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IAS 39 Financial Instruments: Reassessment of Embedded Derivatives

Go To List of IFRIC Issues Whether the requirement in IAS 39 to assess whether there is an embedded derivative which must be separated is required to be reassessed, and if so how often. Discussion at the IFRIC Meeting December 2004: The IFRIC agreed that an interpretation should be developed prohibiting the reassessment. In coming to this conclusion the IFRIC noted that the intention of the Board in requiring the separation of embedded derivatives was to prevent entities from deliberately including in a single instrument items which should rightly be accounted for separately. The IFRIC agreed that matters which would result in such a reassessment requiring an existing instrument to be separated are things such as fluctuations in currency which are outside the control of the entity, and therefore a requirement to reassess would be inconsistent with the Board's objective. In addition it was noted the practical difficulties of reassessing all of the entities instruments on a regular basis are significant. The IFRIC then discussed whether first-time adopters should be required to reassess whether embedded derivatives that ought to be separated exist as at the date of transition, or at the inception of the instrument. The IFRIC agreed that, despite the difficulties of hindsight, the assessment must be made as at the date of inception of the instrument. Discussion at the IFRIC Meeting February 2005 The draft conclusion reached so far is that reassessment of host contracts for the existence of embedded derivatives (after initial recognition) is not required under IAS 39. The staff pointed out that FASB staff has confirmed that this conclusion would result in a difference between IFRS and US GAAP as the latter requires reassessment throughout the contract term. The IFRIC agreed with the staff's proposal to proceed with the draft interpretation. Arising from the discussions was a similar issue of principle – whether an investor in a subsidiary is required to reassess the classification of a lease at the time of acquiring the subsidiary as opposed to leaving the classification in the subsidiary which would have been determined at the time of entering into the lease arrangement by that subsidiary. The IFRIC agreed that this issue, although similar in principle to the embedded derivative issue, should be dealt with separately as an interpretation of IFRS 3. The staff was requested to proceed with the work on this project. March 2005: IFRIC D15 Issued IFRIC D15 Reassessment of Embedded Derivatives issued 31 March 2005. Click for Press Release (PDF 66k). Comment deadline is 31 May 2005. Discussion at the January 2006 IASB Meeting The Board was asked whether they would approve the proposed final interpretation on D15 Reassessment of Embedded Derivatives. The Board had one minor comment which staff said would be addressed. Based on this the interpretation was approved. March 2006: IFRIC 9 Issued On 1 March 2006, the IFRIC issued Interpretation 9 Reassessment of Embedded Derivatives.