www.technology.infomine.com/
Industries (now superseded) para 62.
reviews/Blockcaving (accessed
111 Former OIAC SORP para 127.
09/10/2015).
112 IFRIC Update, June 2018
144 IASC Issues Paper, 10.26.
113 IASC Issues Paper 10.27.
145 IASC Issues Paper, 10.23.
114 UK Oil Industry Accounting Committee
146 IASC Issues Paper, 10.24.
(OIAC) Statement of Recommended
147 IASC Issues Paper, 1.27.
Practice (SORP) on Accounting for Oil and
148
HM Revenue & Customs website,
Gas Exploration, Development, Production
www.hmrc.gov.uk, International – Taxation
and Decommissioning Activities
of UK oil production.
115 IASC Issues Paper 10.29.
149 IASC Issues Paper, Glossary of Terms.
3400 Chapter 39
3401
Chapter 40
Financial instruments:
Introduction
1 STANDARDS APPLYING TO FINANCIAL INSTRUMENTS ........................... 3403
1.1
IAS 32 ................................................................................................................... 3403
1.2 IAS
39
...................................................................................................................
3404
1.3 IFRS 7 ................................................................................................................... 3404
1.4 IFRS
9
...................................................................................................................
3405
1.5
Structure and objectives of the standards .................................................... 3407
2 ADOPTION OF IFRS IN THE EUROPEAN UNION ...................................... 3407
3402 Chapter 40
3403
Chapter 40
Financial instruments:
Introduction
1
STANDARDS APPLYING TO FINANCIAL INSTRUMENTS
The subject matter of this and the next ten chapters is the recognition, measurement,
presentation and disclosure of financial instruments, the IASB’s accounting
requirements for which are regarded by many as some of the more difficult to
understand. There are many likely reasons for this, including the fact that it is such a
broad topic encompassing some of the more complex contracts entities enter into. In
addition, the requirements have been subject to a process of almost continual change
over the last twenty years or so and are dealt with in a number of different standards
and other pronouncements.
The following are the standards which deal primarily with the accounting for financial
instruments:
• IAS 32 – Financial Instruments: Presentation;
• IAS 39 – Financial Instruments: Recognition and Measurement;
• IFRS 7 – Financial Instruments: Disclosures; and
• IFRS 9 – Financial Instruments.
In addition a number of interpretations address the requirements of these standards,
including:
• IFRIC 2 – Members’ Shares in Co-operative Entities and Similar Instruments;
• IFRIC 16 – Hedges of a Net Investment in a Foreign Operation; and
• IFRIC 19 – Extinguishing Financial Liabilities with Equity Instruments.
Information about the development of the standards is set out at 1.1 to 1.4 below.
1.1 IAS
32
The original version of IAS 32 – Financial Instruments: Disclosure and Presentation –
was published in March 1995. The presentation requirements of the standard were
subject to significant review during 2002 and 2003 and a revised standard was
published in December 2003. IFRS 7, which was published in August 2005, superseded
the disclosure requirements in IAS 32 and the title of the latter standard was changed
3404 Chapter 40
to reflect this. In February 2008, the IASB amended IAS 32 to change the classification
of certain puttable financial instruments and instruments of limited life entities from
liabilities to equity. Further amendments to IAS 32, designed to clarify its requirements
for offsetting (or netting) of financial instruments, were issued in December 2011 and
numerous other amendments have been made throughout the life of the standard.
The IASB recognises that the classification of financial instruments as liabilities or
equity in accordance with IAS 32 presents many challenges. Consequently, it is working
on a research project exploring what improvements could be made to the presentation
and disclosure requirements for financial instruments with characteristics of equity. In
June 2018 the IASB published Financial Instruments with Characteristics of Equity, a
discussion paper setting out its preliminary views on the subject.
1.2 IAS
39
IAS 39 was originally published in March 1999. Its origins could be found in US GAAP
and at a high level there were only limited differences between the two systems. In
particular both adopted a similar ‘mixed attribute’ model whereby some financial
instruments were measured by reference to their historical cost and some by reference
to their fair value.
By dealing with most aspects of virtually all financial instruments, it was the longest, and
by far the most complex, standard issued by the IASC which also established a process
to develop and publish guidance in the form of Questions and Answers (Q&As). IAS 39,
like IAS 32, was subject to significant review during 2002 and 2003 and a revised
standard, incorporating most of the Q&As as implementation guidance, was published
in December 2003.
