IAS 39 Financial Instruments: Recognition and Measurement
IAS 39 is a standard fully replaced by the new standard on financial instruments IFRS 9 applicable from 1 January 2018. If you would like to know more about this process, please read our article IAS 39 vs. IFRS 9: Clarifying the Confusion.
UPDATE 2018: IAS 39 is superseded for the periods starting on or after 1 January 2018 and you have to apply IFRS 9 Financial Instruments. I leave this summary here for your information.
IAS 39 prescribes rules for accounting and reporting of almost all types of financial instruments. Typical examples include cash, deposits, debt and equity securities (bonds, treasury bills, shares…), derivatives, loans and receivables and many others.
IAS 39 also explicitly lists what is outside its scope and thus you should look to other standards for guidance, for example interests in subsidiaries, associates etc.
Due to overall complexity of IAS 39, I decided to split this summary into several logical blocks. So let’s proceed.
Classification of financial assets and financial liabilities
IAS 39 classifies financial assets into 4 main categories:
- Financial asset at fair value through profit or loss:a financial asset that is either
- classified as held for trading, or
- upon initial recognition it is designated by the entity as at fair value through profit or loss
- Held-to-maturity financial investments:non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention to hold to maturity, other than:
- those designated at fair value through profit or loss upon initial recognition
- those designated as available for sale and
- those that meet the definition of loans and receivables
- Loans and receivables: non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than:
- those that entity intends to sell immediately or in the near term (held for trading)
- those designated at fair value through profit or loss upon initial recognition
- those designated as available for sale
- those for which the holder may not recover substantially all of its investment, other than
because of credit deterioration (available for sale)
- Available-for-sale financial assets: non-derivative financial assets designated as available for sale
or are not classified in any other of 3 above categories.
Financial liabilities are classified into 2 main categories:
- Financial liabilities at fair value through profit or loss:a financial liability that is either
- classified as held for trading, or
- upon initial recognition it is designated by the entity as at fair value through profit or loss
- Other financial liabilities measured at amortized cost using the effective interest method
However, no matter how the financial instrument would be initially classified, IAS 39 permits entities to initially designate the instrument at fair value through profit or loss (but fair value must be reliably measured).
Initial classification of financial assets and financial liabilities is critical due to their subsequent measurement.
Embedded derivatives
Embedded derivatives became a big thing among all auditors and accountants several years ago as people started to realize that these can be found almost everywhere.
Embedded derivative is simply a component of a hybrid instrument that also includes a non-derivative host contract. Typical example is rental contract concluded for several years in advance with rental price adjustments according to inflation measured as consumer price index in European Union.
Non-derivative part in this case is a rent of some property or facility. An embedded derivative part is then forward contract indexed to the consumer price index in EU.
IAS 39 requires separation of embedded derivative from the host contract when the following conditions are fulfilled:
- the economic risks and characteristics of the embedded derivative are not closely related to the economic risks and characteristics of the host contract (here, you would assess whether rent of property is somehow dependent on changes in EU consumer price index)
- a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative
- the hybrid instrument (whole rental contract in our example) is not measured at fair value with changes in fair value recognized in the income statement
Separation means that you account for embedded derivative separately in line with IAS 39 and the host contract (rent in this case) in line with other appropriate standard. If an entity is not able to do this, then the whole contract must be accounted for as a financial asset at fair value through profit or loss.
Initial recognition
IAS 39 requires recognizing a financial asset or a financial liability in the statement of financial position when the entity becomes a party to the contractual provisions of the instrument.
It seems obvious, but the important thing is that also derivatives shall be recognized in the statement of financial position. I stress this point, because many countries do not require recognizing the derivatives as they usually have zero or very small initial costs. But—as the time passes, fair value of derivatives changes and this can have significant impact on the profit or loss and the statement of financial position, too.
Initial measurement
Financial asset or financial liability shall be initially measured at its fair value. When financial asset or financial liability are NOT measured at fair value through profit or loss, then directly attributable transaction costs shall be included in the initial measurement.
