Initial recognition FOREIGN EXCHANGE

Chapter 20 – Financial Instruments Page 276 8 Offsetting Financial assets and financial liabilities should generally be presented as separate items in the statement of financial position. However, it is possible to report financial assets and liabilities net where the entity has a legally enforceable right to offset the amounts and the entity intends to settle on a net basis. If the amounts are not settled on a net basis, then they may still be offset if the entity intends to realise the asset and settle the liability simultaneously. [IAS 32.42] 9 Objectives and Scope of IAS 39 The objective of IAS 39 is to establish principles for recognising and measuring financial assets and financial liabilities. The scope of IAS 39 is consistent with IAS 32; however there are a number of additional exceptions to its application. These include rights and obligations under a leasing arrangement as accounted for in accordance with IAS 17 Leases. However, certain elements of a lease are within the scope of IAS 39. For example a lease receivable recognised by a lessor is subject to IAS 39’s derecognition and impairment provisions, a finance lease obligation of a lessee is subject to its derecognition criteria and IAS 39 applies where a lease contains what is called an embedded derivative. [IAS 39.2] An equity instrument that meets the definition of a financial instrument but is an investment in an associate, subsidiary or joint venture is not subject to the requirements of IAS 39, nor are certain financial guarantees in relation to non-payment by a specified debtor. A loan commitment that cannot be settled by the payment of cash or another financial instrument is also outside of the scope of IAS 39. [IAS 39.2] A loan commitment designated as a financial liability at fair value with the changes in fair value reported directly in profit or loss is specifically identified as being within the scope of IAS 39. [IAS 39.4] Liabilities in relation to financial guarantee contracts are within the scope of IAS 39. A financial guarantee contract is defined as being one that requires the issuer to make specified payments to reimburse any loss that the holder may make where the debtor has failed to make the required payments when they were due as set out in the terms of the debt instrument. 10 Recognition and Measurement of Financial Instruments A financial asset or financial liability should be recognised when an entity enters into the contractual provisions of the financial instrument. [IAS 39.14] The value at which a financial asset or financial liability should originally be measured is its fair value plus, in certain circumstances, any directly attributable transaction costs, such as fees and commissions paid to brokers and advisors. [IAS 39.43] For subsequent measurement of financial assets, the treatment depends on the categorisation of the financial asset, as explained below. Where an entity holds investments in equity instruments that do not have a quoted price in an active market and it is not possible to calculate their fair values reliably, they should be measured at cost. Derivatives that are linked to such investments, or require the delivery of such an investment, should also be measured at cost. [IAS 39.46] An entity is required to consider whether financial assets are impaired carried at more than Chapter 20 – Financial Instruments Page 277 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