By Steve BurkholderThe Financial Accounting Standards Board proposed an accounting standards update that would require footnote disclosures that would allow investors to link a company's use of an embedded derivative with the host contract to which it is attached.FASB, which issued the exposure draft on the disclosures Feb. 24, asks that comments be submitted by April 30.Effort to Streamline Hedge Accounting In separate but related action Feb. 25, the board began its substantive deliberations to streamline and ease some of the requirements of hedge accounting rules.At its education session that ended with directing its staff down possible accounting avenues, FASB focused in part on component hedging for nonfinancial items. It also tackled the mechanics of gauging hedge effectiveness, and the use of quantitative versus qualitative assessments of effectiveness.Derivatives typically are used by banks and other companies to hedge against risk. When the hedging instrument is deemed effective at countering risk, such derivatives-based arrangements receive business-friendly hedge accounting treatment.Both the disclosure effort and the new hedge accounting project represent FASB's work to improve financial reporting prescriptions in Accounting Standards Codification 815, Derivatives and Hedging formerly FAS 133.New Disclosures, for Transparency In its newly issued draft accounting standards update on disclosures, FASB is calling for footnote reporting that would provide information that explicitly links “bifurcated embedded derivatives (which are measured at fair value) with their related host contracts, according to the draft ASU. The host contract may be measured at amortized cost, fair value, or another measurement attribute under applicable accounting principles. “Users of financial statements often only see the two components”—the split-off embedded derivative and the host contract—“disclosed separately, and they have little ability to trace one back to the other,” FASB wrote in the exposure draft. Follow-On Effort to Decisions on Hybrid Instruments The disclosure proposal represents a follow-on effort by FASB on the topic of accounting for embedded derivatives, according to the draft ASU on disclosures.The work was conducted in the wake of the board's decision to retain current requirements under generally accepted accounting principles for splitting, or bifurcation...