# ASC 815-15-25: Derivatives and Hedging — Embedded Derivatives — 25 Recognition Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/815/15/#25-recognition) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:9a370e03408bc5e48c4a47c8c8293932a4a419674e4feaa9e8b4a8d47f81c2a3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 815-15-25: 25 Recognition [Read section](https://asc.understandingaccounting.org/asc/815/15/#25-recognition) SEC content: no ##### [815-15-25-1](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:2b5f7ab930b1624f8ca08e647cde59d6d7b5925e34311411b054e5fe1b58cbbf Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An [embedded derivative](https://asc.understandingaccounting.org/glossary/e/#embedded-derivative "Implicit or explicit terms that affect some or all of the cash flows or the value of other exchanges required by a contract in a manner similar to a derivative instrument.") shall be separated from the host contract and accounted for as a [derivative instrument](https://asc.understandingaccounting.org/glossary/d/#derivative-instrument "Paragraphs 815-10-15-83815-10-15-84815-10-15-85815-10-15-86815-10-15-87815-10-15-88815-10-15-89815-10-15-90815-10-15-91815-10-15-92815-10-15-93815-10-15-94815-10-15-95815-10-15-96815-10-15-97815-10-15-98815-10-15-99815-10-15-100815-10-15-101815-10-15-102815-10-15-103815-10-15-104815-10-15-105815-10-15-106815-10-15-107815-10-15-108815-10-15-109815-10-15-110815-10-15-111815-10-15-112815-10-15-113815-10-15-114815-10-15-115815-10-15-116815-10-15-117815-10-15-118815-10-15-119815-10-15-120815-10-15-121815-10-15-122815-10-15-123815-10-15-124815-10-15-125815-10-15-126815-10-15-127815-10-15-128815-10-15-129815-10-15-130815-10-15-131815-10-15-132815-10-15-133815-10-15-134815-10-15-135815-10-15-136815-10-15-137815-10-15-138815-10-15-139 define the term derivative instrument.") pursuant to Subtopic 815-10 if and only if all of the following criteria are met: 1. a The economic characteristics and risks of the embedded derivative are not clearly and closely related to the economic characteristics and risks of the host contract. 2. b The [hybrid instrument](https://asc.understandingaccounting.org/glossary/h/#hybrid-instrument "A contract that embodies both an embedded derivative and a host contract.") is not remeasured at [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.") under otherwise applicable generally accepted accounting principles (GAAP) with changes in fair value reported in earnings as they occur. 3. c A separate instrument with the same terms as the embedded derivative would, pursuant to Section 815-10-15, be a derivative instrument subject to the requirements of Subtopic 815-10 and this Subtopic. (The initial net investment for the hybrid instrument shall not be considered to be the initial net investment for the embedded derivative.) ##### [815-15-25-2](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:49d5782474393de6127411cd11d369ae87242bdf667461ac3bdb2e48b90d0141 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The notion of an embedded derivative in a hybrid instrument refers to provisions incorporated into a single contract, and not to provisions in separate contracts between different counterparties. Paragraph [815-10-15-6](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-6) states that an option that is added or attached to an existing debt instrument by another party results in the investor having different counterparties for the option and the debt instrument and, thus, the option shall not be considered an embedded derivative. ##### [815-15-25-3](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:b8eeb91f8043ef1a87b760b4cbdb636a749e3207936b7fe83235da6496b3d1ff Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The remainder of the guidance in this Section is organized as follows: 1. a Fair value election for hybrid financial instruments 2. b Compound embedded derivative 3. c Interests in securitized financial assets—holder's accounting 4. d Applying the separate instrument criterion 5. e Applying the clearly and closely related criterion 6. f Entity unable to reliably identify and measure embedded derivative 7. g Host contract after separation. #### Fair Value Election for Hybrid Financial Instruments ##### [815-15-25-4](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:c6168bec9c3583995c8b5cc5a46b582b8d8955cd524d86bcd6a63b4928d36777 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity that initially recognizes a hybrid financial instrument that under paragraph [815-15-25-1](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1) would be required to be separated into a host contract and a derivative instrument may irrevocably elect to initially and subsequently measure that hybrid financial instrument in its entirety at fair value (with changes in fair value recognized in earnings and, if paragraph [825-10-45-5](https://asc.understandingaccounting.org/asc/825/10/#825-10-45-5) is applicable, other comprehensive income). A financial instrument shall be evaluated to determine that it has an embedded derivative requiring bifurcation before the instrument can become a candidate for the fair value election. ##### [815-15-25-5](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:8d31f8caaa9d2260fe58bc03bade788bbfe098c04e563db39ad26c111f326194 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The fair value election shall be supported by concurrent documentation or a preexisting documented policy for automatic election. That recognized hybrid financial instrument could be an asset or a liability and it could be acquired or issued by the entity. The fair value election is also available when a previously recognized [financial instrument](https://asc.understandingaccounting.org/glossary/f/#financial-instrument "Cash, evidence of an ownership interest in an entity, or a contract that both: Imposes on one entity a contractual obligation either: To deliver cash or another financial instrument to a second entity To exchange other financial instruments on potentially unfavorable terms with the second entity. Conveys to that second entity a contractual right either: To receive cash or another financial instrument from the first entity To exchange other financial instruments on potentially favorable terms with the first entity. The use of the term financial instrument in this definition is recursive (because the term financial instrument is included in it), though it is not circular. The definition requires a chain of contractual obligations that ends with the delivery of cash or an ownership interest in an entity. Any number of obligations to deliver financial instruments can be links in a chain that qualifies a particular contract as a financial instrument. Contractual rights and contractual obligations encompass both those that are conditioned on the occurrence of a specified event and those that are not. All contractual rights (contractual obligations) that are financial instruments meet the definition of asset (liability) set forth in FASB Concepts Statement No. 6, Elements of Financial Statements, although some may not be recognized as assets (liabilities) in financial statements—that is, they may be off-balance-sheet—because they fail to meet some other criterion for recognition. For some financial instruments, the right is held by or the obligation is due from (or the obligation is owed to or by) a group of entities rather than a single entity. (P) December 16, 2024; (N) December 16, 2025105-10-65-9Cash, evidence of an ownership interest in an entity, or a contract that both: Imposes on one entity a contractual obligation either: To deliver cash or another financial instrument to a second entity To exchange other financial instruments on potentially unfavorable terms with the second entity. Conveys to that second entity a contractual right either: To receive cash or another financial instrument from the first entity To exchange other financial instruments on potentially favorable terms with the first entity. The use of the term financial instrument in this definition is recursive (because the term financial instrument is included in it), though it is not circular. The definition requires a chain of contractual obligations that ends with the