Explanatory Statement

Accounting Standard AASB 2009-3 Amendments to Australian Accounting Standards – Embedded Derivatives

April 2009

EXPLANATORY STATEMENT

Standards Amended by AASB 2009-3

This Standard makes amendments to the following Australian Accounting Standard and Interpretation:

1. AASB 139 Financial Instruments: Recognition and Measurement; and
2. Interpretation 9 Reassessment of Embedded Derivatives.

These amendments arise from the issuance of Embedded Derivatives (Amendments to IFRIC 9 and IAS 39) by the International Accounting Standards Board in March 2009.

The amendments clarify the requirements in AASB 139 and Interpretation 9 in relation to the treatment of embedded derivatives within a host contract that is reclassified out of the fair value through profit or loss category in accordance with the amendments made to AASB 139 in October 2008.

Main Features of this Standard

Application Date

This Standard is applicable to annual reporting periods ending on or after 30 June 2009.  Early adoption of this Standard is not permitted.

Main Requirements

The amendments require:

(a) an entity to assess whether an embedded derivative is required to be separated from a host contract when the entity reclassifies a hybrid (combined) financial asset out of the fair value through profit or loss category;

(b) the assessment to be made on the basis of the circumstances that existed on the later date of:

(i) when the entity first became a party to the contract; and

(ii) a change in the terms of the contract that significantly modified the cash flows that otherwise would have been required under the contract; and

(c) if the fair value of an embedded derivative that would have to be separated cannot be reliably measured, the entire hybrid financial instrument must remain in the fair value through profit or loss category.

Consultation Prior to Issuing AASB 2009-3

The AASB issued Exposure Draft ED 172 Embedded Derivatives (Proposed Amendments to AASB Interpretation 9 and AASB 139) in December 2008.  ED 172 reproduced the proposals included in the IASB’s Exposure Draft Embedded Derivatives (Proposed amendments to IFRIC 9 and IAS 39) without amendment and invited comments from Australian constituents on the proposed amendments.

The AASB received four submissions that were generally supportive of the proposals in ED 172, with no significant concerns raised.  The AASB’s submission to the IASB expressed support for the IASB taking steps to clarify the treatment of embedded derivatives within a host contract that is reclassified out of the fair value through profit or loss category.

A Regulation Impact Statement has not been prepared in connection with the issue of AASB 2009-3 as the amendments made do not have a substantial direct or indirect impact on business or competition, are of a minor or machinery nature or clarify existing requirements.