This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

U.S. comment letter on disclosures about hybrid financial instruments with bifurcated embedded derivatives

Published on: May 01, 2015

Deloitte & Touche LLP comments on the FASB's proposed ASU, Disclosures About Hybrid Financial Instruments With Bifurcated Embedded Derivatives.

An excerpt from the comment letter is shown below:

We support the Board’s objective to increase the transparency and decision-usefulness of information in financial statements, including information pertaining to financial instruments. However, we are concerned that the proposed disclosure requirements will pose operational challenges and will not achieve the Board’s objective related to providing financial statement users with insights into the overall economics and cash flows of hybrid financial instruments. Thus, we do not believe the Board should finalize the ASU as proposed.

We recommend that, rather than requiring only incremental disclosures for hybrid financial instruments with bifurcated embedded derivatives, the Board consider addressing disclosures associated with hybrid financial instruments as part of a broader project on determining the effectiveness of financial statement disclosures regarding derivatives or financial instruments. In the interim, the Board could consider incorporating into U.S. GAAP existing SEC staff guidance indicating that bifurcated embedded derivatives should be presented in the statement of financial condition on a combined basis with the host contract except when the host contract is not recognized (e.g., an operating lease) or the embedded derivative is classified as a liability and the host contract as equity. Incorporating such guidance into U.S. GAAP would promote consistent presentation and improve comparability between entities. 

If the Board chooses instead to issue an ASU requiring disclosures about hybrid financial instruments with bifurcated embedded derivatives, we believe that certain key issues should be addressed. These issues are discussed below and further detailed in the appendix of this letter.


The quantitative aspect of the proposed disclosure requirements may be operationally burdensome for entities that have host contracts (with bifurcated embedded derivatives) whose carrying values are composed of multiple components, including components measured on a portfolio basis. For example, when an allowance for loan losses is a component of a loan host contract’s carrying amount and the allowance is calculated on a portfolio basis, the proposed disclosure requirements would force an entity to identify and allocate a portion of the allowance to the loan host contract. Determining the different quantitative amounts associated with the host contract may be burdensome given all the interim disclosures that need to be collected within a short public reporting time frame and the small benefit these disclosures would provide. 

Necessary Clarifications

The proposed guidance and illustrative example are unclear on what tabular disclosures an entity should provide for a host contract whose activity affects multiple financial statement line items (e.g., if a debt host is accounted for as an available-for-sale debt security, whether an entity would be required to disclose the location and amounts related to both the credit and the noncredit impairments that are recognized in earnings and other comprehensive income, respectively). In addition, for a host contract that is an equity instrument, the Board should consider clarifying how dividends would be presented in the tabular disclosures. Furthermore, the relationship between the proposal’s disclosure requirements pertaining to embedded derivatives and those in ASC 815-10-50 also needs to be clarified. 

Financial Versus Nonfinancial Hybrid Instruments

We believe that there is no basis for limiting the proposed disclosure requirements to hybrid financial instruments. Information that allows users to analyze the overall economics and cash flows of hybrid financial instruments with bifurcated embedded derivatives should apply equally to nonfinancial hybrid instruments (e.g., operating lease agreements that contain embedded derivatives or commodity-based hybrid instruments). Furthermore, the Board may wish to consider whether disclosing information associated with hybrid instruments that is derived from the statement of cash flows would further enhance the disclosure requirements and be consistent with the Board’s stated objective.

Full text of the comment letter is available below.


Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.