delivery of cash or an ownership interest in an entity. Any number of obligations to deliver financial instruments can be links in a chain that qualifies a particular contract as a financial instrument. Contractual rights and contractual obligations encompass both those that are conditioned on the occurrence of a specified event and those that are not. Some contractual rights (contractual obligations) that are financial instruments may not be recognized in financial statements—that is, they may be off-balance-sheet—because they fail to meet some other criterion for recognition. For some financial instruments, the right is held by or the obligation is due from (or the obligation is owed to or by) a group of entities rather than a single entity.") is subject to a [remeasurement event](https://asc.understandingaccounting.org/glossary/r/#remeasurement-event "A remeasurement (new basis) event is an event identified in other authoritative accounting literature, other than the measurement of an impairment under Topic 321 or credit loss under Topic 326, that requires a financial instrument to be remeasured to its fair value at the time of the event but does not require that financial instrument to be reported at fair value continually with the change in fair value recognized in earnings. Examples of remeasurement events are business combinations and significant modifications of debt as discussed in paragraph 470-50-40-6.") ([new basis event](https://asc.understandingaccounting.org/glossary/n/#new-basis-event "See Remeasurement Event.")) and the separate recognition of an embedded derivative. The fair value election may be made instrument by instrument. For purposes of this paragraph, a remeasurement event (new basis event) is an event identified in generally accepted accounting principles, other than the recording of a credit loss under Topic 326, or measurement of an impairment loss through earnings under Topic 321 on equity investments, that requires a financial instrument to be remeasured to its fair value at the time of the event but does not require that instrument to be reported at fair value on a continuous basis with the change in fair value recognized in earnings. Examples of remeasurement events are business combinations and significant modifications of debt as defined in Subtopic 470-50. ##### [815-15-25-6](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:88955b29bb752cf23d67c9f0841bb2d41adca8ddf9dd770faefac4a981c15620 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The fair value election shall not be applied to the hybrid instruments described in paragraph [825-10-50-8](https://asc.understandingaccounting.org/asc/825/10/#825-10-50-8). #### Compound Embedded Derivative ##### [815-15-25-7](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:78455ed53ba7bcf5c3fad7565b36b8920be0c905bd3b4c53a0dfbddd4739989b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If a hybrid instrument contains more than one embedded derivative feature that would individually warrant separate accounting as a derivative instrument under paragraph [815-15-25-1](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1), those embedded derivative features shall be bundled together as a single, compound embedded derivative that shall then be bifurcated and accounted for separately from the host contract under this Subtopic unless a fair value election is made pursuant to paragraph [815-15-25-4](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-4). ##### [815-15-25-8](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:b9b93e99e88059653c8a3a1a3d1460c78577d724e1ba8886e3dac2d692c44119 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity shall not separate a compound embedded derivative into components representing different risks (for example, based on the risks discussed in paragraphs [815-20-25-12\[f\]](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-12) and [815-20-25-15\[i\]](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-15)) and then account for those components separately. ##### [815-15-25-9](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:481615c32a5946af4d8dee86314bfa0b594c66ac082b4062d2d4e77dbb3854a2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If a compound embedded derivative comprises multiple embedded derivative features that all involve the same risk exposure (for example, the risk of changes in market interest rates, the creditworthiness of the obligor, or foreign currency exchange rates), but those embedded derivative features differ from one another by including or excluding optionality or by including a different optionality exposure, an entity shall not separate that compound embedded derivative into components that would be accounted for separately. ##### [815-15-25-10](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:3f31460b8c84d74156dd36c3918cdbd8a678198454ffb0b6426a2d668f38cc0a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If some of the embedded derivative features in a hybrid instrument are clearly and closely related to the economic characteristics and risks of the host contract, those embedded derivative features shall not be included in the compound embedded derivative that is bifurcated from the host contract and separately accounted for. #### Interests in Securitized Financial Assets—Holder's Accounting ##### [815-15-25-11](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:da62c82061ec1d9559c9fd550f247a3abbf75818c8ff33611edc869bb1a17b16 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [815-10-15-11](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-11) explains that the holder of an interest in securitized financial assets (other than those identified in paragraphs [815-10-15-72 through 15-73](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-72) ) shall determine whether the interest is a freestanding derivative instrument or contains an embedded derivative that under this Section would be required to be separated from the host contract and accounted for separately. ##### [815-15-25-12](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-12) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:053b74221de56fc4d8ff6aa300f382cb480d0994c506ac35888bd8d4e1d12580 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. That determination shall be based on an analysis of the contractual terms of the interest in securitized financial assets, which requires understanding the nature and amount of assets, liabilities, and other financial instruments that compose the entire securitization [transaction](https://asc.understandingaccounting.org/glossary/t/#transaction "An external event involving transfer of something of value (future economic benefit) between two (or more) entities. (See FASB Concepts Statement No. 6, Elements of Financial Statements.)(P) December 16, 2024; (N) December 16, 2025105-10-65-9An external event involving transfer of something of value (future economic benefit) between two (or more) entities."). ##### [815-15-25-13](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-13) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:6e26271e97d45d083427347ecf5ac9f354ea7c60841f657fc886d5bd7541bb66 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A holder of an interest in securitized financial assets shall obtain sufficient information about the payoff structure and the payment priority of the interest to determine whether an embedded derivative exists. #### Applying the Separate Instrument Criterion ##### [815-15-25-14](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-14) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:078a77f9c7052d74aa8d5e2eb3a9d0b46235e80eee8dad0855db998586ba5549 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The criterion in paragraph [815-15-25-1(c)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1) is not met if the separate instrument with the same terms as the embedded derivative would be classified as a liability (or an asset in some circumstances) under the provisions of Topic 480 but would be classified in stockholders' equity absent the provisions in that Topic. For purposes of analyzing the application of paragraph [815-10-15-74(a)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-74) to an embedded derivative