International Accounting Standard 39, Financial Instruments: Recognition and Measurement, IFRS

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International Accounting Standard (IAS) 39
Financial Instruments: Recognition and Measurement

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International Accounting Standard (IAS) 39

IAS 39
      Financial Instruments: Recognition and Measurement
      Issued in March 1999
      Revised in December 2003
      Recent amendment: by IFRS 3 revised in January 2008

Hedge Accounting

Financial Instruments: Recognition and Measurement

Initial recognition
--> A financial asset or financial liability is initially recognized at fair value.

Financial assets and financial liabilities are recognized
--> when the entity becomes a party to the contract

Subsequent measurement of financial assets
       --> financial assets are measured at fair value
       --> derivatives that are assets are measured at fair value

Exceptions:
      (1) held-to-maturity investments
           --> measured at amortised cost

      (2) loans and receivables
           --> measured at amortised cost

      (3) investments in equity instruments
           (whose fair value cannot be reliably measured)
           --> measured at cost

Subsequent measurement of financial liabilities
--> financial liabilities are measured at amortised cost

Exceptions:
      (1) financial liabilities at fair value through profit or loss
           --> measured at fair value

      (2) financial guarantee contracts
           --> measured at the higher of (2a) and (2b)
                 (2a) amount determined by IAS 37
                 (2b) initially recognized amount - cumulative amortisation

      (3) commitments to provide a loan at a below-market interest rate
           --> measured at the higher of (3a) and (3b)
                 (3a) amount determined by IAS 37
                 (3b) initially recognized amount - cumulative amortisation

Four categories of financial instruments
      (1) A financial asset or financial liability at fair value through profit or loss
      (2) Held-to-maturity investments
      (3) Available-for-sale financial assets
      (4) Loans and receivables

Reclassification
      (1) A reclassification into the fair value through profit or loss category
           --> not allowed
      (2) A reclassification out of the fair value through profit or loss category
           --> not allowed

A gain or loss on a financial asset or financial liability at fair value through profit or loss
--> recognized in profit or loss

A gain or loss on an available-for-sale financial asset
--> recognized in other comprehensive income

A gain or loss on financial assets and financial liabilities carried at amortised cost
--> recognized in profit or loss through amortisation process
--> recognized in profit or loss when they are derecognized or impaired

What is a derivative?

      A derivative is a financial instrument or other contract
      that has all of the following characteristics:

      (1) settled at a future date
      (2) requires no initial net investment or
           initial net investment required is smaller than
           what would normally be required in other contact types
      (3) its value changes
           --> as the value of an underlying variable changes.

Examples of underlying variables:
      (1) interest rate
      (2) foreign exchange rate
      (3) commodity price
      (4) price of a financial instrument
      (5) price index

Hedging, fair value hedge, cash flow hedge

IFRIC 19

      Extinguishing Financial Liabilities with Equity Instruments
      Issued in November 2009
      Clarification of IAS39.41

      Entity's own equity instruments issued
      --> to extinguish financial liability
      --> qualify as "consideration paid" in IAS39.41

      Equity instruments issued
      --> are measured at fair value

      If the fair value of equity instruments cannot be measured reliably
      --> use the fair value of financial liability extinguished

      Equity instruments are recognised
      --> at the date financial liability is extinguished

      The difference between (A) and (B) is recognised in profit or loss
      (A) carrying amount of financial liability extinguished
      (B) consideration paid

      Gain or loss recognised in this case is reported
      --> as a separate line item in profit or loss
      --> or in the notes

Derecognition of a financial liability
       IAS 39: paragraphs 39 - 42

       IAS39.39
       --> financial liability is removed from financial statements
             when it is extinguished
       --> financial liability is extinguished
             when the obligation is discharged, cancelled, expired

       IAS39.40
       In the following cases, existing financial liability is extinguished
       --> and new financial liability is recognised.
       (1) Exchange with debt instruments that have substantially different terms
       (2) Terms of existing financial liability are substantially modified

       IAS39.41
       --> The difference between (A) and (B) is recognised in profit or loss
       (A) carrying amount of financial liability extinguished or transferred
       (B) consideration paid

       IAS39.42
       When a part of a financial liability is repurchased,
       --> carrying amount of financial liability is allocated to each part
       --> based on fair value of each part, on the repurchase date

       The difference between (C) and (D) is recognised in profit or loss
       (C) carrying amount allocated to derecognised part
       (D) consideration paid

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