JULY 2001 IAS 39 Implementation Guidance Questions and Answers as of 1 July 2001 Approved for Issuance by the IAS 39 Implementation Guidance Committee International Accounting Standards Board IAS 39 Implementation Guidance (July 2001) IAS 39 Implementation Guidance (July 2001) No responsibility for loss occasioned to any person acting or refraining from IAS 39 Implementation Guidance: action as a result of any material in this publication can be accepted by the authors or publisher. Questions and Answers Introduction Background IAS 39, Financial Instruments: Recognition and Measurement, establishes principles for recognising, measuring, and disclosing information about financial assets and financial liabilities. When the old IASC Board voted to approve IAS 39 in December 1998, the Board noted that, at about the same time, the United States had adopted new standards on derecognition, derivatives, and hedging, and that other countries did not have comprehensive standards on accounting for financial instruments. Consequently, the IASC Board recognised that there was little experience in applying principles Copyright © 2001 International Accounting Standards Committee Foundation similar to those in IAS 39 in most countries. (IASCF) The Board instructed its staff to monitor implementation issues and to International Accounting Standards, Exposure Drafts, and other IASB consider how IASC can best respond to such issues and thereby help financial publications are copyright of the International Accounting Standards statement preparers, auditors, financial analysts, and others understand IAS 39 Committee Foundation (IASCF). Please address publications and copyright and particularly those preparing to apply it for the first time. matters to: Publications Department, 166 Fleet Street, London EC4A 2DY, United Kingdom. Telephone: +44 (020) 7427-5927, Fax: +44 (020) 7353- At its meeting in March 2000, the IASC Board approved an approach to 0562, E-mail: [email protected] Internet: http://www.iasb.org.uk publish implementation guidance on IAS 39 in the form of Questions and Answers (Q&A). At that meeting, the Board appointed an IAS 39 All rights reserved. No part of this publication may be translated, reprinted or Implementation Guidance Committee (IGC) to review and approve the draft reproduced or utilised in any form either in whole or in part or by any Q&A and to seek public comment before approval of final Q&A. In April electronic, mechanical or other means, now known or hereafter invented, 2001, the IASB agreed to a continuation of that approach. At 1 July 2001, the including photocopying and recording, or in any information storage and IGC had eight members (all experts in financial instruments with backgrounds retrieval system, without prior permission in writing from the International as accounting standard-setters, auditors, bankers, and preparers, from seven Accounting Standards Committee Foundation. countries) and observers from the Basel Committee, IOSCO, and the The [logo] ‘‘Hexagon Device’’, ‘‘IAS’’, ‘‘IASB’’, ‘‘IASCF’’, ‘‘IASC’’ and European Commission. ‘‘International Accounting Standards’’ are Trade Marks of the International Accounting Standards Committee Foundation and should not be used without Due Process the approval of IASCF. The Q&A were drafted by the IASB Staff. The questions are based largely on International Accounting Standards Board, 1st Floor, 30 Cannon Street, inquiries submitted by financial statement preparers, auditors, regulators, and London EC4M 6XH, United Kingdom. Telephone: +44 (020) 7246-6410, other interested parties. The draft Q&A were discussed and revised by the Fax: +44 (020) 7246-6411, E-mail: [email protected] Internet: IGC, and were approved to be posted on the IASB website for public http://www.iasb.org.uk comment by consensus of the IGC. The IGC reviewed the comments received © Copyright IASCF 2 3 © Copyright IASCF IAS 39 Implementation Guidance (July 2001) IAS 39 Implementation Guidance (July 2001) from the public, agreed to necessary revisions to the Q&A, and approved the Q&A for publication in final form. Contents This publication includes all Q&A approved in final form as of 1 July 2001. IAS 39 Implementation Guidance: Questions and Answers It includes final versions of the draft Q&A issued for public comment on 8 May 2000, 12 June 2000, 14 July 2000, 19 September 2000, and 20 SCOPE December 2000. Scope: financial guarantee contracts Question 1-1 Status of the implementation guidance Scope: credit derivatives 1-2 The implementation guidance represents the consensus view of the IGC on the Scope: financial reinsurance 1-3-a appropriate interpretation and practical application of IAS 39 in a range of circumstances and takes into account comments received during the comment