IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 25 / Financial Instruments: Recognitionand Measurement (lAS 39)

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(I) A "strategic" investment in an equity instrument that is not quoted in an active market and for which there is no intention to sell should be classified as available for sale unless Entity A des– ignates it as at fair value through profit or loss. (g) An investment in a financial asset that is held for trading should be classified into the category of financial asset at fair value through profit or loss. 3.2 Financial Liabilities 3.2.1 There are two principal catego ries of financi al liabilities: (1) Financial liabilities at fair value through profit or loss (FVTPL) (2) Financial liabilities measured at amorti zed cost 3.2.2 Additionally, lAS 39 provides accounting requirements for issued finan cial guarantee con– tracts and commitment s to provide a loan at a below-market interest rate . 3.2.3 Financial liabilities at fair value through profit or loss include financial liabilities that the entity either has incurred for tradi ng purposes or otherwise has elected to classify into this ca te– gory . Derivative liabilities are alway s treated as held for trading unless the y are designated and ef– fective hedging instrument s. The designation of hedging instrument s is discu ssed later in this chapter. 3.2.4 An example of a liability held for tradin g is an issued debt instrument that the entity intends to repurcha se in the near term to make a gain from short-term movements in interest rate s. Another example of a liability held for tradin g is the obligation that arises when an entity sells a security that it has borrowed and does not own (a so-called short sale). 3.2.5 As with financia l asse ts, the abilit y to selectively classify financial instrument s as items measured at fair va lue with changes in fair value recognized in profit or loss is referred to as the fair value option. Th is fair value option may be applied only at initial recogni tion and only if any of these conditions are met: • Such designation eliminates or significa ntly reduces a measurement or recogniti on inconsis– tency (sometimes referred to as an acco unting mismatch ) that would oth erwise arise from measuring assets or liabilities or recogni zing the gains and losses on them on different bases. • A gro up of financial asse ts, financial liabil ities, or both are managed and eva luated on a fair value basis in accordance with a documented risk management or investment strategy, and information is provided intern ally on that basis. • An instrument contains an embedded deriv ative (unless that embedded derivative does not significantl y modify the instrument' s cash flows under the contract or it is clear with little or no analysis that separation of the embedded derivative is proh ibited ). 3.2.6 The second catego ry of financial liabilities is fi nancia l liab ilities measured at amorti zed cost. It is the default category for financial liabilities that do not meet the definition of financial liab ilities at fair value throu gh profi t or loss. For most entities , most financ ial liabilities will fall into this category. Examples of financia l liab ilities that generally would be classified in this ca te– gory are acco unt payables, note payable s, issued debt instrument s, and deposits from customers. 3.2.7 In addition to the two categories of financial liabilities just listed , lAS 39 also address es the measurement of certa in issued financial guarantee contracts and loan commitment s. A financial guarantee contract is a contract that requires the issuer to mak e specified payments to reimburse the holder for a loss it incurs becau se a specified debtor fails to make payment when due in accor– dance with the original or modi fied terms of a debt instrument. After initial recognition, lAS 39 requires issued financial guarante e contracts to be measured at the higher of (a) the amount deter– mined in accordance with lAS 37. Provisions. Contingent Liabilities and Contingent Assets, and (b) the amount initially recogni zed less, when appropriate, cumulative amortization. A similar re– quirement applie s to issued commitments to provide a loan at a below-market interest rate. 3.3 Reclassifications 3.3.1 lAS 39 seve rely restricts the ability to reclassify financial assets and financial liabil ities from one category to another. Reclassifications into or out of the FVTPL ca tegory are not permit– ted. Reclassifications between the AFS and HTM categories are possibl e, although recl assifications