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International Accounting Sta… IAS 39 — Financial Instruments: Recognition and M

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International Accounting
Standards

IAS 39 — Financial Instruments:

Recognition and Measurement
IAS 39 outlines the requirements for the recognition and measurement of financial ass
cial liabilities, and some contracts to buy or sell non-financial items. Financial instrum
initially recognised when an entity becomes a party to the contractual provisions of th
ment, and are classified into various categories depending upon the type of instrumen
then determines the subsequent measurement of the instrument (typically amortised
fair value). Special rules apply to embedded derivatives and hedging instruments. IAS
reissued in December 2003, applies to annual periods beginning on or after 1 January 2
will be largely replaced by IFRS 9 'Financial Instruments' for annual periods beginning
1 January 2018.

History of IAS 39
Date Development Commen

October 1984 Exposure Draft E26 Accounting for Investments

March 1986 IAS 25 Accounting for Investments Operative

nancial st
covering p
beginning
ter 1 Janu

September 1991 Exposure Draft E40 Financial Instruments

January 1994 E40 was modified and re-exposed as Exposure Draft

E48 Financial Instruments

June 1995 The disclosure and presentation portion of E48 was

adopted as IAS 32

March 1997 Discussion Paper Accounting for Financial Assets

and Financial Liabilities issued

June 1998 Exposure Draft E62 Financial Instruments: Comment

Recognition and Measurement issued 30 Septem
1998
December 1998 IAS 39 Financial Instruments: Recognition and Effective d
Measurement (1998) January 2

April 2000 Withdrawal of IAS 25 following the approval of IAS Effective f

40 Investment Property cial statem
covering p
beginning
ter 1 Janu

October 2000 Limited revisions to IAS 39 Effective d

January 2

17 December 2003 IAS 39 Financial Instruments: Recognition and Effective f

Measurement (2004) issued nual perio
ginning o
1 January

31 March 2004 IAS 39 revised to reflect macro hedging Effective f

nual perio
ginning o
1 January

17 December 2004 Amendment issued to IAS 39 for transition and ini-

tial recognition of profit or loss

14 April 2005 Amendment issued to IAS 39 for cash flow hedges Effective f
of forecast intragroup transactions nual perio
ginning o
1 January

15 June 2005 Amendment to IAS 39 for fair value option Effective f

nual perio
ginning o
1 January

18 August 2005 Amendment to IAS 39 for financial guarantee Effective f

contracts nual perio
ginning o
1 January

22 May 2008 IAS 39 amended for Annual Improvements to IFRSs Effective f

2007 nual perio
ginning o
1 January

30 July 2008 Amendment to IAS 39 for eligible hedged items Effective f

nual perio
ginning o
1 July 200
 13 October 2008 Amendment to IAS 39 for reclassifications of finan- Effective 1
cial assets 2008

12 March 2009 Amendment to IAS 39 for embedded derivatives on Effective f

reclassifications of financial assets nual perio
ginning o
1 July 200

16 April 2009 IAS 39 amended for Annual Improvements to IFRSs Effective f

2009 nual perio
ginning o
1 January

12 November 2009 IFRS 9 Financial Instruments issued, replacing the Original e

classification and measurement of financial assets date 1 Jan
provisions of IAS 39 2013, late
ferred an
quently re

28 October 2010 IFRS 9 Financial Instruments reissued, incorporating Original e

new requirements on accounting for financial liabili- date 1 Jan
ties and carrying over from IAS 39 the requirements 2013, late
for derecognition of financial assets and financial ferred an
liabilities quently re

27 June 2013 Amended by Novation of Derivatives and Effective f

Continuation of Hedge Accounting nual perio
ginning o
1 January
(earlier ap
permitted

19 November 2013 IFRS 9 Financial Instruments (Hedge Accounting and Applies w

amendments to IFRS 9, IFRS 7 and IAS 39) issued, 9 is applie
permitting an entity to elect to continue to apply the
hedge accounting requirements in IAS 39 for a fair
value hedge of the interest rate exposure of a por-
tion of a portfolio of financial assets or financial lia-
bilities when IFRS 9 is applied, and to extend the fair
value option to certain contracts that meet the 'own
use' scope exception

24 July 2014 IFRS 9 Financial Instruments issued, replacing IAS 39 Effective f

requirements for classification and measurement, nual perio
impairment, hedge accounting and derecognition ginning o
1 January

* IFRS 9 (2014) supersedes IFRS 9 (2009), IFRS 9 (2010) and IFRS 9 (2013), but these standards remain available for app
relevant date of initial application is before 1 February 2015.

