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    International Accounting Standards Committee

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    shakeito
    This document summarizes the key points of IAS 39, the international accounting standard on financial instruments. It discusses the scope, recognition, measurement, impairment, hedge accounting and other major aspects of IAS 39. It also provides examples of implementation guidance being developed to help address questions around applying specific aspects of the standard. Overall, the document is intended to help accountants understand and implement the requirements of IAS 39.

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    International Accounting Standards Committee

    Uploaded by

    shakeito
    124 views54 pages
    This document summarizes the key points of IAS 39, the international accounting standard on financial instruments. It discusses the scope, recognition, measurement, impairment, hedge accounting and other major aspects of IAS 39. It also provides examples of implementation guidance being developed to help address questions around applying specific aspects of the standard. Overall, the document is intended to help accountants understand and implement the requirements of IAS 39.

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    This document summarizes the key points of IAS 39, the international accounting standard on financial instruments. It discusses the scope, recognition, measurement, impairment, hedge accounting and other major aspects of IAS 39. It also provides examples of implementation guidance being developed to help address questions around applying specific aspects of the standard. Overall, the document is intended to help accountants understand and implement the requirements of IAS 39.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    124 views54 pages

    International Accounting Standards Committee

    Uploaded by

    shakeito
    This document summarizes the key points of IAS 39, the international accounting standard on financial instruments. It discusses the scope, recognition, measurement, impairment, hedge accounting and other major aspects of IAS 39. It also provides examples of implementation guidance being developed to help address questions around applying specific aspects of the standard. Overall, the document is intended to help accountants understand and implement the requirements of IAS 39.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 54

    International Accounting

    Standards Committee

    Issues Under IAS 39


    AAA August 2000

    Presentation by
    Paul Pacter

    Hong Kong
    [email protected]

    IAS 39: SCOPE


    All enterprises
    All financial instruments
    except:
    -- Investments in subs,
    associates, joint ventures
    -- Leases, pensions, insurance
    -- Enterprises own equity
    -- Commodity contracts - intent
    to take delivery

    IAS 39: RECOGNITION


    All financial assets and
    liabilities must be on the
    balance sheet
    Including all derivatives

    TRADE DATE OR
    SETTLEMENT DATE?
    Purchases: Normal purchases
    either at trade or settlement
    date, with recognition of certain
    value changes if settlement date
    accounting is used.
    Sales: Settlement date.

    INITIAL MEASUREMENT:
    FINANCIAL ASSETS AND
    LIABILITIES
    Initially all financial
    instruments measured at cost
    (which is fair value at
    acquisition)
    Transaction cost included in
    initial measurement.

    SUBSEQUENT MEASUREMENT:

    FINANCIAL ASSETS
    All financial assets are
    remeasured to fair value
    (includes those held for trading
    or available for sale) except the
    following, which are measured at
    amortised cost . . .

    SUBSEQUENT
    MEASUREMENT AT COST

    Originated loans and


    receivables
    Fixed maturity investments:
    must intend and be able to hold
    to maturity
    Some unquoted equities and
    derivatives indexed to them (if
    FV is not measurable reliably)

    STRICT TESTS FOR HELD


    TO MATURITY

    Single sale taints all for two


    years -- unless sale is due to
    isolated event beyond
    companys control and not
    reasonably anticipated
    Variable rate debt can be HTM
    Note: Intent and ability tests do
    not apply to originated loans

    SUBSEQUENT MEASUREMENT:

    FINANCIAL LIABILITIES
    Most financial liabilities at
    original recorded amount less
    principal repayments and
    amortisation
    Derivatives and liabilities held
    for trading (short sales)
    remeasured to fair value

    REPORTING FV CHANGE:
    Single enterprise-wide option:
    Entire FV change in P&L OR
    In P&L only FV changes
    relating to trading assets and
    liabilities. FV changes for nontrading assets in equity until
    sold, then in P&L. Derivatives
    always trading (unless hedging)

    IMPAIRMENT OF FINANCIAL
    ASSETS CARRIED AT COST
    Recognise impairment losses
    Individually for large assets
    Portfolio allowed for groups
    Strict indicators of impairment
    Write-down to P&L
    Reversal to P&L up to cost
    Interest after impairment

    MEASURING IMPAIRMENT
    Impairment is the excess of
    carrying amount over
    estimated recoverable amount
    (present value of cash flows
    discounted at the loan's
    original effective interest rate).

    DERECOGNITION

    Assets: Control surrendered -transferee can sell or pledge


    the asset. Transferor can only
    reacquire at fair value.
    Liabilities: Debtor must be
    legally released. No insubstance defeasance.
    Partial transfer: Split based on
    relative FV.

    COLLATERAL
    If a debtor gives collateral to
    the creditor, and the creditor
    can sell or repledge:
    Debtor recognises the
    collateral given as a receivable
    Creditor recognises the
    collateral received as an asset
    and the obligation to repay the
    collateral as a liability.

