IAS 39 Financial Instruments: Recognition and Measurement

IAS 39 was superseded by IFRS 9 subject to:

• the accounting policy choice about whether or not to continue applying the hedge accounting requirements in IAS 39 in accordance with paragraph 7.2.21 or paragraph 6.1.3 of IFRS 9; and
• the temporary exemption in paragraph 20A of IFRS 4 that provides a temporary exemption to some insurers from applying IFRS 9 until they apply IFRS 17.

IAS 39 establishes principles for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. It also prescribes principles for derecognising financial instruments and for hedge accounting. The presentation and the disclosure of financial instruments are the subjects of IAS 32 and IFRS 7 respectively.

Recognition and derecognition

A financial instrument is recognised in the financial statements when the entity becomes a party to the financial instrument contract. An entity removes a financial liability from its statement of financial position when its obligation is extinguished. An entity removes a financial asset from its statement of financial position when its contractual rights to the asset’s cash flows expire; when it has transferred the asset and substantially all the risks and rewards of ownership; or when it has transferred the asset, and has retained some substantial risks and rewards of ownership, but the other party may sell the asset. The risks and rewards retained are recognised as an asset.

Measurement

A financial asset or financial liability is measured initially at fair value. Subsequent measurement depends on the category of financial instrument. Some categories are measured at amortised cost, and some at fair value. In limited circumstances other measurement bases apply, for example, certain financial guarantee contracts.

The following are measured at amortised cost:

• held to maturity investments—non-derivative financial assets that the entity has the positive intention and ability to hold to maturity;
• loans and receivables—non-derivative financial assets with fixed or determinable payments that are not quoted in an active market; and
• financial liabilities that are not carried at fair value through profit or loss or otherwise required to be measured in accordance with another measurement basis.

The following are measured at fair value:

• financial assets and financial liabilities held for trading—this category includes derivatives not designated as hedging instruments and financial assets and financial liabilities that the entity has designated for measurement at fair value. All changes in fair value are reported in profit or loss.
• available for sale financial assets—all financial assets that do not fall within one of the other categories. These are measured at fair value. Unrealised changes in fair value are reported in other comprehensive income. Realised changes in fair value (from sale or impairment) are reported in profit or loss at the time of realisation.

IAS 39 sets out the conditions where special hedge accounting is permitted, and the procedures for doing hedge accounting.

In April 2001 the International Accounting Standards Board (Board) adopted IAS 39 Financial Instruments: Recognition and Measurement, which had originally been issued by the International Accounting Standards Committee (IASC) in March 1999. That Standard had replaced the original IAS 39 Financial Instruments: Recognition and Measurement, which had been issued in December 1998. That original IAS 39 had replaced some parts of IAS 25 Accounting for Investments, which had been issued in March 1986.

In December 2003 the Board issued a revised IAS 39 as part of its initial agenda of technical projects. The revised IAS 39 also incorporated an Implementation Guidance section, which replaced a series of Questions & Answers that had been developed by the IAS 39 Implementation Guidance Committee.

Following that, the Board made further amendments to IAS 39:

(a)            in March 2004, to enable fair value hedge accounting to be used for a portfolio hedge of interest rate risk;

(b)            in June 2005, relating to when the fair value option could be applied;

(c)             in July 2008, to provide application guidance to illustrate how the principles underlying hedge accounting should be applied;

(d)            in October 2008, to allow some types of financial assets to be reclassified; and

(e)             in March 2009, to address how some embedded derivatives should be measured if they were previously reclassified.

In August 2005 the Board issued IFRS 7 Financial Instruments: Disclosures. Consequently, the disclosure requirements that were in IAS 39 were moved to IFRS 7.

In September 2019 the Board amended IFRS 9 and IAS 39 by issuing Interest Rate Benchmark Reform to provide specific exceptions to hedge accounting requirements in IFRS 9 and IAS 39 for (a) highly probable requirement; (b) prospective assessments; (c) retrospective assessment (IAS 39 only); and (d) separately identifiable risk components. Interest Rate Benchmark Reform also amended IFRS 7 to add specific disclosure requirements for hedging relationships to which an entity applies the exceptions in IFRS 9 or IAS 39.

In August 2020 the Board issued Interest Rate Benchmark Reform―Phase 2 which amended requirements in IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 relating to:

•                changes in the basis for determining contractual cash flows of financial assets, financial liabilities and lease liabilities;

•                hedge accounting; and

•                disclosures.

The Phase 2 amendments apply only to changes required by the interest rate benchmark reform to financial instruments and hedging relationships.

Other Standards have made minor consequential amendments to IAS 39. They include IAS 1 Presentation of Financial Statements (issued September 2007), IAS 27 Consolidated and Separate Financial Statements (issued January 2008), Improvements to IFRSs (issued May 2008), Eligible Hedged Items (Amendment to IAS 39 Financial Instruments: Recognition and Measurement) (issued July 2008), Improvements to IFRSs (issued April 2009), IFRS 13 Fair Value Measurement (issued May 2011), Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (issued October 2012), Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39) (issued June 2013), IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), IFRS 15 Revenue from Contracts with Customers (issued May 2014) and IFRS 9 Financial Instruments (issued July 2014).

In response to requests from interested parties that the accounting for financial instruments should be improved quickly, the Board divided its project to replace IAS 39 into three main phases. As the Board completed each phase, it issued chapters in IFRS 9 that replaced the corresponding requirements in IAS 39. The Board had always intended that IFRS 9 Financial Instruments would replace IAS 39 in its entirety. However, IFRS 9 permits an entity to choose as its accounting policy either to apply the hedge accounting requirements of IFRS 9 or to continue to apply the hedge accounting requirements in IAS 39. Consequently, although IFRS 9 is effective (with limited exceptions for entities that issue insurance contracts and entities applying the IFRS for SMEs Standard), IAS 39, which now contains only its requirements for hedge accounting, also remains effective.