Subsequent measurement
As written above, subsequent measurement and the method of accounting for gains or losses from subsequent measurement strongly depend on the category of financial asset or financial liability. Subsequent measurement is summarized in the following table:
| Category – WHAT | Subsequent measurement – HOW MUCH | Gains and losses – WHERE |
|---|---|---|
| Financial assets | ||
| Financial assets at fair value through profit or loss | Fair value | Profit or loss |
| Held-to-maturity financial investments | Amortized cost using the effective interest method | Profit or loss |
| Loans and receivables | Profit or loss | |
| Available-for-sale financial investments except below | Fair value | Other comprehensive income (except for impairment and foreign exchange gain/loss) |
| Investments in equity instruments with no reliable fair value measurement and derivatives linked to them | Cost | Impairment to profit or loss |
| Financial assets designated as hedged items | See Hedge Accounting | See Hedge Accounting |
| Derivative financial assets | Fair value | Profit or loss |
| Financial liabilities | ||
| Financial liabilities at fair value through profit or loss | Fair value | Profit or loss |
| Other financial liabilites | Amortized cost using the effective interest method | Profit or loss |
| Financial liabilities designated as hedged items | See Hedge Accounting | See Hedge Accounting |
| Derivative financial liabilities | Fair value | Profit or loss |
| Financial liabilities arising when transfer of financial asset does not qualify for derecognition or is accounted using continuing-involvement method | Measured in line with specific IAS 39 provisions related to transfers / continuing involvement | Profit or loss |
In fact, derivative financial assets and liabilities belong to category “at fair value through profit or loss”, but I show them separately for your convenience.
Impairment
An entity shall assess at the end of each reporting period whether there is any objective evidence that a financial asset is impaired. If there is such evidence, then an entity must calculate the amount of impairment loss.
Impairment loss is calculated as a difference between asset’s carrying amount and the present value of estimated cash flows discounted at the financial asset’s original effective interest rate. Impairment loss shall be recognized to profit or loss account.
Reversal of the impairment loss is possible, but only if in a subsequent period the impairment loss decreases and the decrease directly relates to some event occurring after the recognition of impairment loss. Reversal shall be re recognized in profit or loss.
Derecognition of a financial asset
Standard IAS 39 provides extensive guidance on derecognition of a financial asset. Before deciding on derecognition, an entity must determine whether derecognition is related to:
- a financial asset (or a group of similar financial assets) in its entirety, or
- a part of a financial asset (or a part of a group of similar financial assets). The part must fulfill
the following conditions (if not, then asset is derecognized in its entirety):- the part comprises only specifically defined cash flows from a financial asset (or group)
- the part comprises only a fully proportionate (pro rata) share of the cash flows from a financial asset (or group)
- the part comprises only a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or group)
An entity shall derecognize the financial asset when:
- the contractual rights to the cash flows from the financial asset expire, or
- an entity transfers the financial asset and the transfer qualifies for the derecognition
Transfers of financial assets are discussed in more details. First of all, an entity must decide whether the asset was transferred or not. Then, if the financial asset was transferred, the entity must determine whether also risks and rewards from the financial asset were transferred.
Was the financial asset transferred?
An entity transfers a financial asset if either the entity transfers the contractual rights to receive the cash flows from a financial asset, or the entity retains the contractual rights to receive the cash flows from the asset, but assumes a contractual obligation to pass those cash flows on (or to pay these cash flows to one or more recipients) under an arrangement that meets the following conditions:
- the entity has no obligation to pay amounts to the eventual recipient unless it collects equivalent amounts on the original asset
- the entity is prohibited from selling or pledging the original asset (other than as security to the eventual recipient)
- the entity has an obligation to remit any cash flows it collects on behalf of eventual recipients without material delay
Were the risks and rewards from the financial assets transferred?
If substantially all the risks and rewards have been transferred, the asset is derecognized. If substantially all the risks and rewards have been retained, the entity must continue recognizing the asset in its financial statements.
If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset, then the entity must assess whether it has retained control of the asset or not.
If the entity does not control the asset then it must derecognize the asset. But if the entity has retained control of the asset, then the entity continues to recognize the asset to the extent of its continuing involvement in the asset.