# When an entity first applies IFRS 9, it may choose as its accounting policy choice to continue to apply the hedge acco
quirements of IAS 39 instead of the requirements of Chapter 6 of IFRS 9. The IASB currently is undertaking a project o
hedge accounting which is expected to eventually replace these sections of IAS 39.

Related Interpretations
IFRIC 16 Hedge of a Net Investment in a Foreign Operation
IFRIC 12 Service Concession Arrangements
IFRIC 9 Reassessment of Embedded Derivatives
IAS 39 (2003) superseded SIC-33 Consolidation and Equity Method – Potential Voting Ri
Allocation of Ownership Interest

Amendments under consideration by the IAS

Financial instruments — Macro hedge accounting
IBOR reform and the effects on financial reporting — Phase 1
IBOR reform and the effects on financial reporting — Phase 2

Summary of IAS 39
Deloitte guidance on IFRSs for financial instruments

iGAAP 2012: Financial Instruments

Deloitte (United Kingdom) has developed iGAAP 2012: Financial Instruments –

and related Standards (Volume B) and iGAAP 2012: Financial Instruments – I
related Standards (Volume C), which have been published by LexisNexis. These
tions are the authoritative guides for financial instruments accounting under IFRS
two titles go beyond and behind the technical requirements, unearthing common
and problems, and providing views, interpretations, clear explanations and exam
enable the reader to gain a sound understanding of the standards and an apprec
their [Link] iGAAP 2012 Financial Instruments books can be purchas
through [Link]/deloitte.

Scope
Scope exclusions

IAS 39 applies to all types of financial instruments except for the following, which are scoped
IAS 39: [IAS 39.2]

interests in subsidiaries, associates, and joint ventures accounted for under IAS 27 Cons
and Separate Financial Statements, IAS 28 Investments in Associates, or IAS 31 Interests
Ventures (or, for periods beginning on or after 1 January 2013, IFRS 10 Consolidated Fin
Statements, IAS 27 Separate Financial Statements or IAS 28 Investments in Associates a
Ventures); however IAS 39 applies in cases where under those standards such interests
accounted for under IAS 39. The standard also applies to most derivatives on an interes
sidiary, associate, or joint venture
employers' rights and obligations under employee benefit plans to which IAS 19 Employ
applies
forward contracts between an acquirer and selling shareholder to buy or sell an acquire
result in a business combination at a future acquisition date
rights and obligations under insurance contracts, except IAS 39 does apply to financial i
that take the form of an insurance (or reinsurance) contract but that principally involve
of financial risks and derivatives embedded in insurance contracts
financial instruments that meet the definition of own equity under IAS 32 Financial Instr
Presentation
 financial instruments, contracts and obligations under share-based payment transactio
IFRS 2 Share-based Payment applies
rights to reimbursement payments to which IAS 37 Provisions, Contingent Liabilities and
Contingent Assets applies

Leases

IAS 39 applies to lease receivables and payables only in limited respects: [IAS 39.2(b)]

IAS 39 applies to lease receivables with respect to the derecognition and impairment pr
IAS 39 applies to lease payables with respect to the derecognition provisions
IAS 39 applies to derivatives embedded in leases.

Financial guarantees

IAS 39 applies to financial guarantee contracts issued. However, if an issuer of financial guara
tracts has previously asserted explicitly that it regards such contracts as insurance contracts
used accounting applicable to insurance contracts, the issuer may elect to apply either IAS 39
Insurance Contracts to such financial guarantee contracts. The issuer may make that election
by contract, but the election for each contract is irrevocable.

Accounting by the holder is excluded from the scope of IAS 39 and IFRS 4 (unless the contrac
surance contract). Therefore, paragraphs 10-12 of IAS 8 Accounting Policies, Changes in Acco
Estimates and Errors apply. Those paragraphs specify criteria to use in developing an accoun
if no IFRS applies specifically to an item.

Loan commitments

Loan commitments are outside the scope of IAS 39 if they cannot be settled net in cash or an
nancial instrument, they are not designated as financial liabilities at fair value through profit
the entity does not have a past practice of selling the loans that resulted from the commitme
after origination. An issuer of a commitment to provide a loan at a below-market interest rat
quired initially to recognise the commitment at its fair value; subsequently, the issuer will rem
at the higher of (a) the amount recognised under IAS 37 and (b) the amount initially recognis
where appropriate, cumulative amortisation recognised in accordance with IAS 18. An issuer
commitments must apply IAS 37 to other loan commitments that are not within the scope of
(that is, those made at market or above). Loan commitments are subject to the derecognition
of IAS 39. [IAS 39.4]

Contracts to buy or sell financial items

Contracts to buy or sell financial items are always within the scope of IAS 39 (unless one of th
ceptions applies).