    FINANCIAL GUARANTEES
    Not normally recognised
    under IAS 39 (eg letter of credit)
    Recognised in some
    derecognitions
    If recognised, measure at fair
    value until expiration

    HEDGE ACCOUNTING
    Designating a financial
    instrument as an offset to the
    change in FV or cash flows of
    an asset, liability, commitment,
    or forecasted transaction.
    Offsetting effects recognised in
    P&L in the same period.

    HEDGE ACCOUNTING
    Permitted by IAS 39 in certain
    circumstances. The hedging
    relationship must be:
    Clearly designated
    Measurable
    Actually effective

    FAIR VALUE HEDGE


    Hedge value change in a
    recognised asset or liability
    Gain or loss on hedging
    instrument and on hedged item
    are both recognised in P&L
    Carrying amount of hedged
    item is adjusted even if
    otherwise carried at cost

    CASH FLOW HEDGE


    Hedge cash flow risk from an
    asset or liability, firm
    commitment, or forecasted
    transaction
    Gain or loss on hedging
    instrument in equity until the
    hedged transaction hits P&L,
    then recycled to P&L

    DISCONTINUE HEDGE
    ACCOUNTING WHEN
    Hedging instrument expires
    (unless replaced or rolled over)
    Hedge is no longer effective
    The forecasted transaction (if
    any) is no longer expected to
    occur

    BASIS ADJUSTMENT
    When the forecasted
    transaction occurs, should the

    amount reported in equity


    become part of the cost of
    the asset or liability?
    IAS 39: Yes.

    DISCLOSURE - 1
    Most IAS 32 disclosures
    continue
    How FV was determined
    FV changes in P&L or equity?
    Current period amounts in
    P&L or equity
    Cumulative amounts in equity

    DISCLOSURE - 2
    Describe risk management
    policies
    Detailed Info if FV cannot be
    reliably measured
    Detailed info about hedges
    Reclassifications of financial
    instruments (e.g. HTM to AFS)
    Impairment and reversals

    EFFECTIVE DATE
    1 January 2001
    Companies are gearing

    up now
    Postponement
    probability: nil

    TRANSITION
    Recognise all financial assets
    and liabilities, including those
    that had not previously been
    recognised
    If a previously designated
    hedge does not meet IAS 39
    conditions, no more hedge
    accounting

    MAINTENANCE OF IAS 39
    Minor amendments to IAS 39:
    proposed in June
    Implementation Guidance
    Q&A: Special Implementation
    Guidance Committee is hard at
    work. Over 100 Q&A exposed.

    E66 JUNE 2000

    Minor Amendments to IAS 39


    Symmetry of trade or
    settlement date for both
    purchases and sales.
    Lender will no longer
    recognise collateral received
    from a borrower. Disclose.
    Assess impairment
    individually for large assets.

    IMPLEMENTATION GUIDANCE
    Being developed by IASC staff
    Reviewed by Implementation
    Guidance Committee (IGC)
    Exposed for public comment
    Reviewed and approved by
    IGC

    IMPLEMENTATION GUIDANCE
    Proposed Guidance:
    Batch 1, 8 May 2000: 75 Q&A
    Batch 2,12 May 2000: 33 Q&A
    Batch 3 dealing with bank
    issues under development
    Goal: finish by October
    Status: Best practice guidance

    SAMPLE GUIDANCE ISSUES


    Are credit rating guarantee
    contracts excluded? No.
    Are credit default derivatives
    excluded? Yes.
    Is gold bullion a financial
    asset? No.
    Are offsetting loans, one fixed
    one variable, a derivative? Yes.

    SAMPLE GUIDANCE ISSUES


    Company sells a put on its own
    shares, and has right to settle in
    shares. Liability or equity? Eq.
    What if holder of put has right
    to require cash settlement? Liab.
    Are royalties based on volume
    of revenue a derivative? No.
    Contract to convert currency at
    fixed rate -- derivative? Yes.

    SAMPLE GUIDANCE ISSUES


    Is fixed price forward contract
    to purchase a commodity a
    derivative? Depends on intent.
    Is 5-year put option to sell
    building for fixed price a
    derivative? Depends on history.
    Are bank loan commitments
    derivatives? Yes, but not treated
    if regular way draw-down.

    SAMPLE GUIDANCE ISSUES


    If embedded is separated from
    host, show separately on
    balance sheet? Yes.
    Can investment in convertible
    bond be HTM? No.
    Transferor has right of first
    refusal. Derecognise? Yes.
    HTM not tainted by sale close
    to maturity. What is close?
    Under 3 months.

    SAMPLE GUIDANCE ISSUES


    HTM not tainted by sale after
    collecting substantially all
    principal. Substantially = 90%.
    Does reclass from HTM to
    trading taint all HTM? Yes.
    Is amortisation of premium or
    discount interest (P&L) or part
    of FV change (equity)? Interest.

