IAS 39

Overview and History

IAS 39: Financial Instruments: Recognition and Measurement was an international accounting standard which outlined the requirements for the recognition and measurement of financial assets, financial liabilities, and some contracts to buy or sell non-financial items. It was released by the International Accounting Standards Board in December 2003 as a revision of the original 1998 version. The standard was largely replaced in 2014 by IFRS 9, which became effective for annual periods beginning on or after 1 January 2018. Despite this replacement, IAS 39 remains relevant for entities that choose an accounting policy to continue to apply the hedge accounting requirements of IAS 39 instead of IFRS 9.

Adoption in the European Union

The standard was adopted by the European Union in 2004, though with a specific "carve-out" regarding macro-hedging requirements. In 2005, the EU also introduced the fair value and hedging provision of the amended version of IAS 39 to align with international practices.

Reclassification and Global Convergence

The EU version was changed at the end of 2008 in response to the 2008 financial crisis, allowing for the reclassification of certain financial instruments under stressed market conditions. The comparative accounting measures in the United States are provided by FAS 133 and FAS 157, which serve similar functions for recognition and measurement. The Financial Accounting Standards Board released a 'FASB Staff Position' statement in October 2008 to align fair value measurement practices with the IASB's guidance in response to the global crisis.

Illustrative Examples

1. Financial Assets at Fair Value Through Profit or Loss (FVTPL)

Scenario: An entity purchases shares for $10,000 for short-term trading. At year-end, the market value has increased to $11,500.

Event	Debit	Credit	Amount	Rationale
Purchase	Trading Assets	Cash	$10,000	Initially recognized at fair value.
Fair Value Gain	Trading Assets	Gain on Investment	$1,500	Fair value changes for trading assets go directly to P&L.
Balance 31.12.		Trading Asset	$11,500	Reported at current market value.

2. Held-to-Maturity (HTM) Investments

Scenario: An entity buys a bond for $50,000 with a fixed maturity and the intent to hold it. Effective interest earned for the period is $2,500.

Event	Debit	Credit	Amount	Rationale
Initial Recognition	HTM Investment	Cash	$50,000	Measured at cost plus transaction costs.
Amortized Interest	HTM Investment	Interest Income	$2,500	Measured at amortized cost using the effective interest method.
Balance 31.12.		HTM Asset	$52,500	Market value fluctuations are ignored for HTM.

3. Loans and Receivables

Scenario: An entity provides a loan of $20,000 to a customer. An impairment test at year-end suggests that only $18,000 is recoverable.

Event	Debit	Credit	Amount	Rationale
Issuance of Loan	Loans Receivable	Cash	$20,000	Initial recognition at fair value.
Impairment Loss	Bad Debt Expense	Loans Receivable	$2,000	Measured at amortized cost less impairment.
Balance 31.12.		Loan Balance	$18,000	Carrying amount reflects the incurred loss.

4. Available-for-Sale (AFS) Financial Assets

Scenario: An entity buys shares for $30,000 as a long-term investment. At year-end, fair value is $32,000.

Event	Debit	Credit	Amount	Rationale
Purchase	AFS Investment	Cash	$30,000	Initial recognition at fair value.
Fair Value Gain	AFS Investment	AFS Reserve	$2,000	Gains on AFS are recognized in equity.
Balance 31.12.		AFS Asset	$32,000	Reported at fair value, but gain is deferred in equity.

Disclosure Requirements (IAS 39)

IAS 39 establishes principles for recognizing and measuring financial assets, financial liabilities, and some contracts to buy or sell non-financial items. While most disclosures are in IFRS 7, the measurement categories defined here must be clearly identified.

Paragraph	Category	Disclosure Requirement	Description / Examples
IAS 39.9	Measurement Categories	Classification of Assets	Disclosure of financial assets into the four categories: FVTPL, Held-to-maturity, Loans and receivables, and Available-for-sale.
IAS 39.47	Measurement Categories	Liability Measurement	Classification of financial liabilities as either at fair value through profit or loss or measured at amortized cost.
IAS 39.71	Hedge Accounting	Hedging Instruments	Identification of the hedging instrument and the nature of the risk being hedged.
IAS 39.88	Hedge Accounting	Effectiveness Criteria	Disclosure of the method used to assess hedge effectiveness to justify the continuation of hedge accounting.
IAS 39.89-95	Hedge Accounting	Hedge Types	Classification of the hedge as a Fair Value Hedge, Cash Flow Hedge, or a Hedge of a Net Investment in a foreign operation.
IAS 39.58	Impairment	Objective Evidence	The nature and amount of any impairment loss recognized for financial assets carried at amortized cost.
IAS 39.AG8	Effective Interest	Amortized Cost Basis	The assumptions and calculation methods used for the effective interest rate to spread interest income/expense over the life of the instrument.