International Accounting Standard 39
Financial Instruments:
Recognition and Measurement

 

In April 2001 the International Accounting Standards Board (IASB) adopted IAS 39 Financial Instruments: Recognition and Measurement, which had originally been issued by the International Accounting Standards Committee (IASC) in March 1999. That Standard had

replaced the original IAS 39 Financial Instruments: Recognition and Measurement, which had

been issued in December 1998. That original IAS 39 had replaced some parts of IAS 25

Accounting for Investments, which had been issued in March 1986.

In December 2003 the IASB issued a revised IAS 39 as part of its initial agenda of technical

projects. The revised IAS 39 also incorporated an Implementation Guidance section, which replaced a series of Questions & Answers that had been developed by the IAS 39 Implementation Guidance Committee.

In March 2004, amendments enabled fair value hedge accounting to be used for a portfolio

hedge of interest rate risk. June 2005 amendments were related to when the fair value option could be applied. In July 2008, application guidance was provided to illustrate how the principles underlying hedge accounting should be applied. Amendments made in October 2008 allowed some types of financial assets to be reclassified and, in March 2009, amendments addressed how some embedded derivatives should be measured if they were previously reclassified.

In August 2005 the IASB issued IFRS 7 Financial Instruments: Disclosures. Consequently, the

disclosure requirements that were in IAS 39 were moved to IFRS 7.

The IASB intends ultimately to replace IAS 39 in its entirety. However, in response to

requests from interested parties that the accounting for financial instruments should be improved quickly, the IASB divided the project into phases. As the IASB completes each

phase, it will create chapters in IFRS 9 that replace the relevant requirements in IAS 39.

In November 2009, the IASB issued the chapters of IFRS 9 Financial Instruments relating to the

classification and measurement of financial assets. In October 2010 the IASB added to IFRS 9 the requirements related to the classification and measurement of financial

liabilities.      When those chapters were issued, the IASB withdrew those relevant

requirements from IAS 39.

In October 2010 the IASB also moved the requirements related to the derecognition of

financial assets and financial liabilities and embedded derivatives from IAS 39 to IFRS 9.

Other IFRSs have made minor consequential amendments to IAS 39. They include Embedded

Derivatives (Amendments to IFRIC 9 and IAS 39) (issued March 2009), Improvements to IFRSs (issued April 2009), Improvements to IFRSs (issued May 2010), IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 11 Joint Arrangements (issued May 2011), IFRS 13 Fair Value Measurement (issued May 2011), Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (issued October 2012), Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39) (issued June 2013), IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013) and Annual Improvements to IFRSs 2010-2012 Cycle (issued December 2013).

CONTENTS

INTRODUCTION

INTERNATIONAL ACCOUNTING STANDARD 39

FINANCIAL INSTRUMENTS: RECOGNITION AND

MEASUREMENT

SCOPE

DEFINITIONS

Impairment and uncollectibility of financial assets measured at amortised

cost

HEDGING

Hedging instruments

Qualifying instruments

Designation of hedging instruments

Hedged items

Qualifying items

Designation of financial items as hedged items

Designation of non-financial items as hedged items

Designation of groups of items as hedged items

Hedge accounting

Fair value hedges Cash flow hedges

Hedges of a net investment

EFFECTIVE DATE AND TRANSITION

WITHDRAWAL OF OTHER PRONOUNCEMENTS

APPENDIX A

Application guidance

Scope (paragraphs 2-7)

Definitions (paragraphs 8 and 9)

Effective interest rate

Transaction costs

Impairment and uncollectibility of financial assets measured at amortised

cost (paragraphs 58-65)

Interest income after impairment recognition

Hedging (paragraphs 71-102)

Hedging instruments (paragraphs 72-77)

Qualifying instruments (paragraphs 72 and 73)

Hedged items (paragraphs 78-84)

Qualifying items (paragraphs 78-80)

Designation of financial items as hedged items (paragraphs 81 and 81A)

Designation of non-financial items as hedged items (paragraph 82)

Designation of groups of items as hedged items (paragraphs 83 and 84)

Hedge accounting (paragraphs 85-102)

Assessing hedge effectiveness

Fair value hedge accounting for a portfolio hedge of interest rate risk

Transition (paragraphs 103-108C)

APPENDIX B

Amendments to other pronouncements

FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS

EDITION

APPROVAL BY THE BOARD OF IAS 39 ISSUED IN DECEMBER 2003

APPROVAL BY THE BOARD OF AMENDMENTS TO IAS 39:

Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk

issued in March 2004

Transition and Initial Recognition of Financial Assets and Financial Liabilities

issued in December 2004

Cash Flow Hedge Accounting of Forecast Intragroup Transactions issued in

April 2005

The Fair Value Option issued in June 2005

Financial Guarantee Contracts (Amendments to IAS 39 and IFRS 4) issued in

August 2005

Eligible Hedged Items issued in July 2008

Embedded Derivatives (Amendments to IFRIC 9 and IAS 39) issued in March

20091

Novation of Derivatives and Continuation of Hedge Accounting (Amendments

to IAS 39) issued in June 2013

IFRS 9 Financial Instruments (Hedge Accounting and Amendments to IFRS 9,

IFRS 7 and IAS 39) issued in November 2013

BASIS FOR CONCLUSIONS

DISSENTING OPINIONS

ILLUSTRATIVE EXAMPLE

IMPLEMENTATION GUIDANCE

AG133

     IFRIC 9 was superseded by IFRS 9 Financial Instruments, issued in October 2010.

International Accounting Standard 39 Financial Instruments: Recognition and Measurement (IAS 39) is set out in paragraphs 2-110 and Appendices A and B. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 39 should be read in the context of its objective and the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.

Introduction

The International Accounting Standards Board has decided to replace IAS 39 Financial Instruments: Recognition and Measurement over a period of time. The first instalment, dealing with classification and measurement of financial assets, was issued as IFRS 9 Financial Instruments in November 2009. The requirements for classification and measurement of financial liabilities and derecognition of financial assets and liabilities were added to IFRS 9 in October 2010. Requirements for hedge accounting were added to IFRS 9 in November 2013. As a consequence, parts of IAS 39 are being superseded. The Board is re-deliberating proposals to replace the requirements on impairment. The Board is also deliberating proposals on accounting for macro hedging, which are expected to be published as a Discussion Paper. The remaining requirements of IAS 39 continue in effect until superseded by future instalments of IFRS 9. The Board expects to replace IAS 39 in its entirety.

In the third phase of its project to replace IAS 39, the Board considered replacing the hedge accounting requirements in IAS 39. As part of those deliberations, the Board considered the accounting for executory contracts that gives rise to accounting mismatches in some situations. In November 2013 the scope of this IFRS was amended by extending the fair value option (for situations in which it eliminates or significantly reduces an accounting mismatch) to contracts that meet the 'own use' scope exception.

International Accounting Standard 39

Financial Instruments: Recognition and Measurement

              [Deleted]

Scope

              This Standard shall be applied by all entities to all types of financial

instruments except:

 

those interests in subsidiaries, associates and joint ventures that

are accounted for in accordance with IFRS 10 Consolidated

Financial Statements, IAS 27 Separate Financial Statements or IAS 28 Investments in Associates and Joint Ventures. However, in some cases,

IFRS 10, IAS 27 or IAS 28 require or permit an entity to account for an

interest in a subsidiary, associate or joint venture in accordance with some or all of the requirements of this Standard. Entities shall also apply this Standard to derivatives on an interest in a subsidiary, associate or joint venture unless the derivative meets the

definition of an equity instrument of the entity in IAS 32Financial

Instruments: Presentation.

rights and obligations under leases to which IAS 17 Leases applies.

However:

 

lease receivables recognised by a lessor are subject to the derecognition provisions of IFRS 9 Financial Instruments

and impairment provisions of this Standard;

finance lease payables recognised by a lessee are subject to

the derecognition provisions of IFRS 9; and

derivatives that are embedded in leases are subject to the embedded derivatives provisions of IFRS 9.

 

employers' rights and obligations under employee benefit plans,

to which IAS 19 Employee Benefits applies.

financial instruments issued by the entity that meet the definition of

an equity instrument in IAS 32 (including options and warrants) or that are required to be classified as an equity instrument in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D of IAS 32. However, the holder of such equity instruments shall apply this Standard to those instruments, unless they meet the exception in (a) above.