Contracts to buy or sell non-financial items

Contracts to buy or sell non-financial items are within the scope of IAS 39 if they can be settle
cash or another financial asset and are not entered into and held for the purpose of the rece
ery of a non-financial item in accordance with the entity's expected purchase, sale, or usage
ments. Contracts to buy or sell non-financial items are inside the scope if net settlement occ
lowing situations constitute net settlement: [IAS 39.5-6]

the terms of the contract permit either counterparty to settle net

there is a past practice of net settling similar contracts
there is a past practice, for similar contracts, of taking delivery of the underlying and sel
within a short period after delivery to generate a profit from short-term fluctuations in p
from a dealer's margin, or
the non-financial item is readily convertible to cash

Weather derivatives
Although contracts requiring payment based on climatic, geological, or other physical variab
erally excluded from the original version of IAS 39, they were added to the scope of the revis
December 2003 if they are not in the scope of IFRS 4. [IAS 39.AG1]

Definitions
IAS 39 incorporates the definitions of the following items from IAS 32 Financial Instruments:
Presentation: [IAS 39.8]
financial instrument
financial asset
financial liability
equity instrument.

Note: Where an entity applies IFRS 9 Financial Instruments prior to its mandatory application date (1 January 2015), de
following terms are also incorporated from IFRS 9: derecognition, derivative, fair value, financial guarantee contract. T
of those terms outlined below (as relevant) are those from IAS 39.

Common examples of financial instruments within the scope of IAS 39

cash
demand and time deposits
commercial paper
accounts, notes, and loans receivable and payable
debt and equity securities. These are financial instruments from the perspectives of
holder and the issuer. This category includes investments in subsidiaries, associates,
joint ventures
asset backed securities such as collateralised mortgage obligations, repurchase agree
and securitised packages of receivables
derivatives, including options, rights, warrants, futures contracts, forward contracts, a
swaps.

A derivative is a financial instrument:

Whose value changes in response to the change in an underlying variable such as an int
commodity or security price, or index;
That requires no initial investment, or one that is smaller than would be required for a c
with similar response to changes in market factors; and
That is settled at a future date. [IAS 39.9]

Examples of derivatives

Forwards: Contracts to purchase or sell a specific quantity of a financial instrument, a com

or a foreign currency at a specified price determined at the outset, with delivery or settlem
specified future date. Settlement is at maturity by actual delivery of the item specified in t
tract, or by a net cash settlement.

Interest rate swaps and forward rate agreements: Contracts to exchange cash flows as
specified date or a series of specified dates based on a notional amount and fixed and flo
rates.

Futures: Contracts similar to forwards but with the following differences: futures are gene
change-traded, whereas forwards are individually tailored. Futures are generally settled th
an offsetting (reversing) trade, whereas forwards are generally settled by delivery of the u
ing item or cash settlement.
 Options: Contracts that give the purchaser the right, but not the obligation, to buy (call op
sell (put option) a specified quantity of a particular financial instrument, commodity, or fo
currency, at a specified price (strike price), during or at a specified period of time. These ca
dividually written or exchange-traded. The purchaser of the option pays the seller (writer)
option a fee (premium) to compensate the seller for the risk of payments under the optio

Caps and floors: These are contracts sometimes referred to as interest rate options. An in
rate cap will compensate the purchaser of the cap if interest rates rise above a predeterm
(strike rate) while an interest rate floor will compensate the purchaser if rates fall below a
termined rate.

Embedded derivatives
Some contracts that themselves are not financial instruments may nonetheless have financia
ments embedded in them. For example, a contract to purchase a commodity at a fixed price
at a future date has embedded in it a derivative that is indexed to the price of the commodit

An embedded derivative is a feature within a contract, such that the cash flows associated w
ture behave in a similar fashion to a stand-alone derivative. In the same way that derivatives
accounted for at fair value on the balance sheet with changes recognised in the income state
must some embedded derivatives. IAS 39 requires that an embedded derivative be separate
host contract and accounted for as a derivative when: [IAS 39.11]

the economic risks and characteristics of the embedded derivative are not closely relate
of the host contract
a separate instrument with the same terms as the embedded derivative would meet the
of a derivative, and
the entire instrument is not measured at fair value with changes in fair value recognised
come statement

