The Accounting Standards Board (ASB) has today issued a Financial Reporting Exposure Draft (FRED) on Embedded Derivatives proposing amendments to UITF Abstract 42 (IFRIC 9) ‘Reassessment of Embedded Derivatives’ and FRS 26 (IAS 39) ‘Financial Instruments: Recognition and Measurement’. The proposed amendments clarify the treatment of embedded derivatives when an entity reclassifies a financial asset out of the fair value through profit or loss category.

The proposed amendments are a consequence of the International Accounting Standards Board (IASB) issuing ‘Embedded Derivatives – Amendments to IFRIC 9 and IAS 39’ on 12 March 2009. The amendments to IFRIC 9 and IAS 39 require an entity to assess whether an embedded derivative is required to be separated from a host contract when an entity reclassifies a hybrid (combined) financial asset out of the fair value through profit or loss category. The assessment is made on the basis of the circumstances that existed on the later date of (i) when the entity first became a party to the contract; and (ii) a change in the terms of the contract that significantly modified the cash flows that otherwise would have been required under the contract. If the fair value of the embedded derivative that is to be separated cannot be reliably measured then the entire financial instrument must remain in the fair value through profit or loss category.

The FRED proposes parallel amendments to UITF Abstract 42 (IFRIC 9) and FRS 26 (IAS 39) with the objective of ensuring that UK GAAP remains fully converged with IFRS in this area.

The comment period for the FRED closes on 31 July 2009.

1. The ASB is an operating body of the The Financial Reporting Council (FRC), the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance. Its functions are exercised principally by its operating bodies (the Accounting Standards Board, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Professional Oversight Board and the Accountancy and Actuarial Discipline Board) and by the FRC Board. The Committee on Corporate Governance assists the Board in its work on corporate governance.
2. The main role of the ASB is to issue accounting standards. The ASB collaborates with accounting standard-setters from other countries and the International Accounting Standards Board (IASB) both in order to influence the development of international standards and in order to ensure that its standards are developed with due regard to international developments.
3. The ASB has eleven Board members, of whom two (the Chairman and the Technical Director) are full-time, and the remainder, who have a variety of experiences as preparers, auditors and users of financial reports, are part-time.
4. The FRED is available free of charge on the ASB’s website at: http://www.frc.org.uk/asb/publications/documents.cfm?cat=3. Hard copies are available, price £10.00 (post-free) from ASB Publications, 145 London Road, Kingston Upon Thames, Surrey, KT2 6SR (020 8247 1274). Web: www.asbpublications.com.
5. The IASB amendments can be obtained from the IASCF Publications Department – e-mail: publications@iasb.org. Website: www.iasb.org.
6. Press enquiries should be directed to Ian Mackintosh (Chairman) on 020 7492 2434, David Loweth (Technical Director) on 020 7492 2420 or Deepa Raval (Project Director) on 020 7492 2424.