IAS 39 Financial Instruments: Recognition and Measurement
Measurement and hedging
Under existing UK requirements, financial instruments are generally carried at amortised cost - less impairment provisions in the case of financial assets - although some entities mark-to-market trading books with changes in value recognised in the profit and loss account. IAS 39 requires specific measurement bases to be applied to different categories of financial instrument, which would require a number of significant changes to existing UK practice.
Under IAS 39, all derivatives, and nonderivative financial instruments held for trading purposes, must be measured at fair value with changes in value recognised in the profit and loss account. This also applies to certain derivative-like features - including some prepayment options or settlement options - that are incorporated into a non-derivative contract, which must be separated from the main contract and accounted for as a derivative. IAS 39
allows any other financial asset or liability, when initially recognised, to be designated as being at ?fair value through profit or loss'. This ?fair value option' may simplify the accounting in certain circumstances. Detailed rules for the method of determining fair value are set out, including requirements for the use of valuation models for instruments that are not traded on a market.
Other financial assets that are loans or other receivables and are not traded on a market are measured on an amortised cost basis. Accrual of interest must be calculated on the effective yield basis which spreads the interest, together with any initial fees or costs, over the life of the asset at a constant yield. Financial liabilities are also measured at amortised cost, unless the option to designa ...