as though it were a separate instrument, paragraphs [480-10-25-4 through 25-14](https://asc.understandingaccounting.org/asc/480/10/#480-10-25-4) shall be disregarded. Those embedded features are analyzed by applying other applicable guidance (such as the guidance in Subtopic 815-40 on contracts in entity's own equity). ##### [815-15-25-15](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-15) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:7fcfdaaa24672ace2e74d1ad327b274f52ac8efeb61f3dba9d3dd751b3ae5f19 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [815-40-25-39](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-39) states that, for purposes of evaluating under paragraph [815-15-25-1](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1) whether an embedded derivative indexed to an entity's own stock would be classified in stockholders' equity if freestanding, the additional considerations necessary for equity classification beginning in paragraph [815-40-25-7](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-7) do not apply if the hybrid contract is a convertible debt instrument (see paragraph [815-40-25-41](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-41)) in which the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash (at the discretion of the issuer). However, paragraph [815-40-25-40](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-40) states that those additional considerations do apply when an issuer is evaluating whether any embedded derivative other than those discussed in paragraph [815-40-25-39](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-39) is an equity instrument and thereby excluded from the scope of this Subtopic. #### Applying the Clearly-and-Closely Related Criterion ##### [815-15-25-16](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-16) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:73e5f8d32cac91a5f5c79bfdd84fa8b9dcc291f704711833b7e40c77024203c3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If the host contract encompasses a residual interest in an entity, then its economic characteristics and risks shall be considered that of an equity instrument and an embedded derivative would need to possess principally equity characteristics (related to the same entity) to be considered clearly and closely related to the host contract. ##### [815-15-25-17](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-17) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:8dda15a64b20ad1d6f63e61d3a15257f393d5608a4029f6d2333ada06bb8155b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Because the changes in fair value of an equity interest and interest rates on a debt instrument are not clearly and closely related, the terms of convertible preferred stock shall be analyzed to determine whether the preferred stock (and thus the potential host contract) is more akin to an equity instrument or a debt instrument. ##### [815-15-25-17A](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-17A) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:f0bdf9844b9b61b9a75cf6ef890fd78b2537515fc3a312bd11236a12d3fae79d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For a hybrid financial instrument issued in the form of a share, an entity shall determine the nature of the host contract by considering all stated and implied substantive terms and features of the hybrid financial instrument, weighing each term and feature on the basis of the relevant facts and circumstances. That is, in determining the nature of the host contract, an entity shall consider the economic characteristics and risks of the entire hybrid financial instrument including the embedded derivative feature that is being evaluated for potential bifurcation. In evaluating the stated and implied substantive terms and features, the existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host contract. Although an individual term or feature may weigh more heavily in the evaluation on the basis of the facts and circumstances, an entity should use judgment based on an evaluation of all of the relevant terms and features. For example, an entity shall not presume that the presence of a fixed-price, noncontingent redemption option held by the investor in a convertible preferred stock contract, in and of itself, determines whether the nature of the host contract is more akin to a debt instrument or more akin to an equity instrument. Rather, the nature of the host contract depends on the economic characteristics and risks of the entire hybrid financial instrument. ##### [815-15-25-17B](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-17B) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:cb9a3a220dfbe90db6f7db9e8fd7adc7e6762be3a0503fdd0f34a5e7c64b8480 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance in paragraph [815-15-25-17A](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-17A) relates to determining whether a host contract within a hybrid financial instrument issued in the form of a share is considered to be more akin to a debt instrument or more akin to an equity instrument for the purposes of evaluating one or more embedded derivative features for bifurcation under paragraph [815-15-25-1(a)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1). It is not intended to address when an embedded derivative feature should be bifurcated from the host contract or the accounting when such bifurcation is required. In addition, the guidance in paragraph [815-15-25-17A](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-17A) is not intended to prescribe the method to be used in determining the nature of the host contract in a hybrid financial instrument that is not issued in the form of a share. ##### [815-15-25-17C](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-17C) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:36e01095f060726f905c222b515e9761515592c334b01b5159ed50fffd73510d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. When applying the guidance in paragraph [815-15-25-17A](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-17A), an entity shall determine the nature of the host contract by considering all stated and implied substantive terms and features of the hybrid financial instrument, determining whether those terms and features are debt-like versus equity-like, and weighing those terms and features on the basis of the relevant facts and circumstances. That is, an entity shall consider not only whether the relevant terms and features are debt-like versus equity-like, but also the substance of those terms and features (that is, the relative strength of the debt-like or equity-like terms and features given the facts and circumstances). In assessing the substance of the relevant terms and features, each of the following may form part of the overall analysis and may inform an entity's overall consideration of the relative importance (and, therefore, weight) of each term and feature among other terms and features: 1. a The characteristics of the relevant terms and features themselves (for example, contingent versus noncontingent, in-the-money versus out-of-the-money) 2. b The circumstances under which the hybrid financial instrument was issued or acquired (for example, issuer-specific characteristics, such as whether the issuer is thinly capitalized or profitable and well-capitalized) 3. c The potential outcomes of the hybrid financial instrument (for example, the instrument may be settled by the issuer issuing a fixed number of shares, the instrument may be settled by the issuer transferring a specified amount of cash, or the instrument may remain legal-form equity), as well as the likelihood of those potential outcomes. The assessment of the potential outcomes may be qualitative in nature. ##### [815-15-25-17D](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-17D) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:b80c3c327b5ab794eae03c57f05ac55462b661b81acf6ff18c84009ef9909ed6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following are examples (and not an exhaustive list) of common terms and features included within a hybrid financial instrument issued in the form of a share and the types of information and indicators that an entity (an issuer or an investor) may consider when assessing the substance of those terms and features in the context of determining the nature of the host contract, as discussed in paragraph [815-15-25-17C](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-17C): 1. a Redemption rights. The ability for an issuer or investor to redeem a hybrid financial instrument issued in the form of a share at a fixed or determinable price generally is viewed as a debt-like characteristic. However, not all redemption rights are of equal importance. For example, a noncontingent redemption option may be given more weight in the analysis than a contingent redemption option. The relative importance (and, therefore, weight) of redemption rights among other terms and features in a hybrid financial instrument may be evaluated on the basis of information about the following (among other relevant) facts and circumstances: 1. 