at fair value through other comprehensive income shall be recognised in other comprehensive income, except for impairment gains or losses and foreign exchange gains and losses, until the financial asset is derecognised or reclassified. When the financial asset is derecognised the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment. If the financial asset…

What is a hybrid contract? What is meant by a hybrid contract? A hybrid contact is one that includes a non-derivative host and an embedded portion. An embedded derivative is a component of a hybrid contract. The cash flows of the hybrid instrument that is combined instrument vary in a way similar to a standalone derivative. Ind AS Accounting Standards

What is an embedded derivative? What is an embedded 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. However, in the case of a non-financial variable that variable should not be 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…

Separately accounting for an embedded derivative Should an embedded derivative contained in a financial liability be separated and accounted for? When a hybrid contract contains a host contract and it is not a financial asset, the embedded derivatives portion should be separated from the host and accounted for as a derivative if and only if the following conditions are met: The economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host A separate instrument with the same terms as the embedded derivative would meet the definition of a derivative;…

Reclassification of a financial asset When should a financial asset be reclassified? When, and only when, an entity changes its business model for managing financial assets it shall reclassify all affected financial assets to reflect the appropriate category. An entity should reclassify financial assets if the entity changes its business model for managing those financial assets. Such changes are expected to be very infrequent. Such changes are determined by the entity’s senior management as a result of external or internal changes and must be significant to the entity’s operations and demonstrable to external parties. Accordingly, a change in an entity’s…

Gains and losses on a financial instrument How are gains and losses on a financial instrument be measured? A gain or loss on a financial asset or financial liability that is measured at fair value should be recognised in profit or loss account. For an investment in equity instrument, which the entity has elected to present gain or loss on that investment in other comprehensive income, then gains or loss on such investments should be recognised in other comprehensive income. Dividends are recognised in profit or loss account when the entity’s right to receive payment of dividend is established and…

Gains and losses from liabilities designated as FVTPL How are the gains and losses from liabilities designated as at fair value through profit or loss account recognised? An entity shall present a gain or loss on a financial liability that is designated as at fair value through profit or loss as follows: The amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability shall be presented in other comprehensive income; and The remaining amount of change in the fair value of the liability shall be presented in…