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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