IAS 39: Financial Instruments: Recognition and Measure was first adopted by European Union for annual periods beginning on or after January 1st 2005. The goal was to provide principles for recognising and measuring financial assets, financial liabilities (including derivative financial instruments) and some specific contracts to buy and sell non-financial items. Initial Recognition: Financial asset or financial liability is only recognised on balance sheet when and only when, an entity becomes a party to contractual provisions of the instruments. Initial Measurement: At initial recognition, the financial asset or liability is measured at fair value. Directly attributable transaction cost are added to fair value for financial asset or financial liability not at fair value through profit or loss. Subsequent measurement of financial assets: IAS 39 classifies financial assets into following categories to determine their subsequent measurement criteria. (a) Initially recognized financial assets at fair value through profit or loss are subsequently measured at fair value without deducting any transaction cost. (b) Loans and receivables and held for maturity investments are measured at amortized cost using effective interest rate method (c) Available for sale assets are measured at cost if fair value cannot be reliably measured. Subsequent measurement of financial liabilities: All financial liabilities are measured at cost using effective interest method. Exceptions to this rule are financial liability at fair value through profit or loss, financial liability arising from transfer of financial asset that does not qualify for derecognition, financial guarantee contracts, and loans at below market rate. Derecognition: A financial liability is derecognized when the contract obligation is discharged or cancelled or expires. Derecognition of financial asset applies only when the contractual right to the cash flow from the asset expires or when the entity transfers all the risks and rewards of ownership of the asset.
In addition, IAS 39 contains extensive hedge accounting regulations especially for derivatives. Derivatives are classified as trading transactions and are valued at fair value. When derivatives are used to hedge risks, IAS 39 allows cash flow hedge and fair value hedge accounting. IAS 39 requires the documentation of hedge at the time hedge is established and calls for evidence of effective hedge. IAS 39 also requires derivatives that are embedded in no-derivative contracts to be accounted for separately at fair value through profit or loss. The replacement of IAS 39 with IFRS 9:
IAS 39 standard is by far one of the most complex standards issued. At their meeting in April 2009, the G20 nations called for standard setters to reduce the complexity of accounting standards for financial instruments and to address the issues arising from the financial crisis of 2008. Consequently, a major initiative was undertaken by IASB to replace IAS 39 with IFRS 9. All of the requirements of IAS 39 are planned to be replaced by the end of 2011. The new IFRS 9 standard is effective for annual periods beginning on or after January 1st 2013 with earlier adoption permitted. The IASB’s project plan for the replacement of IAS 39 with IFRS 9 consists of three main phases: (a) Phase 1: Classification and measurement
(b) Phase 2: Impairment methodology
(c) Phase 3: Hedge Accounting
Phase 1: Classification and measurement:
Phase 1 only deals with classification and measurement of financial assets and liabilities. This phase was completed in October 2010. While most of the standards are followed from IAS 39 to IFRS 9, followings are the notable differences.
(1) Classification of financial assets falls into two groups: Measured at fair value and measured at amortised cost. Available for sale and held to maturity category from IAS 39 are removed. (2) An asset is classified as measured at amortised cost if the objective of...