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can somebody help me?? because i really can not differentiate between compound financial instrument and embedded derivative? under ias 32, compound financial instrument will be split into liability and equity. however, embedded derivative will be split into liability and financial asset(derivative). i can do the calculation, but i am worry that i don’t know that question is asking for compound financial instrument or embedded derivative. thanks for your reply.:)
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As far as I understand embedded derivative is split into Host contract(The initial terms of the contract) and Terms and clauses that may change the payoff profile, if the host contract refers to equity then embedded derivative is similiar to compound financial instrument(containing liability and equity) but there is a small difference: that embedded derivative cause some or all of the cash flows of the host contract to be modified based on a specified variable e.g.
an interest rate
a foreign currency, or
a commodity pricethx gagik. i find the answer already.
For the issuer, it will be treated as compound financial instrument.
therefore, dr cash
cr liability
cr equity componentfor the investor, if it meet the definition of embedded derivative,
dr derivative, FVTPL
dr carrying value of host contract
cr cashhopefully i don’t make mistake this time.
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