Commission Regulation (EC) No 2086/2004 of 19 November 2004 amending Regulation (EC) No 1725/2003 on the adoption of certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards the insertion of IAS 39Text with EEA relevance
Date: 2004-11-19
Institutions: European Commission
Subjects: accounting, capital market, international standard

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(Acts whose publication is obligatory)

COMMISSION REGULATION (EC) No 2086/2004

of 19 November 2004

amending Regulation (EC) No 1725/2003 on the adoption of certain international accounting standards
in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as
regards the insertion of IAS 39

(Text with EEA relevance)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(4)

Having regard to the Treaty establishing the European
Community,

Having regard to Regulation (EC) No 1606/2002 of the European
Parliament and of the Council of 19 July 2002 on the application
international accounting standards (1), and in particular
of
Article 3(1) thereof,

Whereas:

(5)

(1)

(2)

(3)

By Commission Regulation (EC) No 1725/2003 (2) certain
international standards and interpretations that were
extant at 1 September 2002 were adopted.

On 17 December 2003 the International Accounting Stan-
dard Board (IASB) published revised International
Accounting Standard (IAS) 39 Financial Instruments: rec-
ognition and measurement as part of the IASB’s initiative
to improve 15 standards in time for them to be used by
companies adopting IAS for the first time in 2005. The
purpose of the revision was the further improvement of
the quality and consistency of the body of existing IAS.

On 31 March 2004, the IASB issued an amendment to
IAS 39 Financial Instruments: recognition and measure-
ment on fair value hedge accounting for a portfolio hedge
of interest rate risk. The general objective of the amend-
ment is to simplify the implementation of IAS 39 by
enabling fair value hedge accounting for a portfolio hedge
of interest rate risk.

(1) OJ L 243, 11.9.2002, p. 1.
(2) OJ L 261, 13.10.2003, p. 1. Regulation as amended by Regulation (EC)

No 707/2004 (OJ L 111, 17.4.2004, p. 3)

Pursuant to Regulation (EC) No 1606/2002, it is the objec-
tive of the Commission to have a stable platform of inter-
national accounting standards in place as from 1 January
2005. However, certain important provisions in IAS 39 are
still the subject of unfinished discussions between the
IASB, the European Central Bank, prudential supervisors
and the banking industry. These provisions relate to the
option to fair value all financial assets and liabilities and to
hedge accounting. Each of these provisions concern areas
which are completely autonomous, distinct and separate
from the rest of the standard. In order to respect the date
of 1 January 2005, it is necessary to introduce IAS 39 with
the exception of these provisions.

IAS 39 introduces an option to fair value all financial assets
and liabilities without any restrictions. However, the IASB
has recently published an Exposure Draft (a consultative
paper) which proposes an amendment to IAS 39 in order
to restrict the fair value option contained in the standard.
The proposed amendment is a direct response to concerns
expressed by the European Central Bank, by prudential
supervisors represented in the Basel Committee as well as
by securities regulators of the Member States who are con-
cerned that the fair value option could be used inappropri-
ately, in particular in the case of a company’s own liabili-
ties. The Commission considers
these questions as
important and requiring further examination. The IASB
has received many comments on this proposed amend-
ment and is expected to take a final decision on this issue
by the end of 2004. The Regulation permits the fair value
option to be applied to financial assets. However, in the
case of financial assets that are not traded in active and liq-
uid markets, companies should take care to apply the fair
value option to financial assets in a way that leads to reli-
able measurement.

(6)

The full fair value option should not apply until the IASB
has developed a solution to this issue and until the Com-
mission is able to recognise that an appropriate solution
for this issue has been found. Since the full fair value option
is only an option, the provisions relating to this option are
clearly distinct and separable from the other parts of the
standard.

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(7)

(8)

(9)

(10)

On hedge accounting, there is discussion whether IAS 39
sufficiently takes into account the way in which many
European banks operate their asset/liability management
particularly in a fixed interest rate environment. The con-
troversy is about the limitation of hedge accounting to
either cash flow hedges or fair value hedges and the strict
requirements concerning the effectiveness of those hedges.

Many European banks argue that IAS 39 does not allow
them to apply hedge accounting to their core deposits on
a portfolio basis and would force them to carry out dispro-
portionate and costly changes both to their asset/liability
management and to their accounting systems. As a port-
folio hedge, due to internal interactions and the law of
large numbers, is different from the hedge of a single asset
or a single liability, it is also argued that enabling portfolio
hedge accounting of core deposits on a fair value measure-
ment basis is consistent with the principle in IAS 39 that
the fair value of a financial liability with a demand feature
cannot be less than the amount payable on demand.

