IASB proposes three amendments to IAS 39

  • IASB Exposure Draft (original) Image

08 Jul 2004

The IASB has published three short exposure drafts proposing limited amendments to IAS 39 'Financial Instruments: Recognition and Measurement'.

Comment deadline on all is 8 October 2004. The EDs will be available on the IASB's website starting 19 July. Click for Press Release (PDF 41k).

First-time adoption of IAS 39

The ED Transition and Initial Recognition of Financial Assets and Financial Liabilities proposes an amendment that would apply when entities first adopt IAS 39. It would give an entity a choice of applying the "day one gain and loss" recognition requirements either prospectively to transactions entered into after 25 October 2002 or retrospectively under IAS 39.104.

"Day one gains and losses" arise when the transaction price differs from fair values calculated by using, for example, a valuation model. These gains and losses can only be recognised in certain circumstances – when variables in the valuation model include only data from observable markets. This change would allow entities conform their treatment under IAS 39 to US GAAP.

Proposed effective date: Annual periods beginning on or after 1 January 2005.

Cash flow hedging of forecast intragroup transactions

The ED Cash Flow Hedge Accounting of Forecast Intragroup Transactions addresses whether forecast intragroup transactions can be considered hedged items.

Under IAS 39 prior to the December 2003 revisions, forecast intragroup transactions could be designated as a hedged item if the criteria in IGC 137-14 were met. That approach was consistent with US GAAP. However, IAS 39 as revised in December 2003 removed IGC 137-14 without including its guidance in the standard. As a result, it was unclear whether forecast intragroup transactions could still be considered hedged items.

The Exposure Draft confirms that the forecast intragroup transactions can not be considered hedged items. However, the ED provides guidance that in the consolidated accounts, a highly probable forecasted external transaction that gives rise to an exposure that will have an effect on consolidated profit or loss can be designated as the hedged item.

Proposed effective date: Annual periods beginning on or after 1 January 2006.

Financial guarantee contracts

The ED Financial Guarantee Contracts and Credit Insurance proposes that the issuer of a financial guarantee contract should measure the contract initially at fair value. If the financial guarantee contract was issued in a stand-alone arm's length transaction to an unrelated party, its fair value at inception is likely to equal the premium received.

The ED also addresses the subsequent measurement of those guarantees:

  • A guarantee that meets the IFRS 4 definition of an insurance contract (guarantee against failure of a specific debtor to pay) would initially be measured at fair value and subsequently at the higher of (a) the amount initially recognised minus amortisation under IAS 18 and (b) IAS 37.
  • A guarantee arising on derecognition would be accounted for under IAS 39 (mark to market through profit or loss) even if it is like an insurance contract.
  • A guarantee that is indexed based on a credit index or other variable would be treated as a derivative under IAS 39 (mark to market through profit or loss).
Proposed effective date: Annual periods beginning on or after 1 January 2006.


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