ias+39+detailed+summary

8/13/2019 IAS+39+Detailed+Summary

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IAS 39 Detailed Summary

TABLE OF CONTENTS

SCOPE I

FINANCIAL ASSETS CATEGORIES II

MEASUREMENT OF FINANCIAL ASSETS AND LIABILITIES III

DERIVATIVES IV

EDGING V

TRADE DATE VS! SETTLEMENT DATE VI

DERECOGNITION VII


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I! SCOPE

IAS 39 should be applied by allenterprises to allfinancial instruments e"#e$t:

a. Interests in subsidiaries, associates, and joint ventures that are accounted for under

IAS 27, Consolidated Financial Statements and Accounting for Investments inSubsidiaries IAS 2!, Accounting for Investments in Associates and IAS 3",

Financial Reporting of Interests in Joint Ventures, respectively, u%le&&the near#term disposal or the severe lon$#term restrictions e%ceptions applies

b. &i$hts and obli$ations under leases 'IAS "7 applies( '()e*er, IAS 39 d(e&a$$ly to 'i( dereco$nition of lease receivables reco$ni)ed by a lessor a%d 'ii(derivatives that are embedded in leases

c. *mployers+ assets and liabilities under employee benefit plans 'IAS "9(d. Insurance contracts e"#e$tderivatives embedded in insurance contractse. *uity instruments (+ t'e i&&ui%, e%ter$ri&e -%(t t'e '(ldi%, e%ter$ri&e.

includin$ options and -arrantsf. inancial $uarantee contracts, includin$ /0s, $uaranteein$ payment default a%d

the holder of the contract is the party that is e%posed to a loss in the case of non#payment. I% #(%tra&t, financial $uarantee contracts are subject to IAS 39 if theyprovide for payments to be made in response to chan$es in an underlyin$ 'e.$.,credit do-n$rade(

$. 0ontracts for contin$ent consideration in a business combination a%dh. 0ontracts that reuire a payment based on climate, $eolo$ical, or other physical

variables, e"#e$t +(rembedded derivatives in such contracts.

II! FINANCIAL ASSETS CATEGORIES

Tradi%,1 an asset or liability, includin$ derivatives, acuired or incurred principallyfor the purpose of $eneratin$ a profit from short#term fluctuations in price or dealer+smar$in. Also included are assets re$ardless of the reason acuired that are part of a

portfolio for -hich there is evidence of a recent actual pattern of short#term profit#tain$ 'i.e., assets can be transferred to radin$(. Assets cannot be transferred out ofradin$.

4erivatives 'see definition in section I5( are al-ays deemed radin$ unless they aredesi$nated as 6ed$es. he term 6ed$es and 6ed$in$ Instruments used in thisdocument refer to instruments that are effective hed$es for accountin$ purposes.

'inancial instruments may be used as hed$es economically but yet may not meet thestrict criteria for 6ed$e Accountin$(

radin$ /iabilities include:a. derivative liabilities that aren+t 6ed$in$ Instruments a%d

b. the obli$ation to deliver securities borro-ed by a short seller.

eld/t(/Maturity -0TM0. # financial assets -ith fi%ed or determinable paymentsand fi%ed maturity that an enterprise has the positive intent and ability to hold tomaturity other than loans and receivables ori$inated by the enterprise.

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Intent and AbilityAn enterprise is %(tdeemed to have the positive intent to hold to maturity i+ a%y (%eof the follo-in$ conditions is met 'not all#inclusive(:

a. the intent is to hold for an undefined period

b. the enterprise -ill readily sell in response to chan$es in: interest rates or riss,liuidity needs, the availability of and the yield on alternative investments,financin$ sources and terms, or forei$n currency ris (r

c. the issuer can settle the financial asset si$nificantly belo- amorti)ed cost.

An enterprise doesn+t have a demonstrated ability to hold to maturity an investment ina financial asset -ith a fi%ed maturity if 'not all#inclusive(:

a. it doesn+t have the financial resources available to continue to finance theinvestment until maturity (r

b. it is subject to an e%istin$ le$al or other constraint that could frustrate its intention

to hold the financial asset to maturity.

0all eaturesA callable financial asset can be classified as 6 if the holder intends and is able tohold it until it is called or until maturity a%dif the holder -ould recover substantiallyall of its carryin$ amount. he call option is simply a possible acceleration ofmaturity.

8ut eaturesA puttable financial asset is classified as a 6 investment only if the holder has the

positive intent and ability to hold it until maturity a%dnot to e%ercise the put feature.

Sale *%ceptionshe 6 cate$orymay %(t 1e u&edif the enterprise has, durin$ the current financialyear or durin$ the t-o precedin$ financial years, sold, transferred, or e%ercised a putoption on 6 investments before maturity e"#e$t i+the:

a. amount sold is insi$nificant in relation to the entire portfoliob. sale is close enou$h to maturity or to e%ercised call date so that chan$es in the

maret rate of interest don+t have a si$nificant effect on the financial asset+s fairvalue

c. sale occurs after the enterprise has collected substantially all of the financialasset+s ori$inal principal throu$h scheduled payments or prepayments (rd. sale is due to an isolated event that is beyond the enterprise+s control and that is

non#recurrin$ a%dcouldn+t have been reasonably anticipated by the enterprise.