The question whether and how the accounting treatment
of portfolio hedging can be designed in such a way that it
better reflects the particularities of banks operating in a
fixed interest rate environment has been recognised as a
significant issue by the IASB. The latter has created as a
matter of priority a working group which is examining
proposals made by European banks for the introduction
into IAS 39 of a new hedge accounting method (interest
margin hedge) which would reflect more closely the way in
asset/liability
conduct
these
which
management.

banks

their

The provisions of IAS 39, which are directly related to the
accounting treatment of portfolio hedging should there-
fore not be adopted for mandatory use at this stage because
they cannot be considered as final and may be changed in
the near future. The relevant provisions that are excluded
from mandatory application are clearly distinct and sepa-
rable from the rest of the standard. They concern those
provisions that do not reflect a portfolio approach and
therefore prevent the application of hedge accounting to a
portfolio of core deposits and those provisions that assimi-
late a prepayment risk to an interest rate risk and therefore
prevent the continuation of risk management techniques
recognised as acceptable by banking supervisors. However,
companies do have the option to apply these provisions
and can therefore apply all hedge accounting provisions in
IAS 39.

companies in 2005. It is therefore the objective to arrive as
soon as possible, and if at all possible no later than around
the end of 2005, at a situation whereby an amended IAS 39
can be adopted in full by the Commission. Accordingly,
the Commission will review the applicability of IAS 39
once the provisions relating to the fair value option and
the hedge accounting have been amended by the IASB and
at the latest by 31 December 2005. A solution is being
worked at between the IASB, the European Central Bank
and banking supervisors for the full fair value option.
Accordingly, the Commission will closely follow this ongo-
ing work and will regularly review the applicability of the
standard. Similarly, the adoption of appropriate provisions
on hedge accounting in the near future is closely linked to
the progress made by the working group set up by the
IASB.

(12)

Companies that prepare for the first time their financial
statements in accordance with international
financial
reporting standards (IFRS) and apply IAS 39 in the version
annexed to this Regulation should be considered as ‘first
time adopters’ within the meaning of IFRS 1, as adopted by
Regulation (EC) No 707/2004 and the present Regulation.
The purpose of IFRS 1 is that costs for the transition
towards full IAS/IFRS should not outweigh the benefits for
the users of financial statements. This reasoning continues
to apply in the case of moving towards full application of
endorsed IAS. Accordingly, references in IFRS 1 to
IAS/IFRS, which was adopted by Regulation (EC)
No 707/2004, should be construed as references to
IAS/IFRS as adopted on the basis of Regulation (EC)
No 1606/2002.

(13)

The adoption of IAS 39 implies, by way of consequence,
amendments to IAS 12, 18, 19, 30, 36 and 37, and SIC 27,
which were adopted by Regulation (EC) No 1725/2003, in
order to ensure consistency between the accounting stan-
dards concerned.

(14)

The Commission therefore has concluded that IAS 39 as
set out in the Annex to this Regulation meets the criteria
for adoption set out in Article 3 of Regulation (EC)
No 1606/2002.

(15)

Regulation (EC) No 1725/2003 should therefore be
amended accordingly.

(11)

The existence in Community law of an accounting stan-
dard on the treatment of financial instruments is an essen-
tial element of the core set of standards to be applied by

(16)

The measures provided for in this Regulation are in accor-
dance with the opinion of the Accounting Regulatory
Committee,

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HAS ADOPTED THIS REGULATION:

Article 1

1.
International Accounting Standard (IAS) 39 Financial Instru-
ments: Recognition and Measurement, with the exception of certain
of its provisions on the use of the fair value option and certain of
its provisions relating to hedge accounting, is inserted in the
Annex to Regulation (EC) No 1725/2003.

The text for insertion, as referred to in the first subparagraph, is
set out in the Annex to this Regulation.

2.
Companies shall be regarded as ‘first time adopters’ in accor-
dance with paragraph 1. References in IFRS 1 to IAS/IFRS shall be
construed as references to IAS/IFRS as adopted by the Commis-
sion on the basis of Regulation (EC) No 1606/2002.

IAS 12, 18, 19, 30, 36 and 37 and SIC-27 as well as Inter-
3.
national Financial Reporting Standard No 1 are amended in accor-
dance with Appendix B of IAS 39, as set out in the Annex to this
Regulation.

Article 2

This Regulation shall enter into force on the 20th day following
that of its publication in the Official Journal of the European Union.

It shall apply from 1 January 2005 at the latest.

Done at Brussels, 19 November 2004.

For the Commission
Frederik BOLKESTEIN
Member of the Commission

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ANNEX

INTERNATIONAL ACCOUNTING STANDARDS

IAS

IAS 39

Financial Instruments: Recognition and Measurement with the exception of the provisions on the use of
the fair value option and certain provisions relating to hedge accounting

Title

Reproduction allowed within the European Economic Area. All existing rights reserved outside the EEA, with the
exception of the right to reproduce for the purposes of personal use or other fair dealing. Further information can
be obtained from the IASB at www.iasb.org.uk

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INTERNATIONAL ACCOUNTING STANDARD 39

