1 | IAS 39 Financial Instruments: Recognition and Measurement

IAS 39 FINANCIAL
INSTRUMENTS:
RECOGNITION
AND MEASUREMENT
FACT SHEET
2 | IAS 39 Financial Instruments: Recognition and Measurement

This fact sheet is based on existing requirements as at 31 December 2015 and does not take into account recent
standards and interpretations that have been issued but are not yet effective.

IMPORTANT NOTE
This fact sheet is based on the requirements of the International Financial Reporting Standards (IFRSs). In some
jurisdictions, the IFRSs are adopted in their entirety; in other jurisdictions the individual IFRSs are amended. In
some jurisdictions the requirements of a particular IFRS may not have been adopted. Consequently, users of the
fact sheet in various jurisdictions should ascertain for themselves the relevance of the fact sheet to their particular
jurisdiction. The application date included below is the effective date of the initial version of the standard.
3 | IAS 39 Financial Instruments: Recognition and Measurement

IASB APPLICATION DATE • A

 ny forward contract between an acquirer and a selling
shareholder to buy or sell an acquiree that will result
(NON-JURISDICTION SPECIFIC)
in a business combination within the scope of IFRS 3
IAS 39 is applicable for annual reporting periods Business Combinations at a future acquisition date.
commencing on or after 1 January 2005 and will be The term of the forward contract should not exceed
superseded by IFRS 9 Financial Instruments for annual a reasonable period normally necessary to obtain any
periods beginning on or after 1 January 2018. required approvals and to complete the transaction.

OBJECTIVE RECOGNITION AND MEASUREMENT

IAS 39 Financial Instruments: Recognition and The main requirements for the recognition and
Measurement establishes the principles for the recognition measurement of financial instruments are:
and measurement of financial assets, financial liabilities
• A
 n entity shall categorise its financial assets into one
and some contracts to buy or sell non-financial assets.
of the following categories:
Requirements relating to the presentation of information
about financial instruments are in IAS 32 Financial –– fi
 nancial assets at fair value through profit or loss.
Instruments: Presentation. Requirements for disclosing This category consists of three sub-categories:
information about financial instruments are in IFRS 7 (1) financial instruments held for trading (2)
Financial Instruments: Disclosure. contingent consideration of an acquirer in a business
combination to which IFRS 3 Business Combinations
SCOPE applies, and (3) financial instruments designated as at
fair value through profit or loss
IAS 39 does not apply to the following financial
instruments: –– held-to-maturity investments

• T
 hose interests in subsidiaries, associates and joint –– loans and receivables, or
ventures that are accounted for in accordance with IFRS –– available-for-sale financial assets.
10 Consolidated Financial Statements, IAS 27 Separate
• R
 ecognition of a financial asset or financial liability is
Financial Statements or IAS 28 Investments in Associates
at the point when, and only when the entity becomes
and Joint Ventures. However, in some cases, IFRS 10,
a party to the contractual provisions of the instrument.
IAS 27 or IAS 28 require or permit an entity to account
for an interest in a subsidiary, associate or joint venture • W
 hen a financial asset or financial liability is recognised
in accordance with some or all of the requirements of initially, an entity shall measure it at its fair value plus,
this Standard. Entities shall also apply this Standard to in the case of a financial asset or financial liability not at
derivatives on an interest in a subsidiary, associate or fair value through profit or loss, transaction costs that
joint venture unless the derivative meets the definition are directly attributable to the acquisition or issue of
of an equity instrument of the entity in IAS 32. the financial asset or financial liability.
• R
 ights and obligations under leases to which IAS • After initial recognition:
17 Leases applies, other than the derecognition –– fi
 nancial assets or financial liabilities at fair value
and impairment of lessor’s lease receivables, the through profit or loss shall be measured at fair value
derecognition of lessee’s finance lease payables and without any deduction for expected transaction costs
derivatives embedded in leases. on disposal and the change in fair value is recognised
• E
 mployers’ rights and obligations under employee in profit or loss
benefit plans to which IAS 19 Employee Benefits applies. –– h
 eld-to-maturity investments are measured at
• F
 inancial instruments issued by the entity that meet amortised cost using the effective interest method,
the definition of an equity instrument in IAS 32. with interest and impairment costs being recognised
in profit or loss
• R
 ights and obligations under insurance contracts as
defined in IFRS 4 Insurance Contracts, subject to some –– loans and receivables are measured at amortised
exceptions including financial guarantee contracts, cost using the effective interest method, with interest
or the contract contains a discretionary participation and impairment costs being recognised in profit or
feature. loss
• Loan commitments subject to some exceptions. –– a
 vailable-for-sale financial assets are measured
at fair value without any deduction for expected
• F
 inancial instruments, contracts and obligations under
transaction costs on disposal and the change in fair
share-based payment transactions which IFRS 2 Share-
value is recognised directly in other comprehensive
based Payment applies.
income (except for an impairment loss and a foreign
• R
 ights to payments to reimburse the entity for exchange gain or loss) until the financial asset is
expenditure to settle a liability that it recognises derecognised when the cumulative gain or loss
as a provision in accordance with IAS 37 Provisions, previously recognised in other comprehensive
Contingent Liabilities and Contingent Assets. income is recognised in profit or loss
4 | IAS 39 Financial Instruments: Recognition and Measurement

