IAS 39, or International Accounting Standard 39, “Financial Instruments: Recognition and Measurement,” is an accounting standard issued by the International Accounting Standards Board (IASB) that provides guidance on the recognition, measurement, and derecognition of financial instruments. Financial instruments include items such as financial assets, financial liabilities, and derivatives. Here are some examples of how IAS 39 may be applied in practice:
- Example 1: ABC Corp, a manufacturing company, holds a portfolio of investment securities.
ABC Corp classifies its investment securities as available-for-sale financial assets in accordance with IAS 39. The investment securities are initially recognized at their fair value, and subsequent changes in fair value are recognized in other comprehensive income. If there is objective evidence of impairment, such as a significant decline in the fair value of the investment securities, the impairment loss is recognized in profit or loss. When the investment securities are derecognized, such as when they are sold or otherwise disposed of, the accumulated fair value changes in other comprehensive income are reclassified to profit or loss.
- Example 2: XYZ Bank, a financial institution, issues a fixed-rate loan to a customer.
XYZ Bank classifies the fixed-rate loan as a financial asset at amortized cost in accordance with IAS 39. The loan is initially recognized at its fair value, which is the present value of the future cash flows expected to be collected, and subsequently measured at amortized cost using the effective interest rate method. The interest income is recognized over the term of the loan, and any impairment of the loan is recognized in profit or loss if there is objective evidence of impairment, such as the borrower’s financial difficulties.
- Example 3: DEF Ltd, a commodity trader, enters into a forward contract to hedge its exposure to commodity price fluctuations.
DEF Ltd classifies the forward contract as a derivative in accordance with IAS 39. The fair value of the derivative is recognized on the balance sheet, with subsequent changes in fair value recognized in profit or loss. If the forward contract is designated as a cash flow hedge and meets the hedge accounting criteria, the changes in fair value of the derivative are recognized in other comprehensive income to offset the changes in fair value of the hedged item. If the forward contract does not meet the criteria for hedge accounting, the changes in fair value are recognized in profit or loss.
It’s important to note that the specific application of IAS 39 may vary depending on the individual circumstances and accounting policies of each entity. Professional judgment and expertise may be required to properly apply the recognition, measurement, and derecognition requirements in IAS 39 and ensure compliance with the applicable accounting standards and regulations in the accounting for financial instruments.