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IAS 39
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Overview and History
[edit]IAS 39: Financial Instruments: Recognition and Measurement was an international accounting standard which outlined the requirements for the recognition and measurement of financial assets, financial liabilities, and some contracts to buy or sell non-financial items.[1] It was released by the International Accounting Standards Board (IASB) in December 2003 as a revision of the original 1998 version.[2] The standard was largely replaced in 2014 by IFRS 9, which became effective for annual periods beginning on or after 1 January 2018.[3] Despite this replacement, IAS 39 remains relevant for entities that choose an accounting policy to continue to apply the hedge accounting requirements of IAS 39 instead of IFRS 9.[4]
Adoption in the European Union
[edit]The standard was adopted by the European Union in 2004, though with a specific "carve-out" regarding macro-hedging requirements.[5][6] In 2005, the EU also introduced the fair value and hedging provision of the amended version of IAS 39 to align with international practices.[7][8][9]
Reclassification and Global Convergence
[edit]The EU version was changed at the end of 2008 in response to the 2008 financial crisis, allowing for the reclassification of certain financial instruments under stressed market conditions.[10][11] The comparative accounting measures in the United States are provided by FAS 133 and FAS 157, which serve similar functions for recognition and measurement.[12] The Financial Accounting Standards Board (FASB) released a 'FASB Staff Position' statement in October 2008 to align fair value measurement practices with the IASB's guidance in response to the global crisis.[13][14]
Illustrative Examples
[edit]1. Financial Assets at Fair Value Through Profit or Loss (FVTPL)
[edit]Scenario: An entity purchases shares for $10,000 for short-term trading. At year-end, the market value has increased to $11,500.
| Event | Debit | Credit | Amount | Rationale |
|---|---|---|---|---|
| Purchase | Trading Assets (SoFP) | Cash | $10,000 | Initially recognized at fair value.[15] |
| Fair Value Gain | Trading Assets (SoFP) | Gain on Investment (P&L) | $1,500 | Fair value changes for trading assets go directly to P&L.[16] |
| Balance 31.12. | Trading Asset | $11,500 | Reported at current market value. |
2. Held-to-Maturity (HTM) Investments
[edit]Scenario: An entity buys a bond for $50,000 with a fixed maturity and the intent to hold it. Effective interest earned for the period is $2,500.
| Event | Debit | Credit | Amount | Rationale |
|---|---|---|---|---|
| Initial Recognition | HTM Investment (SoFP) | Cash | $50,000 | Measured at cost plus transaction costs.[17] |
| Amortized Interest | HTM Investment (SoFP) | Interest Income (P&L) | $2,500 | Measured at amortized cost using the effective interest method.[18] |
| Balance 31.12. | HTM Asset | $52,500 | Market value fluctuations are ignored for HTM. |
3. Loans and Receivables
[edit]Scenario: An entity provides a loan of $20,000 to a customer. An impairment test at year-end suggests that only $18,000 is recoverable.
| Event | Debit | Credit | Amount | Rationale |
|---|---|---|---|---|
| Issuance of Loan | Loans Receivable (SoFP) | Cash | $20,000 | Initial recognition at fair value.[19] |
| Impairment Loss | Bad Debt Expense (P&L) | Loans Receivable (SoFP) | $2,000 | Measured at amortized cost less impairment.[20] |
| Balance 31.12. | Loan Balance | $18,000 | Carrying amount reflects the incurred loss. |
4. Available-for-Sale (AFS) Financial Assets
[edit]Scenario: An entity buys shares for $30,000 as a long-term investment (not trading). At year-end, fair value is $32,000.
| Event | Debit | Credit | Amount | Rationale |
|---|---|---|---|---|
| Purchase | AFS Investment (SoFP) | Cash | $30,000 | Initial recognition at fair value.[21] |
| Fair Value Gain | AFS Investment (SoFP) | AFS Reserve (OCI) | $2,000 | Gains on AFS are recognized in equity (Other Comprehensive Income).[22] |
| Balance 31.12. | AFS Asset | $32,000 | Reported at fair value, but gain is deferred in equity. |
Disclosure Requirements (IAS 39)
[edit]IAS 39 establishes principles for recognizing and measuring financial assets, financial liabilities, and some contracts to buy or sell non-financial items. While most disclosures are in IFRS 7, the measurement categories defined here must be clearly identified.[23]
| Paragraph | Category | Disclosure Requirement | Description / Examples |
|---|---|---|---|
| IAS 39.9 | Measurement Categories | Classification of Assets | Disclosure of financial assets into the four categories: (1) FVTPL, (2) Held-to-maturity, (3) Loans and receivables, and (4) Available-for-sale. |
| IAS 39.47 | Liability Measurement | Classification of financial liabilities as either at fair value through profit or loss (FVTPL) or measured at amortized cost. | |
| IAS 39.71 | Hedge Accounting | Hedging Instruments | Identification of the hedging instrument (e.g., a derivative) and the nature of the risk being hedged (e.g., interest rate or foreign exchange). |
| IAS 39.88 | Effectiveness Criteria | Disclosure of the method used to assess hedge effectiveness (both prospective and retrospective) to justify the continuation of hedge accounting. | |
| IAS 39.89-95 | Hedge Types | Classification of the hedge as a Fair Value Hedge, Cash Flow Hedge, or a Hedge of a Net Investment in a foreign operation. | |
| IAS 39.58 | Impairment | Objective Evidence | The nature and amount of any impairment loss recognized for financial assets carried at amortized cost (incurred loss model). |
| IAS 39.AG8 | Effective Interest | Amortized Cost Basis | The assumptions and calculation methods used for the effective interest rate (EIR) to spread interest income/expense over the life of the instrument. |
References
[edit]- ^ IASB. IAS 39, Paragraph 1.
- ^ IASB. IAS 39, Paragraph IN1.
- ^ IASB. IFRS 9, Paragraph BC0.1.
- ^ IASB. IFRS 9, Paragraph 7.2.21.
- ^ IASB. IAS 39, Paragraph BC175.
- ^ "Accounting standards: Commission endorses IAS 39". European Commission. 2004-11-19.
- ^ IASB. IAS 39, Paragraph BC71.
- ^ "EU adopts new accounting rules for financial derivatives". Forbes. 2005-11-15.
- ^ "Accounting standards: Commission endorses "IAS 39 Fair Value Option"". European Commission. 2005-11-15.
- ^ IASB. IAS 39, Paragraph 50.
- ^ "EU executive to ease fair value on banks". Reuters. 2008-10-10.
- ^ IASB. IAS 39, Paragraph BC25.
- ^ IASB. IAS 39, Paragraph BC11E.
- ^ "FASB Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" (PDF). FASB. 2008-10-10.
- ^ IASB. IAS 39, Para 43.
- ^ IASB. IAS 39, Para 55(a).
- ^ IASB. IAS 39, Para 43.
- ^ IASB. IAS 39, Para 46.
- ^ Deloitte. IAS 39 Summary.
- ^ IASB. IAS 39, Para 58.
- ^ IASB. IAS 39, Para 43.
- ^ IASB. IAS 39, Para 55(b).
- ^ IASB. IAS 39.