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IFRIC 9 — Reassessment of Embedded Derivatives

References

  • IAS 39 Financial Instruments: Recognition and Measurement

History

DateDevelopmentComments
31 March 2005 IFRIC D15 Reassessment of Embedded Derivatives published Comment deadline 31 May 2005
1 March 2006 IFRIC 9 Reassessment of Embedded Derivatives issued Effective for annual periods beginning on or after 1 June 2006
23 December 2008 Exposure Draft Embedded Derivatives (Proposed amendments to IFRIC 9 and IAS 39) published Comment deadline 21 January 2009
30 January 2009 Exposure Draft ED/2009/1 Post-implementation Revisions to IFRIC Interpretations (Proposed amendments to IFRIC 9 and IFRIC 16) published Comment deadline 3 March 2009
12 March 2009 Amended by Embedded Derivatives (Amendments to IFRIC 9 and IAS 39)
(reassessment on reclassification)
Effective for annual periods ending on or after 30 June 2009
16 April 2009 Amended by Improvements to IFRSs (scope of IFRIC 9 and revised IFRS 3) Effective for annual periods beginning on or after 1 July 2009

 

IAS Plus Newsletter

Summary of IFRIC 9

An embedded derivative as a component of a hybrid (combined) financial instrument that also includes a non-derivative host contract. Some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative.

An example is the conversion option in convertible debt. The fair value of the convertible (hybrid) instrument changes, in part, with movements in the fair value of the equity shares into which it is convertible - which would be similar to a stand-alone option.

IAS 39 Financial Instruments: Recognition and Measurement requires an entity, when it first becomes a party to a hybrid contract, to assess whether any embedded derivatives contained in the contract are required to be separated from the host contract and accounted for as if they were stand-alone derivatives.

IFRIC 9 addresses:

  • whether IAS 39 requires such an assessment to be made only when the entity first becomes a party to the hybrid contract, or whether the assessment be reconsidered throughout the life of the contract
  • whether a first-time adopter of IFRSs should make its assessment on the basis of the conditions that existed when the entity first became a party to the contract, or those prevailing when the entity adopts IFRSs for the first time.

IFRIC 9 concludes that an entity must assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative 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 that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required.

A first-time adopter must assess whether an embedded derivative is required to be separated on the basis of the conditions that existed at the date it first became a party to the contract, unless there was a subsequent change in terms of the contract that significantly modified the cash flows.

IFRIC 9 is effective for annual periods beginning on or after 1 June 2006. Earlier application is encouraged.

Discussion at the December 2008 IASB Meeting

The Board agreed to propose a fast-track amendment to IFRIC 9 to make clear that, on Reclassification, an entity is required to assess whether an embedded derivative must be separately accounted for under IAS 39. The amendment will be effective for periods ending on or after 15 December 2008.

December 2008: IASB exposure draft on embedded derivatives

On 22 December 2008, the IASB proposed to amend IFRIC 9 and IAS 39 Financial Instruments: Recognition and Measurement to clarify the accounting treatment for embedded derivatives. The proposals are set out in an exposure draft Embedded Derivatives, on which the IASB invites comments by 21 January 2009. The exposure draft can be downloaded from the IASB's Website. The IASB is issuing this ED to prevent any diversity in practice developing as a result of the amendments made to IAS 39 in October 2008 to permit the reclassification of particular financial assets. The proposals published today would require all embedded derivatives to be assessed, including those embedded in reclassified instruments, and, if necessary, separately accounted for in financial statements. Click for Press Release (PDF 44k).

Amendment to IFRIC 9 Proposed at IASB January 2009 Meeting - Reassessment of Embedded Derivatives

The Board agreed that an amendment to paragraph 5 of IFRIC 9 Reassessment of Embedded Derivatives was necessary to clarify that the scope of IFRIC 9 excludes contracts with embedded derivatives acquired in a combination between entities under common control or in the formation of a joint venture. With the revised definition of a 'business' in IFRS 3 (2008), the formation of a joint venture was brought within the scope of IFRIC 9, something that the Board had not addressed specifically as it developed IFRS 3 (2008).

The Board agreed that the scope of IFRIC 9 should be amended to read as follows:

5. This interpretation does not apply to the acquisition of contracts with embedded derivatives in:

 

  • a. a business combination;
  • b. a combination of entities or businesses under common control as described in paragraphs B1-B4 of IFRS 3 Business Combinations (as revised in 2008); or
  • c. the formation of a joint venture as defined in IAS 31 Interests in Joint Ventures
nor their possible reassessment at the date of acquisition.

So this amendment can be in place in time for the effective date of IFRS 3 (2008) – 1 July 2009 – the Board agreed that it should issue an exposure draft of the proposals for a 30-day comment period (the minimum permitted by the IASB's Due Process Handbook).

Amendment to IFRIC 9 Proposed at IASB January 2009 Meeting – Scope Exclusion in Business Combinations

Based on discussions at its January 2009 Meeting, on 30 January 2009 the Board issued exposure draft ED/2009/1 proposing to exclude from the scope of IFRIC 9 embedded derivatives in contracts acquired in combinations of entities or businesses under common control or in the formation of a joint venture. The proposed effective date is annual periods beginning on or after 1 July 2009 – in time for the effective date of IFRS 3 (2008). Comment deadline is 2 March 2009. Click for More Information.

March 2009: IFRIC 9 amended for embedded derivatives on reclassification

On 12 March 2009, the IASB published amendments to IFRIC 9 and IAS 39 to clarify the accounting treatment of embedded derivatives for entities that make use of the Reclassification Amendment to IAS 39 issued by the IASB in October 2008. The reclassification amendment allows entities to reclassify particular financial instruments out of the 'fair value through profit or loss' category in specific circumstances. These amendments to IFRIC 9 and IAS 39 clarify that on reclassification of a financial asset out of the 'fair value through profit or loss' category, all embedded derivatives have to be assessed and, if necessary, separately accounted for in financial statements. The amendments apply retrospectively and are required to be applied for annual periods ending on or after 30 June 2009. Click for the IASB Press Release (PDF 22k).