assignment on International Accounting Standard 39

1. International
Accounting
Standard 39
RUQUIA SHAH
ISLAMIA UNIVERSITY BAHAWALPUR (DEP OF COMMERCE)

2. IAS 39 Financial Instruments: Recognition and
Measurement
The objective of this Standard is to establish principles for recognizing
and measuring financial assets, financial liabilities and some contracts to
buy or sell non-financial items at their fair value.
IAS 39 amends IAS 32 particularly with instructions related to so-called
"derivatives". These are, e.g. swaps, option contracts, futures, forwards or
complex, hybrid financial instruments which frequently serve for
speculation purposes as issued at 1 January 2012.
This extract has been prepared by IFRS Foundation staff and has not been approved by the IASB
because the impairment phase of the IFRS 9 project has not yet been completed.
In IFRS 9 most of the requirements for financial liabilities were carried forward unchanged from
IAS 39. However, some changes were made to the fair value option for financial liabilities to
address the issue of own credit risk (principles of Recognition and Measurement over a period of
time in IFRS 9 Financial Instruments in November 2009 and de-recognition of financial assets
and liabilities were added to IFRS 9 in October 2010).
In result, parts of IAS 39 are being superseded and will become obsolete for annual periods
beginning on or after 1 January 2013, earlier application is permitted in 2010. The remaining
requirements of IAS 39 continue in effect until superseded by future installments of IFRS 9. The
Board expects to replace IAS 39 in its entirety.
Initial Recognition
All financial assets and financial liabilities are recognized on the balance
sheet, including all derivatives as assets and liabilities in their statement of
financial position.
IAS 39 provides the following examples of how to apply the principles
 Unconditional receivables and payables are recognized as assets or
liabilities when the entity becomes a party to the contract and, as a
consequence, has a legal right to receive or a legal obligation to pay cash.
 Assets to be acquired and liabilities to be incurred as a result of a firm commitment to
purchase or sell goods or services are generally not recognized until at least one of the
parties has performed under the agreement. For example, an entity that receives a firm
order does not generally recognize an asset (and the entity that places the order does not
recognize a liability) at the time of the commitment but, rather, delays recognition until
the ordered goods or services have been shipped, delivered or rendered. If a firm
Financial instrument
Any contract that gives
rise to both a financial
asset of one entity and a
financial liability or
equity instrument of
another entity.
Financial asset
Any asset that is cash,
or a contractual right
to receive cash or
another financial asset
from another entity or
to exchange financial
instruments with
another entity, or an
equity instrument of
another Entity.

3. commitment to buy or sell non-financial items is within the scope of this Standard its net
fair value is recognized as an asset or liability on the commitment date. In addition, if a
previously unrecognized firm commitment is designated as a hedged item in a fair value
hedge, any change in the net fair value attributable to the hedged risk is recognized as an
asset or liability after the inception of the hedge
 A forward contract that is within the scope of this Standard is recognized as an asset or a
liability on the commitment date, rather than on the date on which settlement takes place.
When an entity becomes a party to a forward contract, the fair values of the right and
obligation are often equal, so that the net fair value of the forward is zero. If the net fair
value of the right and obligation is not zero, the contract is recognized as an asset or
liability.
 Option contracts that are within the scope of this Standard are recognized as assets or
liabilities when the holder or writer becomes a party to the contract.
 Planned future transactions, no matter how likely, are not assets and liabilities because
the entity has not become a party to a contract.
Initial Measurement
All financial instruments are measured initially at fair value, directly attributable transaction
costs are added to or deducted from the carrying value of those financial instruments that are not
subsequently measured at fair value
through profit or loss.
 Fair value
“The amount for which an asset could be exchanged or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction” (IAS 39 paragraph 9)
 Directly attributable transaction costs
Incremental costs that is directly attributable to the acquisition, issue or disposal of a
financial asset or financial liability.
An enterprise will recognize normal purchases of securities in the market place either at trade
date or settlement date. If settlement date accounting is used, IAS 39 requires recognition of
certain value changes between trade and settlement dates so that the income statement effects are
the same for all enterprises.
Subsequent measurement of financial assets
For the purpose of measuring a financial asset after initial recognition, this Standard classifies
financial assets into the following four categories
 Financial assets at fair value through profit or loss;
 Held-to-maturity investments;
 Loans and receivables; and
 Available-for-sale financial assets.

