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An embedded derivative is a component of a hybrid contract that also includes a non derivative host with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand alone derivative. The embedded derivative concept that exists in IAS 39 has been included in IFRS 9 to apply only to hosts that are not financial assets with the scope of the standard is financial liabilities and host contracts not in the scope of IFRS, such as leases, purchase contracts. As such embedded derivative that under ISA 39 would have been separately accounted for at FVTPL, because they were not closely related to a host financial asset will no longer be separated.Instead the contractual cash flows of the financial asset are assessed in their entirely and the asset as a whole is measured at FVTPL if the contractual cash flow characteristics test is not passed.
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