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European Union Accounting Rule 11 Financial Instruments

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European Union Accounting Rule 11 Financial Instruments EUROPEAN COMMISSION Budget Budget execution Accounting EUROPEAN UNION ACCOUNTING RULE 11 FINANCIAL INSTRUMENTS EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EU ACCOUNTING RULE 11: FINANCIAL INSTRUMENTS Date: December 2011 Page 2 of 35 I N D E X 1. Objective ....................................................................................................................................... 3 2. Scope ............................................................................................................................................. 3 3. Definitions..................................................................................................................................... 3 4. Presentation ................................................................................................................................... 7 5. Recognition ................................................................................................................................... 9 6. Measurement ............................................................................................................................... 10 6.1 Initial measurement ............................................................................................................ 10 6.2 Subsequent measurement ................................................................................................... 11 6.3 Recognition of gains and losses ......................................................................................... 15 6.4 Reclassification .................................................................................................................. 16 7. Impairment .................................................................................................................................. 18 8. Derecognition .............................................................................................................................. 21 8.1 Derecognition of financial assets ....................................................................................... 21 8.2 Derecognition of financial liabilities.................................................................................. 25 9. Disclosures .................................................................................................................................. 26 10. Effective date .............................................................................................................................. 34 11. Reference to other rules .............................................................................................................. 34 Annex: Categories of financial instruments ....................................................................................... 35 EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EU ACCOUNTING RULE 11: FINANCIAL INSTRUMENTS Date: December 2011 Page 3 of 35 1. Objective The objective of this EU Accounting Rule is to prescribe the accounting treatment of financial in- struments. It applies to the classification, presentation, recognition and measurement of financial instruments as well as to disclosures on financial instruments and the risk management in the con- text of financial instruments. 2. Scope This EU accounting rule applies to accounting for all financial instruments (financial assets, finan- cial liabilities, equity instruments, financial guarantees) in the consolidated financial statements of the European Union except: • Interests in controlled entities, joint ventures and associates (except where otherwise re- quired by EU Accounting Rule 1); • Trust funds falling under the scope of EU Accounting Rule 1 (Group accounting); • Leases (EU Accounting Rule 8); • Pre-financing (EU Accounting Rule 5); • Employers rights and obligations under EU Accounting Rule 12 (Employee benefits); • Loan commitments in the scope of EU Accounting Rule 10 (Provisions); and • Non-exchange transactions under EU Accounting Rule 17 (revenue from non-exchange transactions): initial recognition and initial measurement of rights and obligations. 3. Definitions The following terms are used in this accounting rule with the meanings specified: 1) Assets are resources controlled by an entity as a result of past events and from which future eco- nomic benefits or service potential are expected to flow to the entity. 2) A financial instrument is any contract that gives rise to a financial asset of one entity and a fi- nancial liability or equity instrument of another entity. 3) A financial asset is any asset that is: (a) Cash; (b) An equity instrument of another entity; (c) A contractual right: (i) To receive cash or another financial asset from another entity; or (ii) To exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity; or (d) A contract that will or may be settled in the entity’s own equity instruments and is: EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EU ACCOUNTING RULE 11: FINANCIAL INSTRUMENTS Date: December 2011 Page 4 of 35 (i) A non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or (ii) A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include puttable financial instru- ments classified as equity instruments, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments. 4) A financial liability is any liability that is: (a) A contractual obligation: (i) To deliver cash or another financial asset to another entity; or (ii) To exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity; or (b) A contract that will or may be settled in the entity’s own equity instruments and is: (i) A non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or (ii) A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include puttable financial instru- ments classified as equity instruments, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments. 5) An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. 6) Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. 7) A puttable instrument is a financial instrument that gives the holder the right to put the instru- ment back to the issuer for cash or another financial asset or is automatically put back to the is- suer on the occurrence of an uncertain future event or the death or retirement of the instrument holder. 8) A derivative is a financial instrument or other contract within with all three of the following characteristics: (a) Its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the "underlying"); EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EU ACCOUNTING RULE 11: FINANCIAL INSTRUMENTS Date: December 2011 Page 5 of 35 (b) It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and (c) It is settled at a future date. 9) A financial asset or financial liability at fair value through surplus or deficit is a financial asset or financial liability that is classified as held for trading. A financial asset or financial lia- bility is classified as held for trading if it is: (a) It is acquired or incurred principally for the purpose of selling or repurchasing it in the near term; (b) On initial recognition it is part of a portfolio of identified financial instruments that are man- aged together and for which there is evidence of a recent actual pattern of short-term profit- taking; or (c) It is a derivative (except for a derivative that is a financial guarantee contract). 10) Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to ma- turity other than: (a) Those that the entity upon initial recognition classifies as held for trading; (b) Those that the entity designates as available for sale; and (c) Those that meet
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