You are employed by a CPA firm that has an international client, Global Manufacturing, with home offices in a country in the European Union. The company recently entered into a lucrative sales contract with a company in South Africa. The contract is rather unusual for Global in that it is denominated in neither the currency of the seller (Euros) nor that of the buyer (South Africa Rands); rather, it is denominated in British pounds. Global's Chief Financial Officer, Jaques Perrot, is concerned about the proper accounting tratement of this transaction, because he believes it involves something called an EMBEDDED DERIVATIVE, a concept he is not familiar.
He asks your firm to determine whether an EMBEDDED DERIVATIVE is needed and, if it is, provide him with a memo describing exactly how to account for it.
Because Global's stock is concerned with satisfying the requirements of both Internation Accounting Standards and U.S. GAAP
First, in this contract with Global Manufacturing, an embedded derivative is involved. The reason for this conclusion is that the contract is denominated in British pounds. The contract for sales to a company in South Africa is the non derivative host contract but the contract for receiving the payment in pounds is the derivative portion of the contract and in accordance with the IAS39R. 10 is an embedded derivative contract.
How do we decide if Global Manufacturing has entered into an embedded derivative contract? We can decide that it has entered into an embedded derivative contract because the embedded derivative has the potential of changing the cash flow ...
Global Manufacturing is discussed very comprehensively in this explanation