Abstract 42 has the effect of implementing IFRIC Interpretation 9 ‘Reassessment of Embedded Derivatives’ in the UK and the Republic of Ireland for entities preparing their financial statements in accordance with UK accounting standards and, in doing so, are applying FRS 26 (IAS 39) ‘Financial Instruments: Measurement’.

FRS 26 (IAS 39) describes an embedded derivative as a component of a financial instrument that has the features of a stand-alone derivative; that is, it causes cash flows under the instrument to vary with a specified interest rate, market price, foreign exchange rate or other financial variable. FRS 26 (IAS 39) requires an embedded derivative to be separated from the non-derivative elements of the contract, and accounted for as a stand-alone derivative, unless the derivative features are ‘closely related’ to the non-derivative features of the compound instrument.

Abstract 42 (IFRIC 9) addresses the question of whether it is necessary to reassess the treatment of an embedded derivative throughout the life of a contract if certain events occur after an entity first becomes a party to the contract. It concludes that reassessment is not permitted unless there is a significant change to the terms of the contract.