Transfers of financial assets are then discussed in much greater detail in IAS 39 and also, application guidance in paragraph 36 summarizes derecognition steps in a simple decision tree. You can familiarize yourself with the decision tree in the video below this summary.
Derecognition of a financial liability
An entity shall derecognize a financial liability when it is extinguished. It is when the obligation specified in the contract is discharged, cancelled or expires.
Hedge accounting
In this short summary I do not intend to explain what hedging is and how it works. But I can promise to do it with some good example in some future article. Here, I just want to sum up what IAS 39 says about hedging.
IAS 39 allows hedge accounting only if all the following conditions are met:
- hedging relationship is at its inception formally designated and documented, together with entity’s risk management objective and strategy for undertaking the hedge
- the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk (consistently with the documentation)
- for cash flow hedges: a forecast transaction must be highly probable and must present exposure to variations in cash flows (which can affect profit or loss)
- the effectiveness of the hedge can be reliably measured
- the hedge is assessed on an ongoing bases and determined actually to have been highly effective
IAS 39 then describes the rules for 3 types of hedging: fair value hedges, cash flow hedges and hedges of a net investment in a foreign operation.
A fair value hedge is a hedge of the exposure to changes in fair value of a recognized asset, liability or a previously unrecognized firm commitment that is attributable to particular risk and can affect profit or loss. The gain or loss from the change in fair value of the hedging instrument is recognized immediately in profit or loss. Also, an entity should adjust the carrying amount of the hedged item for corresponding gain or loss from the hedged risk—this adjustment shall be recognized to profit or loss, too.
A cash flow hedge is a hedge of the exposure to variability in cash flows that could affect profit or loss and is attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction. Here, that portion of the gain or loss on the hedging instrument that is determined to be an effective shall be recognized to other comprehensive income. Ineffective portion shall be recognized to profit or loss. IAS 39 then prescribes rules for accounting when a forecast transaction subsequently results in recognition of a financial or non-financial asset or liability.
A hedge of a net investment in a foreign operation is accounted in the similar way as a cash flow hedge.
IAS 39 also specifies when hedge accounting shall be discontinued prospectively:
- when the hedging instrument expires or is sold, terminated, or exercised, or
- when the hedge no longer meets the criteria for hedge accounting, or
- when the forecast transaction is no longer expected to occur, or
- when the entity revokes the hedge designation
Standard IAS 39 addresses all issues in a greater detail and contains application guidance, because it really is very complex and tough standard. I have summarized it also in the following video:
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136 Comments
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Can the classification available for sale also be called as held for trading (while going through frs 39 -I got this query)
Good afternoon,
What are the Effective Interest Rate (EIR) and Amortised Costs (AC) for an Avalaible for Sale (AFS) security in the table below ?
ID_INSTRUMENT ID_TRANSACTION VALUE_DATE SETTLEMENT_DATE QUANTITY FACE_VALUE SETTLEMENT_AMOUNT PRICE CLEAN_FLAG
sec_afs_1 1 2/15/13 -100 0.9 1
sec_afs_1 2 3/15/13 60 0.89 1
sec_afs_1 3 3/31/13 -40 0.93 1
sec_afs_1 4 3/31/13 50 0.95 1
Regards
Thank you soo much
Company applies CF hedge on its variable liabilities (IAS 39). The hedged risk is changes in the Libor.
The liabilities pay Libor plus margin, subject to an embedded zero floor on the total interest including margin (ie no interest is charged to the lenders in any case). Floor is out of the money at initial recognition , thus not bifurcated.
Company designates receive –variable (Libor)/ pay- fixed as CF hedge. Swap has no floor.
Ineffectiveness arises when Libor plus margin <0 because swap pays on both legs while the liabilities don’t bear interest. Can Company ignore the time value of the embedded floor and only recognise ineffectiveness when the floor is actually in the money?
Hi Miss Sylvia,
I would like to ask regarding the directly attributable transaction cost. Does this include value added taxes and sales taxes?
This site has been very helpful. Thanks for this. 🙂
Dear Regie Mae,
it depends on whether these taxes are claimable from the tax authorities or not. For example, if you are a VAT payer and you are able to claim VAT paid back in your tax return, then no, it’s not a part of acquisition cost. But, if you are not a VAT payer and you are not able to claim VAT, then yes, VAT is a part of an acquisition cost.
