Holt - IAS 39 Part 2 - The following is a slightly edited...

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1 The following is a slightly edited version of an article published in the November / December 2006 issue of and available at the url below: http://www.accaglobal.com/members/publications/accounting_business/cpd/2806959 IAS 39 Financial Instruments: Recognition and Measurement II By Graham Holt Intoduction This article looks at some of the more complex areas of IAS 39 including de-recognition, impairment, derivatives, and hedge accounting. The accounting entries for the above elements of the standard are relatively straight forward. The difficulty comes in determining how the standard should be applied. De-recognition and impairment De-recognition of a financial asset occurs where: 1. the contractual rights to the cash flows of the financial asset have expired, or 2. the financial asset has been transferred (e.g., sold) and the transfer qualifies for de-recognition based on the extent of the transfer of the risks and rewards of ownership of the financial asset. The contractual rights to cash flows may expire if a customer has paid off an obligation to the company or an option held by the company has expired. De-recognition occurs because the rights associated with the financial asset do not now exist. When a company sells or transfers a financial asset to another party, the company must evaluate the extent to which it has transferred the risks and rewards of ownership. The risks and rewards of ownership are transferred where the seller does not retain any rights or obligations associated with the sold asset or where the seller retains a right to repurchase the financial asset in the future at the current fair value of the asset.
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2 For example a company retains substantially all risks and rewards of ownership where the asset will be returned to the company for a fixed price at a future date. Here the sale would not qualify for de-recognition. Examples If a company sells an investment in shares, but retains the right to repurchase the shares at any time at a price equal to their current fair value then it should derecognise the asset. If a company sells an investment in shares and enters into an agreement whereby the buyer will return any increases in value to the company and the company will pay the buyer interest plus compensation for any decrease in the value of the investment, then the company should not derecognise the investment as it has retained substantially all the risks and rewards. The de-recognition criteria for financial liabilities are different from those for financial assets. There is no requirement to assess the extent to which the company has retained risks and rewards in order to derecognise a financial liability. The de-recognition requirements focus on whether the financial liability has been extinguished. IAS 39 requires an assessment at each balance sheet date as to whether there is any
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Holt - IAS 39 Part 2 - The following is a slightly edited...

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