4. Subsequent Measurement of Financial Liabilities
After initial recognition, an entity shall measure all financial liabilities at amortized cost using
the effective interest method, except for:
 Financial liabilities at fair value through profit or loss. Such liabilities, including derivatives
that are liabilities, shall be measured at fair value except for a derivative liability that is
linked to and must be settled by delivery of an unquoted equity instrument whose fair value
cannot be reliably measured, which shall be measured at cost.
 Financial liabilities that arise when a transfer of a financial asset does not qualify for de
recognition or when the continuing involvement approach applies.
 financial guarantee contracts after initial recognition, an issuer of such a contract shall
measure it at the higher of:
o the amount determined in accordance with IAS 37; and
o The amount initially recognized less, when appropriate, cumulative amortization
recognized in accordance with IAS 18.
 Commitments to provide a loan at a below-market interest rate. After initial recognition, an
issuer of such a commitment shall measure it at the higher of:
o The amount determined in accordance with IAS 37; and
o The amount initially recognized less, when appropriate, cumulative amortization
recognized in accordance with IAS 18.

5. Reclassification
Financial instruments at fair value through profit or loss
o Derivative financial instruments may not be reclassified out of this
category while it is held or issued.
o Any financial instrument designated into this category on initial
recognition may not be reclassified out of this category.
o May reclassify instruments that would have met the definition of
loans and receivables out of this category to loans and receivables
if the entity has the intention and ability to hold for the foreseeable future or until
maturity. Any gain or loss already recognized in profit or loss is not reversed. The fair
value on date of reclassification becomes the new cost or amortized cost.
o May reclassify instruments to held to maturity or available for sale in rare
circumstances.
Derivative financial
Instrument
Instrument that creates
rights and obligations
with the effect of
transferring one or
more of the
financial risks inherent
in an underlying
primary
financial instrument.

6. o May not reclassify a financial instrument into the fair value through profit or loss
category after initial recognition.
Held to maturity instruments
o If no longer appropriate to classify investment as held to maturity, reclassify as
available for sale and re measure to fair value
o Difference between carrying amount and fair value recognized in equity
o Prohibited from classifying any instruments as HTM in the current and following two
financial years.
Available for sale instruments
o May reclassify instruments that would have met the definition of loans and
receivables out of this category to loans and receivables if the entity has the intention
and ability to hold for the foreseeable future or until maturity.
Financial instruments measured at cost as unable to reliably measure fair
value
o If a reliable fair value measure becomes available for which a fair value measure was
previously not available, the instrument is required to be measured at fair value.
o Difference between carrying amount and fair value recognized in equity for available
for sale instruments.
o Difference between carrying amount and fair value recognized in profit or loss for
financial instruments measured at fair value through profit or loss.
Fair value measurement is no longer reliably measureable
o If a financial instrument currently carried at fair value subsequently has to be carried
at cost or amortized cost because fair value is no longer reliably measurable, the fair
value carrying amount at that date becomes the new cost or deemed cost.
o Prior gain/loss on financial asset with no fixed maturity recognized in equity remains
in equity until the financial asset is derecognized at which time it is released to profit
or loss.
IMPAIRMENT
Assess at each reporting date whether there is objective evidence that a financial asset (group of
financial assets) is impaired. If there is evidence of impairment then following procedures should
be considered:
Financial assets at amortized cost
o Amount of the loss is measured as the difference between the asset’s carrying amount
and the present value of estimated future cash flows discounted using the asset’s
original effective interest rate. Future credit losses that have not been incurred are
excluded.
o The carrying amount of the asset is reduced either directly or through the use of an
allowance account.
o The impairment loss is recognized in profit or loss.
o Reversals of impairment are recognized in profit or loss. Reversals cannot result in a
carrying amount that exceeds what the amortized cost would have been had no
impairment been recognized.