However, are we talking about PPE here? As you posted this question under financial instruments and I’m not sure what VAT is applicable here. S.
Thanks Miss Sylvia. Your response is very helpful. I’m talking about Available for Sale financial assets. Well, your reply has given me a lot of information. Thanks for this. 🙂
Hello Silvia! Thank you so much for this site, it has really been helpful. 🙂
I’m having great difficulty with a question and I hope you would be able to assist me.
On 1 January 2013, Bank Alpha takes a five-year deposit from a customer with the following rates of interest specified in the agreement: 2% in 2013, 2.1% in 2014, 2.2% in 2015, 2.4% in 2016 and 3% in 2017.
Supposing the customer exercises his option to withdraw the deposit after four years without any penalty, at what rates should interest expense be accrued by Bank Alpha in each of the deposit years?
Any relevant FRS-es would help 🙂
I have raised a liability that has incurred transaction costs. I want to write the costs off to the income statement at the start of the loan rather than capitalise and amortise them over the loan period. Is there scope in the standard to allow me to do this
Jonathan,
you can put your transaction cost into the P/L rather than amortize them together with the liability – it’s when you decide to classify your financial liability at fair value through profit or loss at initial recognition. But, you need to do it at initial recognition. S.
Another question. Do we have to amortise a one-year interest-free loan obtained for building/constructing/acquiring a qualifying asset (according to IAS 23: Borrowing Costs)?
Yes.
Thanks a lot.
Hi,
What is the treatment of an interest-free loan payment date of which is uncertain?
For Example:
Company A provided its subsidiary with an interest-free loan which will be payable at some point in time in future. Company A has not demanded the loan from last 3 years and it is expected that it will not demand it in foreseeable future.
How should Company A and Company B account for such a transaction?
Dear Asadullah,
this is difficult as the cash flows are not set in this case. Can you at least assume that this loan is repayable on demand? In this case, you would not need to discount it. If it cannot be repayable on demand, you should discount it over the minimal period over which a lender can demand its repayment.S.
Making this assumption is the only choice then I suppose.
It is in substance an investment and not a loan as it is interest free and the investor will not demand repayment. Provided that such intention is communicated to the subsidiary, the loan in effect is an investment (substance over form). When this treatment is applied it should be disclosed in the accounting policies.
Hi Sylvia,
Can you explain to me if netting off management fee arising from an investment against the investment income from same investment is allowed in presenting IFRS compliant financial statement?
Dead D1, in fact, IFRS permits netting off only at some circumstances. In your case – it depends on your activities, but if investment income is not material and is not a primary activity, then you can net off. S.
Hi. Can financial assets at FVTPL be subject to impairment. Thanks.
What method of accounting im going to use.IFRS 9 or 4 talks about on the side of the guarantor, how about on the part of the company who is guaranteed? Is it a financial asset or liabilities? I think its an asset for us,
Colleagues , comments are welcome
Hi Sylvia Good Day
Our company is a bank( giving credit to client)
We entered to a financial guarantee contract for 10 yrs,wherein company X will be the guarantor.
The contract price for 10 yrs is $35.000.000
In the first year we need to pay $175.000 and for the succeeding years we need to pay 1/2 of 1% of all the outstanding loan of the client.
My question is, what is the treatment of $175.000 that i pay for the first year,and the payment for the succeeding years ?and what IFRS im goinhg to apply
Thank you so much!!
Hi, good Day
If the equity holder provides long term loan for company operation than Is it necessary to be discounted and charge the amount as revision in retained earning?
It seems that the loan would be a financial liability and the interest is charged in profit or loss (if held at amortized cost). It does not matter whether it’s from an equity holder or not. S.
Hi,
I have a query:-
How would you account for semi-annual premium on redemption on debentures receivable by the investors.
Hi.
Nice article.
Can you advise on how to book a bond purchased at a discount please.
Thank you.
Hi, Silvia, Thanks for simple explanation of difficult issues. The illustrations are brilliant. It helps a lot.