1 Whether the redemption right is held by the issuer or investors 2. 2 Whether the redemption is mandatory 3. 3 Whether the redemption right is noncontingent or contingent 4. 4 Whether (and the degree to which) the redemption right is in-the-money or out-of-the-money 5. 5 Whether there are any laws that would restrict the issuer or investors from exercising the redemption right (for example, if redemption would make the issuer insolvent) 6. 6 Issuer-specific considerations (for example, whether the hybrid financial instrument is effectively the residual interest in the issuer \[due to the issuer being thinly capitalized or the common equity of the issuer having already incurred losses\] or whether the instrument was issued by a well-capitalized, profitable entity) 7. 7 If the hybrid financial instrument also contains a conversion right, the extent to which the redemption price (formula) is more or less favorable than the conversion price (formula), that is, a consideration of the economics of the redemption price (formula) and the conversion price (formula), not simply the form of the settlement upon redemption or conversion. 2. b Conversion rights. The ability for an investor to convert, for example, a preferred share into a fixed number of common shares generally is viewed as an equity-like characteristic. However, not all conversion rights are of equal importance. For example, a conversion option that is noncontingent or deeply in-the-money may be given more weight in the analysis than a conversion option that is contingent on a remote event or deeply out-of-the-money. The relative importance (and, therefore, weight) of conversion rights among other terms and features in a hybrid financial instrument may be evaluated on the basis of information about the following (among other relevant) facts and circumstances: 1. 1 Whether the conversion right is held by the issuer or investors 2. 2 Whether the conversion is mandatory 3. 3 Whether the conversion right is noncontingent or contingent 4. 4 Whether (and the degree to which) the conversion right is in-the-money or out-of-the-money 5. 5 If the hybrid financial instrument also contains a redemption right held by the investors, whether conversion is more likely to occur before redemption (for example, because of an expected initial public offering or change-in-control event before the redemption right becoming exercisable). 3. c Voting rights. The ability for a class of stock to exercise voting rights generally is viewed as an equity-like characteristic. However, not all voting rights are of equal importance. For example, voting rights that allow a class of stock to vote on all significant matters may be given more weight in the analysis than voting rights that are only protective in nature. The relative importance (and, therefore, weight) of voting rights among other terms and features in a hybrid financial instrument may be evaluated on the basis of information about the following (among other relevant) facts and circumstances: 1. 1 On which matters the voting rights allow the investor's class of stock to vote (relative to common stock shareholders) 2. 2 How much influence the investor's class of stock can exercise as a result of the voting rights. 4. d Dividend rights. The nature of dividends can be viewed as a debt-like or equity-like characteristic. For example, mandatory fixed dividends generally are viewed as a debt-like characteristic, while discretionary dividends based on earnings generally are viewed as an equity-like characteristic. The relative importance (and, therefore, weight) of dividend terms among other terms and features in a hybrid financial instrument may be evaluated on the basis of information about the following (among other relevant) facts and circumstances: 1. 1 Whether the dividends are mandatory or discretionary 2. 2 The basis on which dividends are determined and whether the dividends are stated or participating 3. 3 Whether the dividends are cumulative or noncumulative. 5. e Protective covenants. Protective covenants generally are viewed as a debt-like characteristic. However, not all protective covenants are of equal importance. Covenants that provide substantive protective rights may be given more weight than covenants that provide only limited protective rights. The relative importance (and, therefore, weight) of protective covenants among other terms and features in a hybrid financial instrument may be evaluated on the basis of information about the following (among other relevant) facts and circumstances: 1. 1 Whether there are any collateral requirements akin to collateralized debt 2. 2 If the hybrid financial instrument contains a redemption option held by the investor, whether the issuer's performance upon redemption is guaranteed by the parent of the issuer 3. 3 Whether the instrument provides the investor with certain rights akin to creditor rights (for example, the right to force bankruptcy or a preference in liquidation). ##### [815-15-25-18](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-18) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:69622dace07587ec229b8b769cb80c0652ed33eaeba00836c8360aed95256cc0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following guidance is relevant in deciding whether the economic characteristics and risks of the embedded derivative are clearly and closely related to the economic characteristics and risks of the host contract. The guidance is organized as follows: 1. a Purchase contracts—price cap and price floor 2. b Host contracts with equity characteristics 3. c Host contracts that are leases 4. d Host contracts with debt characteristics 5. e Hybrid instruments that are beneficial interests in securitized financial assets. ##### [815-15-25-19](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-19) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:570e4ca9814c7e55907cd6a9fd91a90121d127caffc33cb04ffdf37730e0cd19 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The economic characteristics and risks of a floor and cap on the price of an asset embedded in a contract to purchase that asset are clearly and closely related to the purchase contract, because the options are indexed to the purchase price of the asset that is the subject of the purchase contract. See Example 6 (paragraph [815-15-55-114](https://asc.understandingaccounting.org/asc/815/15/#815-15-55-114)) for an illustration of such options. ##### [815-15-25-20](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-20) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:8053fc2ecd815340b8413ea37f45ae91e16b1ca7b060943335449f2205f24343 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A put option that enables the holder to require the issuer of an equity instrument (which has been deemed to contain an equity host contract in accordance with paragraphs [815-15-25-17A through 25-17D](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-17A) ) to reacquire that equity instrument for cash or other assets is not clearly and closely related to that equity instrument. Thus, such a put option embedded in a publicly traded equity instrument to which it relates shall be separated from the host contract by the holder of the equity instrument if the criteria in paragraph [815-15-25-1(b) through (c)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1) are also