Sales before maturity could satisfy the above conditions, and therefore don+t uestionthe enterprise+s intent to hold other investments to maturity # if they are due to:

a. a si$nificant deterioration in the issuer+s credit-orthinessb. a chan$e in ta% la- that eliminates or si$nificantly reduces the ta%#e%empt status

of interest on the 6 investment

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c. a major business combination or major disposition 'such as sale of a se$ment( thatnecessitates the sale or transfer of 6 investments to maintain the enterprise+se%istin$ interest rate ris position or credit ris policy

d. a chan$e in statutory or re$ulatory reuirements si$nificantly modifyin$ either-hat constitutes a permissible investment or the ma%imum level of certain inds

of investments, thereby causin$ an enterprise to dispose of a 6 investmente. a si$nificant increase by the re$ulator in the industry+s capital reuirements that

causes the enterprise to do-nsi)e by sellin$ 6 investments (rf. a si$nificant increase in the ris -ei$hts of 6 investments used for re$ulatory

ris#based capital purposes.

L(a%& a%d Re#ei*a1le& Ori,i%ated 1 loans and receivables ori$inated other thanthose -ith the intent to be sold immediately or in the short term, -hich should beclassified as radin$.

A loan acuired via loan participation is considered to be ori$inated by the

participatin$ lender provided it is funded by that lender on the date that the loan isori$inated by the other lender. Similarly, a loan acuired by syndication is anori$inated loan because each lender shares in the fundin$ and ris.

Some loans are in substance purchased loans althou$h they appear to be ori$inatedloans. or e%ample, a loan made to an unconsolidated S8* that in order to fund forthe S8*+s loan purchases.

A loan acuired by an enterprise in a business combination is considered to beori$inated by the acuirin$ enterprise provided that it -as similarly classified as such

by the acuired enterprise.

8urchased loans or receivables should be classified as radin$, 6 or Available#for#Sale, as appropriate.

A*aila1le/+(r/Sale -0AFS0.1 all other financial assets.

III! MEASUREMENT OF FINANCIAL ASSETS AND LIABILITIES

Fi%a%#ial A&&et&

inancial assets, includin$ derivatives, are reco$ni)ed initially at cost, includin$

transaction costs. Subseuently, they should be accounted for as follo-s:

radin$ 1 fair value and throu$h 8/.

6 1 amorti)ed cost usin$ the effective interest rate method.

/oans and &eceivables ri$inated ;ith(ut a i%ed aturity 1 cost.

/oans and &eceivables ri$inated ;ith a i%ed aturity 1 amorti)ed cost.

here is a presumption that fair value can be reliably determined for radin$ or AS

assets. 6o-ever, that presumption can be overcome for an euity investment thatdoesn+t have a uoted maret price in an active maret a%dfor -hich there are no


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appropriate or -orable methods of reasonably estimatin$ fair value. hepresumption can also be overcome for a derivative that is lined to and that must besettled by delivery of such an unuoted euity instrument.

AS 1 fair value and throu$h either: 'i( current 8/ (r'ii( euity, until the

financial asset is disposed of or determined to be impaired, at -hich time thecumulative $ain or loss previously reco$ni)ed in euity should be included in current8/. his #'(i#e (+ i%#(me (r e2uity +ir&t t'e% i%#(meshould made as a +irm/)ide $(li#ythat applies to all of its AS assets.

Subseuent and 8otential ransaction 0osts8otential transaction costs to sell are not considered in the of a radin$ or ASasset. 6o-ever, the actual transaction costs to purchase are considered as part of thecost of the asset.

Fi%a%#ial Lia1ilitie&

radin$ /iabilities, includin$ liabilities that are derivatives are recorded at fair value,e%cept for a derivative liability that is lined to and that must be settled by delivery ofan unuoted euity instrument -hose fair value cannot be reliably measured, -hichshould be measured at cost.

All financial liabilities other than radin$ /iabilities and 6ed$e liabilities arerecorded at amorti)ed cost.

F(rei,% Curre%#y E"#'a%,e Ri&&

orei$n e%chan$e $ains and losses on monetary financial assets and financialliabilities denominated in a forei$n currency are reported in 8/. his e%cludes thechan$e in fair value of a 0ash lo- 6ed$e due to forei$n e%chan$e rates, -hich-ould be accounted for as described in Section 5 of 6ed$in$ 1 0ash lo- 6ed$es.

N(%#monetary financial assets and financial liabilities 'e.$., euity investments andmandatorily redeemable preferred stoc issued by the reportin$ enterprise( arerecorded at cost.

Fair Value Mea&ureme%t C(%&iderati(%&

air value is reliably measurable for the follo-in$ instruments:

a. an actively publicly traded security -ith a published priceb. a debt rated by an independent ratin$ a$ency and -hose cash flo-s can bereasonably estimated a%d

c. a financial instrument for -hich there is an appropriate valuation model and for-hich the data inputs to that model come from active marets.

he appropriate uoted maret price for an asset held or liability to be issued isusually the current bid price and, for an asset to be acuired or liability held, thecurrent asin$ price. he price of the most recent transaction may be used absent a

bid or as price, provided no si$nificant chan$e in economic circumstances. id#maret prices may be used for matchin$ asset and liability positions.

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>uoted maret prices may not be indicative of fair value and may need to be adjustedin certain situations includin$:a. infreuent maret activity,

b. absence of a -ell established maret, andc. small tradin$ volumes relative to the number of tradin$ units to be valued 'a price

uotation for a lar$er bloc may be available from a maret maer(.

In situations -here a uote is unavailable or unreliable 'above( one of the follo-in$-ell#established estimation techniues may be used:a. reference to a substantially similar instrument,

b. discounted cash flo- analysis, (rc. option pricin$ models.