rights and obligations arising under (i) an insurance contract as defined in IFRS 4 Insurance Contracts, other than an issuer's rights

and obligations arising under an insurance contract that meets the definition of a financial guarantee contract in Appendix A of IFRS 9 Financial Instruments, or (ii) a contract that is within the

scope of IFRS 4 because it contains a discretionary participation feature. However, this Standard applies to a derivative that is

embedded in a contract within the scope of IFRS 4 if the derivative is not itself a contract within the scope of IFRS 4. Moreover, if an issuer of financial guarantee contracts has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer may elect to apply either this Standard or IFRS 4 to such financial guarantee contracts (see paragraphs AG4 and AG4A). The issuer may make that election contract by contract, but the election for each contract is irrevocable.

          any    forward     contract      between      an    acquirer      and    a   selling

shareholder to buy or sell an acquiree that will result in a business

combination within the scope of IFRS 3 Business Combinations at a future acquisition date. The term of the forward contract should not exceed a reasonable period normally necessary to obtain any required approvals and to complete the transaction.

 

loan commitments other than those loan commitments described in paragraph 4. An issuer of loan commitments shall apply IAS 37 Provisions, Contingent Liabilities and Contingent Assets to loan

commitments that are not within the scope of this Standard. However, all loan commitments are subject to the derecognition provisions of IFRS 9.

financial instruments, contracts and obligations under share based payment transactions to which IFRS 2 Share-based Payment

applies, except for contracts within the scope of paragraphs 5-7 of this Standard, to which this Standard applies.

rights to payments to reimburse the entity for expenditure it is required to make to settle a liability that it recognises as a provision in accordance with IAS 37, or for which, in an earlier period, it recognised a provision in accordance with IAS 37.

              The following loan commitments are within the scope of this Standard:

 

loan commitments that the entity designates as financial

liabilities at fair value through profit or loss (see paragraph 4.2.2 of IFRS 9). An entity that has a past practice of selling the assets resulting from its loan commitments shortly after origination shall apply this Standard to all its loan commitments in the same class.

loan commitments that can be settled net in cash or by delivering

or issuing another financial instrument. These loan commitments are derivatives. A loan commitment is not regarded as settled net merely because the loan is paid out in instalments (for example, a mortgage construction loan that is paid out in instalments in line with the progress of construction).

commitments to provide a loan at a below-market interest rate

(see paragraph 4.2.1 of IFRS 9).

 

This standard shall be applied to those contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments, with the exception of contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity's expected purchase, sale or usage requirements. However, this Standard shall be applied to those contracts that an entity designates as measured at fair value through profit or loss in accordance with paragraph 5A.

A contract to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contract was a financial instrument, may be irrevocably designated as measured at fair value through profit or loss even if it was entered into for the purpose of the receipt or delivery of a non-financial item in accordance with the entity's expected purchase, sale or usage requirements. This designation is available only at inception of the contract and only if it eliminates or significantly reduces a recognition inconsistency (sometimes referred to as an 'accounting mismatch') that would otherwise arise from not recognising that contract because it is excluded from the scope of this Standard (see paragraph 5).

There are various ways in which a contract to buy or sell a non-financial item can be settled net in cash or another financial instrument or by exchanging

financial instruments. These include:

 

when the terms of the contract permit either party to settle it net in cash or another financial instrument or by exchanging financial instruments;

when the ability to settle net in cash or another financial instrument, or

by exchanging financial instruments, is not explicit in the terms of the contract, but the entity has a practice of settling similar contracts net in cash or another financial instrument or by exchanging financial instruments (whether with the counterparty, by entering into offsetting

contracts or by selling the contract before its exercise or lapse);

when, for similar contracts, the entity has a practice of taking delivery of

the underlying and selling it within a short period after delivery for the purpose of generating a profit from short-term fluctuations in price or

dealer's margin; and

when the non-financial item that is the subject of the contract is readily

convertible to cash.

A contract to which (b) or (c) applies is not entered into for the purpose of the

receipt or delivery of the non-financial item in accordance with the entity's expected purchase, sale or usage requirements and, accordingly, is within the scope of this Standard. Other contracts to which paragraph 5 applies are evaluated to determine whether they were entered into and continue to be held for the purpose of the receipt or delivery of the non-financial item in accordance with the entity's expected purchase, sale or usage requirements and, accordingly, whether they are within the scope of this Standard.

              A written option to buy or sell a non-financial item that can be settled net in

cash or another financial instrument, or by exchanging financial instruments, in accordance with paragraph 6(a) or (d) is within the scope of this Standard. Such a contract cannot be entered into for the purpose of the receipt or delivery of the non-financial item in accordance with the entity's expected purchase, sale or usage requirements.

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