If an embedded derivative is separated, the host contract is accounted for under the approp
dard (for instance, under IAS 39 if the host is a financial instrument). Appendix A to IAS 39 pr
amples of embedded derivatives that are closely related to their hosts, and of those that are

Examples of embedded derivatives that are not closely related to their hosts (and therefore
separately accounted for) include:

the equity conversion option in debt convertible to ordinary shares (from the perspectiv
holder only) [IAS 39.AG30(f)]
commodity indexed interest or principal payments in host debt contracts[IAS 39.AG30(e
cap and floor options in host debt contracts that are in-the-money when the instrument
sued [IAS 39.AG33(b)]
leveraged inflation adjustments to lease payments [IAS 39.AG33(f)]
currency derivatives in purchase or sale contracts for non-financial items where the fore
rency is not that of either counterparty to the contract, is not the currency in which the
good or service is routinely denominated in commercial transactions around the world,
the currency that is commonly used in such contracts in the economic environment in w
transaction takes place. [IAS 39.AG33(d)]

If IAS 39 requires that an embedded derivative be separated from its host contract, but the e
able to measure the embedded derivative separately, the entire combined contract must be
as a financial asset as at fair value through profit or loss). [IAS 39.12]

Classification as liability or equity

Since IAS 39 does not address accounting for equity instruments issued by the reporting ent
it does deal with accounting for financial liabilities, classification of an instrument as liability
is critical. IAS 32 Financial Instruments: Presentation addresses the classification question.
Classification of financial assets
IAS 39 requires financial assets to be classified in one of the following categories: [IAS 39.45]

Financial assets at fair value through profit or loss

Available-for-sale financial assets
Loans and receivables
Held-to-maturity investments

Those categories are used to determine how a particular financial asset is recognised and m
the financial statements.

Financial assets at fair value through profit or loss. This category has two subcategories:

Designated. The first includes any financial asset that is designated on initial recognitio
be measured at fair value with fair value changes in profit or loss.
Held for trading. The second category includes financial assets that are held for trading
tives (except those designated hedging instruments) and financial assets acquired or he
purpose of selling in the short term or for which there is a recent pattern of short-term
ing are held for trading. [IAS 39.9]

Available-for-sale financial assets (AFS) are any non-derivative financial assets designated
recognition as available for sale or any other instruments that are not classified as as (a) loan
ceivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit o
[IAS 39.9] AFS assets are measured at fair value in the balance sheet. Fair value changes on A
are recognised directly in equity, through the statement of changes in equity, except for inter
assets (which is recognised in income on an effective yield basis), impairment losses and (for
bearing AFS debt instruments) foreign exchange gains or losses. The cumulative gain or loss
recognised in equity is recognised in profit or loss when an available-for-sale financial asset i
nised. [IAS 39.55(b)]

Loans and receivables are non-derivative financial assets with fixed or determinable payme
are not quoted in an active market, other than held for trading or designated on initial recog
assets at fair value through profit or loss or as available-for-sale. Loans and receivables for w
holder may not recover substantially all of its initial investment, other than because of credit
tion, should be classified as available-for-sale.[IAS 39.9] Loans and receivables are measured
tised cost. [IAS 39.46(a)]

Held-to-maturity investments are non-derivative financial assets with fixed or determinab

ments that an entity intends and is able to hold to maturity and that do not meet the definiti
and receivables and are not designated on initial recognition as assets at fair value through p
loss or as available for sale. Held-to-maturity investments are measured at amortised cost. If
sells a held-to-maturity investment other than in insignificant amounts or as a consequence
curring, isolated event beyond its control that could not be reasonably anticipated, all of its o
to-maturity investments must be reclassified as available-for-sale for the current and next tw
reporting years. [IAS 39.9] Held-to-maturity investments are measured at amortised cost. [IA

Classification of financial liabilities

IAS 39 recognises two classes of financial liabilities: [IAS 39.47]

Financial liabilities at fair value through profit or loss

Other financial liabilities measured at amortised cost using the effective interest metho

The category of financial liability at fair value through profit or loss has two subcategories:

Designated. a financial liability that is designated by the entity as a liability at fair value
profit or loss upon initial recognition
Held for trading. a financial liability classified as held for trading, such as an obligation
ties borrowed in a short sale, which have to be returned in the future
Initial recognition
IAS 39 requires recognition of a financial asset or a financial liability when, and only when, th
comes a party to the contractual provisions of the instrument, subject to the following provis
spect of regular way purchases. [IAS 39.14]