    SAMPLE GUIDANCE ISSUES


    Can impairment of individual
    loan or HTM asset be ignored
    by a portfolio approach? No.
    Can partial term hedging get
    hedge accounting? Yes.
    Do bank internal hedges get
    hedge accounting? Only if risk
    ultimately laid off with 3rd party.

    SAMPLE GUIDANCE ISSUES


    Can hedge effectiveness be
    assessed on after-tax basis?
    Yes.
    If hedge is considered highly
    (but not 100%) effective, does
    ineffective portion go to equity?
    No, P&L.
    Is purchase of bond when
    issued an originated loan? Yes.

    SAMPLE GUIDANCE ISSUES


    Is commitment to issue debt at
    fixed rate accounted for as a
    derivative? No.
    Derecognise receivables sold
    with guarantee for all credit
    losses? Yes.
    Amortise discount or premium
    on variable rate investment to
    next repricing date or maturity?
    Depends on intent to hold.

    JOINT WORKING GROUP ON


    FINANCIAL INSTRUMENTS
    IASC and 10 standard setters
    Exploring full fair value model
    Developing proposal by end of
    2000
    Each standard-setter will invite
    comments on JWG discussion
    paper

    KEY TENTATIVE JWG


    CONCLUSIONS
    Applies to all enterprises
    Scope similar to IAS 39, but:
    -- Includes financial guarantee
    contracts
    -- Includes weather derivatives
    -- Applies to acquired servicing
    assets and liabilities
    -- Applies to any obligation that
    either party can settle in cash

    KEY TENTATIVE JWG


    CONCLUSIONS
    Recognition of financial
    instruments: similar to IAS 39
    Embedded derivative
    provisions are similar to IAS 39
    except will be fewer separations
    because more hybrids are
    measured at fair value

    KEY TENTATIVE JWG


    CONCLUSIONS
    Derecognition: when enterprise
    is no longer a party to the
    contractual rights or
    obligations (transferor has no
    continuing interest)

    KEY TENTATIVE JWG


    CONCLUSIONS
    Would derecognise in most
    repo and securities lending
    transactions.
    Note: Transferee must have
    substance in its own right or
    transferred asset is isolated in
    bankruptcy.

    KEY TENTATIVE JWG


    CONCLUSIONS
    Measure all financial
    instruments at fair value when
    recognised initially.
    Remeasure to fair value at
    each reporting date.

    KEY TENTATIVE JWG


    CONCLUSIONS
    Fair value is exit price based on
    market transactions
    Best: observed market price
    If exchange traded, closing
    price minus commissions
    If dealer traded, bid prices for
    assets, asked prices for
    liabilities

    KEY TENTATIVE JWG


    CONCLUSIONS
    Best: market price for identical
    instrument.
    If not available, use price for
    similar instrument.
    If more than one market, use
    most advantageous price.

    KEY TENTATIVE JWG


    CONCLUSIONS
    If no market price for identical
    or similar, use a DPV cash flow
    model based on general market
    info (interest rates, FX rates,
    commodity prices) riskadjusted as necessary.
    If not able to make reliable FV
    estimate currently, use most
    recent FV estimate.

    KEY TENTATIVE JWG


    CONCLUSIONS
    Ignore non-contractual
    aspects of financial instruments
    (such as future deposits by
    depositors or additional
    purchases by credit card
    holders).
    But do consider behavioural
    expectations (eg prepayments).

    KEY TENTATIVE JWG


    CONCLUSIONS
    If financial instrument is
    denominated in foreign
    currency:
    For forward contract use
    forward rate
    For all others use spot rate

    KEY TENTATIVE JWG


    CONCLUSIONS
    Do not adjust market price for
    size of holding.
    Procedures for determining
    fair value must be documented.
    Fair values are generally
    determinable, at reasonable
    cost, and are practicably
    implementable.

    KEY TENTATIVE JWG


    CONCLUSIONS
    Reported value of liabilities
    should reflect changes in an
    enterprises own
    creditworthiness.

    KEY TENTATIVE JWG


    CONCLUSIONS
    All gains and losses arising
    from changes in fair value of
    financial instruments reported
    in net income when they arise.
    Interest revenue and interest
    expense should be calculated
    on a fair value basis using
    current YTM, not contractual.

    KEY TENTATIVE JWG


    CONCLUSIONS
    Separately report FV changes
    relating to impaired loan assets.
    All forms of hedge accounting
    prohibited, including hedges of
    commitments or forecasted
    transactions. Certain hedging
    note disclosures allowed.

    CONCLUSION
    The participating JWG
    countries are committed to
    invite comments
    None has said they accept or
    reject the JWG conclusions
    IASC consideration will await
    the new restructured IASC
    Board

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