I have a question. A subsidiary buys a financial instrument (doesn’t matter bond or equity) from its parent. Under IFRS 9 the instrument will be classified as FVOCI. But there is a difference at initial recognition between the FV and the transaction cost. Can we account this difference to OCI, or it must be PV? My friend says it’s OCI since it’s an instrument from shareholder, but I can’t find the legal answer in IFRS/IAS.
Thanks
IFRS 9 states that there are different ways of measuring a financial asset, which are:
1. Amortised Cost
2. FV through P&L
3. FV through OCI
Can you please highlight what is meant by recognizing an asset at amortised cost, at FV through PL and OCI? How do we recognize an asset at FV through P&L? and at OCI?
Can the same security be held by an institution in both AFS book and Trading book?
Are there any restrictions or concerns under IFRS?
Thank you
Hi, I have a question about transaction cost under IFRS 3 (business combination) and IFRS 39
You stated that under IFRS 39, When financial asset or financial liability are not measured at fair value through profit or loss, then directly attributable transaction costs shall be included in the initial measurement.
When you said “included in the initial measurement”, did you mean to add the transaction cost to the carrying value or deduct against the carrying value?
Also, under IFRS 3, is the cost to issue equity securities added to the capital stock or deducted against the capital stock?
Thank you for your help.
Daniel
Hi Daniel,
under IAS 39, if your financial instrument is not at FVTPL, then the initial measurement is its fair value + transaction cost.
Transaction cost to issue own equity stock – it’s deducted from equity as soon as it’s incremental to the issue (it would not have been incurred without the issue of stock) – please refer to IAS 32 para 37.
S.
Thank you. Just to confirm on the transaction cost under IAS 39, if it’s a financial asset that isn’t measured at FVTPL, transaction cost is added to the financial asset, while if it’s a financial liability that isn’t measured at FVTPL, transaction cost is deducted from the financial liability, right?
Daniel
Yes!
what is the meaning of Incurred loss model under IAS 39 ? ,
You account only for the losses that have already incurred and not the losses that you expect to incur based on the past experience/statistics (as in IFRS 9). S.
Can derivatives be classified as AFS or are they always at FVTPL?
Hi Silvia, If a parent company collects a loan at market rate in its own name but transferred it to its subsidiary at no cost. How will the loan be treated in the books of the parent company and subsidiary.
Thanks for the swift response
Well, if it’s a market rate at which the loan is transferred, then I don’t see any problem with the fair values. Just be careful with the cost of acquiring loan – if subsidiary effectively takes this cost, then you simply recognize subsidiary’s liability and parent’s receivable to subsidiary + parent’s liability to bank (however, take this as a guidance only – I would need to see the contract to make reliable conclusion).
Thanks for the response. The loan papers carry the name of the parent company as obligor. This was obatined in its name because the subsidiary is a new company and is yet to have that capacity to secure facility from the bank.
My concerns which I need your input are as follows;
1. Who will recognize the loan in its book. Is it the parent or sub?
2. If its the parent, can it transfer the cost of the loan and the full loan value to the sub?
3. What will be the accounting entries for 2 above
4. Who recognizes normal and effective interests?
Thanks.
I see. Basically, parent can’t get rid of the loan, because it will still be liable to the bank – this does not qualify for derecognition and parent keeps recognizing the loan.
As a result, there are 2 separate relationships: 1) loan between the bank and parent, 2) loan between the parent and a subsidiary. Each of them should be treated separately, based on the nature of agreements.
For the remaining answers, I can’t give you responsible answer and I haven’t seen the papers and I will never guess. But the above should give you hints. 🙂
Thanks a lot. You are a darling!
Accounting for changes in classification from FVPL-HFT to AFS my question is;
if i prepare the accounting entries for the reclassification should i includes the realized trading gains/losses and interest earned Or it will retain to FVPL-HFT category.
Hi Silvia, if a company issued a convertible bond to its investor with a redemption option, in other word, the company can redeem the convertible bond at anytime before the maturity date, is the redemption option an embedded derivative? should it be treated as a derivative financial asset separately?
Hi Iris-Ann, what you described, is a typical compound financial instrument with both equity and liability component. I have written an article about it some time ago, so you might check it here: http://www.cpdbox.com/how-to-account-compound-financial-instruments-ias-32/
S.