Many other changes have been made to IAS 39 since its original publication, including
amendments in March 2004 allowing the use of hedge accounting for certain portfolio
(or macro) fair value hedges of interest rate risk. However, subject limited exceptions,
most of the requirements of IAS 39 are now superseded by or carried forward into
IFRS 9. Those exceptions are:
• any entity may continue applying the hedge accounting requirements of IAS 39
instead of those in IFRS 9 even after applying the rest of IFRS 9;
• any entity may apply the macro fair value hedge accounting requirements of
IAS 39 for hedges of interest rate risk in addition to the hedge accounting
requirements of IFRS 9; and
• certain insurers may delay their application of IFRS 9 (see 1.4 below).
This publication reflects the reduced applicability of IAS 39 by covering its
requirements only at a high level, although there are explanations in Chapter 49 of the
more important differences between hedge accounting under IAS 39 and IFRS 9.
1.3 IFRS
7
A project principally focused on revising the then IAS 30 – Disclosures in the Financial
Statements of Banks and Similar Financial Institutions – evolved into a comprehensive
review of all disclosure requirements related to financial instruments. This resulted in
Financial instruments: Introduction 3405
the publication of IFRS 7 in August 2005, superseding IAS 30 and the disclosure
requirements in IAS 32.
IFRS 7 has been
subject to a number of amendments since publication. The requirements
relating to liquidity risk were improved in the light of experience gained in the financial
crisis; disclosures about transfers of financial assets were enhanced following an aborted
attempt to revise the requirements addressing derecognition of financial assets; and more
information about offsetting and netting agreements is now required. IFRS 9 also makes
a significant number of amendments and additions to IFRS 7.
1.4 IFRS
9
In April 2009, during the financial crisis, the IASB committed itself to a comprehensive
review of IAS 39. The IASB’s plan split this project into the following three phases, each
of which would result in the publication of requirements replacing the corresponding
parts of IAS 39:
• classification of financial assets and financial liabilities;
• impairment and the effective interest method; and
• hedge accounting.
Originally, the IASB had proposed a simplified accounting model under which all
financial instruments would be measured either at amortised cost or at fair value
through profit or loss. Subsequently, additional categories of financial asset were
introduced allowing certain investments in debt and equity instruments to be measured
at fair value with most changes in value recognised in other comprehensive income.
For debt instruments, those gains and losses are subsequently recycled to profit or loss
on derecognition. In addition, the accounting for financial liabilities was eventually left
much the same as in IAS 39, although the IASB introduced a requirement to recognise
in other comprehensive income (rather than profit or loss) gains or losses on most
financial liabilities designated at fair value through profit or loss to the extent they
represent changes in the instrument’s credit risk. The requirements of these parts of
IFRS 9 are primarily covered in Chapters 44 and 46.
During the financial crisis, a number of commentators criticised the requirements of
IAS 39 for unnecessarily delaying the recognition of impairments. IAS 39 uses a so
called ‘incurred loss’ approach whereby impairments are not recognised until there is
objective evidence of the impairment having occurred. The requirements in IFRS 9 are
better described as an ‘expected loss’ approach. In almost all circumstances, applying
IFRS 9 will result in the recognition of an impairment expense sooner than would have
been the case under IAS 39. Consequently, at any point in time, an entity will have
accumulated a higher impairment provision (and report a lower amount of equity) than
would have arisen from applying IAS 39. This part of IFRS 9 is covered in Chapter 47.
The hedge accounting phase of the project was designed to simplify hedge accounting,
expand the relationships for which hedge accounting could be applied and align the
accounting requirements more closely with entities’ risk management practices. IFRS 9
does not itself address portfolio hedge accounting and, viewed in isolation, is less
accommodating than IAS 39. However, IFRS 9 does allow for the continued application
of the portfolio fair value hedge accounting requirements of IAS 39 alongside its more
3406 Chapter 40
general hedge accounting requirements. In addition, entities wishing to use the portfolio
cash flow hedge accounting guidance in IAS 39 can continue applying the entirety of
IAS 39’s hedge accounting requirements, although none of the benefits of applying the
hedge accounting requirements of IFRS 9 would then be available.
The IASB has a separate research project which aims to eliminate any need for this
continued application of IAS 39 (and also the so-called EU ‘carve-out’ – see 2 below).
