IFRS – IAS 39: Financial instruments: recognition and measurement

The International Accounting Standards Committee (IASC) released International Accounting Standard 39 (IAS 39) to address the topic of Recognition and Measurement of Financial Instruments.

IAS 39 applies to all financial instruments except for the following:

  • Interests in subsidiaries, associates, and joint ventures accounted for under IAS 27, IAS 28, or IAS 31; however IAS 39 applies in cases where under IAS 27, IAS 28 or IAS 31 such interests are to be accounted for under IAS 39. The standard also applies to derivatives on an interest in a subsidiary, associate, or joint venture
  • Employers’ rights and obligations under employee benefit plans to which IAS 19 applies
  • Contracts in a business combination to buy or sell an acquire at a future date
  • Rights and obligations under insurance contracts, except IAS 39 does apply to financial instruments that take the form of an insurance (or reinsurance) contract but that principally involve the transfer of financial risks and derivatives embedded in insurance contracts
  • Financial instruments that meet the definition of own equity under IAS 32
  • Financial instruments, contracts and obligations under share-based payment transactions to which IFRS 2 applies
  • Rights to reimbursement payments to which IAS 37 applies

The main types of financial instruments included within IAS 39 are

  • Leases – certain receivables, payables, and those with derivatives embedded
  • Most Financial Guarantee Contracts – most all instances, except those applicable to IFRS 4
  • Most Loan Commitments – unless can’t be settled for cash/financial instruments, not fair value financial liabilities on the P&L, and no past history of selling shortly after origination
  • Contracts to buy or sell financial items
  • Contracts to buy or sell non-financial items – if can be settled in cash/financial instruments and not purchased for the purpose of receiving non-financial items
  • Weather derivatives

IAS are principles based standards, rather than strict rules based standards that govern international accounting. IAS standards differ from IFRS standards in that they were introduced prior to 2001, whereas IFRS were produced after this date by the IASB, or the International Accounting Standards Board. When determining the hierarchy of these, the IAS is considered to be the building blocks in which the newer and more relevant IFRS are founded and therefore IFRS is more authoritative when these conflict.

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