A financial liability that is combined with other financial arrangements such as embedded derivatives. The hybrid instrument has its own cash flow that may, or may not, be significantly distinct from those the of the financial liability. For example, a loan may come with an “embedded” prepayment option that allows the holder (the borrower) to prepay the loan almost for its amortized cost.

A hybrid financial liability may be designated as at fair value through profit and loss (FVTPL), at initial recognition, if the embedded derivative significantly alters/ modifies the cash flows that otherwise would be required by the hybrid contract and if separation between the hybrid components is allowed. For example, an entity issues a debt instrument whose interest payments are linked to a basket of commodity prices (i.e., interest payment is affected by changes in the underlying commodity prices). This loose link between the debt instrument and the embedded derivative calls for separation between the two hybrid components, and recognition at FVTPL.