met. That put option also shall be separated from the host contract by the issuer of the equity instrument except in those circumstances in which the put option is not considered to be a derivative instrument pursuant to paragraph [815-10-15-74(a)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-74) because it is classified in stockholders' equity. A purchased call option that enables the issuer of an equity instrument (such as common stock) to reacquire that equity instrument would not be considered to be a derivative instrument by the issuer of the equity instrument pursuant to that paragraph. Thus, if the call option were embedded in the related equity instrument, it would not be separated from the host contract by the issuer. However, for the holder of the related equity instrument, the embedded written call option would not be considered to be clearly and closely related to the equity instrument, if the criteria in paragraph [815-15-25-1(b) through (c)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1) were met, and shall be separated from the host contract. ##### [815-15-25-21](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-21) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:e2c2f397e1ca40382d9abf2c1d22c945ce05ca3261170f9d0b5ebb5f065006a5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Rentals for the use of leased assets and adjustments for inflation on similar property are considered to be clearly and closely related. Thus, unless a significant leverage factor is involved, the inflation-related derivative instrument embedded in an inflation-indexed lease would not be separated from the host contract. ##### [815-15-25-22](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-22) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:2840cf316db471e3121e08fe0fe9df0db94193d33d7dccc9227d5d120b39f2e1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The obligation to make future payments for the use of leased assets and the adjustment of those payments to reflect changes in a variable-interest-rate index are considered to be clearly and closely related. Thus, leases that include [variable lease payments](https://asc.understandingaccounting.org/glossary/v/#variable-lease-payments "Payments made by a lessee to a lessor for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time.") based on changes in the prime rate would not have the embedded derivative that is related to the variable lease payment separated from the host contract. ##### [815-15-25-23](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-23) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:a25c0ed6aaac32dfe7dc14ae6aca4aa909afd3be376dfcb3bf59bbd4d8bdd2f6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This guidance is organized as follows: 1. a Characteristics of a debt host contract 2. b Interest-rate-related underlyings 3. c Call options and put options on debt instruments 4. d Term-extending options 5. e Credit-sensitive payments 6. f Commodity-indexed interest or principal payments 7. g Equity-indexed interest payments 8. h Inflation-indexed principal payments 9. i Convertible debt. ##### [815-15-25-24](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-24) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:673fb420d96376414a7c864af1b31e4b50b690ccc0ba1849ffe50da41a3f825c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The characteristics of a debt host contract generally shall be based on the stated or implied substantive terms of the hybrid instrument. Those terms may include a fixed-rate, variable-rate, zero-coupon, discount or premium, or some combination thereof. ##### [815-15-25-25](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-25) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:2b25880e55fe5746f3505204db2330f31805abdc62d05fe7719dffcb647cb8c2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In the absence of stated or implied terms, an entity may make its own determination of whether to account for the debt host as a fixed-rate, variable-rate, or zero-coupon bond. That determination requires the application of judgment, which is appropriate because the circumstances surrounding each hybrid instrument containing an embedded derivative may be different. That is, in the absence of stated or implied terms, it is appropriate to consider the features of the hybrid instrument, the issuer, and the market in which the instrument is issued, as well as other factors, to determine the characteristics of the debt host contract. However, an entity shall not express the characteristics of the debt host contract in a manner that would result in identifying an embedded derivative that is not already clearly present in a hybrid instrument. For example, it would be inappropriate to do either of the following: 1. a Identify a variable-rate debt host contract and an interest rate swap component that has a comparable variable-rate leg in an embedded compound derivative, in lieu of identifying a fixed-rate debt host contract 2. b Identify a fixed-rate debt host contract and a fixed-to-variable interest rate swap component in an embedded compound derivative in lieu of identifying a variable-rate debt host contract. ##### [815-15-25-26](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:a43d2fbecaa992fc204533682580e0d4f3af0301447691e10812a8b76893648f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For purposes of applying the provisions of paragraph [815-15-25-1](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1), an embedded derivative in which the only [underlying](https://asc.understandingaccounting.org/glossary/u/#underlying "A specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable (including the occurrence or nonoccurrence of a specified event such as a scheduled payment under a contract). An underlying may be a price or rate of an asset or liability but is not the asset or liability itself. An underlying is a variable that, along with either a notional amount or a payment provision, determines the settlement of a derivative instrument.") is an interest rate or interest rate index (such as an interest rate cap or an interest rate collar) that alters net interest payments that otherwise would be paid or received on an interest-bearing host contract that is considered a debt instrument is considered to be clearly and closely related to the host contract unless either of the following conditions exists: 1. a The hybrid instrument can contractually be settled in such a way that the investor (the holder or the creditor) would not recover substantially all of its initial recorded investment (that is, the embedded derivative contains a provision that permits any possibility whatsoever that the investor's \[the holder's or the creditor's\] undiscounted net cash inflows over the life of the instrument would not recover substantially all of its initial recorded investment in the hybrid instrument under its contractual terms). 2. b The embedded derivative meets both of the following conditions: 1. 1 There is a possible future interest rate scenario (even though it may be remote) under which the embedded derivative would at least double the investor's initial rate of return on the host contract (that is, the embedded derivative contains a provision that could under any possibility whatsoever at least double the investor's initial rate of return on the host contract). 2. 