Hi Sylvia. Please what is the right treatment for amount deposited for shares by a sole shareholder in a financial institution. Is it allowed to treat it under equity & reserves or under liability.
Thank you.
Hi Olesegun,
did you mean the situation when the sole shareholder pays up for the share capital of the new company? S.
What of a scenario where a shareholders makes payment for shares but the shares have not been issued to him or he decides to defer the allotment of his shares to a latter date but doesn’t ask for a refund of his money? How do you treat this- equity or liabilities?
Thanks
It all depends on the specific agreement/arrangement. However, I would say it’s a liability until the shareholder clearly makes a decision about allotment of shares. S.
A financial asset is an asset that is a contract that will or may be settled in the entity’s own equity instruments and is:
a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments.
What is meant by entity’s own equity instrument ?
Hi Jahan,
for example, it is an entity’s own share (not the share of some other entity), or entity’s own warrants or any other instruments that are booked to equity. S.
Hi Silvia .
Thank you for your reply.
will u please help me to understand this sentence . ”A financial asset is an asset that is a contract that will or may be settled in the entity’s own equity instruments and is:
a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments”
Hello Madam,
Thanks for the wonderfull explanation.
Have a doubt.
Can a Equity investment in non functional currency be hedged.
If yes, than how is the fair value gain/loss shall be accounted.
Hi Mayur, yes, why not? In such a case, I would say it’s a fair value hedge. S.
Dear Silvia,
Thanks for your reply.
Equity investment, being a non monetary asset will be carried at historical cost of conversion from non functional currency according to IAS 21.
But there is exception in IAS 39 with regard to carrying Equity investments at Fair value (spot rate).
Just want to know that under what circumstances this option can be availed.
Thanks
Mayur
Hi Silvia, If for example a company signs legal agreements(including share purchase agreement, shareholders agreement) in order to acquire shares/convertible debt in the target firm on say 30th September but the funds to acquire those shares are paid on 1st October when can the company record the investment in its statement of financial position? Would it be 30th or 1st? On the 30th the company would not yet have released the funds so I was wondering when the asset recognition should take place, and if a financial liability has been created by signing the legal agreements on 30th September?
Hi Oliver,
this is a financial instrument and it should be recognized as soon as the entity becomes a party of contractual provisions of that instrument. Therefore – 30th September. S.
Thanks for clarifying.
Hi Silvia,
How do you account for clean up call options?
Brief history:
An originating company (company A) has receivables which it securitises by transferring them to a securitisation entity (company B). Assume that derecognition criteria from the point of vie of company A has been met and as a result all these receivables are on company B’s balance sheet. company A services these receivables on behalf of company B at a fee based on an arms length basis.
A call option (the clean up call) is in place for company A to buy back the receivables once they reach the mark of 10% of the initial transfer value. Note this is a one way option. This contact is in place because of the fact that in future the cost of servicing B’s receivable will be higher than the benefit, therefore as a cost efficient measure.
Question:
Is this an embedded derivative?
How does company A count for the call option?
Does accounting vary depending on how far away we are from the 10% mark?
Many thanks in advance for your response
Tammy
Hi Tammy, yes, call option is an embedded derivative in your sales contract, however, from what you wrote, I have doubts that derecognition criteria related to receivables were met.
It’s difficult to reply to your questions in the comment, as it’s quite complex issue. You need to assess whether you really need to separate embedded derivative from the host contract – please revise separation criteria in IAS 39/IFRS 9 (based on what you apply).
Then if separation criteria are met, you need to set the fair value of this option and account for the option at fair value through profit or loss (as for any other derivative). Again, it’s quite difficult as you need to apply option pricing models or alternative ways. And yes, intrinsic value of the option will depend on how close you’re to surpassing 10% mark.
Hope it helps a bit
S.
Hi Silvia,
I am very grateful for your response. I do understand the complexity of the scenario but your response has give me pointers and confirmed some of my thought.
With regards to accounting for the call option (second question), if it was concluded that the separation criteria were not met, does that mean it is assumed that the value of the receivables does includes the value of the derivative?
