IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley IFRS: Practical Implementation Guide and Workbook

of more than an insignificant amount of HTM inves tments normall y would necessitate reclassifica– tion of all remaining HTM investments to AFS. An entity also cannot reclassify from L&R to AFS. 3.3.2 Without these restrictions on reclassificati ons, there is a concern that entities would be able to manage earnings (i.e., adj ust the figure s reported in profit or loss at will) by selec tive ly recl assi– fying financial instruments. For instance, if the entity desired to increase profit or loss in a peri od, it would reclass ify asset s on which it could recognize a gain following recla ssification (e.g., if an asset me asured at amortized cost has a higher fair value). 3.4 Summary The next table summarizes lAS 39's classification requirements and provides examples of financial assets and financial liabilities in the different ca tegories . Category Financial assets at fair value through profit or loss Classification requirements Financial assets that are either (1) held for trading or (2) electively des– ignated into the category Examnles Derivative assets and investments in debt and equity securities that are held in a trading portfolio

Investments in debt and equity secu– rities that do not fall into any other category Investments in quoted debt securities for which the entity has an intent and ability to hold to maturity Accounts receivable. notes receiv– able. loan assets. and investments in unquoted debt securit ies Derivative liabilitie s and other trading liabilities

Financial assets that are either (1) electively designated into the cate– gory or (2) do not fall into any other category Quoted financial assets with fixed or determinable payments for which the entity has an intent and ability to hold to maturity Unquoted financial assets with fixed or determinable payments Financial liabilities that are either (1) held for trading or (2) electively des– ignated into the category All financial liabilities other than those at fair value through profit or loss

Available-far-sale financial assets

Held-to-maturity investments

Loans and receivables

Financial liabilities at fair value through profit or loss

Accounts payable. notes payable. and issued debt securities

Financial liabilities at amortized cost

4. RECOGNITION

4.1 The term "recognition" refers to when an entity should record an asset or liability initially on its balance sheet. 4.2 The principle for recognition under lAS 39 is that an entity should recognize a finan cial asset or finan cial liability on its balance sheet when , and only when, the entit y become s a party to the contractual provisions of the instrument. Thi s mean s that an entit y recogni zes all its contractual rights and obligations that give rise to financial asse ts or financial liabilities on its balan ce sheet. 4.3 A consequence of lAS 39's recogn ition requirement is that a contract to purchase or sell a financi al instrument at a futur e date is itself a financial asset or financial liabilit y that is recognized in the balance sheet toda y. The contractual right s and obligations are recognized when the entity becomes a party to the contract rather than when the transacti on is settled. Accordingly, deri vative s are recognized in the financial statements even though the entit y may have paid or received nothing on entering into the deriv ative . 4.4 Planned future transactions and other expected trans action s, no matter how likely, are not recognized as financi al assets or financial liabilities becau se the entity has not yet become a party to a contract. Thu s, a forecast transaction is not recognized in the financial statements even though it may be highly probable. In the absence of any right or obligation, there is no financial asset or finan cial liability to recogni ze.