International financial reporting standard
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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]
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]
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]
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. |
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. |
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. |
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. |
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. |