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ASC 815, Derivatives and Hedging, generally requires a derivative embedded in an instrument or contract (that does not meet the definition of a derivative), to be separated from that host instrument and accounted for as a derivative, unless it is clearly and closely related to its host. An embedded derivative does not have to be separated from a host instrument accounted for at fair value with changes in fair value recorded in earnings.
Many instruments and contracts contain embedded components (e.g., termination options, variable pricing provisions, conversion options) that need to be assessed to determine whether they meet the definition of a derivative in ASC 815. If an embedded component is determined to be an embedded derivative (and is not eligible for a scope exception), then a reporting entity should assess whether the embedded derivative is clearly and closely related to its host instrument.
This chapter discusses the framework for determining whether an embedded component meets the definition of a derivative within the scope of ASC 815 and how to determine whether it is clearly and closely related to its host instrument. This chapter also discusses the accounting for embedded derivatives that are separated from their host instruments.
See DH 2 for information on the ASC 815 definition of a derivative. See DH 3 for information on the scope exceptions in ASC 815.

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