International
Accounting standard(IAS) IAS-39
What is the International Accounting Standards (IAS-39)? Describes in details:
IAS-39 (International Accounting Standard 39) is a standard issued by the International Accounting Standards Board (IASB) that provides guidance on the recognition and measurement of financial instruments, including their classification, valuation, and disclosure in financial statements. It outlines how to account for financial assets, financial liabilities, and derivatives.
Key aspects of IAS 39 include:
1.Classification of Financial Instruments:
Financial Assets and Financial Liabilities:
Financial instruments are classified into different categories for recognition and measurement purposes, such as:
Financial assets at fair value through profit or loss:
These are financial assets held for trading or designated at fair value through profit or loss.
Loans and receivables:
These are non-derivative financial assets with fixed or determinable payments.
Held-to-maturity investments:
Non-derivative financial assets with fixed maturities that the entity has the intent and ability to hold to maturity.
Available-for-sale financial assets:
Financial assets that are not classified in the above categories and are available for sale.
Financial Liabilities:
IAS 39 also provides guidance on the classification of financial liabilities, with the default treatment being at amortized cost, unless they are classified as held for trading or designated at fair value through profit or loss.
2. Recognition and De recognition:
Recognition:
Financial instruments are recognized when the entity becomes a party to the contractual provisions of the instrument.
De recognition:
Financial assets are derecognized when the contractual rights to the cash flows from the asset expire or are transferred, and financial liabilities are derecognized when they are settled or extinguished.
3. Measurement of Financial Instruments:
Financial instruments are initially recognized at fair value (usually the transaction price). Subsequently, they may be measured at:
Fair value:
For instruments held for trading, derivatives, and available-for-sale financial assets.
Amortized cost:
For loans, receivables, and other financial liabilities, using the effective interest method.
4. Hedge Accounting:
IAS 39 provides guidance on hedge accounting, where derivatives or other financial instruments are used to hedge the risk of fluctuations in the value of assets, liabilities, or future cash flows. The standard allows for the deferral of gains and losses on hedging instruments under certain conditions, including cash flow hedges and fair value hedges.
5. Impairment of Financial Assets:
IAS 39 requires that financial assets, such as loans and receivables, be assessed for impairment. If there is objective evidence that an asset is impaired, an impairment loss must be recognized in the income statement. This applies to available-for-sale financial assets as well.
6. Derivatives and Embedded Derivatives:
IAS 39 provides specific guidance on how to account for derivatives (financial instruments whose value depends on the value of an underlying asset) and embedded derivatives (derivatives embedded in other financial contracts, such as convertible bonds).
7. Disclosures:
IAS 39 requires extensive disclosures about the nature and extent of risks arising from financial instruments, including risk management policies, fair value, credit risk, liquidity risk, and the classification of financial instruments.
In short, IAS 39 offers detailed guidelines on how to recognize, measure, and disclose financial instruments, including the use of derivatives, hedge accounting, and impairment, to ensure transparency and consistency in the reporting of financial assets and liabilities. However, it's important to note that IAS 39 was replaced by IFRS 9 starting in 2018, which introduced a new approach for classifying and measuring financial instruments.