–– investments
­ in equity instruments that do not have
a quoted price in an active market and whose fair
value cannot be reliably measured, and derivatives
linked to and settled by delivery of such equity
instruments, shall be measured at cost
–– fi
 nancial assets and financial liabilities designated
as hedged items are subject to measurement under
the hedge accounting requirements
–– fi
 nancial liabilities shall be measured at amortised
cost using the effective interest method except for
those classified as financial liabilities at fair value
through profit or loss, financial liabilities that arise
out of a failed derecognition of a financial asset,
financial guarantee contracts and commitments
–– a
 financial liability at fair value through profit or loss
is measured at fair value, including derivatives, but
excluding a derivative liability that is linked to and
must be settled by delivery of an equity instrument
that does not have a quoted price in an active
market for an identical instrument (i.e. a Level 1
input) whose fair value cannot be reliably measured;
in such an instance, the derivative liability shall be
measured at cost.
5 | IAS 39 Financial Instruments: Recognition and Measurement

Impairment
An entity shall assess at the end of each reporting period whether there is any objective evidence that a financial asset
or group of financial assets is impaired. Financial assets carried at amortised cost, financial assets carried at cost and
available-for-sale financial assets are potentially subject to impairment. IAS 39 distinguishes impairment from other
declines in value and requires impairment testing of all asset categories except financial assets measured at fair value
through profit or loss. However, this exception does not apply to an investment in an equity instrument that was initially
categorised as a financial asset at fair value through profit or loss and is subsequently measured at cost. Financial assets
are assessed for impairment at each reporting period as depicted in Diagram 1 below.
The amount of the impairment loss is recognised in profit or loss and measured as follows:
• F
 or loans/receivables or held-to-maturity investments carried at amortised cost, the difference between the asset’s
carrying amount and the present value of estimated future cash flows (excluding future credit losses that have
not been incurred) discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate
computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an
allowance account. The amount of the loss shall be recognised in profit or loss. These impairment losses are also to be
tested subsequently for reversal.
• F
 or an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured,
or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the
difference between the carrying amount of the financial asset and the present value of estimated future cash flows
discounted at the current market rate of return for a similar financial asset. Such impairment losses shall not be
reversed.
• F
 or available-for-sale financial assets where a decline in the fair value has been recognised directly in other
comprehensive income, the cumulative loss that had been recognised directly in other comprehensive income is
reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been
derecognised. Impairment losses recognised in profit and loss for an investment in an equity instrument classified as
available for sale shall not be reversed through profit or loss. However, if in a subsequent period the fair value of a
debt instrument classified as available for sale increases because of an event occurring after the impairment loss was
recognised, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss.

Diagram 1: IAS 39 Impairment Model

Objective evidence Yes Impairment

Yes of impairment calculation

Financial asset Yes

No

Group of assets with similar Objective evidence

No Yes No No impairment
credit characteristics of impairment

No
Reclassifications
An entity:
a. Shall not reclassify a derivative out of the fair value through profit or loss category while it is held or issued.
b. S
 hall not reclassify any financial instrument out of the fair value through profit or loss category if upon initial
recognition it was designated by the entity as at fair value through profit or loss.
c. M
 ay, if a financial asset is no longer held for the purpose of selling or repurchasing it in the near term, reclassify
that financial asset out of the fair value through profit or loss category if the requirements in paragraphs 50B
or 50D applies.
An entity shall not reclassify any financial instrument into the fair value through profit or loss category after initial
recognition.
6 | IAS 39 Financial Instruments: Recognition and Measurement

