International Accounting Standards 39

Grasping Accounting Standards Without Falling Asleep

Alright, let’s chat about how International Accounting Standards (IAS) 39 evolved into the more user-friendly International Financial Reporting Standard (IFRS) 9, without making it dry as dust.

The Journey of IAS 39

IAS 39, officially titled Financial Instruments: Recognition and Measurement, saw the light of day in 2003. Issued by the International Accounting Standards Board (IASB), this standard set the rules for identifying and valuing financial toys like assets, liabilities, and certain contracts (IFRS Foundation). It also outlined the dos and don’ts for getting rid of these instruments and laying out how to account for hedges.

Though pretty thorough, IAS 39 was often slammed for being too darn complicated, leaving companies entangled in complex calculations for many financial instruments. But hey, it did set a solid groundwork for financial instrument-related accounting practices across the globe.

Key Points About IAS 39 (The Good, The Bad, and The Ugly)

• It dealt with recognizing and measuring financial assets and liabilities.
• Allowed hedge accounting only under certain conditions.
• Re-released in December 2003 and applied from January 1, 2005, onward.

Feature	What It Means
Recognition	Spotting and including financial items in statements.
Measurement	Figuring out their value continuously.
Derecognition	Kicking out financial items when needed.
Hedge Accounting	Letting you use hedge accounting under specific rules.

Got curiosity? Dig deeper into how recognizing and measuring these assets works over in international accounting standards.

IFRS 9 Makes An Entrance

Cue 2014: Enter IFRS 9, set to replace the convoluted IAS 39 starting 2018. It aimed to simplify the chaos, making the classification, measurement, impairment, and hedge accounting of financial stuff less of a headache.

IFRS 9 came up with a clearer classification system based on how you manage your financial assets and their cash flow characteristics. It also rolled out the “expected credit loss” model, which lets you spot credit losses way earlier.

Cool Stuff in IFRS 9

• A streamlined model for classifying and measuring financial assets.
• The expected credit loss model for early spotting of credit losses.
• Easier and improved hedge accounting rules.

Curious about how these standards shuffle the financial reporting scene? Check out the UK accounting standards to see how these transitions play out.

Understanding the shift from IAS 39 to IFRS 9 helps you tame the beast of accounting standards and stay on top of the latest rules. For more nitty-gritty details, dive into international accounting standards 37 and international accounting standards 16.

And there you have it—accounting standards made just a tad less boring. Keep crunching those numbers!

What’s Up with IAS 39?

IAS 39 lays down the rules for financial instruments, making sure everyone plays fair with their numbers. Knowing the ins-and-outs of IAS 39 is a must if you want to stay on the right side of the books.

What’s Covered?

IAS 39 isn’t shy—it deals with all sorts of financial tools, except for a few no-go zones. Here’s the lowdown:

• Financial assets
• Financial liabilities
• Certain contracts to buy or sell non-financial items

You’ve got to recognize financial instruments as soon as the ink is dry on the contract. Then, these instruments get sorted into categories, which tells you if they should be measured at amortized cost or fair value. This scoops up stuff like embedded derivatives and hedging instruments.

Commonly Dealt Instruments:

• Financial Assets: Think cash, shares in another company, and rights to get cash or another asset.
• Financial Liabilities: These mean you owe cash or another asset.

What’s Not?

While IAS 39 covers a lot, it doesn’t do everything. Here’s what it skips:

• Leases: Lease payments and receivables mostly dance to the tune of IAS 17 or IFRS 16.
• Financial Guarantees: You can go with IAS 39 or IFRS 4—your choice.
• Loan Commitments: Only included if they’re net settled and you’re not flipping them right after issuing.

Financial Thingy	IAS 39 Coverage	Notes
Leases	Halfway	Mostly under IAS 17/IFRS 16
Financial Guarantees	Optional	Can be counted under IAS 39 or IFRS 4
Loan Commitments	Nope	Unless net settled, and you’re not expecting to sell right after they originate

Some contracts to buy or sell non-financial stuff are covered if they can be settled with cash or other financial assets and aren’t just for delivery. Weather derivatives? They’re in there too if not already handled by IFRS 4.

For more detailed rules and regs, check out our international accounting standards section. Understanding this stuff is key to playing by the financial rules.

Mastering IAS 39 helps you stay on top of financial instrument recognition and measurement. Need more on related standards? Take a gander at our pieces on IAS 36 and IAS 19. Keep those numbers in line and your financial world will stay smooth!

