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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Accounting for corporate finance: hybrid debt: embedded derivatives and bifurcation under IAS 39

This guidance applies to companies which adopt IAS 39 (or FRS 26 under Old UK GAAP).

Treatment of embedded derivatives: bifurcation

IAS 39 requires that an embedded derivative be separated (sometimes known as ‘bifurcated’) from its host contract and accounted for as a derivative when:

  • the economic risks and characteristics of the embedded derivative are not closely related to the economic characteristics and risk of the host contract (see CFM25050).
  • a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and
  • the entire instrument is not measured at fair value with changes in fair value recognised in the income statement.

If the instrument is in any case measured at fair value (with changes recognised in the profit and loss), there is no need to separate it out.

If an embedded derivative is separated/bifurcated, the host contract is accounted for under the appropriate standard, IAS 39 in the case of a financial instrument.

At any time where IAS 39 requires separation of an embedded derivative from its host contract, but it is not possible to measure the embedded derivative separately, the entire hybrid (combined) contract is measured at fair value through profit or loss, and separation does not take place.