Derecognition of financial assets c. T

 he hybrid (combined) instrument is not measured at
A financial asset is derecognised and removed from fair value with changes in fair value recognised in profit
the statement of financial position when the contractual or loss (i.e. a derivative that is embedded in a financial
rights to the cash flows from the financial asset expire or asset or financial liability at fair value through profit or
the financial asset is transferred (e.g. the entity transfers loss is not separated).
the contractual rights to receive the cash flows or the If an embedded derivative is separated, the host contract
entity retains the right to receive such cash flows but also is accounted for under IAS 39 if it is a financial instrument,
assumes a contractual obligation to pass such cash flows and in accordance with other appropriate standards if it is
on to another party and specified conditions are met). not a financial instrument.
In determining whether a financial asset has been Hedge Accounting
transferred and hence needs to be derecognised, an Hedge accounting recognises the offsetting effects on
entity evaluates the extent to which it retains the risks profit or loss of changes in the fair values of the hedging
and rewards of ownership. In cases where the entity instrument and the hedged item.
retains the risks and rewards of ownership of the financial
There are three types of hedging relationships:
asset, entity continues to recognise the financial asset.
• F
 air value hedge – a hedge of the exposure to
If the entity neither transfers nor retains substantially changes in fair value of a recognised asset or liability
all the risks and rewards of ownership, then the entity or an unrecognised firm commitment, or an identified
determines whether it has retained control of the portion of such an asset, liability or unrecognised firm
financial asset. Where the entity retains control of the commitment, that is attributable to a particular risk
financial asset, the financial asset is retained on the and could affect profit or loss. The gain or loss from
entity’s statement of financial position to the extent of remeasuring the hedging instrument at fair value is
its continuing involvement in that financial asset. Where recognised in profit or loss. Any change in the value
the entity does not retain control, it derecognises the of the hedged item as a result of the hedged risk will
financial asset and recognises separate assets and affect the carrying amount of the hedged item and be
liabilities representing any rights and obligations created recognised in profit or loss.
or retained in the transfer. • C
 ash flow hedge – a hedge of the exposure to
variability in cash flows related to the hedged item
Derecognition of financial liabilities
that (i) is attributable to a particular risk associated
A financial liability (or part of a financial liability) is with a recognised asset or liability or a highly probable
derecognised and removed from the statement of forecast transaction and that (ii) could affect profit or
financial position when it is extinguished, that is, when the loss. The portion of the gain or loss that is effective is
obligation is discharged, cancelled or expires. recognised in other comprehensive income, while the
An exchange between an existing borrower and lender ineffective portion is recognised in profit or loss. Gains
of debt instruments with substantially different terms, or and losses recognised directly in other comprehensive
income are reclassified into profit or loss as a
the substantial modification of the terms of an existing
reclassification adjustment in the same periods during
financial liability, shall be recognised as an extinguishment
which the hedged forecast cash flows affect profit or
of the original financial liability and the recognition of a
loss (such as in the periods that interest income or
new financial liability. interest expense is recognised). However, if an entity
The difference between the carrying amount of a financial expects that all or a portion of a loss recognised in
liability (or part of a financial liability) extinguished or other comprehensive income will not be recovered in
transferred to another party and the consideration paid, one or more future periods, it shall reclassify into profit
including any non-cash assets transferred or liabilities or loss as a reclassification adjustment the amount that
assumed, shall be recognised in profit or loss. is not expected to be recovered.
• H
 edge of a net investment in a foreign operation
Embedded derivatives – the accounting treatment for this type of hedge is
An embedded derivative is a component of a hybrid similar to that described for a cash flow hedge. Refer
(combined) instrument that also includes a non-derivative to IAS 21 The Effects of Changes in Foreign Exchange
host contract – with the effect that some of the cash flows Rates for an illustration and discussion.
of the combined instrument vary in a way similar to a To qualify for hedge accounting, the hedging instrument
stand-alone derivative. must involve a party external to the entity.
An embedded derivative is separated from the host The hedging relationship between the hedged item
contract and accounted for as a derivative under IAS 39 if, and the hedging instrument must satisfy prescribed
and only if: conditions, including:
a. T
 he economic characteristics and risks of the • a
 formal designation and documentation of the
embedded derivative are not closely related to the hedging relationship at inception
economic characteristics and risks of the host contract.
• e
 xpected to be highly effective in achieving offsetting
b. A
 separate instrument with the same terms as the changes in fair value or cash flows
embedded derivative would meet the definition of
• reliable measure of hedge effectiveness
a derivative.
• o
 ngoing assessment that demonstrates the instrument
is highly effective.
7 | IAS 39 Financial Instruments: Recognition and Measurement

DISCLOSURES
IAS 39 does not include any disclosures; refer to IFRS 7 for disclosures relating to financial instruments.

