CFM16050 - Accounting for financial instruments: IAS 32 and IAS 39: overview of IAS 39

Overview of IAS 39

IAS 39 adopts a "mixed-measurement" or hybrid model of accounting. To date UK accounting has generally used the historic cost model. The exception is found in the financial sector which marks-to-market its trading assets and liabilities, taking gains and losses through the profit and loss account. The tax treatment of loan relationships and derivative contracts follows this, using "authorised accruals basis" – reflecting historic cost accounting – as standard, but with "authorised mark to market basis" permitted.

Under the historic cost model, many derivatives are off balance sheet.

IAS 39 requires all financial assets and financial liabilities, including derivatives, to be recognised on the balance sheet. They are initially measured at cost, which is the fair value of the consideration exchanged (at this point there is no difference to UK GAAP). Subsequent to initial recognition, however, all financial assets are remeasured to fair value, except for certain defined categories that are carried at amortised cost (see CFM16025).

Most non-derivative financial liabilities are measured at amortised cost, although there is a category of "fair value through profit or loss" liabilities. All derivatives are measured at fair value, except for hedges.

Where financial instruments are measured at fair value, changes in fair value flow through the income statement. The exception is financial assets classified as "available for sale", where changes in fair value go to equity but are brought back into the income statement on disposal – a process referred to as "recycling".

The classification of financial assets and financial liabilities is summarised at CFM16055, and the different types of financial asset are covered in more detail at CFM16155 onwards.