2 For any of the possible interest rate scenarios under which the investor's initial rate of return on the host contract would be doubled (as discussed in (b)(1)), the embedded derivative would at the same time result in a rate of return that is at least twice what otherwise would be the then-current market return (under the relevant future interest rate scenario) for a contract that has the same terms as the host contract and that involves a debtor with a credit quality similar to the issuer's credit quality at inception. ##### [815-15-25-27](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-27) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:63be73c65f0b0fe769dcd75f34aa6ee1c7df76cb109276f107f616bbada01424 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Even though the conditions in (a) and (b) in the preceding paragraph focus on the investor's rate of return and the investor's recovery of its investment, the existence of either of those conditions would result in the embedded derivative not being considered clearly and closely related to the host contract by both parties to the hybrid instrument. Because the existence of those conditions is assessed at the date that the hybrid instrument is acquired (or incurred) by the reporting entity, the acquirer of a hybrid instrument in the secondary market could potentially reach a different conclusion than could the issuer of the hybrid instrument due to applying the conditions in the preceding paragraph at different points in time. ##### [815-15-25-28](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-28) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:ba7db212fc1651f904880b3c19c01ad84b5f19c38dd08407a68c89d81ff9a593 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An embedded derivative that alters net interest payments based on changes in a stock price index (or another non-interest-rate index) is not addressed in paragraph [815-15-25-26](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26). ##### [815-15-25-29](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-29) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:2ca184f768980ba14d7ae88fffba93ab7dbdcb702b52c5179d073bd9bd18abbe Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The condition in paragraph [815-15-25-26(a)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) applies only to those situations in which the investor (creditor) could be forced by the terms of a hybrid instrument to accept settlement at an amount that causes the investor not to recover substantially all of its initial recorded investment. That condition does not apply to a situation in which the terms of a hybrid instrument permit, but do not require, the investor to settle the hybrid instrument in a manner that causes it not to recover substantially all of its initial recorded investment, provided that the issuer does not have the contractual right to demand a settlement that causes the investor not to recover substantially all of its initial net investment. ##### [815-15-25-30](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-30) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:f5d8658eee8b9886652a1130a966f6e9c7e593fd2fd8c9267e0c2484088b17ba Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraphs [815-10-15-72 through 15-73](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-72) address the scope application of this Subtopic to interest-only strips and principal-only strips. ##### [815-15-25-31](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-31) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:80f2aeb7d2d4f5884326314d3791e279df4c63649b559acb99b30c111769b7e2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The remainder of this guidance on interest-rate-related underlyings is organized as follows: 1. a Interest rate floors, caps, and collars 2. b Exception for certain securitized interest in [prepayable](https://asc.understandingaccounting.org/glossary/p/#prepayable "Able to be settled by either party before its scheduled maturity.") financial assets 3. c Exception for call options exercisable only by the debtor. ##### [815-15-25-32](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-32) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:db1d88a59b297fa697ddef607aac56d8849e92a626b7b803a5668e12fbf106e7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Floors or caps (or collars, which are combinations of caps and floors) on interest rates and the interest rate on a debt instrument are considered to be clearly and closely related unless the conditions in either paragraph [815-15-25-26(a)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) or [815-15-25-26(b)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) are met, in which circumstance the floors or the caps are not considered to be clearly and closely related. ##### [815-15-25-33](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-33) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:a80b30f85136e61785cacf5481dd16192c33804d2e6b245b9c1e3141d1eaa40a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A securitized interest in prepayable financial assets would not be subject to the conditions in paragraph [815-15-25-26(b)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) if it meets both of the following criteria: 1. a The right to accelerate the settlement of the securitized interest cannot be controlled by the investor. 2. b The securitized interest itself does not contain an embedded derivative (including an interest-rate-related derivative instrument) for which bifurcation would be required other than an embedded derivative that results solely from the embedded call options in the underlying financial assets. ##### [815-15-25-34](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-34) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:1ea1032287723c8e73a9edb258892b6745a8a542b7d5614a822f2baaa02bb4ba Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This exception from paragraph [815-15-25-26(b)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) is limited to securitized interests that contain only an embedded derivative that is tied to the prepayment risk of the underlying prepayable financial assets and that meet the criteria in the preceding paragraph. If a securitized interest contains any other terms that affect some or all of the cash flows or the value of other exchanges required by the contract in a manner similar to a derivative instrument and those terms create an embedded derivative that requires bifurcation (ignoring the effects of the embedded call options in the underlying financial assets), that securitized interest would be subject to the requirements of paragraph [815-15-25-26(b)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) (for example, an inverse floater). ##### [815-15-25-35](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-35) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:26114b8b151ed5d6539da0fe22c5e9c627381e4b2b386edf0b38a37b85922153 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Whether the securitized interest itself contains an embedded derivative (including an interest-rate-related derivative instrument) for which bifurcation would be required, other than an embedded derivative that results solely from the embedded call options in the underlying financial assets, shall be determined in accordance with paragraphs [815-15-25-11 through 25-13](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-11) . This assessment is expected to be simple for basic securitized interests but could be more difficult for complex securitized interests (for example, in securitizations involving the resecuritization of tranches from previous transactions, the analysis might require an understanding of each securitization making up the resecuritization transaction). ##### [815-15-25-36](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-36) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:d2b2c1102ecd7845a28bbf9ecaf2748c46d7881ea8a3e0ce66c30192284cce0a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A securitized interest in prepayable financial assets that does not meet both of the criteria in paragraph [815-15-25-33](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-33) is subject to the conditions in paragraph [815-15-25-26(b)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26). When assessing the conditions in paragraph [815-15-25-26(b)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) for those instruments, an entity shall consider the effect of prepayment risk. Example 11 (see paragraph [815-15-55-137](https://asc.understandingaccounting.org/asc/815/15/#815-15-55-137)) illustrates the application of this guidance to specific securitized interests in prepayable financial assets. ##### [815-15-25-37](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-37) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:d47815e6e3dccf4959d01bb5afb69c9aa5ac119e557f5cfa8e12b8aaeb34a3d2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The conditions in paragraph [815-15-25-26(b)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) do