Hybrid contracts with a financial asset host

Learning objectives

• Determine that a derivative embedded in a host that is a financial asset is not separated and that the classification requirements apply to the entire hybrid contract.L2
• Support in writing, from the facts of the case, the judgement made on hybrid contracts with a financial asset host.L2

Normative references

• IFRS 9 §4.3.2If the host contract is a financial asset within the scope of the Standard, the embedded derivative is not separated: the classification requirements apply to the entire hybrid financial asset.
• IFRS 9 §B4.1.7ASPPI cash flows are consistent with a basic lending arrangement: the time value of money and credit risk are typically the most significant elements of interest, which may also include consideration for other basic lending risks (for example, liquidity risk) and costs (for example, administrative costs) and a profit margin, and may even be negative in extreme circumstances; by contrast, contractual terms that introduce exposure to risks or volatility unrelated to a basic lending arrangement, such as changes in equity prices or commodity prices, do not give rise to SPPI cash flows.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• A derivative embedded in a host contract that is a financial asset within the scope of IFRS 9 is not separated.L2
• Océan SA holds as an investment a bond convertible into shares of the issuer. How does it treat the conversion derivative embedded in this financial asset?L2
• A trainee summarises the treatment of embedded derivatives in a financial asset host. Which sentence is wrong?L2