Holt IAS 39 Part 1 - The following is a slightly edited version of an article published in the October 2006 issue of Accounting Business and

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1 The following is a slightly edited version of an article published in the October 2006 issue of and available at the url below: http://www.accaglobal.com/members/publications/accounting_business/cpd/2780406 IAS 39, Financial Instruments By Graham Holt IAS 39, Financial Instruments: Recognition and Measurement, Part 1 Current requirements for financial instruments are included in IAS 32, Financial Instruments: Presentation, IAS 39, Financial Instruments: Recognition and Measurement, and IFRS 7, Financial Instruments: Disclosures. The purpose of this article is to provide an introduction to IFRS requirements for financial instruments. It is not a comprehensive guide to all of the requirements of the standards. IAS 32 includes requirements for the presentation of financial instruments as either financial liabilities or equity, including: when a financial instrument should be presented as a financial liability or equity instrument by the issuing entity how to separate and present the components of a compound financial instrument that contains both liability and equity elements. Further, it sets out the nature of the presentation of interest, dividends, losses and gains related to financial instruments and the circumstances in which financial assets and financial liabilities should be offset. IFRS 7 deals with financial instruments’ disclosures and pulls them together in a new standard. Disclosure was formerly dealt with by IAS 32. The two main categories of disclosures required by IFRS 7 are: information about the significance of financial instruments information about the nature and extent of risks arising from financial instruments.
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2 This article deals with the following areas of IAS 39: the application of IAS 39 the recognition of a financial asset or financial liability in the balance sheet the classification of a financial asset or financial liability into different categories of financial assets or financial liabilities and their measurement. Application of IAS 39 A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. The definition is wide and includes cash, deposits in other entities, trade receivables, loans to other entities. investments in debt instruments, investments in shares and other equity instruments. Examples of financial liabilities are: trade payables, loans from other entities, and debt instruments issued by the entity. IAS 39 also applies to more complex, derivative financial instruments such as call options, put options, forwards, futures, and swaps. Derivatives are contracts that allow entities to speculate on future changes in the market at a relatively low or no initial cost. Apart from items that meet the definition of financial instruments, IAS 39 also applies to
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Holt IAS 39 Part 1 - The following is a slightly edited version of an article published in the October 2006 issue of Accounting Business and

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