*stimation techniues should incorporate the assumptions that maret participants-ould use in their estimates of fair values, includin$ assumptions about prepaymentrates, rates of estimated credit losses, and interest or discount rates.

Im$airme%t a%d U%#(lle#ta1ility

?pon the balance sheet date, an enterprise should determine -hether there is@objective evidenced@ of an impairment of financial assets.

Impairment and ?ncollectability of inancial Assets &ecorded at 0ostIf it is probable that an enterprise -ill not be able to collect all amounts due 'principaland interest( accordin$ to the contractual terms, an impairment loss or bad debt losshas occurred. Ge%erally, the amount of the loss is the difference bet-een the asset+scarryin$ amount and the present value of e%pected future cash flo-s discounted at thefinancial instrument+s (ri,i%aleffective interest rate. he ori$inal effective interestrate is used as the discount rate because discountin$ at the current maret rate ofinterest -ould, in effect, impose fair#value measurement on the asset.

he follo-in$ are some e%ceptions to the $eneral rule above 'the impairment is thedifference bet-een the recorded amount and the measurement value belo-(:

A&&et Bei%, Te&t +(r Im$airme%t Mea&ureme%t Value

Asset carried at cost only because its fairvalue cannot be readily determinable

0ash flo-s discounted usin$ thecurrent maret rate

/oan, receivable, or 6 investment -ith avariable interest rate 0ash flo-s discounted usin$ thecurrent effective interest ratedetermined under the contract

Acceptable alternative to the above bservable maret rate

0ollaterali)ed asset -ith probable foreclosure air value of the collateral

;hichever discount rate is used for estimatin$ the recoverable amount is used toreco$ni)e interest income after an asset is -ritten do-n.


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Impairment of inancial Assets &emeasured to air 5alueIf a loss on a financial asset carried at fair value has been reco$ni)ed in euity andthere is objective evidence that the asset is impaired, the cumulative net loss that had

been reco$ni)ed in euity should be reco$ni)ed in current 8/.

&eversal of Impairment ;rite#do-nIf the facts and circumstances -arrant it, impairment -rite#do-ns may be reversed.he reversal -ould be recorded in current 8/.

Tra%&+er& Bet)ee% Fi%a%#ial A&&et Cate,(rie&

Tra%&+erred

Fr(m

Tra%&+erred

T(

A##(u%ti%,

radin$ 6 Bot allo-ed.

radin$ ri$inated /oans Bot allo-ed.

radin$ AS Bot allo-ed.

6 radin$ Asset is mared to fair value -ith the $ain or lossrecorded 8/ and accounted for prospectively as aradin$ Asset.

6 ri$inated /oans Bot allo-ed.

6 AS Asset is mared to fair value -ith the $ain or loss

recorded in either 'i( 8/ or 'ii( first in euity andthen reclassified to 8/ as the transaction affects8/ dependin$ upon the firm#-ide election made.

ri$inated /oans radin$ Asset is mared to fair value -ith the $ain or lossrecorded 8/ and accounted for prospectively as aradin$ Asset.

ri$inated /oans 6 Bot allo-ed.

ri$inated /oans AS Bot allo-ed.

AS radin$ Amounts previously recorded in euity arereclassed to 8/. he asset is accounted for

prospectively as a radin$ Asset.

AS 6 he fair value on the date of reclassificationbecomes the ne- amorti)ed cost. Any previousrelated $ain or loss reco$ni)ed in euity should beamorti)ed over the remainin$ life. Any difference

bet-een the ne- amorti)ed cost and maturityamount should be amorti)ed over the remainin$ lifeof the financial asset as an adjustment of yield.

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AS ri$inated /oans Bot allo-ed.

C'a%,e i% *aluati(% Met'(d(l(,y Ot'er T'a% Cate,(ry Re#la&&i+i#ati(%

Amorti)ed 0ost to air 5alueIf a reliable measure becomes available for a financial asset for -hich such a measure

previously -asn+t available, the difference bet-een its carryin$ amount and fair valueshould be accounted for:

a. in the case of a Tradi%, a&&et, in 8/ (rb. in the case of a AFS a&&et, in either 'i( 8/ or 'ii( first in euity and then

reclassified to 8/ as the transaction affects 8/ dependin$ upon the firm#-ideelection made.

air 5alue to Amorti)ed 0ostIf a reliable measure for a financial asset is no lon$er available, the fair value on thedate of reclassification becomes its ne- amorti)ed cost. Any previous related $ain or

loss reco$ni)ed in euity should be accounted for as follo-s:

c. in the case of a +i%a%#ial a&&et )it' a +i"ed maturity, a previous related $ain orloss reco$ni)ed in euity should be amorti)ed over the remainin$ life. Anydifference bet-een the ne- amorti)ed cost and maturity amount should beamorti)ed over the remainin$ life of the financial asset as an adjustment of yield(r

d. in the case of a +i%a%#ial a&&et t'at d(e& %(t 'a*e a +i"ed maturity, a previousrelated $ain or loss reco$ni)ed in euity should be left in euity until the financialasset has been sold or other-ise disposed of.

IV! DERIVATIVES

IAS 39 reuires that all derivatives be recorded on the balance as assets or liabilitiesand mared to maret. 6o-ever, special 6ed$e Accountin$ is provided -hen aderivative is used as a 6ed$e and certain criteria are met 'See section 5(.

