Proposed FASB disclosures would link bifurcated embedded derivatives to host contracts

By Ken Tysiac

A FASB proposal issued Tuesday is designed to provide more useful information to financial statement users about hybrid financial instruments that contain bifurcated embedded derivatives.

The amendments in the proposal would require an entity to disclose information in the notes to financial statements that links each bifurcated embedded derivative to its related host contract.

This information would be helpful to financial statement users because it would reflect the overall economics and cash flows for the entire hybrid financial instrument, according to the proposal.

Under current GAAP, Accounting Standards Codification Topic 815, Derivatives and Hedging, does not require an entity to provide information that explicitly links bifurcated embedded derivatives with their related host contracts. As a result, financial statement users often are unable to trace these derivatives to their host contracts.

The proposed amendments would apply to all reporting entities that issue or invest in hybrid financial instruments with embedded derivatives that are separated from their host contracts and accounted for as derivative instruments.

Under the proposal, an entity would be required to disclose in both interim and annual reporting periods the carrying amount, measurement attribute, and line item within the balance sheet and the income statement in which each bifurcated embedded derivative and its related host contract are presented.

The amendments would be applied on a prospective basis to hybrid financial instruments with bifurcated embedded derivatives that existed as of the beginning of the fiscal year for which the proposed amendments are effective.

The effective date will be determined by the board after hearing stakeholders’ comments, which can be submitted through April 30 at FASB’s website. The proposal is titled Proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Disclosures About Hybrid Financial Instruments With Bifurcated Embedded Derivatives.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA editorial director.

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