CFM37645 | Loan relationships: ‘hybrid’ securities with embedded derivatives: bifurcation: compound financial instruments

How a company splits a compound financial instrument

The accounting treatment adopted by the issuer of a compound financial instrument - a financial liability plus an equity component - is slightly different to the treatment of where embedded derivatives are bifurcated.

• As with bifurcation, the instrument is treated as being split into two notional instruments. In this case, there would be a liability component and an equity component.

• The value of the equity component when it is initially recognised is the difference between the fair value of the instrument as a whole, and the fair value of the ‘financial liability’ component.

• The equity component is not subsequently revalued.

Note that the treatment of compound financial instruments is largely the same under all of the accounting frameworks for UK GAAP and IFRS.

See example at CFM37650.