De+i%iti(% (+ a Deri*ati*e

A derivative is a financial instrument:a. -hose value chan$es in response to the chan$e in an underlyin$

b. that reuires no initial net investment or little initial net investment relative to

other types of contracts that have a similar response to chan$es in maretconditions a%d

c. that is settled at a future date.

his standard shouldn+t be applied to commodity#based contracts that:a. -ere entered into and continue to meet the enterprise+s e%pected purchase, sale, or

usa$e reuirements,b. -ere desi$nated for that purpose at their inception, a%dc. are e%pected to be settled by deliveryaren+t considered derivatives, but rather e%ecutory contracts and thus, are e%cludedfrom IAS 39.

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0ommitments to buy or sell non#financial assets and liabilities that are intended to besettled by the reportin$ enterprise by main$ or tain$ delivery in the normal courseof business, and for -hich there is no practice of settlin$ net 'e.$., offsettin$contracts(, aren+t accounted for as derivatives but rather as e%ecutory contracts.

In a re$ular#-ay trade, the fi%ed#price commitment bet-een trade date and settlementdate is a for-ard contract that meets the definition of a derivative. 6o-ever, becauseof the short duration of the commitment, such a contract isn+t reco$ni)ed as aderivative.

Em1edded Deri*ati*e&

A financial instrument may contain an embedded optionality feature # referred to asan @embedded derivative.@ he portion of the financial instrument other than theembedded derivative is referred to as the @host contract.@ he host contract and theembedded derivative, to$ether is referred to as the @hybrid instrument.@

An embedded derivative should be separated from the host contract and accounted foras a derivative if allof the follo-in$ conditions are met:

a. the economic characteristics and riss of the embedded derivative are %(t #l(&elyrelated to those of the host contract

b. the embedded derivative -ould meet the definition of a derivative on a stand#alone basis a%d

c. the hybrid instrument isn+t mared to maret throu$h 8/.

If an enterprise cannot separately measure an embedded derivative that it is reuiredto separate from its host contract but is unable to, it should treat the entire hybridinstrument as radin$.

A derivative that is attached to a non#derivative financial instrument that may betransferred separately, isn+t an embedded derivative, but rather a stand#alonederivative.

*mbedded 4erivatives N(t 0onsidered Cl(&ely Related to the 6ost 0ontract 'not all#inclusive(a. a put option on an euity instrument held by an enterprise

b. a call option embedded in an euity instrument 'from the perspective of the

holder(c. an option or automatic provision to e%tend the maturity date of debt unless there isa concurrent adjustment to the maret rate of interest at the time of the e%tension

d. euity#inde%ed interest or principal paymentse. commodity#inde%ed interest or principal paymentsf. an euity conversion feature of convertible debt$. a call or put option on debt that is issued at a si$nificant discount or premium,

e"#e$t +(rdebt 'such as a )ero coupon bond( that is callable or puttable at itsaccreted amount and

h. credit derivatives that are embedded in debt that allo- one party to transfer thecredit ris of an asset, -hich it may or may not actually o-n, to another party.

Such credit derivatives allo- the $uarantor to assume the credit ris associated-ith the reference asset -ithout directly purchasin$ it.

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*mbedded 4erivatives 0onsidered Cl(&ely Related to the 6ost 0ontract 'not all#inclusive(a. a derivative lined to an interest rate 'or inde%( that can chan$e the amount of

interest that -ould other-ise be paid

b. a floor or cap on interest rates if the cap is at or above the maret rate of interestor if the floor is at or belo- the maret rate of interest -hen the instrument isissued, and the cap or floor isn+t levera$ed in relation to the host instrument

c. a stream of principal or interest payments denominated in a forei$n currencyd. a prepayment option -ith an e%ercise price that -ould not result in a si$nificant

$ain or losse. a forei$n currency derivative in -hich the host contract is %(t a financial

instrument a%d it reuires forei$n#currency denominated payments a%d thatcurrency is either the currency: 'i( of any substantial party to the contract or 'ii(that the related $oods or services are routinely denominated in internationalcommerce

f. a prepayment option that is embedded in an I or 8 strip that 'i( initiallyresulted from separatin$ the ri$ht to receive contractual cash flo-s of a financialinstrument that, in and of itself, didn+t contain an embedded derivative a%d that'ii( doesn+t contain any terms not present in the ori$inal host debt contract

$. an inde% of lease payments to a consumer price inde% or contin$ent rentals basedon related sales or interest rates and

h. an interest rate 'or inde%( that doesn+t alter the net interest payments that other-ise-ould be paid on the host contract in such a -ay that the holder )(uld %(trecover substantially all of its recorded investment or the issuer -ould pay a ratemore than t-ice the maret rate at inception.

V! EDGING

6ed$e Accountin$, -hich allo-s a proportionate income offset bet-een chan$es infair value of 'or cash flo-s( attributable to the 6ed$in$ Instrument and the 6ed$edItem, is available as lon$ as the 6ed$in$ &elationship 0riteria, 6ed$in$ Instruments0riteria, and 6ed$ed Items 0riteria 'collectively, the @6ed$e Accountin$ 0riteria@(are met.

ed,i%, Relati(%&'i$ CriteriaAll of the follo-in$ conditions are met:

a. at the inception of the 6ed$e there is formal documentation of the hed$in$relationship and the enterprise+s ris mana$ement objective and strate$y forundertain$ the hed$e. hat documentation should include:i. identification of the 6ed$in$ Instrument,ii. identification of the related 6ed$ed Item,iii. the nature of the ris bein$ hed$ed, a%div. process for assessin$ hed$e effectiveness

b. the 6ed$e is e%pected to be hi$hly effective, consistent -ith the ori$inallydocumented ris mana$ement strate$y for that particular hed$in$ relationship

c. for 0ash lo- 6ed$es, a forecasted transaction that is the subject of the 6ed$emust be hi$hly probable a%dmust present an e%posure to variations in cash flo-s

that could ultimately affect reported 8/

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d. the fair value or cash flo-s of the 6ed$ed Item and the fair value of the 6ed$in$Instrument can be reliably measured a%d

e. the 6ed$e -as assessed on an on$oin$ basis and determined actually to have beenhi$hly effective throu$hout the financial reportin$ period

ed,i%, I%&trume%t& Criteria

*%ternal radeshe 6ed$in$ Instrument must be transacted -ith or directly lined to e%ternal bonafide 3rdparties.

