FASB Proposed Accounting Standards Update: Topic 815

On February 25, 2015, the FASB issued a proposed accounting standards update to Topic 815, Derivatives and Hedging, regarding financial statement disclosures for hybrid financial instruments with bifurcated embedded derivatives.

The proposed update would require additional disclosures in the notes to the financial statements showing the relationship between each bifurcated embedded derivative and its related financial instrument host contract. The embedded derivative and the related host contract represent one legal contract. Currently the derivative and the contract are presented separately in the financial statements.

There is no requirement to disclose the link between the embedded derivative and its host contract; therefore, users of financial statements have no way to link the embedded derivative to the associated contract. The objective of the new disclosures would be to provide transparency into the relationship between an embedded derivative and its associated contract. The FASB suggests that this disclosure would provide useful information about the economics and cash flows for the hybrid financial instrument as a whole.

The amendments of the proposed update would apply to all reporting entities that issue or invest in hybrid financial instruments with embedded derivatives that are separated from the host contract.

The proposed update would require an entity to disclose the carrying amount, measurement, attribute and line item for each bifurcated embedded derivative and its host contract as presented in the balance sheet and income statement. This disclosure would be required for each interim and annual reporting period. The new disclosures would be applied prospectively for hybrid financial instruments that existed as of the beginning of the year for which the proposed amendments are effective.

Individuals and organizations are invited and encouraged to submit comments on the proposed update no later than April 30, 2015. We encourage registrants, especially those with embedded derivatives not related to financial instruments, to reach out to the FASB and respond that the guidance should NOT be expanded to include non-financial instrument host contracts.