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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
Available-far-sale financial assets
Held-to-maturity investments
Loans and receivables
Financial liabilities at fair value
through profit or loss
Financial liabilities at amortized cost
4.
RECOGNITION
Classification requirements
Financial assets that are either
(1)
held for trading or (2) electively des–
ignated into the category
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
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
Accounts payable. notes payable. and
issued debt securities
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.