Bon#derivative 6ed$esBon#derivatives &u#' a& TM &e#uritie&may be used as a 6ed$in$ Instrument (%lyfor a hed$e of a forei$n currency ris. Bon#derivatives are permitted as 6ed$in$Instruments in only limited circumstances in order to reduce measurementinconsistencies. hat is, under IAS 39, derivatives are re$arded as radin$ or

6ed$in$ and, therefore, are 'e%cept in unusual circumstances( remeasured to fairvalue. o remain consistent -ith the measurement of derivative 6ed$es, non#derivative 6ed$es -ould need to be remeasured at fair value, as -ell. 6o-ever, aremeasurement to fair value of non#derivative 6ed$es -ould then be inconsistent -iththe measurement of non#derivatives that are classified as 6.

;ritten ptions;ritten options aren+t effective in reducin$ the e%posure on net 8/ and therefore,cannot be 6ed$in$ Instrument unless they are desi$nated as an offset to a purchasedoption, includin$ one that is embedded in another financial instrument 'e.$., a -rittenoption used to hed$e callabe debt(.

inancial Assets and inancial /iabilities -ithout &eliably easurable air 5aluesA financial asset or financial liability -hose fair value cannot be reliably measuredcannot be a 6ed$in$ Instrument e%cept in the case of a non#derivative instrument 'a(that is denominated in a forei$n currency, 'b( that is desi$nated as a hed$e of forei$ncurrency ris, a%d'c( -hose forei$n currency component is reliably measurable.

ne 6ed$e, ore han ne ype of &isA sin$le 6ed$in$ Instrument may be desi$nated as a 6ed$e of more than one type ofris provided that: 'a( the riss hed$ed can be clearly identified, 'b( the effectiveness

of the 6ed$e can be demonstrated, a%d 'c( it is possible to ensure that there is aspecific desi$nation of the 6ed$in$ Instrument and the different ris positions.

8artial 6ed$e Instrumentshere is normally a sin$le fair value measure for a 6ed$in$ Instrument in its entirety,and the factors that cause chan$es in fair value are co#dependent. hus, a hed$in$relationship is desi$nated by an enterprise for a 6ed$in$ Instrument in its entirety.he only e%ceptions permitted are:a. desi$natin$ only the intrinsic value of an option as a 6ed$e 'i.e., e%cludin$ the

time value(:b. desi$natin$ only the interest element of a for-ard as a 6ed$e 'i.e., e%cludin$ the

spot price(.

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A portion of the entire 6ed$in$ Instrument, such as =CD of the notional amount, maybe desi$nated as the 6ed$e Instrument. 6o-ever, a portion of the time that a6ed$in$ Instrument is outstandin$ may not be.

ed,ed Item& Criteria

6ed$ed Items can be assets, liabilities, firm commitments, or 'i,'ly $r(1a1lea%ti#i$ated transactions.

*%ternal &ishe 6ed$ed Item must relate to an e%ternal ris, and not merely to overall enterprise

business riss, a%dmust ultimately affect the enterprise+s 8/.

8ortion of the air 5alue or 0ash lo-s of a inancial Asset or /iabilityA portion of the fair value or cash flo-s of a financial asset or liability may bedesi$nated as a 6ed$ed Item.

*uityAn enterprise+s o-n euity securities aren+t financial liabilities of that enterprise and,therefore, cannot be 6ed$ed Items.

Bon#financial Asset or /iabilityA non#financial asset or liability can only be a 6ed$ed Item if it is bein$ hed$ed:a. for forei$n currency ris (r

b. in its entirety for all riss. his is due to the difficulty of measurin$ theappropriate portion of the cash flo-s or fair value chan$es attributable to specificriss other than forei$n currency riss.

6 Investment?nlie ori$inated loans and receivables, a 6 investment cannot be hed$ed forinterest#rate ris because desi$nation as 6 involves not accountin$ for associatedchan$es in interest rates. 6o-ever, a 6 investment can be hed$ed for forei$ncurrency ris and credit ris.

Similar Assets and Similar /iabilitiesSimilar assets and similar liabilities may be hed$ed in the a$$re$ate if 'a( theindividual assets or individual liabilities in the $roup share the ris e%posure for-hich they are desi$nated as bein$ hed$ed a%d 'b( the chan$e in fair value

attributable to the hed$ed ris for each individual item is e%pected to beappro%imately proportional to the overall chan$e in fair value attributable to thehed$ed ris of the $roup.

