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Chapter CFM37625

Cited in Related
Vincent
Published date16 April 2016
Record NumberCFM37625

The accounting treatment for hybrid instruments under both UK GAAP and International Financial Reporting Standards (IFRS) has changed over time, and can differ between the holder and the issuer of such instruments.

Holder of hybrid financial instruments

There are two main permutations for the accounting by the holder of hybrid financial instruments which contain an embedded derivative:

  • Under IAS39 (and previously under FRS26) the instrument would normally be treated as a hybrid financial instrument and bifurcated into a financial liability plus an embedded derivative. For guidance on when bifurcation is required under IAS39 (and previously under FRS26), see {CFM37630}.
  • Alternatively, it may be that the whole instrument is measured at fair value (either (i) as an option under IAS 39; (ii) under IFRS9; or (iii) under FRS102 where the company does not take the option to apply the requirements of IAS 39).

For further details of the accounting permutations for the holders of hybrid financial instruments see {CFM55215}.

Issuers of standard convertible and other compound financial instruments

A compound financial instrument is one which contains both liability and equity components. The typical example is a standard convertible loan which provides the holder with the option to convert the loan into a fixed number of ordinary shares.

Where an issuer has a compound instrument, they will typically be required to split the instrument into two components, one being a liability component (representing the debt element of the instrument) and the other being an equity component (representing the conversion feature). Note that because the conversion feature is considered to be an equity instrument it cannot be considered to be an embedded derivative.

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