IFRIC D15 Reassessment of Embedded Derivatives
Mar 31, 2005
The International Financial Reporting Interpretations Committee (IFRIC) has released for public comment Draft Interpretation D15 'Reassessment of Embedded Derivatives'.
IAS 39 Financial Instruments: Recognition and Measurement requires an entity, when it first becomes a party to a contract, to assess whether any embedded derivatives contained in the contract are required to be separated from the host contract and accounted for separately as derivatives under the standard. (An example of an embedded derivative is the conversion option that is part of an investment in convertible debt.)
The two questions addressed in D15, and the proposed responses, are:
- Question: Does IAS 39 require assessment of whether an embedded derivative must be separated from the host contract only when the entity first becomes a party to the derivative contract or throughout the life of the contract?
D15 Proposal: Make the assessment only when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract, in which case it is required.
- Question: Should a first-time adopter of IFRSs make its assessment on the basis of the conditions that existed when the entity first became a party to the derivatives contract, or those prevailing when the entity adopts IFRSs for the first time?
D15 Proposal: Make the assessment based on the conditions that existed when the entity first became a party to the contract.
To allow entities affected by the final interpretation enough time to change current practices, the proposed effective date for the interpretation is annual periods beginning on or after a date to be set at three months after the interpretation is finalised. Earlier application would be encouraged. Comment deadline on D15 is 31 May 2005.