Many thanks again and your response is very much appreciated.
Tammy
Hi Tammy,
hm, I would rather say that the transfer price for these receivables should reflect the value of a derivative – otherwise, the receivables were not transferred at fair value.
S.
Hi Silvia,
I would like to obtain some clarification in respect of offsetting of financial assets and financial liabilities. Could you please tell me if loan granted by a bank could be offset against the savings account held with the same bank and presented as a net liability in the statement of financial position. Is this allowed under IFRS 9/7?
Thanks.
No, you cannot offset these 2. S.
Hi Silvia,
Thank you. You are very helpful.
If Insurance company is required to classify all investment as held to maturity as per law. Whether they can hedge their liabilities under IAS 39. What the provisions.
Mahesh Agarwal, India
Hi Mahesh, yes, they can 🙂 S.
Our company intends to treat loan and advances as Financial assets as per IAS 39. I need your help to apprise me the procedure and really appreciate if you send me schedule and journal entries of following scenario.
Loan amount US$ 2 Million interest rate @ 3% p.a. and effective rate of interest 7% and loan period is 5 years. Looking forward your reply. Many thanks.
Thank you for the summarized piece.
When a receivable has been derecognized due to uncertainty in collection. How should it be treated if it was later collected?
Hello,
receivable should not have been derecognized due to uncertainty in collection, because in this case, rules for derecognition were NOT met. Instead, a company should have recognized a bad debt adjustment. S.
Hi
My company had invested in securities in one of the company. Company is not listed and we have recognized under AFS . It is unquoted securities.
We had done provision as no activities had been there from long time. Recently I have received its audited financials and last financial year there loss has been reduce as compare to previous year
So my question can we reversed the provision as investment is active and show sign of improvement.
Hi Raj, I don’t know exactly about your transaction and how you recognized the provision, but I guess you talk about the impairment. Well, IAS 39 explicitly states that you cannot reverse an impairment loss related to equity instruments like shares. S.
Hi,
What would happen if an AFS financial asset was impaired down to zero, but in subsequent years a cash recovery was received – how would this be treated?
Dr Cash, Cr ??
Could this be treated as a recovery through the impairment line, or as a realised fair value gain?
Many thanks,
Mary
Hi Mary,please could you clarify a bit? What kind of asset was that? You received the cash and then what happened? Did you derecognize the asset? Or its part?
If you derecognize the asset, then it’s more appropriate to recognize profit from sale / disposal, rather than reverse the impairment loss. If the asset stays in your accounts and reasons for impairment no longer exist, then you can reverse impairment loss to P/L.
My company applies fair value hedge accounting with financial liabilities. Should these liabilities been classified as financial liabilities in the group: fair value through profit/loss or in the group Amortised costs.
Thank you for your answer.
Kind regards,
Glenn
Hi Glenn! Yes, you can measure these financial liabilities at amortized cost. But in this case, application of hedge accounting is more complicated than if you carry these liabilities at fair value. The reason is that any gain or loss on hedged item shall adjust the carrying amount of that item (=your liabilities), and you literally amortize this difference to profit or loss (based on recalculated effective interest rate at the date of starting the amortization). Quite complicated, but your choice. Hope it helps! S.
Thank u so much for this video and summary. I would like to ask with regards to loans and receivable,can you have me to answer this question ” identify, with reason how trade account receivable will be disclosed
and measured accordance with IAS 39″ plz. Thank u!!!
Hi Lucy,
trade receivables are in most cases classified as “loans and receivables”in line with IAS 39. They are measured at amortized cost. The reason is that they were generated in the normal course of business and serve as a medium of money collection rather than for capital / trading purposes. They are not quoted on the active market and the payments are determinable in advance. Hope it helps. S.
Thank u so much 😀
Thanks for such a wonderful teaching! You are just AWESOME 🙂 I am a big fan of yours!
Thank you so much 🙂 In fact, I love your quote and I’ll use it on my web 🙂
My company has an embedded derivative which is a foreign currecncy denominated convertible loan. It is carried at fair value leading to huge varaiations in PL.
is their any way that such variations are eliminated?? if yes, how???