DEFINITIONS
Amortised cost of a financial asset or financial liability The amount at which the financial asset or financial liability
is measured at initial recognition minus principal repayments,
plus or minus the cumulative amortisation using the effective
interest method of any difference between that initial amount
and the maturity amount, and minus any reduction (directly or
through the use of an allowance account) for impairment or
uncollectibility.
Available-for-sale financial assets Those non-derivative financial assets that are designated as
available for sale or that are not classified as (a) loans and
receivables, (b) held-to-maturity investments or (c) financial
assets at fair value through profit or loss.
Derecognition The removal of a previously recognised financial asset
or financial liability from an entity’s statement of financial
position.
Derivative A financial instrument or other contract with all three
of the following characteristics:
• its value changes in response to the change in a
specified interest rate, financial instrument price,
commodity price, foreign exchange rate, index of prices
or rates, credit rating or credit index, or other variable
(sometimes called the ‘underlying’)
• it requires no initial net investment or an initial net
investment that is smaller than would be required for
other types of contracts that would be expected to
have a similar response to changes in market factors
• it is settled at a future date
Effective interest method A method of calculating the amortised cost of a financial
asset or a financial liability (or group of financial assets or
financial liabilities) and of allocating the interest income
or interest expense over the relevant period. The effective
interest rate is the rate that exactly discounts estimated future
cash payments or receipts through the expected life of the
financial instrument or, when appropriate, a shorter period
to the net carrying amount of the financial asset or financial
liability
Financial guarantee contract A contract that requires the issuer to make specified
payments to reimburse the holder for a loss it incurs because
a specified debtor fails to make payment when due in
accordance with the original or modified terms of a debt
instrument.
Held-to-maturity investment A non-derivative financial asset with fixed or determinable
payments and fixed maturity that an entity has the positive
intention and ability to hold to maturity.
Financial asset or financial liability at fair value through A financial asset or financial liability that is held for trading,
profit or loss is contingent consideration of an acquirer in a business
combination to which IFRS 3 Business Combinations applies,
or a financial asset or financial liability that upon initial
recognition, the entity has designated as at fair value through
profit or loss (the ‘fair value’ option).
Loans and receivables Non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market.
8 | IAS 39 Financial Instruments: Recognition and Measurement

Regular way purchase or sale A purchase or sale of a financial asset under a contract whose
terms require delivery of the asset within the time frame
established generally by regulation or convention in the
marketplace concerned.
Transaction costs Incremental costs that are directly attributable to the
acquisition, issue or disposal of a financial asset or liability.
An incremental cost is one that would not have been incurred
if the entity had not acquired, issued or disposed of the
financial instrument.
Firm commitment A binding agreement for the exchange of a specified quantity
of resources at a specified price on a specified future date or
dates.
Forecast transaction An uncommitted but anticipated future transaction.

Hedging instrument Designated derivative or a designated non-derivative financial

asset or non-derivative financial liability whose fair value or
cash flows are expected to offset changes in the fair value or
cash flows of a designated hedged item.
Hedged item An asset, liability, firm commitment, highly probable forecast
transaction or net investment in a foreign operation that:
a. e
 xposes the entity to risk of changes in fair value or
future cash flows and
b. is designated as being hedged
Hedge effectiveness The degree to which changes in fair value or cash flows
attributable to a hedged risk are offset by changes
in the fair value or cash flows of the hedging instrument.

RELATED INTERPRETATIONS
• IFRIC 9 Reassessment of Embedded Derivatives
• IFRIC 12 Service Concession Arrangements
• IFRIC 16 Hedges of a Net Investment in a Foreign Operation
• IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments
IFRICs 9 and 19 are relatively more significant than IFRICs 12 and 16.
IFRIC 9 applies to all embedded derivatives within the scope of IAS 19 except for derivatives in contracts acquired in:
• a business combination
• a combination of entities or businesses under common control
• the formation of a joint venture
IAS 39 requires an entity, when it first becomes a party to a contract, to assess whether any embedded derivatives
contained in the contract are required to be separated from the host contract and accounted for as derivatives under
the Standard. IFRIC 9 addresses the following issues:
a. D
 oes IAS 39 require such an assessment to be made only when the entity first becomes a party to the contract,
or should the assessment be reconsidered throughout the life of the contract?
b. S
 hould a first-time adopter make its assessment on the basis of the conditions that existed when the entity first
became a party to the contract, or those prevailing when the entity adopts IFRSs for the first time?
IFRIC 19 addresses the accounting by an entity when the terms of a financial liability are renegotiated and result
in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability.
It does not address the accounting by the creditor.
It addresses the following specific issues:
a. A
 re an entity’s equity instruments issued to extinguish all or part of a financial liability ‘consideration paid’
in accordance with paragraph 41 of IAS 39?
b. How should an entity initially measure the equity instruments issued to extinguish such a financial liability?
c. H
 ow should an entity account for any difference between the carrying amount of the financial liability extinguished
and the initial measurement amount of the equity instruments issued?
9 | IAS 39 Financial Instruments: Recognition and Measurement

AUSTRALIAN SPECIFIC REQUIREMENTS

The Australian equivalent standard is AASB 139 Financial Instruments: Recognition and Measurement.
 10 | IAS 39 Financial Instruments: Recognition and Measurement

OTHER MATTERS
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