Regular way purchases or sales of a financial asset. A regular way purchase or sale of fina
sets is recognised and derecognised using either trade date or settlement date accounting. [
The method used is to be applied consistently for all purchases and sales of financial assets
to the same category of financial asset as defined in IAS 39 (note that for this purpose assets
trading form a different category from assets designated at fair value through profit or loss).
of method is an accounting policy. [IAS 39.38]

IAS 39 requires that all financial assets and all financial liabilities be recognised on the balanc
That includes all derivatives. Historically, in many parts of the world, derivatives have not bee
nised on company balance sheets. The argument has been that at the time the derivative co
entered into, there was no amount of cash or other assets paid. Zero cost justified non-recog
withstanding that as time passes and the value of the underlying variable (rate, price, or inde
the derivative has a positive (asset) or negative (liability) value.

Initial measurement
Initially, financial assets and liabilities should be measured at fair value (including transaction
assets and liabilities not measured at fair value through profit or loss). [IAS 39.43]

Measurement subsequent to initial recognition

Subsequently, financial assets and liabilities (including derivatives) should be measured at fa
with the following exceptions: [IAS 39.46-47]

Loans and receivables, held-to-maturity investments, and non-derivative financial liabili

be measured at amortised cost using the effective interest method.
Investments in equity instruments with no reliable fair value measurement (and derivat
dexed to such equity instruments) should be measured at cost.
Financial assets and liabilities that are designated as a hedged item or hedging instrume
ject to measurement under the hedge accounting requirements of the IAS 39.
Financial liabilities that arise when a transfer of a financial asset does not qualify for der
or that are accounted for using the continuing-involvement method, are subject to part
surement requirements.

Fair value is the amount for which an asset could be exchanged, or a liability settled, betwee
edgeable, willing parties in an arm's length transaction. [IAS 39.9] IAS 39 provides a hierarchy
in determining the fair value for a financial instrument: [IAS 39 Appendix A, paragraphs AG69

Quoted market prices in an active market are the best evidence of fair value and should
where they exist, to measure the financial instrument.
If a market for a financial instrument is not active, an entity establishes fair value by usi
tion technique that makes maximum use of market inputs and includes recent arm's len
transactions, reference to the current fair value of another instrument that is substantia
same, discounted cash flow analysis, and option pricing models. An acceptable valuatio
incorporates all factors that market participants would consider in setting a price and is
with accepted economic methodologies for pricing financial instruments.
If there is no active market for an equity instrument and the range of reasonable fair va
nificant and these estimates cannot be made reliably, then an entity must measure the
strument at cost less impairment.

Amortised cost is calculated using the effective interest method. The effective interest rate is
that exactly discounts estimated future cash payments or receipts through the expected life
nancial instrument to the net carrying amount of the financial asset or liability. Financial asse
not carried at fair value though profit and loss are subject to an impairment test. If expected
be determined reliably, then the contractual life is used.

IAS 39 fair value option

IAS 39 permits entities to designate, at the time of acquisition or issuance, any financial asse
cial liability to be measured at fair value, with value changes recognised in profit or loss. This
available even if the financial asset or financial liability would ordinarily, by its nature, be mea
amortised cost – but only if fair value can be reliably measured.

In June 2005 the IASB issued its amendment to IAS 39 to restrict the use of the option to des
financial asset or any financial liability to be measured at fair value through profit and loss (t
value option). The revisions limit the use of the option to those financial instruments that me
conditions: [IAS 39.9]

the fair value option designation eliminates or significantly reduces an accounting mism
a group of financial assets, financial liabilities or both is managed and its performance i
on a fair value basis by entity's management.

Once an instrument is put in the fair-value-through-profit-and-loss category, it cannot be rec

out with some exceptions. [IAS 39.50] In October 2008, the IASB issued amendments to IAS 3
amendments permit reclassification of some financial instruments out of the fair-value-throu
or-loss category (FVTPL) and out of the available-for-sale category – for more detail see IAS 3
the event of reclassification, additional disclosures are required under IFRS 7 Financial Instru
Disclosures. In March 2009 the IASB clarified that reclassifications of financial assets under th
2008 amendments (see above): on reclassification of a financial asset out of the 'fair value th
profit or loss' category, all embedded derivatives have to be (re)assessed and, if necessary, se
accounted for in financial statements.