Dear Hassan, of course there is a way to eliminate it – for example, taking some fair value hedge. S.
Hi. I would like to ask with regards to loans and receivables, should we amortized the service charges deducted from loan proceeds over the term of the loan using EIR method like how the principal and interest are computed?
Hi Michelle, basically you’re right. S.
Your style of teaching is unique. God bless you for this wonderful piece.
Re IAS 39 I am a student trying to understand the derecogntion tests. Please clariify if the financial asset remains on balance sheet because it does not meet the criteria for a “Transfer” how is the consideration received by the entity for the transaction treated under the standard. There is no specific provision that states that the consideration be treated as an imputed loan i.e para 29 (risk and rewards test) of para 31 (continuing involvement)
Gabrielle
Hi, Gabrielle,
The consideration received is basically a liability, of course. The provisions related to financial liabilities arising from failed derecognition of financial assets say that you need to recognize an interest expense on your liability in the subsequent periods (if there is any). Also, there are specific provisions related to continuing involvement accounting, but it’s quite impossible to cover this topic in the comments’ section. I covered it fully in my course about financial instruments. Silvia
Hi Silvia.
Your video was perfect fro the basics on hedge accounting . But I’m struggling to grasp the finer concepts such as IAS 39 para 93 and 94. Along with the application of the different types of hedges in the financial statements. Do you think you could do a video with an example to help us understand these.
Many thanks Michael
Hi Michael,
currently, I am working on the course about financial instruments including hedging, so finer items will be covered there. But of course, I plan to add free videos related to basic understanding of hedging principles.
Best regards, Silvia
Thank you so much! However, I’d like very much if you could check my consideration in your example on http://www.youtube.com/watch?v=1MPj2eIGHi0&hd=1
About the entry at last for the case when asset held at Fair value; I think that the interest income received should be recognized on P/L and therefore does not affect the FV of asset, right? At year end of 20z3, we just have to compare the FV 125.584 and FV2: 127.500…
That’s what I’ve known. Please help me check them!! Thank you!
Hi Binh,
either way you do, the effect on P/L is the same, isn’t it?
FV2 at 125 584 is before paying the coupon at the end of 20Z2 (or beginning of 20Z3); FV at 127 500 is AFTER paying the coupon, so we recognized coupon payment as decrease in receivable from bond to be consistent.
The thing is that IFRS give really little guidance on how gains and losses should be disaggregated. I always prefer to treat cash payment of coupon as decrease in bond asset and then compare fair values AFTER coupon – in this case, P/L effect is 8 416 as per example.
According to you, interest income is 6 500 plus change in FV is 1 916 (127 500 less 125 584) – add it up and you’ll still have the same P/L effect of 8 416.
Best regards
Silvia
Dear Writer,
Kindly explian how to designate a subsidiary low interest loan in the holding compay’s seperate financial statement and if it’s apporopriate to record it as investment so fair value can be avoide.:)
Thanks
Pricilla
Hi Pricilla,
please clarify the question: are you asking about the below-market rate loan that was provided by parent company to subsidiary? And also, what standard are you following – IAS 39 or IFRS 9?
Anyway, if we talk about separate financial statements, loans are basically measured at amortized cost (if not designated at fair value), even if they are below-market rate. However, you should always measure financial assets at fair value initially (plus transaction cost in this case) – so at initial measurement, you can never avoid fair values. And no, you cannot record this loan as “investment” and measure it at cost as it is not an equity instrument.
Best regards
Silvia
hi, which category out of the four for financial assests is the most commonly used for insurance companies ? and why?
i would say AFS P&L.
Hello, Victoria,
well, it does not really matter whether the company who classifies financial assets is insurance company or not. Insurance companies classify their financial assets exactly in the same way as any other company – so it depends whether the entity aims to hold the asset to maturity or not; whether the asset is a loan / receivable or not and other.
S.
Yes, I too agree with u, because it depends on the intention of the company.
Insurance companies specifically life companies do invests significantly in fixed maturity quoted instruments and we can have either keep them at HTM or AFS depending on management decision and intentions.
This is a must read article for clear and concise knowledge. Thanks.
great summary, answered lots of questions