A security that has the features of debt and equity securities or combines such securities together. A typical hybrid security is the preferred stock, representing ownership in an entity (i.e., the equity element) but having fixed payments (the debt element). Hybrid securities may be structured on a debt basis, where the holder/ owner can receive a cash flow (floating or fixed) with a periodic rate of return. Enhanced features may include embedded options for conversion to equity.

Given their hybrid nature, these securities pay a predictable rate of return or dividend over a specified period of time, after which the holder may have the right to change the very nature of a security (e.g., by converting it into the underlying share). Hybrid securities may be subject to specific accounting requirements for measurement, remeasurement, bifurcation, among others.

For example, an entity is usually required to account for its hybrid financial instruments (hybrid securities) by isolating the embedded component (embedded derivative) from its host contract and separately accounting for these components (that is, bifurcating the derivative from its host contract). The bifurcated embedded derivative has to be accounted for as a derivative and will consequently be marked to market each accounting period. The host contract is accounted for in accordance with the type of a respective contract.