CFM25080 - Accounting for corporate finance: hybrid debt: comparison of compound and hybrid financial instruments
Differences between compound and hybrid financial instruments
There is a superficial similarity between separating a compound financial instrument into liability and equity components (CFM21260), and separating a hybrid financial instrument into a host contract and an embedded derivative (CFM25030), so that it is possible to confuse the two. The table below summarises the differences.
|
Compound financial instrument |
Hybrid financial instrument |
|
Comprises
|
Comprises
|
|
Dealt with by IAS 32 |
Dealt with by IAS 39 |
|
Separation required in all cases |
Separation required only where certain conditions are met (CFM25040) |
|
Equity component measured on initial recognition as the difference between the fair value of the instrument as a whole, and the fair value of the liability; not subsequently remeasured. |
Where separation required, embedded derivative is accounted for at fair value (unless functioning as a hedge). |
A ‘plain vanilla’ convertible bond, which converts into shares of the issuing company, will be
- a compound financial instrument of the issuer, and
- a hybrid financial instrument of the holder.
Because compound and hybrid financial instruments are accounted for in different ways, you would not necessarily expect symmetry between the amounts going through the income statement of the issuer, and those going through the income statement of the holder.
