IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Chapter 25 / Financial Instruments: Recogn ition and Measurem ent (l AS 39)

Finan cial liabilities within the scope of lAS 39 include • Deposit liabilities • Payables (e.g., trade payables) • Loan s fro m other entities • Bonds and other debt instruments issued by the entity

2.1.2 Apart from the preced ing traditi onal types of financial instrument s, lAS 39 also applies to more compl ex, derivative finan cial instruments (e.g., call options, put options, forwards, futures, and swaps) . Derivatives are contracts that allow entities to specul ate on- or hedge against- future changes in market factor s at a relati vely low or no initial cost. Example Derivative fina ncial instruments within the scope oflAS 39 include • A purchased call option to purchase (call) ajinancial asset at a jixed price at a future date. The call option gives the entity the right, but not the obligation, to purchase the asset. • A purchas ed put option to sell (put) a fi nancial ass et at ajixed pri ce at a future dat e. The put option gives the entity the right, but not the obligation, to sell the ass et. • A fo rward contract for the purchase (or sale ) of a jinancial asset at a jixed pri ce at a future date An interest rate swap under which the entity pays a floating inte rest rate and receives a jixed interest rate on a specified notional amount 2.2 Other Contracts within the Scope of lAS 39 2.2.1 Apart from items that meet the definition of financial instruments, lAS 39 also appli es to some contracts that do not meet the definition of a financial instrument but have characteristics similar to derivative financial instruments. Thi s expands the scope of lAS 39 to contrac ts to pur– chase or sell nonfinancial items (e.g., gold, electricity, or gas ) at a future date when, and only when, they have both of these two characteristics: (I) The contract is subject to pote ntial net se ttlem ent, Specifically, when the entity can settle the contract net in cas h or by some other financial instrument , or by exc hangi ng financi al instruments rather than by deli vering or receiving the underl ying nonfinancial item , the contract is subject to poten tial net settlement. (2) The contract is not part of the entity' s expected purch ase, sa le, or usage requirement s (i.e., the contract is not a "normal" purchase or sale). Spec ially , when the contrac t is entered into and held for the purpose of making or taking delivery of the nonfinancial item (e.g., gold, electricity, or gas) in acco rdance with the entity's expec ted pur chase, sale, or usage re– quirement s, it is not within the scope of lAS 39. 2.2.2 By includin g contracts that meet the preceding two characteristics in the scope of lAS 39, deri vatives are acco unted for under lAS 39 whether they meet the definit ion of financia l instrument or not. Example If an entity today (e.g., I111X6) enters into a contract to purchase gold at ajixed price (e.g., flOO) at a certain date in the f uture (e.g., 1/11X7), the contract would be within the scope of lAS 39 if the entity could settle the contract net in cash and the entity does not expect to use the gold in its busi– ness activities. In that case, the contract is sufficiently similar to a derivati ve jinancial instrum ent that it is appropriate to recognize and measure in accordance with lAS 39. Recognition and mea– surement requirements are disc ussed later in this chapter. If, however, the entity enters into a cont ract to purchase electricity and the purpos e is to take deli v– ery of the electricity in accordance with the entity 's expe cted usage requirements, that contract would be outside the scope of lAS 39. Such a contract would instead be accou nted fo r as an execu– tory contract and usually not recogni zed until one of the parties has performed unde r the contract.

Case Study 1

This case illustrates the appli cation oflAS 39 to items other than jinancial instruments. Entity A enters into a contract to purchase 5 million pounds of copper for a fixed price at a future date. Copper is actively traded on the metals exchange and is readily convertible to cash.