not apply to an embedded call option in a hybrid instrument containing a debt host contract if the right to accelerate the settlement of the debt can be exercised only by the debtor (the issuer or the borrower). This guidance does not affect the application of the condition in paragraph [815-15-25-26(a)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) or the application of paragraphs [815-15-25-41 through 25-43](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-41) . In addition, this guidance does not apply to other embedded derivative features that may be present in the same hybrid instrument. ##### [815-15-25-38](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-38) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:51f8f72f78bac08a2ad32731c2729279eae8ba3d3256ccd8bb5c60f93c5b699d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The conditions in paragraph [815-15-25-26(b)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) apply only to situations that meet the two conditions specified in paragraph [815-15-25-26(b)(1) through (b)(2)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) and for which the investor has the unilateral ability to obtain the right to receive the high rate of return specified in those paragraphs. If the embedded derivative is an option rather than a forward contract, it is important to analyze whether the investor is the holder of that option. For an embedded call option, the issuer or borrower (and not the investor) is the holder, and thus only the issuer (borrower) can exercise the option. Consequently, the investor does not have the unilateral ability to obtain the right to receive the high rate of return, which is contingent on the issuer's exercise of the embedded call option. ##### [815-15-25-39](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-39) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:7fbbf22b892e545fdd97dd435a264cd8011e6e1313fefcc2e8d827fde7b816ca Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [815-15-55-25](https://asc.understandingaccounting.org/asc/815/15/#815-15-55-25) provides implementation guidance on the application of this guidance to specific debt instruments. ##### [815-15-25-40](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-40) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:9f410c093e80f1e01f143d46efe48aead5d91b0d99a391e29e21040cd15e0a32 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2016-06](https://asc.understandingaccounting.org/updates/asu-2016-06/). ##### [815-15-25-41](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-41) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:0f57c5d71fa9bf47bc1935669c8d10e4ee15d4f400017eb515be1b4ec2c36b5b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Call (put) options that do not accelerate the repayment of principal on a debt instrument but instead require a cash settlement that is equal to the price of the option at the date of exercise would not be considered to be clearly and closely related to the debt instrument in which it is embedded. ##### [815-15-25-42](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-42) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:8d6b207c8f1c6cfc49b41a2fb77461f136ce154632f3f0be0238180f95a05a8c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following four-step decision sequence shall be followed in determining whether call (put) options that can accelerate the settlement of debt instruments shall be considered to be clearly and closely related to the debt host contract: - Step 1: Is the amount paid upon settlement (also referred to as the payoff) adjusted based on changes in an index? If yes, continue to Step 2. If no, continue to Step 3. - Step 2: Is the payoff indexed to an underlying other than interest rates or credit risk? If yes, then that embedded feature is not clearly and closely related to the debt host contract and further analysis under Steps 3 and 4 is not required. If no, then that embedded feature shall be analyzed further under Steps 3 and 4. - Step 3: Does the debt involve a substantial premium or discount? If yes, continue to Step 4. If no, further analysis of the contract under paragraph [815-15-25-26](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) is required, if applicable. - Step 4: Does a contingently exercisable call (put) option accelerate the repayment of the contractual principal amount? If yes, the call (put) option is not clearly and closely related to the debt instrument. If not contingently exercisable, further analysis of the contract under paragraph [815-15-25-26](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) is required, if applicable. ##### [815-15-25-43](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-43) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:18b1039117034323df7418aba60bf9e41e61359ecc0a5f242c095c13de2243f9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The preceding paragraph is distinct from paragraph [815-15-25-37](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-37), which addresses whether the conditions in paragraph [815-15-25-26(b)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) involving rate of return apply to certain call options exercisable only by the debtor. Paragraph [815-15-55-13](https://asc.understandingaccounting.org/asc/815/15/#815-15-55-13) illustrates the application of the guidance in the preceding paragraph to nine illustrative debt instruments. ##### [815-15-25-44](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-44) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:458760af2ec4c369cbc3f8812a5ef069730c9eb567a451e88516be94c08609be Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An embedded derivative that either (a) unilaterally enables one party to extend significantly the remaining term to maturity or (b) automatically extends significantly the remaining term triggered by specific events or conditions is not clearly and closely related to the interest rate on a debt instrument unless the interest rate is concurrently reset to the approximate current market rate for the extended term and the debt instrument initially involved no significant discount. Thus, if there is no reset of interest rates, the embedded derivative is not clearly and closely related to the host contract. That is, a term-extending option cannot be used to circumvent the restriction in paragraph [815-15-25-26](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) regarding the investor's not recovering substantially all of its initial recorded investment. ##### [815-15-25-45](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-45) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:a96311b47ce64a19cdc023ee753ef9abda3f720567f22947b1eb7011ee70135f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The preceding paragraph does not provide guidance for determining whether term-extending options in nondebt host contracts are clearly and closely related to the host contract, as discussed in paragraph [815-15-25-1(a)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1). A term-extending option in a nondebt host contract can have a significantly different effect than a term-extending option in a debt host contract. Nondebt contracts (as well as debt contracts) that contain embedded term-extension features shall be evaluated under paragraph [815-15-25-1](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1) to determine whether the term-extension feature is a derivative instrument that shall be accounted for separately. ##### [815-15-25-46](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-46) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:fa94ff57bc6864c8a811039f4effec7d4467c843ea421c25c65ef6f43b285a3d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The creditworthiness of the debtor and the interest rate on a debt instrument shall be considered to be clearly and closely related. Thus, for debt instruments that have the interest rate reset in the event of any of the following conditions, the related embedded derivative shall not be separated from the host contract: 1. a Default (such as violation of a credit-risk-related covenant) 2. b A change in the debtor's published credit rating 3. c A change in the debtor's