*uity ethod Investments and Investment in a 0onsolidated SubsidiaryAn euity method investment cannot be a air 5alue 6ed$e because the euitymethod reco$ni)es the investor+s share of the investee+s net income, rather than fairvalue chan$es. If it -ere a 6ed$ed Item, it -ould be adjusted for both fair valuechan$es and 8/ accruals # -hich essentially -ould result in double countin$

because the fair value chan$es include the 8/ accruals. or similar reasons, aninvestment in a consolidated subsidiary cannot be a 6ed$e Item because consolidation

reco$ni)es the parent+s share of the subsidiary+s accrued net income, rather than fairvalue chan$es, in net income.

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Bet Investment in a orei$n SubsidiaryA net investment in a forei$n subsidiary, unlie a consolidated subsidiary, is allo-edas a 6ed$e Item. hat is, there is no double countin$ because the forei$n currencye%posure is bein$ hed$ed, not the chan$e in the value of the investment.

irm 0ommitment to Acuire a EusinessA firm commitment to acuire a business cannot be a 6ed$ed Item -ith respect toforei$n e%chan$e ris because the other riss bein$ hed$ed cannot be specificallyidentified and measured. It is a hed$e of a $eneral business ris.

6ed$e of a Bet 8osition of Similar Assets and /iabilities6ed$e effectiveness must be assessed by comparin$ the chan$e in value or cash flo-of a 6ed$in$ Instrument and a 6ed$ed Item. hus, comparin$ a 6ed$in$ Instrumentto an overall net position rather than to a specific 6ed$ed Item 'e.$., the net of allfi%ed rate assets and fi%ed rate liabilities -ith similar maturities( doesn+t ualify for

6ed$e Accountin$. 6o-ever, appro%imately the same effect can be achieved bydesi$natin$ part of the underlyin$ items as the 6ed$ed Item. or e%ample, if a banhas F"CC of assets and F9C of liabilities -ith riss and terms of a similar nature and-ishes to hed$e the net F"C e%posure, it can desi$nate F"C of those assets as the6ed$ed Item. his desi$nation could be used if such assets and liabilities are fi%edrate instruments, in -hich case it is a air 5alue 6ed$e, or if they are both variablerate instruments, in -hich case it is a 0ash lo- 6ed$e.

ed,e A##(u%ti%,

Fair Value ed,e# hed$es the e%posure to chan$es in the fair value of an asset orliability, or an identified portion of such, that is attributable to a particular ris'includin$ forei$n currency ris( a%dthat -ill affect reported 8/.

Ca&' Fl() ed,e # hed$es the e%posure to variability in cash flo-s that 'a( isattributable to a particular ris associated -ith a reco$ni)ed asset or liability or aforecasted transaction a%d that 'b( -ill affect reported 8/. A 6ed$e of anunreco$ni)ed firm commitment in the enterprise+s reportin$ currency is accounted foras a 0ash lo- 6ed$e even thou$h it has a fair value e%posure.

ed,e (+ a Net I%*e&tme%t i% a F(rei,% E%tity# as defined in IAS 2", a forei$nentity is a forei$n operation, the activities of -hich aren+t an inte$ral part of the

reportin$ enterprise. ?nder IAS 2", all forei$n e%chan$e differences that result fromtranslatin$ the financial statements of the forei$n entity into the parent+s reportin$currency are classified as euity until disposal of the net investment.

A&&e&&i%, ed,e E++e#ti*e%e&&

o be considered hi$hly effective, it must be e%pected that, at inception andthrou$hout the life of the 6ed$e, the chan$es in the fair value or cash flo-s of the6ed$ed Item should be almost fully offset by the chan$es in the fair value or cashflo-s of the 6ed$in$ Instrument. he actual results should be -ithin a ran$e of !CDto "2=D. or e%ample, if the loss on the 6ed$e is "2C and the $ain on the 6ed$edItem is "CC, offset can be measured by "2CG"CC '"2CD( or by "CCG"2C '!3D(.

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A sin$le method for assessin$ hed$e effectiveness isn+t specified. An enterprise+sdocumentation of its hed$in$ strate$y should include its procedures for assessin$effectiveness. hose procedures -ill state -hether the assessment should include allof the $ain or loss on a 6ed$in$ Instrument or -hether a certain ris 'e.$., credit ris(-ill be e%cluded.

*ffectiveness is assessed, at a minimum, at the time an enterprise prepares its annualor interim financial report. If the critical terms of the 6ed$in$ Instrument and theentire hed$ed asset or liability 'as opposed to selected cash flo-s( or hed$edforecasted transaction are the same, an enterprise could conclude that chan$es in fairvalue or cash flo-s attributable to the ris bein$ hed$ed are e%pected to completelyoffset at inception and on an on$oin$ basis.

Fair Value ed,e&

If a air 5alue 6ed$e meets the ed,e A##(u%ti%, Criteria, durin$ the financialreportin$ period, it should be accounted for as follo-s:

a. the $ain or loss from remeasurin$ the 6ed$in$ Instrument at fair value should bereco$ni)ed immediately in current 8/ a%d

b. the $ain or loss on the 6ed$ed Item attributable to the hed$ed ris should adjustthe carryin$ amount of the 6ed$ed Item and be reco$ni)ed in current 8/.

An adjustment to the carryin$ amount of a 6ed$ed interest#bearin$ financialinstrument should be amorti)ed to 8/. Amorti)ation should be$in no later than-hen the 6ed$ed Item ceases to be adjusted for chan$es in its fair value attributableto the ris bein$ hed$ed. he adjustment should be fully amorti)ed by maturity.

