IAS 39 - Accounting for Financial Instruments

Table of Contents

• Executive Summary
• 1. Scope
• 2. Financial Instruments - General Definitions and Regulations
• 2.1. Overview
• 2.2. Financial Assets
• 2.3. Financial Liabilities
• 2.4. Five Categories of Financial Instruments
• 2.4.1. Financial Assets and Liabilities at Fair Value through Profit or Loss
• 2.4.2. Held-to-Maturity Investment Assets
• 2.4.3. Loans and Receivables
• 2.4.4. Available-for-Sale Financial Assets
• 2.5. Offsetting of Financial Assets and Liabilities
• 2.6. Equity Instruments
• 2.7. Differentiation between Equity and Liabilities
• 2.7.1. Compound Equity and Liability Instruments
• 2.8. Derivatives
• 2.8.1. Overview
• 2.8.2. Derivatives under IAS 39
• 2.8.3. Embedded Derivatives
• 3. Initial Recognition and Measurement
• 3.1. Initial Recognition
• 3.2. Initial Measurement
• 4. Subsequent Measurement
• 4.1. Fair Value versus Amortized Cost
• 4.2. Financial assets at Fair Value
• 4.3. Financial Assets excluded from Fair Valuation
• 4.4. Impairment
• 4.5. Financial Liabilities
• 5. Derecognition
• 5.1. Derecognition of Financial Assets
• 5.2. Derecognition of Financial Liabilities
• 6. Hedge Accounting
• 6.1. Overview
• 6.2. Requirements and Definitions
• 6.3. Types of Hedges
• 6.4. Discontinuing Hedge Accounting
• 6.5. Portfolio Hedging

Objectives and Key Themes

This paper aims to explain the accounting treatment of financial instruments under International Accounting Standard (IAS) 39, specifically the revised version issued in December 2003. It seeks to provide a broad understanding of the standard and to facilitate its implementation, highlighting its complexities and potential impact on accounting practices.

• Accounting for financial instruments under IAS 39
• Classification and categorization of financial instruments
• Initial and subsequent measurement of financial instruments
• Derecognition of financial instruments
• Hedge accounting under IAS 39

Chapter Summaries

1. Scope: This chapter likely sets the boundaries and defines the scope of application for IAS 39, specifying which types of financial instruments are covered and which are excluded. It probably introduces the overall objective of the standard and may preview the key areas that will be discussed in subsequent chapters.

2. Financial Instruments - General Definitions and Regulations: This chapter establishes fundamental definitions for financial instruments, assets, and liabilities within the framework of IAS 39. It probably details the various categories of financial instruments, including those measured at fair value, held-to-maturity, loans and receivables, and available-for-sale assets. It also likely covers the treatment of equity instruments and the complexities surrounding the differentiation between equity and liabilities, as well as addressing the crucial topic of offsetting financial assets and liabilities. The chapter likely provides a comprehensive overview of the regulatory landscape surrounding these classifications.

3. Initial Recognition and Measurement: This chapter focuses on the criteria for initial recognition of financial instruments and the methods used for their initial measurement. It likely explains the distinction between trade date and settlement date accounting and details how fair value is determined and the treatment of transaction costs. The significance lies in establishing a consistent and transparent baseline for accounting for these instruments from their inception.

4. Subsequent Measurement: This chapter delves into the methods for measuring financial instruments after their initial recognition. It likely contrasts fair value measurement with the amortized cost method, particularly emphasizing the effective interest method. This is critical because it dictates how changes in the value of these instruments are reported over time. The section on impairment likely details the recognition and measurement of losses in value. The chapter likely highlights the differing approaches based on the classification of the financial instrument.

5. Derecognition: This chapter addresses the criteria for derecognizing (removing from the balance sheet) financial assets and liabilities. It will likely discuss the consequences of derecognition, such as the impact on profit or loss and the treatment of continuing involvement. It likely explains the processes involved in removing an instrument from the balance sheet and the implications for financial reporting, including gain and loss recognition.

6. Hedge Accounting: This chapter is central to the standard, providing detailed guidance on hedge accounting under IAS 39. It likely covers the requirements and definitions of hedging instruments, hedged items, and hedge effectiveness. The various types of hedges (fair value, cash flow, and net investment hedges) are likely detailed along with their specific accounting treatments. The chapter likely also includes examples demonstrating the application of these rules and discusses the complexities of portfolio hedging.

Keywords

IAS 39, financial instruments, fair value, amortized cost, hedge accounting, derivatives, financial assets, financial liabilities, equity instruments, initial recognition, subsequent measurement, derecognition, impairment.

IAS 39: Financial Instruments - A Comprehensive Guide: FAQ

What is this document about?

This document provides a comprehensive preview of a paper explaining the accounting treatment of financial instruments under International Accounting Standard (IAS) 39, specifically the revised version issued in December 2003. It covers the standard's scope, key definitions, initial and subsequent measurement, derecognition, and hedge accounting.

What topics are covered in the Table of Contents?

The table of contents includes sections on the scope of IAS 39, general definitions and regulations for financial instruments (including assets, liabilities, equity instruments, and derivatives), initial recognition and measurement, subsequent measurement, derecognition, and hedge accounting. It provides a detailed breakdown of these sections with sub-sections covering specific aspects of each topic.

What are the key objectives and themes of the paper?

The paper aims to explain the accounting treatment of financial instruments under IAS 39, provide a broad understanding of the standard, and facilitate its implementation. Key themes include the classification and categorization of financial instruments, their initial and subsequent measurement, derecognition, and hedge accounting under IAS 39.

What are the chapter summaries?

The chapter summaries provide concise overviews of each section. They explain the content of each chapter in detail, highlighting key concepts and processes. For example, the summary for Chapter 2 explains the definitions of financial instruments, assets, and liabilities, while the summary for Chapter 6 focuses on the requirements and definitions of hedge accounting, different hedge types, and portfolio hedging.

What are the key concepts discussed in Chapter 2 (Financial Instruments - General Definitions and Regulations)?

Chapter 2 covers fundamental definitions of financial instruments, assets, and liabilities. It details various categories of financial instruments (e.g., fair value, held-to-maturity, loans and receivables, available-for-sale), equity instruments, the difference between equity and liabilities, offsetting financial assets and liabilities, and derivatives (including embedded derivatives).

What is covered in Chapter 3 (Initial Recognition and Measurement)?

Chapter 3 focuses on the criteria for initially recognizing financial instruments and the methods for initial measurement. It likely explains the distinction between trade date and settlement date accounting, and how fair value is determined and how transaction costs are treated.

What are the main points of Chapter 4 (Subsequent Measurement)?

Chapter 4 discusses methods for measuring financial instruments after initial recognition, contrasting fair value measurement with the amortized cost method (including the effective interest method). It highlights how changes in value are reported over time, and it details the treatment of impairment losses.

What does Chapter 5 (Derecognition) cover?

Chapter 5 addresses the criteria for derecognizing (removing from the balance sheet) financial assets and liabilities. It explains the consequences of derecognition, such as the impact on profit or loss and the treatment of continuing involvement.

What are the key topics covered in Chapter 6 (Hedge Accounting)?

Chapter 6 provides detailed guidance on hedge accounting under IAS 39, covering requirements and definitions, types of hedges (fair value, cash flow, and net investment hedges), their accounting treatments, and portfolio hedging. It explains the complexities of this crucial aspect of financial reporting.

What are the keywords associated with this document?

Key words include IAS 39, financial instruments, fair value, amortized cost, hedge accounting, derivatives, financial assets, financial liabilities, equity instruments, initial recognition, subsequent measurement, derecognition, and impairment.