7. Financial assets at cost
o Amount of the loss is measured as the difference between the asset’s carrying amount
and the present value of estimated future cash flows discounted at the current market
rate of return for a similar financial asset.
Available for sale financial assets
o When a decline in the fair value of the asset has been recognized directly in OCI and
there is objective evidence that the asset is impaired, the cumulative loss recognized
directly in OCI is removed from OCI and recognized in profit or loss.
o Subsequent reversals of impairment losses recognized in profit or loss on equity
instruments are recognized in OCI, not profit or loss
o Subsequent reversals of impairment losses recognized in profit or loss on debt
instruments are recognized in profit or loss.

8. Computation of Impairment of Asset

9. DERECOGNITION
De recognition of a Financial Asset
An enterprise should derecognize a financial asset when, and only when, the enterprise loses
control of the asset. An enterprise loses such control if it realizes the rights to benefits specified
in the contract, the rights expire, or the enterprise surrenders those rights. If this derecognition
criteria is not satisfied, the transferor accounts for the transaction as a collateralized borrowing.
In that case, the transferor's right to reacquire the asset isn't a derivative.
If the position of either the transferor or transferee indicates that the transferor has retained
control, the transferor shouldn't remove the asset from its balance sheet.
A transferor has not lost control if, for example:
 the transferor has the right to reacquire the transferred asset unless either
o The asset is readily obtainable or
o The reacquisition price is fair value at the time of reacquisition;
 The transferor is both entitled and obligated to repurchase or redeem the transferred asset on
terms that effectively provide the transferee with a lender's return on the assets received in
exchange for the transferred asset. A lender's return is one that isn't materially different from
that which could be obtained on a loan to the transferor that is fully secured by the
transferred asset; or
 The asset transferred isn't readily obtainable and the transferor has retained substantially all
of the risks and returns of ownership through a total return swap with the transferee or has
retained substantially all of the risks of ownership through an unconditional put option on the
transferred asset held by the transferee.

11. De recognition of a financial liability
A financial liability (or part of it) is extinguished when the debtor either:
 Discharges the liability (or part of it) by paying the creditor, normally with cash, other
financial assets, goods or services; or
 Is legally released from primary responsibility for the liability (or part of it) either by
process of law or by the creditor. (If the debtor has given a guarantee this condition may
still be met.)
Hedge Accounting
Hedge accounting may be applied if, and only if, all the following criteria are
met:
o At the inception of the hedge there is formal designation and
documentation of the hedging relationship and the entity’s risk
management objective and strategy for undertaking the hedge.
o The hedge is expected to be highly effective (80 – 125 % effective) in
achieving offsetting changes in fair value or cash flows attributable to
the hedged risk, consistently with the originally documented risk management strategy
for that particular hedging relationship.
o For cash flow hedges, a forecast transaction that is the subject of the hedge must be
highly probable and must present an exposure to variations in cash flows that could
ultimately affect profit or loss.
o The effectiveness of the hedge can be reliably measured, i.e., the fair value or cash flows
of the hedged item that are attributable to the hedged risk and the fair value of the
hedging instrument can be reliably measured.
o The hedge is assessed on an ongoing basis and determined actually to have been highly
effective throughout the financial reporting periods for which the hedge was designated.
Hedging
Action taken with
the object of
avoiding or
minimizing the
possible
adverse effects of
movements in
exchange rates or
market prices.

