CHAPTER 17
Financial Instruments: Recognition and Measurement (IAS 39)
IAS 32 and 39 and IFRS 7 were issued as separate standards. However, in practice they are applied as a unit because they deal with the same accounting and financial risk issues. IAS 39 deals with the recognition and measurement issues of financial instruments. IAS 32 (chapter 33) deals with presentation issues, and IFRS 7 deals with disclosure issues (see chapter 34). IAS 39 will be superseded by IFRS 9 after 2012. IFRS 9 is discussed in chapter 18.
17.1
OBJECTIVE IAS 39 establishes principles for recognizing and measuring financial instruments in the financial statements. IAS 39 significantly increases the use of fair value in accounting for financial instruments, particularly on the asset side of the Statement of Financial Position. The standard is complex and often difficult to apply in practice, in part because it contains many provisions to avoid the manipulation of results (for example, derecognition rules and hedge accounting). The standard is also complex from an analysis perspective, in that it allows a number of alternatives for the recognition and measurement of financial instruments.
17.2
SCOPE OF THE STANDARD The standard distinguishes between four classes of financial assets: held at fair value through profit and loss (for example, trading and other elected securities); available for sale; held to maturity; and loans and receivables. In addition, IAS 39 identifies two classes of financial liabilities: those held at fair value, and those shown at amortized cost. The standard outlines the accounting approach in each case. It also categorizes and sets out the accounting treatment for three types of hedging: (i) fair value, (ii) cash flow, and (iii) net investment in a foreign operation. IAS 39 should be applied to all financial instruments (refer table 17.1), with the exception of the following: ■ ■ ■ ■ ■
subsidiaries, associates, and joint ventures (IAS 27, IAS 28, and IAS 31); rights and obligations under leases, other than derecognition of lease receivables and payables and the impairment of lease receivables (IAS 17); employee benefit plan assets and liabilities (IAS 19); rights and obligations under insurance contracts (IFRS 4); equity instruments issued by the reporting entity; 193