Companies will face some new disclosure requirements both in interim and annual reports regarding complex financial instruments that contain separately presented embedded derivatives.
The Financial Accounting Standards Board has issued a proposed update to accounting standards to require companies to make some new disclosures that will enable users of financial statements to better understand where derivatives are connected to host contracts when they are presented separate from one another. Current accounting rules, says FASB, do not require an entity to provide information on such embedded derivatives, which are measured at fair value, that would help users see where they are linked to host contracts that might be measured by some other method.
Under the proposal, companies would be require to disclose the carrying amount, measurement attribute, and line item in both the balance sheet and income statement where each separately presented, or bifurcated, embedded derivative and its related host contract are presented. Separately, FASB is still working on a more comprehensive update to accounting standards that would address hedge accounting in general.
GAAP already requires plenty of quantitative and qualitative disclosures for derivative instruments and hedging activities, FASB notes in its proposal. Bifurcated embedded derivatives are included in the scope of those disclosure requirements, but often are not specifically identified within the overall derivative categories in tabular quantitative disclosures, FASB says. That will give users of financial statements the information they need to understand the overall economics and cash flows for the entire hybrid financial instrument, FASB says.
FASB notes in its proposal that International Financial Reporting Standards require disclosure of the carrying amounts, the effect of instruments on the entity’s financial position and performance, and the nature and extent of risks that the instruments present. IFRS does not require, however, disclosures meant to explicitly linking bifurcated embedded derivatives with their host contracts.
FASB is looking for feedback on its proposal before deciding when it should become effective and whether early adoption should be permitted. One of the questions FASB asks preparers to consider is how much time they would need to implement the proposed guidance. FASB is asking for comments on the proposal by April 30.