A discussion paper, Accounting for Dynamic Risk Management: a Portfolio Revaluation
Approach to Macro Hedging, was published in April 2014, but the IASB has since
concluded it is not yet in a position to develop its proposals into an exposure draft. At
the time of writing the intended next step had become the development of a ‘core
model’ addressing the most important issues, the feasibility of which the IASB intends
to seek feedback on in the first half of 2019. The hedge accounting requirements of
IFRS 9 are covered in Chapter 49 which also highlights important differences between
those requirements and those of IAS 39.
The first version of IFRS 9 was published in November 2009 with significant
amendments following in October 2010 and November 2013 before it was substantially
completed in July 2014. In October 2017, the IASB published limited amendments to the
standard designed to address concerns about the classification of financial assets
containing certain prepayment features.
Adoption of IFRS 9 was required for most entities for periods commencing on or after
1 January 2018 and the October 2017 amendments were available to be adopted at the
same time (although their mandatory effective date is one year later). However, a
number of constituents identified adverse accounting consequences that might arise
from insurers applying IFRS 9 before IFRS 17 – Insurance Contracts – adoption of
which is not mandatory for periods commencing before 1 January 2021. The IASB
responded by amending IFRS 4 – Insurance Contracts – to allow certain insurers to
adopt IFRS 9 at a later date as well as offering other reliefs to those that adopt IFRS 9
in a period commencing before 1 January 2021. Further information about these
changes is included in Chapter 51 at 10.
During the development of IFRS 9, the IASB worked closely with its counterparts at the
FASB with the aim of aligning as far as possible the financial reporting requirements for
financial instruments in accordance with IFRS and US GAAP. The measurement of fair
values under the two bodies of GAAP is to a large extent the same and in June 2016 the
FASB published a new standard requiring impairment of financial assets to be based on
expected losses, although it is somewhat different to the approach in IFRS 9. The FASB
has made various other amendments to US GAAP in recent years, but, important
differences remain in the areas of classifying and measuring financial instruments and
hedge accounting and there are significant differences in other areas including the
approach to offsetting financial assets and financial liabilities.
The IASB continues to monitor market developments and their potential financial
reporting implications. One of the recommendations following the financial crisis has
been the reform of interbank offered rates (IBOR). These benchmarks index trillions of
dollars in a wide variety of financial products but their long-term viability has been
brought into question and in some jurisdictions there is an intention to replace them
Financial instruments: Introduction 3407
with alternative rates. In June 2018 the IASB agreed to add to its agenda an active
research project on the effects of these reforms on financial reporting.
1.5
Structure and objectives of the standards
The main text of the standards is supplemented by application guidance (which is an
integral part of each standard).1 IAS 32 and IFRS 9 are each supplemented by illustrative
examples and IFRS
7 and IFRS 9 by implementation guidance. These examples and
implementation guidance accompany, but are not part of, the standards.2
The objective of IAS 32 is to establish principles for presenting financial instruments as
liabilities or equity and for offsetting financial assets and financial liabilities. [IAS 32.2].
For IFRS 9 it is to establish principles for the financial reporting of financial assets and
financial liabilities that present relevant and useful information to users of financial
statements for their assessment of the amounts, timing and uncertainty of the entity’s
future cash flows. [IFRS 9.1.1]. Finally, the objective of IFRS 7 is to require entities to
provide disclosures in their financial statements that enable users to evaluate:
(a) the significance of financial instruments for the entity’s financial position and
performance; and
(b) the nature and extent of risks arising from financial instruments to which the entity
is exposed during the period and at the reporting date, and how the entity manages
those risks. [IFRS 7.1].
2
ADOPTION OF IFRS IN THE EUROPEAN UNION
An endorsement mechanism has been implemented whereby only those standards and
interpretations that have been adopted for application within the EU may be applied in
financial statements prepared in accordance with the ‘IAS Regulation’. The role of this
mechanism is not to reformulate or replace IFRSs, but to oversee the adoption of new
standards and interpretations, intervening only when they contain material deficiencies
or have failed to cater for features specific to the EU economic or legal environments.
Given the number of constituents within the EU, the potential for non-endorsement in
practice provides a degree of additional leverage over the work of the IASB.
IAS 39 as endorsed for use in the EU is currently different in one important respect from
the version published by the IASB. Certain text has been removed (commonly known
as a ‘carve-out’) so that, essentially, the EU version allows the use of macro fair value
hedge accounting in situations that the full version of IAS 39 does not.3 The European
Commission has continued to emphasise the need for the IASB and representatives of
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 673