IAS 39 available for sale option for loans and receivables

IAS 39 permits entities to designate, at the time of acquisition, any loan or receivable as avai
sale, in which case it is measured at fair value with changes in fair value recognised in equity

Impairment

A financial asset or group of assets is impaired, and impairment losses are recognised, only i
objective evidence as a result of one or more events that occurred after the initial recognitio
set. An entity is required to assess at each balance sheet date whether there is any objective
impairment. If any such evidence exists, the entity is required to do a detailed impairment ca
determine whether an impairment loss should be recognised. [IAS 39.58] The amount of the
measured as the difference between the asset's carrying amount and the present value of es
cash flows discounted at the financial asset's original effective interest rate. [IAS 39.63]

Assets that are individually assessed and for which no impairment exists are grouped with fi
sets with similar credit risk statistics and collectively assessed for impairment. [IAS 39.64]

If, in a subsequent period, the amount of the impairment loss relating to a financial asset car
amortised cost or a debt instrument carried as available-for-sale decreases due to an event o
after the impairment was originally recognised, the previously recognised impairment loss is
through profit or loss. Impairments relating to investments in available-for-sale equity instru
not reversed through profit or loss. [IAS 39.65]

Financial guarantees

A financial guarantee contract is a contract that requires the issuer to make specified payme
burse the holder for a loss it incurs because a specified debtor fails to make payment when d
[IAS 39.9]

Under IAS 39 as amended, financial guarantee contracts are recognised:

 initially at fair value. If the financial guarantee contract was issued in a stand-alone arm
transaction to an unrelated party, its fair value at inception is likely to equal the conside
ceived, unless there is evidence to the contrary.
subsequently at the higher of (i) the amount determined in accordance with IAS 37 Prov
Contingent Liabilities and Contingent Assets and (ii) the amount initially recognised less
propriate, cumulative amortisation recognised in accordance with IAS 18 Revenue. (If sp
teria are met, the issuer may use the fair value option in IAS 39. Furthermore, different
ments continue to apply in the specialised context of a 'failed' derecognition transaction

Some credit-related guarantees do not, as a precondition for payment, require that the holde
posed to, and has incurred a loss on, the failure of the debtor to make payments on the guar
set when due. An example of such a guarantee is a credit derivative that requires payments
to changes in a specified credit rating or credit index. These are derivatives and they must be
at fair value under IAS 39.

Derecognition of a financial asset

The basic premise for the derecognition model in IAS 39 is to determine whether the asset u
sideration for derecognition is: [IAS 39.16]

an asset in its entirety or

specifically identified cash flows from an asset or
a fully proportionate share of the cash flows from an asset or
a fully proportionate share of specifically identified cash flows from a financial asset

Once the asset under consideration for derecognition has been determined, an assessment
to whether the asset has been transferred, and if so, whether the transfer of that asset is sub
eligible for derecognition.

An asset is transferred if either the entity has transferred the contractual rights to receive the
flows, or the entity has retained the contractual rights to receive the cash flows from the asse
assumed a contractual obligation to pass those cash flows on under an arrangement that me
lowing three conditions: [IAS 39.17-19]

the entity has no obligation to pay amounts to the eventual recipient unless it collects e
amounts on the original asset
the entity is prohibited from selling or pledging the original asset (other than as security
eventual recipient),
the entity has an obligation to remit those cash flows without material delay

Once an entity has determined that the asset has been transferred, it then determines whet
has transferred substantially all of the risks and rewards of ownership of the asset. If substan
the risks and rewards have been transferred, the asset is derecognised. If substantially all the
rewards have been retained, derecognition of the asset is precluded. [IAS 39.20]

If the entity has neither retained nor transferred substantially all of the risks and rewards of
then the entity must assess whether it has relinquished control of the asset or not. If the ent
control the asset then derecognition is appropriate; however if the entity has retained contro
set, then the entity continues to recognise the asset to the extent to which it has a continuing
ment in the asset. [IAS 39.30]

These various derecognition steps are summarised in the decision tree in AG36.

