IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter

25 /

Finan cial Instruments: Recognition and Meas urement (lAS 39)

Case Study 3

243

This case

illustrates

the application of the principle fo r recognition of a financial asset or finan cial li–

ability.

Facts

Entity A is evaluating whether each of the next items should be recognized as a financial asset or finan–

cial liability under lAS 39:

(a) An unconditional receivable

(b) A forward contract to purchase a specified bond at a specified price at a specified date in the fu–

ture

(d) A firm commitment to purchase a specified quantity of gold at a specified price at a specified

date in the future . The contract cannot be net settled.

(e) A firm commitment to purchase a machine that is designated as a hedged item in a fair value

hedge of the associated foreign currency risk

Required

Help Entity A by indicating whether each of the above items should be recognized as an asset or liability

under lAS 39.

Solution

(a) Entity A should recog nize the unconditional receivab le as a financia l asset.

(b) In principle, Entity A should recognize the forward contract to purch ase a specified bond at a

specified price at a specified date in the future as a financial asse t or financial liabi lity. How–

ever, the initial carrying amount may be zero because forward contracts usually are agreed on

terms that give them a zero fair value at inception.

a specified date in the future, because it does not have any present contractual right or obliga–

tion.

(d) Entity A should not recognize an asset or liability for a firm commitment to purchase a speci–

fied quantit y of gold at a specified price at a specified date in the future. The con tract is not a fi–

nancial instrument but is instead an executory contract. Executory contacts are generally not

recognized before they are settled under existing standards . (Firm commitments that are finan–

cial instruments or that are subject to net settlement, however, are recognized on the commit–

ment date under lAS 39.)

(e) Normally, a firm commitment to purchase a machine would not be recognized as an asset or

liability because it is an executory contract. Under the hedge acco unting provisions of lAS 39,

however, Entity A would recognize an asset or liabilit y for a firm commitment that is desig–

nated as a hedged item in a fair value hedge to the extent there have been changes in the fair

value of the firm commitment attributable to the hedged risk (i.e., in this case, foreign currency

risk).

DERECOGNITION

The term "derecognition" refers to when an entity should remove an asset or liability from its bal–

ance sheet. The derecognition requirements in lAS 39 set out the cond itions that must be met in

order to derecog nize a financial asset or financial liability and the computat ion of any gain or loss

on derecognition. There are separate derecognition requirements for financia l assets and financial

liabilities.

5.1 Derecogniti on of Fina ncial Assets

5.1.1 Under lAS 39, derecognition of a financial asset is appropriate if either one of these two

criteria is met:

( I)

The contractual rights to the cash flows of the financial asset have expired,

(2) The financial asset has been transferred (e.g., sold) and the transfer qualifies for derecogni–

tion based on an evaluation of the extent of transfer of the risks and rewards of ownership

of the financial asset.

5.1.2 The first criterion for derecognition of a financial asset is usually easy to apply. The con–

tractual rights to cash flows may expire, for instance, because a customer has paid off an obligation