4iscontinuance of air 5alue 6ed$e Accountin$air 5alue 6ed$e Accountin$ should be discontinued if:

a. the 6ed$in$ Instrument e%pires or is sold, terminated, or e%ercised 'for thispurpose, the replacement or a rollover of a 6ed$in$ Instrument into another6ed$in$ Instrument isn+t considered an e%piration or termination if suchreplacement or rollover is part of the enterprise+s documented hed$in$ strate$y((r

b. the 6ed$e no lon$er meets the ed,e A##(u%ti%, Criteria.

Ca&' Fl() ed,e&If a 0ash lo- 6ed$e meets the ed,e A##(u%ti%, Criteria, durin$ the financialreportin$ period, it should be accounted for as follo-s:

a. the cumulative effective"portion of the $ain or loss on the 6ed$in$ Instrumentshould be reco$ni)ed in euity a%d

"*ffective 6ed$es are hed$es that have a correlation of !CD 1 "2=D. or accountin$ purposes, the

@*ffective 8ortion@ of a cash flo- hed$e includes @under#effectiveness.@ In other -ords, the entire $ainor loss on a hed$in$ instrument is recorded in euity if that hed$in$ instrument is an effective cashflo- hed$e and has correlation bet-een !CD 1 "CC.CD 'i.e., under#effective(.

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b. the ineffective portion2should be reported eit'er'i( in current 8/ for derivative6ed$in$ Instruments (r'ii( first in euity and then reclassified to 8/ as thetransaction affects 8/ dependin$ upon the firm#-ide election made in thelimited circumstances in -hich non#derivative 6ed$in$ Instruments are used.

Henerally, the amounts related to a cash flo- that are reco$ni)ed in euity arereclassified to 8/ as the 6ed$ed Item affects 8/. or e%ample, -hen theanticipated transaction occurs.

6o-ever, if the 6ed$ed firm commitment or forecasted transaction results in thereco$nition of an asset or a liability, then at the time the asset or liability isreco$ni)ed, the associated $ains or losses that -ere reco$ni)ed in euity should beremoved from euity and should enter into the initial measurement of the carryin$amount of the asset or liability.

he $ain or loss on the 6ed$in$ Instrument that -as included in the acuisition cost

or other carryin$ amount of the asset or liability is subseuently included in 8/-hen the asset or liability affects 8/ 'e.$., in the periods that depreciation e%pense,or interest income or e%pense(.

4iscontinuance of 0ash lo- 6ed$e Accountin$0ash lo- 6ed$e Accountin$ should be discontinued if:

a. the 6ed$in$ Instrument e%pires or is sold, terminated, or e%ercised 'for thispurpose, the replacement or a rollover of a 6ed$in$ Instrument into another6ed$in$ Instrument isn+t considered an e%piration or termination if suchreplacement or rollover is part of the enterprise+s documented hed$in$ strate$y(.In this case, the cumulative $ain or loss on the 6ed$in$ Instrument that had beenrecorded in euity should remain separately in euity until the forecastedtransaction occurs

b. the 6ed$e no lon$er meets the 6ed$e Accountin$ 0riteria. In this case, thecumulative $ain or loss on the 6ed$in$ Instrument that had been recorded ineuity should remain there until the committed or forecasted transaction occurs(r

c. the committed or forecasted transaction is no lon$er e%pected to occur, in -hichcase any related cumulative $ain or loss that has been recorded in euity should bereclassed to current 8/.

ed,e& (+ a Net I%*e&tme%t i% a F(rei,% E%tity

6ed$es of a net investment in a forei$n entity should be accounted for similarly tocash flo- hed$es:

a. the portion of the $ain or loss on the 6ed$in$ Instrument that is determined to bean effective 6ed$e should be reco$ni)ed in euity and classified in the samemanner as forei$n currency translation $ain or loss a%d

2or accountin$ purposes, the @Ineffective 8ortion@ of a cash flo- hed$e only includes @over#effectiveness.@ In other -ords, if a hed$in$ instrument is an effective cash flo- hed$e and hascorrelation bet-een "CC."D 1 "2=D 'i.e., over#effective(, the portion of the $ain or loss that -ould

reflect perfect correlation is recorded in euity and the over#effective portion 'i.e., the "CC."D 1 "2=Dportion( is recorded in 8/.

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b. the ineffective portion should be reported:i. immediately in net profit or loss if the 6ed$in$ Instrument is a derivative (rii. in accordance -ith para$raph "9 of IAS 2", in the limited circumstances in

-hich the 6ed$in$ Instrument isn+t a derivative.

VI! TRADE DATE VS! SETTLEMENT DATE

IAS 39 affords the option of trade date or settlement date accountin$ for re$ular -aypurchases or sales of financial assets. 6o-ever, the method selected should beapplied consistently for all purchases and sales of financial assets that belon$ to thesame cate$ory of financial assets 'i.e., radin$, 6, AS, etc.(.

If settlement date accountin$ is applied, then the difference bet-een trade date andsettlement date are accounted for in 8/ for radin$ Assets accounted for in either8/ or euity for AS assets or not accounted for for assets that are recorded at costor amorti)ed cost. 6o-ever, in all cases impairment losses flo- throu$h 8/.

VII! DERECOGNITION

Dere#(,%iti(% (+ a Fi%a%#ial A&&et

An enterprise should dereco$ni)e a financial asset -hen, and only -hen, theenterprise loses control of the asset. An enterprise loses such control if it reali)es theri$hts to benefits specified in the contract, the ri$hts e%pire, or the enterprisesurrenders those ri$hts. If this dereco$nition #riteria i& %(t &ati&+ied, the transferoraccounts for the transaction as a collaterali)ed borro-in$. In that case, the transferor+sri$ht to reacuire the asset isn+t a derivative.

