Scribd
Upload
102 views1 page

Embedded Derivatives & Hedge Accounting

An embedded derivative is a component of a hybrid instrument that includes both a derivative and a non-derivative host contract. For accounting purposes, an embedded derivative must be separated from the host contract and accounted for separately if the host is not a financial asset or liability and certain conditions are met. Hedge accounting is an optional accounting method where the change in fair value of a hedging instrument offsets the change in fair value or cash flows of the hedged item, but it has specific eligibility criteria and hedging documentation requirements that must be followed.

Uploaded by

Honey Casiple
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
102 views1 page

Embedded Derivatives & Hedge Accounting

An embedded derivative is a component of a hybrid instrument that includes both a derivative and a non-derivative host contract. For accounting purposes, an embedded derivative must be separated from the host contract and accounted for separately if the host is not a financial asset or liability and certain conditions are met. Hedge accounting is an optional accounting method where the change in fair value of a hedging instrument offsets the change in fair value or cash flows of the hedged item, but it has specific eligibility criteria and hedging documentation requirements that must be followed.

Uploaded by

Honey Casiple
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 1

You do NOT have to do it, only if you want

Embedded derivatives to (+meet the conditions).

An embedded derivative is simply a Let’s say you try to protect your company
component of a hybrid instrument that also against foreign currency risk and you enter
includes a non-derivative host contract. into foreign currency forward contract. Even
if you meet the conditions for the hedge
Accounting of embedded accounting, you can still measure the
derivatives depends on WHAT the host derivative at fair value through profit or loss
contract is: and not apply hedge accounting – up to you.

 If host = financial asset within the scope If you want to apply hedge accounting, 3
of IFRS 9, then the whole hybrid criteria must be met (IFRS 9, par. 6.4.1):
contract shall be measured as one and
not separated. 1. There are only eligible hedging
 If host = financial liability within the instruments and eligible hedged
scope of IFRS 9 OR a contract outside items in the relationship;
the scope of IFRS 9 (e.g. service 2. You have the hedge documentation at
contract, lease contract…), then you the inception of the hedge, in which you
should separate when the conditions are designate and describe your hedging,
met. 3. Hedge effectiveness criteria are met.

Separation means that you account for IFRS 9 sets the rules for 3 types of hedges:
embedded derivative separately in line with
IFRS 9 and the host contract in line with other 1. Cash flow hedge,
appropriate standard. 2. Fair value hedge, and
If an entity is not able to do this, then the 3. Hedge of the net investment in the
foreign operation.
whole contract must be accounted for as a
financial instrument at fair value through
profit or loss.

Hedge accounting
Hedge accounting is designating one or
more hedging instruments so that their
change in fair value is an offset to the
change in fair value or cash flows of a
hedged item.

If you’d like to see a simple illustration,


please watch the video below this article
(somewhere around the minute 17:43).

One very important remark:

Hedge accounting is NOT mandatory!

You might also like