Derecognition of a financial liability

A financial liability should be removed from the balance sheet when, and only when, it is exti
that is, when the obligation specified in the contract is either discharged or cancelled or expi
[IAS 39.39] Where there has been an exchange between an existing borrower and lender of d
ments with substantially different terms, or there has been a substantial modification of the
existing financial liability, this transaction is accounted for as an extinguishment of the origin
liability and the recognition of a new financial liability. A gain or loss from extinguishment of
financial liability is recognised in profit or loss. [IAS 39.40-41]

Hedge accounting
IAS 39 permits hedge accounting under certain circumstances provided that the hedging rela
[IAS 39.88]

formally designated and documented, including the entity's risk management objective
egy for undertaking the hedge, identification of the hedging instrument, the hedged ite
ture of the risk being hedged, and how the entity will assess the hedging instrument's e
and
expected to be highly effective in achieving offsetting changes in fair value or cash flows
able to the hedged risk as designated and documented, and effectiveness can be reliab
sured and
assessed on an ongoing basis and determined to have been highly effective

Hedging instruments

Hedging instrument is an instrument whose fair value or cash flows are expected to offset ch
the fair value or cash flows of a designated hedged item. [IAS 39.9]

All derivative contracts with an external counterparty may be designated as hedging instrum
for some written options. A non-derivative financial asset or liability may not be designated a
ing instrument except as a hedge of foreign currency risk. [IAS 39.72]

For hedge accounting purposes, only instruments that involve a party external to the reporti
can be designated as a hedging instrument. This applies to intragroup transactions as well (w
ception of certain foreign currency hedges of forecast intragroup transactions – see below). H
they may qualify for hedge accounting in individual financial statements. [IAS 39.73]

Hedged items

Hedged item is an item that exposes the entity to risk of changes in fair value or future cash
designated as being hedged. [IAS 39.9]

A hedged item can be: [IAS 39.78-82]

a single recognised asset or liability, firm commitment, highly probable transaction or a

ment in a foreign operation
a group of assets, liabilities, firm commitments, highly probable forecast transactions or
ments in foreign operations with similar risk characteristics
a held-to-maturity investment for foreign currency or credit risk (but not for interest risk
ment risk)
a portion of the cash flows or fair value of a financial asset or financial liability or
a non-financial item for foreign currency risk only for all risks of the entire item
in a portfolio hedge of interest rate risk (Macro Hedge) only, a portion of the portfolio of
assets or financial liabilities that share the risk being hedged

In April 2005, the IASB amended IAS 39 to permit the foreign currency risk of a highly probab
group forecast transaction to qualify as the hedged item in a cash flow hedge in consolidated
statements – provided that the transaction is denominated in a currency other than the func
rency of the entity entering into that transaction and the foreign currency risk will affect cons
nancial statements. [IAS 39.80]

In 30 July 2008, the IASB amended IAS 39 to clarify two hedge accounting issues:

inflation in a financial hedged item

a one-sided risk in a hedged item.

Effectiveness
IAS 39 requires hedge effectiveness to be assessed both prospectively and retrospectively. To
hedge accounting at the inception of a hedge and, at a minimum, at each reporting date, the
the fair value or cash flows of the hedged item attributable to the hedged risk must be expec
highly effective in offsetting the changes in the fair value or cash flows of the hedging instrum
prospective basis, and on a retrospective basis where actual results are within a range of 80%

All hedge ineffectiveness is recognised immediately in profit or loss (including ineffectiveness

80% to 125% window).

Categories of hedges

A fair value hedge is a hedge of the exposure to changes in fair value of a recognised asset
or a previously unrecognised firm commitment or an identified portion of such an asset, liab
commitment, that is attributable to a particular risk and could affect profit or loss. [IAS 39.86
gain or loss from the change in fair value of the hedging instrument is recognised immediate
or loss. At the same time the carrying amount of the hedged item is adjusted for the corresp
or loss with respect to the hedged risk, which is also recognised immediately in net profit or
[IAS 39.89]

A cash flow hedge is a hedge of the exposure to variability in cash flows that (i) is attributab
ticular risk associated with a recognised asset or liability (such as all or some future interest p
on variable rate debt) or a highly probable forecast transaction and (ii) could affect profit or l
[IAS 39.86(b)] The portion of the gain or loss on the hedging instrument that is determined to
fective hedge is recognised in other comprehensive income. [IAS 39.95]

If a hedge of a forecast transaction subsequently results in the recognition of a financial asse

nancial liability, any gain or loss on the hedging instrument that was previously recognised d
equity is 'recycled' into profit or loss in the same period(s) in which the financial asset or liab
profit or loss. [IAS 39.97]

If a hedge of a forecast transaction subsequently results in the recognition of a non-financial

non-financial liability, then the entity has an accounting policy option that must be applied to
hedges of forecast transactions: [IAS 39.98]

Same accounting as for recognition of a financial asset or financial liability – any gain or
hedging instrument that was previously recognised in other comprehensive income is 'r
into profit or loss in the same period(s) in which the non-financial asset or liability affect
loss.
'Basis adjustment' of the acquired non-financial asset or liability – the gain or loss on th
instrument that was previously recognised in other comprehensive income is removed
and is included in the initial cost or other carrying amount of the acquired non-financial
liability.

