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.IASB. IAS 39, Paragraph 1. It was released by the International Accounting Standards Board (IASB) in December 2003 as a revision of the original 1998 version.IASB. IAS 39, Paragraph IN1. The standard was largely replaced in 2014 by IFRS 9, which became effective for annual periods beginning on or after 1 January 2018.IASB. IFRS 9, Paragraph BC0.1. 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.IASB. IFRS 9, Paragraph 7.2.21.

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.IASB. IAS 39, Paragraph BC175. In 2005, the EU also introduced the fair value and hedging provision of the amended version of IAS 39 to align with international practices.IASB. IAS 39, Paragraph BC71.

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.IASB. IAS 39, Paragraph 50. The comparative accounting measures in the United States are provided by FAS 133 and FAS 157, which serve similar functions for recognition and measurement.IASB. IAS 39, Paragraph BC25. The Financial Accounting Standards Board (FASB) 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.IASB. IAS 39, Paragraph BC11E.

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 (SoFP) Cash $10,000 Initially recognized at fair value.IASB. IAS 39, Para 43. Fair Value Gain Trading Assets (SoFP) Gain on Investment (P&L) $1,500 Fair value changes for trading assets go directly to P&L.IASB. IAS 39, Para 55(a). 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 (SoFP) Cash $50,000 Measured at cost plus transaction costs.IASB. IAS 39, Para 43. Amortized Interest HTM Investment (SoFP) Interest Income (P&L) $2,500 Measured at amortized cost using the effective interest method.IASB. IAS 39, Para 46. 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 (SoFP) Cash $20,000 Initial recognition at fair value.Deloitte. IAS 39 Summary. Impairment Loss Bad Debt Expense (P&L) Loans Receivable (SoFP) $2,000 Measured at amortized cost less impairment.IASB. IAS 39, Para 58. 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 (not trading). At year-end, fair value is $32,000.

Event Debit Credit Amount Rationale Purchase AFS Investment (SoFP) Cash $30,000 Initial recognition at fair value.IASB. IAS 39, Para 43. Fair Value Gain AFS Investment (SoFP) AFS Reserve (OCI) $2,000 Gains on AFS are recognized in equity (Other Comprehensive Income).IASB. IAS 39, Para 55(b). 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.IASB. IAS 39.

Paragraph Category Disclosure Requirement Description / Examples IAS 39.9 Measurement Categories Classification of Assets Disclosure of financial assets into the four categories: (1) FVTPL, (2) Held-to-maturity, (3) Loans and receivables, and (4) Available-for-sale. IAS 39.47 Liability Measurement Classification of financial liabilities as either at fair value through profit or loss (FVTPL) or measured at amortized cost. IAS 39.71 Hedge Accounting Hedging Instruments Identification of the hedging instrument (e.g., a derivative) and the nature of the risk being hedged (e.g., interest rate or foreign exchange). IAS 39.88 Effectiveness Criteria Disclosure of the method used to assess hedge effectiveness (both prospective and retrospective) to justify the continuation of hedge accounting. IAS 39.89-95 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 (incurred loss model). IAS 39.AG8 Effective Interest Amortized Cost Basis The assumptions and calculation methods used for the effective interest rate (EIR) to spread interest income/expense over the life of the instrument.

References

External links Official IAS 39 Standard (IFRS Foundation) Summary of IAS 39 by Deloitte