IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley IFRS: Practical Implementation Guide and Workbook

Required Discuss whether this contract falls within the scope of lAS 39. Solution

This contract potentially is within the scope of lAS 39 because it is a contract to buy or sell a nonfinan– cial item (copper) and the contract is subject to potential net settlement. Under lAS 39, a contract is con– sidered to be subject to potential net settlement if the nonfinancial item that will be delivered is readily convertible to cash. This condition is met in this case because the nonfinancial item is traded on an ac– tive market. Therefore, the contract is within the scope of lAS 39 unless it is a "normal purchase or sale." There is not sufficient information in the question to determine whether it is a "normal purchase or sale." The contract would be considered to be a normal purchase or sale if the entity intends to settle the contract by taking delivery of the nonfinancial item and has no history of • Settling net; • Entering into offsetting contracts; or • Selling shortly after delivery in order to generate a profit from short-term fluctuations in price or dealer' s margin. 2.3 Scope Exceptions 2.3.1 lAS 39 does not apply to an entity's own issued equit y instruments that are classified in the equity section of the entity ' s balance sheet (e.g., ordinary shares, preference shares, warrants, and share option s classified in equity) . Investments in equity instruments issued by other entities, how– ever, are financial assets and within the scope of lAS 39 unless some other scope exception applies. 2.3.2 lAS 39 also provides scope exceptions for some other items that meet the definition of a financial instrument, because they are accounted for under other International Accounting Stan– dard s (lAS) or International Financial Reportin g Standards (IFRS). Such scope exceptions are listed in the table. Scope exceDtion Lease receivables and lease payables Applicable standard IFRS 4, Insurance Contracts 3. CLASSIFICAnON OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES INTO CATEGORIES In order to determine the appropri ate accounting for a financial asset or financi al liabilit y, the asset or liabilit y must first be classified into one of the categories specified by lAS 39 . There are four categories of financial assets and two categories of financial liabilities. The classification of a fi– nancial asset or financial liability determines • Whether the asset or liability should be measured at cost, amorti zed cost, or fair value in the balance sheet • Whether a gain or loss should be recognized immedi ately in profit or loss or as a separate component of equity (with recognition in profit or loss at a later point in time) 3.1 Financial Assets 3.1.1 An entity is required to classify its finan cial assets into one of these four categories: ( I) Financial assets at fair value through profit or loss (FVTPL) (2) Held-to-maturit y investments (HTM) (3) Loans and receivables (L&R) (4) Available-for- sale financial assets (AFS) Employee benefit plans Interests in subsidiaries Interests in associates Interests in jo int ventures Share-based payment transactions Contingent consideration in business combina– tions Insurance contracts lAS 17, Leases lAS 19, Employee Benefi ts lAS 27, Consolidated and Separate Financial Statements lAS 28, Investments in Associates lAS 31, Interests in Joint Ventures IFRS 2, Share -Based Payment IFRS 3, Business Combinations