IAS 39

IAS 39
Name	IAS 39
Issued by	International Accounting Standards Committee; succeeded by International Accounting Standards Board
First issued	1998
Replaced by	IFRS 9
Subject	Financial instruments: recognition, measurement, presentation, disclosure
Status	Superseded (effective replacement 2018)

IAS 39 IAS 39 is an International Accounting Standard that set out principles for the recognition, measurement, presentation and disclosure of financial instruments. Issued under the authority of the International Accounting Standards Committee and later maintained by the International Accounting Standards Board, it governed how entities accounted for Deutsche Bank, JPMorgan Chase, Goldman Sachs, Morgan Stanley, HSBC Holdings and other institutions’ assets and liabilities until gradual replacement by IFRS 9. IAS 39 influenced regulatory work by Basel Committee on Banking Supervision, oversight by the Financial Stability Board, and reporting by multinational firms such as General Electric, Siemens, Toyota Motor Corporation and Royal Dutch Shell.

Overview and Scope

IAS 39 applied to financial assets, financial liabilities and some contracts to buy or sell non-financial items. The scope included instruments held by commercial banks like Barclays, investment banks such as Citigroup and insurance firms including Allianz SE and AXA, while excluding items covered by standards issued by the International Accounting Standards Board like IAS 17 (leases) and IAS 19 (employee benefits). The standard’s remit intersected with regulation from bodies such as the European Commission, U.S. Securities and Exchange Commission, and national standard-setters including the Accounting Standards Board of Japan. IAS 39 affected disclosure practice for listed issuers on exchanges such as London Stock Exchange, New York Stock Exchange, Tokyo Stock Exchange and Euronext.

Key Definitions and Classification

IAS 39 introduced classification categories for financial assets: held-to-maturity investments, loans and receivables, fair value through profit or loss (trading), and available-for-sale financial assets. These categories shaped accounting for firms like Procter & Gamble, Unilever, PepsiCo, and Nestlé when reporting securities, derivatives or receivables. Financial liabilities were generally measured at amortized cost unless designated at fair value through profit or loss, a choice exercised by entities including Credit Suisse and UBS Group AG. Definitions of derivatives, hedging instruments and embedded derivatives referenced markets such as Chicago Mercantile Exchange, London Metal Exchange and Intercontinental Exchange and legal constructs like contracts governed in jurisdictions of England and Wales, New York State and Switzerland.

Recognition and Measurement

Recognition under IAS 39 required an entity to recognise a financial asset or liability when, and only when, it became a party to the contractual provisions of the instrument. Initial measurement was at fair value—commonly market prices from platforms like NASDAQ or valuation techniques influenced by guidance from International Valuation Standards Council—plus transaction costs for assets not measured at fair value through profit or loss. Subsequent measurement depended on classification: amortized cost using effective interest method for loans and receivables, held-to-maturity and many liabilities; and fair value with changes in profit or loss for trading instruments. For available-for-sale assets, fair value changes flowed to equity until derecognition or impairment, affecting balance sheets of corporates such as Apple Inc., Microsoft, Alphabet Inc. and Amazon.com.

Hedge Accounting

IAS 39 established strict hedge accounting criteria: formal designation and documentation at inception, hedge effectiveness testing on an ongoing basis, and clear identification of the hedged item and hedging instrument. Typical hedging relationships included cash flow hedges, fair value hedges and hedges of net investments in foreign operations used by multinationals such as Toyota Motor Corporation, Volkswagen Group, BMW, Honda Motor Co. and Ford Motor Company. Effectiveness assessments often relied on statistical measures or models used by treasury teams at Siemens and GE Capital, and interacted with market risk frameworks from Committee of Sponsoring Organizations of the Treadway Commission (COSO) and regulatory capital models under the Basel Accords.

Derecognition

Derecognition rules under IAS 39 determined when an entity removed a financial asset or liability from its statement of financial position, focusing on whether risks and rewards had been transferred. This framework applied to securitisations and transfers executed by banks such as Societe Generale, Banco Santander, ING Group and BNP Paribas. Assessments considered contractual cash flows and control, and involved routes like sale accounting, transfer with continuing involvement, or retention leading to continued recognition. Legal precedents from jurisdictions including United Kingdom and United States affected interpretation in complex transactions.

Transitional Provisions and Amendments

IAS 39 underwent numerous amendments and interpretations issued by the International Accounting Standards Board and the International Financial Reporting Interpretations Committee, with topics covering embedded derivatives, derecognition, and fair value measurement. Transitions were phased for adopters across regions such as the European Union, Australia, Canada, and South Africa, and entities like RBS and Lloyds Banking Group adjusted accounting systems and controls. Subsequent replacement by IFRS 9 responded to weaknesses identified after the 2008 financial crisis and involved coordinated efforts among standard-setters including the Financial Accounting Standards Board and regulators such as the Financial Conduct Authority.

Criticism and Impact on Financial Reporting

IAS 39 attracted criticism for complexity, patchwork amendments, and rules-based prescriptions that critics in organisations like International Organization of Securities Commissions and World Bank argued exacerbated volatility and reduced comparability. Commentators from academia at London School of Economics, Harvard Business School, Wharton School, and INSEAD highlighted challenges in hedge accounting and fair value measurement during stressed markets exemplified by failures involving Lehman Brothers and strains at Bear Stearns. The standard materially influenced risk reporting, audit practice at firms such as Deloitte, PricewaterhouseCoopers, Ernst & Young and KPMG, and ultimately spurred reform culminating in IFRS 9 to simplify classification and improve forward-looking impairment.

Category:International Accounting Standards