12. CASH FLOW HEDGE
 Definition
A hedge of the exposure to variability in cash flows that
o Is attributable to a particular risk associated with a recognized asset or liability (such
as all or some future interest payments on variable rate debt) or a highly probable
forecast transaction and
o Could affect profit or loss
 The portion of the gain or loss on the hedging instrument that is determined to be an effective
hedge is recognized in OCI; and the ineffective portion of the gain or loss on the hedging
instrument is recognized in profit or loss.
 If the hedge results in the recognition of a financial asset or a financial liability, the
associated gains or losses that were recognized in OCI are reclassified from equity to profit
or loss as a reclassification adjustment in the same period(s) during which the asset acquired
or liability assumed affects profit or loss.
 If the hedge results in the recognition of a non-financial asset or a nonfinancial liability, then
the entity has an accounting policy election of either:
o Reclassifying the associated gains and losses that were recognized in OCI to profit or
loss as a reclassification adjustment in the same period or periods during which the

13. asset acquired or liability assumed affects profit or loss (such as in the periods that
depreciation expense or cost of sales is recognized.
o Removing the associated gains and losses that were recognized in OCI and including
them in the initial cost or other carrying amount of the asset or liability.
 Cash flow hedge accounting is discontinued prospectively if:
o The hedging instrument expires or is sold, terminated or exercised (net amount
recognized in OCI remains in equity until forecast transaction occurs and is then
treated as described above).
o The hedge no longer meets the criteria set out in the above block (net amount
recognized in OCI remains in equity until forecast transaction occurs and is then
treated as described above).
o The forecast transaction is no longer expected to occur (net amount recognized in
OCI is transferred immediately to profit and loss as a reclassification adjustment).
o The entity revokes the designation (net amount recognized in OCI remains in equity
until forecast transaction occurs and is then treated as described above).
FAIR VALUE HEDGE
Definition
A hedge of the exposure to changes in fair value of a recognized asset or liability or an
unrecognized firm commitment, or an identified portion of such an asset, liability or firm
commitment, that is attributable to a particular risk and could affect profit or loss
 Gain/loss from re measuring the hedging instrument at fair value or the foreign
 currency component of its carrying amount is recognized in profit or loss
 Gain/loss on the hedged item attributable to the hedged risk adjusts the carrying
 amount of the hedged item and is recognized in profit or loss
 Fair value hedge accounting is discontinued prospectively if:
o The hedging instrument expires or is sold, terminated or exercised.
o The hedge no longer meets the criteria set out above
o The entity revokes the designation.

14.  Where hedge accounting is discontinued, adjustments to the carrying amount of
 A hedged financial asset for which the effective interest rate is used are amortized to profit or
loss. The adjustment is based on a recalculated effective interest rate at the date amortization
begins.
HEDGE OF A NET INVESTMENT IN A FOREIGN OPERATION
Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is
accounted for as part of the net investment, are accounted for similarly to cash flow hedges:
 The portion of the gain or loss on the hedging instrument that is determined to be an effective
hedge is recognized in equity; and
 The ineffective portion is recognized in profit or loss.
The gain or loss on the hedging instrument relating to the effective portion of the hedge that has
been recognized in OCI is reclassified from equity to profit or loss as a reclassification.

15. DESIGNATION OF NON-FINANCIAL ITEMS AS HEDGED ITEMS
If the hedged item is a non-financial asset or nonfinancial liability, it is designated as a hedged
item, either:
 For foreign currency risks
 In its entirety for all risks, because of the difficulty of isolating and measuring the appropriate
portion of the cash flows or fair value changes attributable to specific risks other than foreign
currency risks.
NOVATION OF DERIVATIVES
Hedge accounting continues for negated derivatives so long as:
 The novation is a consequence of laws or regulations (or the introduction of laws or
regulations)
 The parties to the hedging instrument agree that one or more clearing counterparties replace
their original counterparty to become the new counterparty of each party.
 Any changes to the hedging instrument are limited only to those that are necessary to effect
such a replacement of the counterparty (including changes in the collateral requirements,
rights to offset receivable and payable balances, charges levied.)