Key Components of IAS 39

IAS 39 sets the ground rules for recognizing and measuring financial instruments. Let’s break this down: We’ll tackle financial asset classification, fair value measurement, and derecognition principles. So, let’s get to it!

Financial Asset Classification

IAS 39 splits financial assets into categories that dictate their treatment. It’s like sorting your socks; each type has its own drawer:

1. Financial Assets at Fair Value through Profit or Loss (FVTPL): These assets are kind of like stocks you might buy and sell for quick gains. Any change in value goes straight to your profit or loss sheet.
2. Loans and Receivables: Think of this as money you’ve lent to others. They’re measured using the effective interest method, not bouncing around with market prices.
3. Held-to-Maturity Investments: These assets are like your savings bonds, held until they mature, and measured at amortized cost.
4. Available-for-Sale Financial Assets: These are like your backup investments, maybe those you’ll sell eventually. Their value changes go into equity, not straight into profit or loss.

Here’s a handy cheat sheet:

Category	Measurement	Changes in Value Recognised
FVTPL	Fair Value	Profit or Loss
Loans and Receivables	Amortised Cost	Not applicable
Held-to-Maturity Investments	Amortised Cost	Not applicable
Available-for-Sale Financial Assets	Fair Value	Equity

Check out more, if you’re curious, about how financial instruments are classified in international accounting standards.

Fair Value Measurement

Alright, let’s talk fair value measurement. It’s a big deal in IAS 39, especially for FVTPL and available-for-sale assets:

1. Initial Recognition: You start with the fair value plus transaction costs, unless you’re dealing with FVTPL assets.
2. Subsequent Measurement: Based on which drawer you’ve put your asset in, it’s either tracked at amortized cost or fair value. For fair value, changes go to profit or loss or equity.
3. Quotations in Active Markets: If there’s an active market, you use the observable prices for identical assets or liabilities. Simple!

Need more on valuation stuff? Peek at UK accounting standards.

Derecognition Principles

Derecognition is like clearing items off your balance sheet. IAS 39 sets the terms:

Financial Assets:

• Transferred Assets: Say goodbye to an asset when you’ve transferred all risks and rewards or lost control over it.
• Retained Risks and Rewards: If you’re still hanging onto most risks and rewards, you can’t derecognize the asset.

Financial Liabilities: A liability gets wiped from your books when it’s settled, canceled, or expired.

These rules help make sure financial statements really show what’s happening. Want a deep dive? Head to international accounting standard 36.

Understanding these IAS 39 basics helps keep your financial reporting spot-on with international accounting standards.

How IAS 39 Works in Real Life

IAS 39, or “Financial Instruments: Recognition and Measurement,” is a big deal in the accounting world. It’s all about how we handle financial instruments like assets and liabilities. We’re going to break down its real-world uses, focusing on hedge accounting, impairment, and how to report and present these financial facts.

Let’s Talk Hedge Accounting

Hedge accounting under IAS 39 is like a safety net for your finances, but you have to play by some rules:

• Effectiveness: Your hedge needs to actually reduce risk, not just look good on paper.
• Documentation: You’ve got to have everything written down from the get-go.
• Consistency: Keep checking to make sure your hedge is doing its job over time.

IAS 39 cares about two kinds of hedges:

• Fair Value Hedges: These protect you from changes in the fair value of stuff you already own or owe.
• Cash Flow Hedges: These guard against swings in the cash flows of things you own, owe, or plan to buy or sell.

Want more? Check out our deep dive on international accounting standards 19.

Handling Impairment

IAS 39 doesn’t mess around when it comes to impairment. Here’s the deal:

• Objective Evidence: An asset’s value drops if something happens after you bought it.
• Assessment: Check for impairment every time you balance the books.
• Measurement: Note any losses if future cash flow predictions take a hit.

Some loans or receivables can be labeled as available-for-sale. They get measured at fair value, with value changes showing up in equity.

Reporting the Numbers

IAS 39 lays out clear rules for what you need to disclose and how to show it:

• Disclosure Requirements: Provide all details about risks tied to your financial instruments.
• Presentations: Show these financial instruments in a way that’s easy for people to understand.

Here’s a quick cheat sheet:

Requirement	What You Need to Share
Description of Financial Instruments	Explain what financial instruments you have
Risk Disclosure	Talk about credit risk, liquidity risk, and market risk
Fair Value	Share how you figure out fair value
Hedge Accounting	List what’s being hedged and how well the hedge is working

For more on this, see our guide on international accounting standard 36.

Getting a grip on IAS 39 is key for staying on the right side of the rules and keeping your finances in check. Want to dive deeper? Explore our resources on accounting standards and cost accounting standard.