The objective of this study was to study the recognition, accounting treatment and existence of embedded derivatives under IAS 39 and to compare the differences between IAS and US GAAP in order to determine whether or not to separate embedded derivative from host contract. An empirical survey was conducted to test the existence of embedded derivatives in business activities of Finnish listed companies from four different industries.

To conclude, economic characteristics and risks of both the host contract and the derivative must be understood to determine whether the contract contains an embedded derivative. No significant differences were found between IAS and US GAAP in determining whether or not to separate an embedded derivative from host contract. The accounting treatment of embedded derivatives is challenging for companies and they do not have established procedures for this purpose. However many contracts may include embedded derivatives although they would not have been found yet. Due to the difficulties in recognizing embedded derivatives, they are more common than is generally expected. Embedded derivatives in Finnish listed companies included in the survey were foreign exchange purchase and sale contracts.