IAS 39 — Scope of IAS 39 paragraph 11A and AG 33(d)(iii)

Date recorded:

In May 2007 the IFRIC published in the IFRIC Update tentative agenda decisions regarding the application of two paragraphs in IAS 39 Financial Instruments: Recognition and Measurement:

  • AG33(d)(iii) - The issue relates to assessing the economic environment in which the transaction takes place in the context of determining whether a currency is commonly used in contracts to buy or sell non-financial items and thus is not an embedded foreign currency derivative requiring separation.
  • Paragraph 11A - The issue relates to whether the fair value option in this paragraph can be applied to all contractual arrangements with one or more embedded derivatives, including contractual arrangements with hosts outside the scope of IAS 39.

The IFRIC then concluded that further analysis is needed and that the staff should provide such an analysis including a recommendation on the action to be taken by IFRIC.

At the September IFRIC meeting it was concluded that both IAS 39.11A and IAS 39.AG33(d) need clarification and that both issues will be referred to the Board. The staff has been asked to provide suitable revisions to IAS 39.

As a result the following four alternatives were presented to the IFRIC:

  • Alternative A - Extend the scope of IAS 39 to include all contracts that have the characteristics of a derivative (as set out in paragraph 9 of IAS 39).
  • Alternative B - Extend the scope of IAS 39 to include, in their entirety, all contracts to buy or sell a non-financial item that could either be settled net, or that are not in accordance with the entity's expected purchase, sale or usage requirements
  • Alternative C - Extend the scope of the Fair Value Option (FVO) in IAS 39. (the staff presented two sub-alternatives: permission of application of the fair value option to (a) some or all non-financial contracts or (b) non-financial non-contractual asses and liabilities)
  • Alternative D - Clarify paragraph 11A and paragraph AG33(d).

The IFRIC members agreed to pursue alternative D, which would result in minor amendments to IAS 39, that could possibly be implemented via the Annual Improvements Process. The staff was asked to prepare draft clarification that, after IFRIC's consent, can be presented to the Board. It was pointed out by one IFRIC member that regarding AG33(d)(iii) the term 'commonly used' needs clarification.

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