(paragraph 11(a) of IFRS 17)

BC104 When applying IFRS 9 (and previously IAS 39) entities are required to account separately for some derivatives embedded in hybrid contracts. The Board noted that accounting separately for some embedded derivatives in hybrid contracts:

(a) ensures that contractual rights and obligations that create similar risk exposures are treated alike whether or not they are embedded in a non-derivative host contract.

(b) counters the possibility that entities might seek to avoid the requirement to measure derivatives at fair value through profit or loss by embedding a derivative in a non-derivative host contract. In the Board's view, fair value through profit or loss is the only measurement basis that provides relevant information about derivatives. If derivatives were measured at cost or at fair value through other comprehensive income, their role in reducing or increasing risk would not be visible. In addition, the value of derivatives often changes disproportionately in response to market movements and fair value is the measurement basis that best captures such non-linear responses to changes in risk. That information is essential to communicate the nature of the rights and obligations inherent in derivatives to users of financial statements.