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VRC Alert: Fair Value Considerations Related to the Accounting for Embedded Derivatives

Valuation Research WI

Accounting guidance around embedded derivatives is a reasonably mature topic with SFAS 133, Accounting for Derivative Instruments and Hedging Activities, released in 1998 (now ASC Topic 815). Still, this remains a complex area of accounting due to the variety and technical nature of both the financial instruments and the identified derivatives. Two of the primary reporting challenges are applying specific tests to ascertain whether something is indeed an embedded derivative, and further assessing whether changes in value should be measured in current earnings. Identification and intent – determining whether a derivative is a hedge – presents a litany of accounting issues and tests behind them.

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