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their recoverable amount at the end of each reporting period. Impairment is where an event has occurred after the initial recognition of a financial asset and that event results in a
detrimental effect on the cash flows expected in relation to the item. No account is taken of losses that are expected to arise as a result of future events. [IAS 39.58]
10.1 Financial assets
IAS 39 defines four categories of financial instrument: a financial asset or liability at fair value through profit and loss;
held-to-maturity investments; loans and receivables; and
available-for-sale financial assets.
10.1.1 Financial assetliability at fair value through profit or loss
This measurement basis results in the financial asset or liability being remeasured at fair value at the end of each reporting period, with changes in fair value being recognised as part
of the profit or loss for the period. This treatment is required for financial assets classified as held for trading. [IAS 39.9]
To be classified as held for trading the financial asset should have been acquired for the purpose of selling or repurchasing it in the short-term. Alternatively, the financial asset should
be part of a portfolio of identified financial instruments that are managed together. In this case there should also be evidence that the entity has made profits from the turnover of such items
in the short-term. [IAS 39.9]
A derivative as defined above is generally classified as a financial instrument held for trading. [IAS 39.9]
A financial instrument may also be recognised at fair value, with changes recognised directly in profit or loss, where an entity chooses i.e. designates this treatment when the financial
instrument is first recognised. However, in June 2005 an amendment was made to IAS 39 to restrict the use of this fair value option to circumstances where specific criteria are met only.
[IAS 39.9]
Designation is only permitted when it results in more relevant information because it eliminates, or reduces, a measurement or recognition inconsistency that would otherwise
arise. An example would be if an entity had financial assets that were measured at fair value with gains or losses being recognised in equity but its related financial liabilities were
amortised and therefore had a direct impact on the profit or loss for the period. In such circumstances, by using the at fair value through profit or loss approach, the gains and losses
from both the financial asset and related financial liability would be recognised directly in profit or loss.
Other criteria for using the at fair value through profit or loss approach is when a group of financial assets and financial liabilities is evaluated on a fair value basis for internal risk
management purposes and therefore forms the basis on which information is presented to management. The fair value through profit or loss approach may also be used for contracts
containing one or more embedded derivatives, subject to restrictions on the impact of the embedded derivative. [IAS 39.11A]
Financial assets that are classified as held for trading, or where the entity has chosen the fair value measurement option, as described above, should be remeasured at fair value at the
end of each reporting period. No deduction is made for the transaction costs that may be incurred on the disposal of the financial asset. All movements in fair value are recognised
Chapter 20 – Financial Instruments Page 278
directly in profit or loss for the period. [IAS 39.46, 39.55]
10.1.2 Held-to-maturity investments
A financial asset one that is not a derivative that has fixed, or determinable, payments and a fixed maturity date is classified as a held-to-maturity investment, provided the entity intends to
hold it until its maturity and has the ability to do so. [IAS 39.9]
Financial assets that meet the definition of a held-to-maturity investment may also be classified as held at fair value, as discussed above, or as an available-for-sale financial asset.
A financial asset will not meet the definition of a held-to-maturity investment where it meets the definition of a loan or receivable. [IAS 39.9]
An entity is prohibited from classifying financial assets as held-to-maturity if, in the recent past i.e. within the current or two preceding years, it has sold or reclassified more than an
insignificant amount of such investments before their maturity dates. This prohibition is not applicable where the sale of a held-to-maturity investment was so close to its maturity date
that the difference in fair value was minimal, or where the sale is after the entity has received substantially all the principal amount of the financial asset. Also, if the sale was a one-off
unanticipated event beyond the entity’s control, then the prohibition does not apply. [IAS 39.9]
After initial recognition at fair value, a financial asset classified as a held-to-maturity investment should be measured at “amortised cost using the effective interest method”.
[IAS 39.46]
The amortised cost of a financial asset is the initial amount recognised in respect of the financial asset, less any repayments of the principal sum not payments of interest or other
financing costs and plus or minus any amortisation. The amortisation of the financial asset is calculated by applying the effective interest method to spread the financing cost over the
period to maturity i.e. the difference between the initial amount recognised for the financial asset and the amount receivable at maturity. [IAS 39.9]
The effective interest rate is the rate that exactly discounts the scheduled cash flows payable or receivable across the expected life of the financial instrument. [IAS 39.9]
Amortisation, and write downs where the value of the financial asset is impaired i.e. its carrying amount exceeds its recoverable amount, should be reported directly in profit or loss
in the period in which the amortisationimpairment occurs. Any profit or loss on disposal of the financial asset should also be recognised directly in profit or loss for the period. [IAS 39.56]
An impairment loss should be calculated as being the difference between the asset’s carrying amount and the present value of the future cash flows expected to arise from the financial
asset. The present value should be calculated by discounting the cash flows at the original effective interest rate used for amortisation purposes. [IAS 39.63]
A decrease in a previously recognised impairment should be recognised as a reversal of the original impairment. The financial asset’s carrying amount should not exceed the amount of
its amortised cost, had the original impairment not arisen. [IAS 39.65]
10.1.3 Loans and receivables
A non-derivative financial asset that has fixed, or determinable, payments but no fixed maturity date and is not quoted in an active market, is classified as a loan or receivable.
Exceptions to this general classification are where it is classified as held for trading because the entity intends to sell it in the short-term, or where the entity may not substantially recover
the initial investment. [IAS 39.9]
An entity may still choose to classify a financial asset as available-for-sale or at fair value with changes being recognised directly in profit or loss, even where it meets the definition of a loan
or receivable. [IAS 39.9]