Scope: insurance contracts 1-3-b period. The guidance is issued to help financial statement preparers, auditors, Scope: investments in associates 1-4 financial analysts, and others understand IAS 39 and help ensure consistent application of the Standard. Scope: financial guarantee contracts 1-5-a IAS 1, Presentation of Financial Statements, requires compliance “with all the Scope: issued financial guarantee contract 1-5-b requirements of each applicable Standard and each applicable Interpretation Scope: contracts with more than one underlying 1-6 of the Standing Interpretations Committee” if financial statements are to be described as conforming to IAS. The implementation guidance issued by the DEFINITIONS IGC does not have the status of such a Standard or Interpretation. It has not From IAS 32 been formally considered by the Board and does not necessarily represent the views of the Board, although the Board has been able to provide comments on Definition of a financial instrument: gold bullion 8-1 draft Q&A. Additional definitions Since the implementation guidance has been developed to be consistent with Definition of a derivative: examples of derivatives and the requirements and guidance provided in IAS 39, other Standards, underlyings 10-1 Interpretations of the Standing Interpretations Committee, and the IASB Framework, enterprises should consider the guidance as they select and apply Definition of a derivative: settlement at a future date, interest accounting policies in accordance with IAS 1.20-22. rate swap with net or gross settlement 10-2 Definition of a derivative: gross exchange of currencies 10-3 Definition of a derivative: prepaid interest rate swap (fixed rate payment obligation prepaid at inception or subsequently) 10-4-a Definition of a derivative: prepaid pay-variable, receive-fixed interest rate swap 10-4-b Definition of a derivative: contract to purchase fixed rate debt 10-5 Definition of a derivative: settlement amount does not vary proportionately 10-6 © Copyright IASCF 4 5 © Copyright IASCF IAS 39 Implementation Guidance (July 2001) IAS 39 Implementation Guidance (July 2001) Definition of originated loans and receivables: banks’ deposits Definition of a derivative: initial net investment 15-2 in other banks 10-7 ‘‘Regular way’’ contracts: no established market 16-1 Definition of a derivative: offsetting loans 10-8 ‘‘Regular way’’ contracts: forward contract 16-2 Definition of trading activities: balancing a portfolio 10-9 ‘‘Regular way’’ contracts: which customary settlement Definition of a derivative: initial net investment 10-10 provisions apply? 16-3 Definition of originated loans and receivables 10-11-a ‘‘Regular way’’ contracts: share purchase by call option 16-4 Definition of originated loans and receivables: equity security 10-11-b Liabilities held for trading: short sales 18-1 Definition of amortised cost: debt instruments with stepped Liability held for trading: short sales of loan assets 18-2 interest payments 10-12 Embedded derivatives Definition of amortised cost: perpetual debt instruments with Embedded derivatives: separation of host debt instrument 22-1 fixed or market-based variable rate 10-13 Embedded derivatives: presentation 23-1 Definition of amortised cost: perpetual debt instruments with decreasing interest rate 10-14 Embedded derivatives: accounting for convertible bond 23-2 Definition of held for trading: purpose of acquisition 10-15 Embedded derivatives: allocation of carrying amounts 23-3 Definition of held-to-maturity investment: high default risk 10-16 Separation of embedded derivatives 23-4 Definition of held-to-maturity investment: fixed maturity 10-17 Commodity-indexed interest 23-5 Definition of a derivative: option not expected to be exercised 10-18 Embedded derivatives: transferable derivative that is attached to a non-derivative financial instrument 23-6 Effective interest method: expected future cash flows 10-19 Embedded derivatives: derivative attached to a financial Elaboration on the definitions instrument by a third party 23-7 Liability vs. equity classification 11-1 Embedded derivatives: more than one embedded derivative 23-8 Definition of a derivative: royalty agreements 13-1 Embedded derivatives: synthetic instruments 25-1 Definition of a derivative: foreign currency contract based on Embedded derivatives: purchases and sales contracts in sales volume 13-2 foreign currency 25-2 Practice of settling net: forward contract to purchase a Embedded derivatives: dual currency bond 25-3 commodity 14-1 Embedded foreign currency derivative: unrelated foreign Forward contract to purchase a commodity: pattern of net currency provision 25-4 settlement 14-2 Embedded foreign currency derivative: currency of international Option to put a non-financial asset