creditworthiness indicated by a change in its spread over U.S. Treasury bonds. ##### [815-15-25-47](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-47) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:3e6b9c394f1abf87abc445bc582a2b415fffa47bd381556364a458583ec82906 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If an instrument incorporates a credit risk exposure that is different from the risk exposure arising from the creditworthiness of the obligor under that instrument, such that the value of the instrument is affected by an event of default or a change in creditworthiness of a third party (that is, an entity that is not the obligor), then the economic characteristics and risks of the [embedded credit derivative](https://asc.understandingaccounting.org/glossary/e/#embedded-credit-derivative "An embedded derivative that is also a credit derivative.") are not clearly and closely related to the economic characteristics and risks of the host contract, even though the obligor may own securities issued by that third party. This guidance shall be applied to all other arrangements that incorporate credit risk exposures that are unrelated or only partially related to the creditworthiness of the issuer of that instrument. This guidance does not affect the accounting for a nonrecourse debt arrangement (that is, a debt arrangement in which, in the event that the debtor does not make the payments due under the loan, the creditor has recourse solely to the specified property pledged as collateral). ##### [815-15-25-48](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-48) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:0515ed5494d69df55cb9321a5975fa652803eb70f65018fa1c958bb4f7470d63 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The changes in fair value of a commodity (or other asset) and the interest yield on a debt instrument are not clearly and closely related. Thus, a commodity-related derivative instrument embedded in a commodity-indexed debt instrument shall be separated from the noncommodity host contract and accounted for as a derivative instrument. ##### [815-15-25-49](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-49) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:b089df3ce7fb6805cb44937c0bda40981abaace34f84e3c55207693cbe87c953 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The changes in fair value of an equity interest and the interest yield on a debt instrument are not clearly and closely related. Thus, an equity-related derivative instrument embedded in an equity-indexed debt instrument (whether based on the price of a specific common stock or on an index that is based on a basket of equity instruments) shall be separated from the host contract and accounted for as a derivative instrument. ##### [815-15-25-50](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-50) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:3aee5109a62e4b7a5d770123b3897817404d05096b99c0e1193fab126da2f9d7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The interest rate and the rate of inflation in the economic environment for the currency in which a debt instrument is denominated shall be considered to be clearly and closely related. Thus, nonleveraged inflation-indexed contracts (debt instruments, capitalized lease obligations, pension obligations, and so forth) shall not have the inflation-related embedded derivative separated from the host contract. ##### [815-15-25-51](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-51) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:6dacff1a8881fca9c7fb55573aa99d89aa710d22b5d5460f9682d5130a9657e5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The changes in fair value of an equity interest and the interest rates on a debt instrument are not clearly and closely related. Thus, for a debt security that is convertible into a specified number of shares of the debtor's common stock or another entity's common stock, the embedded derivative (that is, the conversion option) shall be separated from the debt host contract and accounted for as a derivative instrument provided that the conversion option would, as a freestanding instrument, be a derivative instrument subject to the requirements of this Subtopic. (For example, if the common stock was not [readily convertible to cash](https://asc.understandingaccounting.org/glossary/r/#readily-convertible-to-cash "Assets that are readily convertible to cash have both of the following: Interchangeable (fungible) units Quoted prices available in an active market that can rapidly absorb the quantity held by the entity without significantly affecting the price. (Based on paragraph 83(a) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises.)(P) December 16, 2024; (N) December 16, 2025105-10-65-9Assets that are readily convertible to cash have both of the following: Interchangeable (fungible) units Quoted prices available in an active market that can rapidly absorb the quantity held by the entity without significantly affecting the price."), a conversion option that requires purchase of the common stock would not be accounted for as a derivative instrument.) That accounting applies only to the holder (investor) if the debt is convertible to the debtor's common stock because, under paragraph [815-10-15-74(a)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-74), a separate option with the same terms would not be a derivative instrument for the issuer. ##### [815-15-25-51A](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-51A) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:31b7291e3e9eeaabbe4f9ac973b33ff87a3c662dcee3cac4d70f2f09501fa586 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An embedded derivative feature that exposes the holder of a beneficial interest in a tranche of a securitized financial instrument to the possibility (however remote) of being required to make potential future payments (not merely receive reduced cash inflows) shall be considered to be not clearly and closely related to the economic characteristics and risks of the host contract and, thus, meet the criterion in paragraph [815-15-25-1(a)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1). #### Entity Unable to Reliably Identify and Measure Embedded Derivative ##### [815-15-25-52](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-52) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:776552b3dcc3b5567adbb7a197afabfd06d3187f055cf19f9ff1a71f138ca529 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity that enters into sophisticated investment and funding strategies such as structured notes or other contracts with embedded derivatives should be able to obtain the information necessary to reliably identify and measure the separate components. It should be unusual that an entity would conclude that it cannot reliably separate an embedded derivative from its host contract. ##### [815-15-25-53](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-53) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:45c7dc81bc8a318b298a1d00ece9d9f50a57ecfe360c4c6c1b5177e85953402f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If an entity cannot reliably identify and measure the embedded derivative that paragraph [815-15-25-1](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1) requires be separated from the host contract, paragraphs [815-15-30-1(b)](https://asc.understandingaccounting.org/asc/815/15/#815-15-30-1) and [815-15-35-2](https://asc.understandingaccounting.org/asc/815/15/#815-15-35-2) require that the entire contract be measured at fair value with gain or loss recognized in earnings, but that contract may not be designated as a hedging instrument pursuant to Subtopic 815-20. #### Host Contract After Separation ##### [815-15-25-54](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-54) Pending content: no Source downloaded (UTC): 2026-09-10T01:36:08.184Z to 2026-09-10T01:36:08.184Z Record version: sha256:5710e383397526935b827ba2a070efe444e4f0ac31159d23eb1d19dc90fdd7e6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If an embedded derivative is separated from its host contract, the host contract shall be accounted for based on GAAP applicable to instruments of that type that do not contain embedded derivatives.