A hedge of a net investment in a foreign operation as defined in IAS 21 The Effects of Cha
Foreign Exchange Rates is accounted for similarly to a cash flow hedge. [IAS 39.102]

A hedge of the foreign currency risk of a firm commitment may be accounted for as a fa
hedge or as a cash flow hedge.

Discontinuation of hedge accounting

Hedge accounting must be discontinued prospectively if: [IAS 39.91 and 39.101]

the hedging instrument expires or is sold, terminated, or exercised

the hedge no longer meets the hedge accounting criteria – for example it is no longer eff
for cash flow hedges the forecast transaction is no longer expected to occur, or
the entity revokes the hedge designation

In June 2013, the IASB amended IAS 39 to make it clear that there is no need to discontinue h
counting if a hedging derivative is novated, provided certain criteria are met. [IAS 39.91 and I
For the purpose of measuring the carrying amount of the hedged item when fair value hedg
ing ceases, a revised effective interest rate is calculated. [IAS 39.BC35A]

If hedge accounting ceases for a cash flow hedge relationship because the forecast transacti
longer expected to occur, gains and losses deferred in other comprehensive income must be
profit or loss immediately. If the transaction is still expected to occur and the hedge relations
the amounts accumulated in equity will be retained in equity until the hedged item affects p
[IAS 39.101(c)]

If a hedged financial instrument that is measured at amortised cost has been adjusted for th
loss attributable to the hedged risk in a fair value hedge, this adjustment is amortised to pro
based on a recalculated effective interest rate on this date such that the adjustment is fully a
by the maturity of the instrument. Amortisation may begin as soon as an adjustment exists a
begin no later than when the hedged item ceases to be adjusted for changes in its fair value
able to the risks being hedged.

Disclosure
In 2003 all disclosures about financial instruments were moved to IAS 32, so IAS 32 was rena
Financial Instruments: Disclosure and Presentation. In 2005, the IASB issued IFRS 7 Financial
Instruments: Disclosures to replace the disclosure portions of IAS 32 effective 1 January 2007
also superseded IAS 30 Disclosures in the Financial Statements of Banks and Similar Financia
Institutions.

Related items

Other

 International Accounting Standards

Projects

 Financial instruments — Impairment  Financial instruments — Joint Working Group prop

 Financial instruments with characteristics of equity  IAS 32/IAS 39 – Amendments 2004-2

 IAS 32/IAS 39 – Improvements to IASC financial instruments standards

 IAS 39 — Cash flow hedge accounting of forecast intragroup transactions

 IAS 39 — Definition of a derivative

 IAS 39 – Definition of a derivative: Indexation on own EBITDA or revenue

 IAS 39 — Exposures qualifying for hedge accounting  IAS 39 — Fair value option

 IAS 39 — Identification of a portion of an exposure eligible for hedge accounting

 IAS 39 — Macro hedging  IAS 39 — Reassessment of embedded derivatives

 IAS 39 — Scope  IAS 39 – Securitisations: Derecognition of groups of financial assets

 IAS 39 — Transition and day 1 profit recognition

  IAS 39 — Transitional requirements on impairment of available-for-sale equity instruments

 IAS 39 — Items not added to the agenda  IAS 39/IAS 32 — Debt to equity swaps

 IAS 39/IAS 37 – Credit risk in liability measurement

 IAS 39/IFRS 4 – Financial guarantee contracts and credit insurance

 IAS 39/IFRS 7 – Reclassification of financial assets  Insurance contracts — Comprehensiv

 Financial instruments — Macro hedge accounting  Annual improvements — 2006-2008

 Annual improvements — 2007-2009 cycle  Financial instruments — Asset and liability off

 IBOR reform and the effects on financial reporting — Phase 2

 IBOR reform and the effects on financial reporting — Phase 1

 Financial instruments — Classification and measurement

 Financial instruments — Comprehensive project  Financial instruments — Derecognition

 Financial instruments — Disclosures  Financial instruments — General hedge accountin

Standards

 IAS 32 — Financial Instruments: Presentation  IFRS 7 — Financial Instruments: Disclosur

 IFRS 9 — Financial Instruments  IAS 39 — Financial Instruments: Recognition and Measu

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