CFM16015 - Accounting for financial instruments IAS 32 and IAS 39: adoption and implementation of IAS 32 and IAS 39

EU adoption and UK implementation

In October 2004, the EU adopted IAS 39 in an amended form. It is with this amended standard that the consolidated accounts of listed companies will have to comply. Two areas of the IASB standard were not adopted (known as “carve outs”):

• Entities cannot avail themselves of the option of measuring financial liabilities (other than those held for trading) at fair value (see CFM16240)
• The requirements of IAS 39 with respect to "macro hedging" ( CFM16315) are relaxed.

In November 2005, following the June 2005 amendment to IAS 39 on the fair value option (see CFM16005) the EU rescinded the first carve out above and adopted the relevant IAS 39 provisions without qualification; the second carve out remains.

The position under FRS 25 and FRS 26 for the major areas in accounting for financial instruments is summarised below.

Recognition and derecognition

The derecognition provisions in IAS 39 are not yet incorporated into FRS 26, although the Accounting Standards Board (ASB) issued an exposure draft of proposals in April 2005 to do so. There is thus no change for the time being to the existing UK requirements on recognition and derecognition – in other words, FRS 5 is retained.

Measurement and hedge accounting

FRS 26 implements the measurement and hedge accounting requirements of IAS 39 in their full version, rather than the version adopted by the EU. It is effective for accounting periods starting on or after 1 January 2005 for listed companies still following UK GAAP. For other companies it is effective from 2006, although they may choose to adopt the standard earlier.

However, companies applying FRS 26 will still be subject to companies legislation, which places restrictions on fair value accounting for financial liabilities. Thus companies will not be able to avail themselves of the full fair value option, although the ASB has issued guidance on the extent to which liabilities may be accounted for at fair value in order to show a true and fair view.

Presentation

From 1 January 2005, all UK entities would be required to comply with the IAS 32's presentation requirements ( CFM16060 outlines what these are), which are embodied in FRS 25. UITF 11 (Capital instruments: issuer call options), UITF 33 (Obligations in capital instruments) and UITF 37 (Purchase and sale of own shares) were withdrawn, and most of FRS 4 (Capital Instruments).

Disclosure

The disclosure requirements of FRS 25 will apply from 1 January 2005 for companies applying the measurement and hedging requirements in FRS 26. For other companies, they will not apply until 2007, and for such companies FRS 13 will remain in force for the time being. The ASB has issued proposals to bring disclosure requirements into line by IFRS 7 – see CFM16005.