Amendments to IAS 32 and IAS 39, Financial Instruments

Date recorded:

The Board reviewed the principal issues discussed at the public roundtables that the Board had held 10-14 March 2003 with over 100 commentators on the exposure draft of proposed amendments to IAS 32 and IAS 39. The Board then sought the reactions of the national standard setters (NSS) on these issues.

You can download our unofficial summaries of the roundtable sessions here:


The Board reported that the no-continuing-involvement model was criticised during the roundtables and used the following example to illustrate the different views:

Entity A transfers to entity B a financial instrument carried at 100. Entity A guarantees a loss on this investment up to 20. The expected loss is 2, and the fair value of the guarantee is 5. How should A should account for this transaction? During the roundtable discussions, the following answers were presented:

  • Since A keeps 100% of the risk, no derecognition.
  • Derecognition of 100.
  • Derecognition of 100 and concurrent recognition of a liability, with various proposals for the amount of the liability including 20, 2, and 5.
Under the no-continuing-involvement model, the 80 would be derecognised.

The NSS representatives expressed a range of views as to the appropriate answer without a clear consensus. Some suggested that the Board continue to explore the no-continuing-involvement model. Others encouraged the Board to seek convergence with US GAAP.

Derivatives and Hedge Accounting

All the NSS representatives agreed on the following principles:

  • Derivatives create assets and liabilities that should be recognised on the balance sheet.
  • Derivatives should be measured at fair value.
  • Only items that meet the definition of assets and liabilities should be recognised. Deferred gains and losses are not assets or liabilities.
  • Hedge accounting is a special exception to the normal accounting for derivatives, provided that the hedging relationship is designated at inception; at inception the hedge is expected to be effective; and any ineffectiveness is recognised immediately.

Some of the NSS representatives supported the position taken by many banks that hedge accounting treatment is appropriate for macro-hedging and encouraged the Board to have further discussions with bankers. The Board noted that at the roundtables banking industry representatives said they are working on a proposal to resolve the issue of accounting for macro-hedges. The Board has scheduled a meeting with some of bank representatives.


The NSS representatives agreed that:

  • The model exposed in IAS 39 is an incurred loss model.
  • Clarification of the wording and details is needed.
The group also discussed reversal of impairment losses for available-for-sale assets, which would not be permitted under the proposed amendments to IAS 39. Some supported keeping the existing IAS 39 reversal requirement while others said it was not an issue.

Equity vs. Liability Classification

The NSS representatives expressed no major concerns about the model proposed in the amended IAS 32.

Fair Value Option

The approach proposed in the amendments to IAS 39 would give companies an option to measure any financial asset or financial liability at fair value, with value changes recognised in the income statement. This would be an irrevocable designation at initial recognition of the financial asset or liability.

The two major concerns expressed during the roundtable discussions were the allocation of changes and "cherry-picking". The NSS representatives generally supported this option, but some asked that the hierarchy of fair value sources be revised and more guidance added.

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