If the position of either the transferor or transferee indicates that the transferor hasretained control, the transferor shouldn+t remove the asset from its balance sheet.

A transferor has %(tlost control if, +(r e"am$le:

a. the transferor has the ri$ht to reacuire the transferred asset u%le&& eit'er'i( theasset is readily obtainable (r'ii( the reacuisition price is fair value at the time ofreacuisition

b. the transferor is both entitled and obli$ated to repurchase or redeem thetransferred asset on terms that effectively provide the transferee -ith a lender+s

return on the assets received in e%chan$e for the transferred asset. A lender+sreturn is one that isn+t materially different from that -hich could be obtained on aloan to the transferor that is fully secured by the transferred asset (r

c. the asset transferred isn+t readily obtainable a%d the transferor has retainedsubstantially all of the ri&& a%d retur%&of o-nership throu$h a total return s-ap-ith the transferee (r has retained substantially all of the ri&& of o-nershipthrou$h an unconditional put option on the transferred asset held by the transferee.

A transferor $enerally has lost control of a transferred financial asset only if thetransferee has the ability to obtain the benefits of the transferred asset. hat ability isdemonstrated, for e%ample, if the transferee:

a. is free either to sell or to pled$e the transferred asset (r

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b. is an S8* -hose permissible activities are limited, and either the S8* itself or theS8*+s beneficial interest holders can obtain substantially all of the benefits of thetransferred asset.

If the transfer is accounted for as a sale, the difference bet-een the sale proceeds and

the boo value of the transferred assets is recorded as a $ain or loss in 8/. Anyprior adjustment -ould be reco$ni)ed in 8/ upon the sale, as -ell.

Partial Dere#(,%iti(% (+ a Fi%a%#ial A&&et

If an enterprise transfers a part of a financial asset to others -hile retainin$ a part, thecarryin$ amount of the financial asset should be allocated bet-een the parts retainedand sold based on their relative fair values on the date of sale. A $ain or loss should

be reco$ni)ed based on the proceeds for the portion sold.

o illustrate, assume an enterprise ori$inates F",CCC of loans that yield "CD. heenterprise sells the F",CCC principal plus the ri$ht to receive interest income of !D to

another enterprise for F",CCC 'that is, the transferor retains a 2CC bps. spread(. hetransferor -ill continue to service the loans, and the contract stipulates that itscompensation for performin$ the servicin$ is the ri$ht to receive half of the spread'i.e., "CC bps.(. he other half of the spread is considered an interest#only stripreceivable. At the date of the transfer, the fair value of the loans, includin$ servicin$,is F","CC, of -hich the fair value of the servicin$ asset is F


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b. sellin$ a portfolio of receivables -hile retainin$ the ri$ht to service thereceivables for a fee that is less than the costs of servicin$.

Dere#(,%iti(% (+ a Fi%a%#ial Lia1ility

An enterprise should remove a financial liability from its balance sheet -hen, and

only -hen, it is e%tin$uished # that is, -hen the obli$ation specified in the contract isdischar$ed, canceled, or e%pires. his condition is met -hen the debtor eit'er:

a. dischar$es the liability by payin$ the creditor (rb. is le$ally released from primary responsibility for the liability either by process of

la- or by the creditor.

8ayment to a third party includin$ a trust 'sometimes called @in#substancedefeasance@( d(e& %(tby itself relieve the debtor of its primary obli$ation to thecreditor, in the absence of le$al release.

;hile le$al release, -hether judicially or by the creditor, -ill result in dereco$nitionof a liability, the enterprise mayhave to reco$ni)e a ne- liability if the dereco$nitioncriteria are %(t met for non#cash financial assets that -ere transferred. If thosecriteria are %(t met, the transferred assets are %(t rem(*ed from the transferor+s

balance sheet, and the transferor reco$ni)es a ne- liability relatin$ to the transferredassets that maybe eual to the dereco$ni)ed liability.

he e%chan$e of debt instrument for another -ith substantially different terms (rthesubstantial modification of the terms of a debt instrument is an e%tin$uishment of theold debt resultin$ in dereco$nition of that debt and reco$nition of a ne- debtinstrument. he difference bet-een the carryin$ amount of a liability e%tin$uished ortransferred to another party, includin$ related unamorti)ed costs, and the amount paidfor it should be included current 8/.

A creditor may allo- a debtor to transfer its primary payment responsibility to a thirdparty contin$ent upon the ori$inal debtor $uaranteein$ payment if the third partydefaults. In this circumstance the ori$inal debtor:

a. reco$ni)es a ne- financial liability based on the fair value of its obli$ation for the$uarantee a%d

b. reco$ni)es a $ain or loss based on the difference bet-een any proceeds and the

carryin$ amount of the ori$inal financial liability 'includin$ any relatedunamorti)ed costs( minus the fair value of the ne- financial liability.

Partial Dere#(,%iti(% (+ a Fi%a%#ial Lia1ility (r C(u$led )it' a Ne) Fi%a%#ial

A&&et (r Lia1ility

If an enterprise transfers a part of a financial liability to others -hile retainin$ a part,(rif an enterprise transfers an entire financial liability and in so doin$ creates a ne-financial asset or assumes a ne- financial liability, the enterprise should account forthe transaction in the manner set out in the Partial Dere#(,%iti(% (+ a Fi%a%#ialA&&et section.

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ias+39+detailed+summary

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