Financial Instruments: Recognition and Measurement

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SUMMARY

Objective

Scope

Definitions

Embedded derivatives

Recognition and derecognition

Initial recognition

Derecognition of a financial asset

Transfers that qualify for derecognition

Transfers that do not qualify for derecognition

Continuing involvement in transferred assets

All transfers

Regular way purchase or sale of a financial asset

Derecognition of a financial liability

Measurement

Initial measurement of financial assets and financial liabilities

Subsequent measurement of financial assets

Subsequent measurement of financial liabilities

Fair value measurement considerations

Reclassifications

Gains and losses

Impairment and uncollectibility of financial assets

Financial assets carried at amortised cost

Financial assets carried at cost

Available-for-sale financial assets

Hedging

Hedging instruments

Qualifying instruments

Designation of hedging instruments

Hedged items

Qualifying items

Paragraphs

1

2-7

8-9

10-13

14-42

14

15-23

24-28

29

30-35

36-37

38

39-42

43-70

43-44

45-46

47

48-49

50-54

55-57

58-62

63-65

66

67-70

71-102

72-77

72-73

74-77

78-84

78-80

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Designation of financial items as hedged items

Designation of non-financial items as hedged items

Designation of groups of items as hedged items

Hedge accounting

Fair value hedges

Cash flow hedges

Hedges of a net investment

Effective date and transitional provisions

Withdrawal of other pronouncements

Paragraphs

81

82

83-84

85-101

89-94

95-101

102

103-108

109-110

This revised Standard supersedes IAS 39 (revised 2000) Financial Instruments: Recognition and Measurement and should be
applied for annual periods beginning on or after 1 January 2005. Earlier application is permitted.

OBJECTIVE

1.

The objective of this Standard is to establish principles for recognising and measuring financial assets, financial liabili-
ties and some contracts to buy or sell non-financial items. Requirements for presenting and disclosing information
about financial instruments are set out in IAS 32 Financial Instruments: Disclosure and Presentation.

SCOPE

2.

This Standard shall be applied by all entities to all types of financial instruments except:

(a)

those interests in subsidiaries, associates and joint ventures that are accounted for under IAS 27 Consoli-
dated and Separate Financial Statements, IAS 28 Investments in Associates or IAS 31 Interests in Joint
Ventures. However, entities shall apply this Standard to an interest in a subsidiary, associate or joint venture
that according to IAS 27, IAS 28 or IAS 31 is accounted for under this Standard. Entities shall also apply this
Standard to derivatives on an interest in a subsidiary, associate or joint venture unless the derivative meets the
definition of an equity instrument of the entity in IAS 32.

(b)

rights and obligations under leases to which IAS 17 Leases applies. However:

(i)

lease receivables recognised by a lessor are subject to the derecognition and impairment provisions of this
Standard (see paragraphs 15-37, 58, 59, 63-65 and Appendix A paragraphs AG36-AG52 and
AG84-AG93);

(ii)

finance lease payables recognised by a lessee are subject to the derecognition provisions of this Standard
(see paragraphs 39-42 and Appendix A paragraphs AG57-AG63);

and

(iii) derivatives that are embedded in leases are subject to the embedded derivatives provisions of this Stan-

dard (see paragraphs 10-13 and Appendix A paragraphs AG27-AG33).

(c)

employers’ rights and obligations under employee benefit plans, to which IAS 19 Employee Benefits applies.

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(d)

rights and obligations arising under insurance contracts. However, entities shall apply this Standard to a finan-
cial instrument that takes the form of an insurance (or reinsurance) contract as described in paragraph 6 of
IAS 32, but principally involves the transfer of financial risks described in paragraph 52 of that Standard. In
addition, derivatives that are embedded in insurance contracts are subject to the embedded derivatives provi-
sions of this Standard (see paragraphs 10-13 and Appendix A paragraphs AG27-AG33).

(e)

financial instruments issued by the entity that meet the definition of an equity instrument in IAS 32 (includ-
ing options and warrants). However, the holder of such equity instruments shall apply this Standard to those
instruments, unless they meet the exception in (a) above.

(f)

financial guarantee contracts (including letters of credit and other credit default contracts) that provide for
specified payments to be made to reimburse the holder for a loss it incurs because a specified debtor fails to
make payment when due under the original or modified terms of a debt instrument (see paragraph 3). An issuer
of such a financial guarantee contract shall initially recognise it at fair value, and subsequently measure it at
the higher of (i) the amount recognised under IAS 37 Provisions, Contingent Liabilities and Contingent
Assets , and (ii) the amount initially recognised less, where appropriate, cumulative amortisation recognised
in accordance with IAS 18 Revenue. Financial guarantees are subject to the derecognition provisions of this
Standard (see paragraphs 39-42 and Appendix A paragraphs AG57-AG63).

(g)

contracts for contingent consideration in a business combination (see paragraphs 65-67 of IAS 22 Business
Combinations). This exemption applies only to the acquirer.

(h)

(i)

contracts that require a payment based on climatic, geological or other physical variables (see Appendix A para-
graph AG1). However, other types of derivatives that are embedded in such contracts are subject to the embed-
ded derivatives provisions of this Standard (for example, if an interest rate swap is contingent on a climatic
variable such as heating degree days, the interest rate swap element is an embedded derivative that is within
the scope of this Standard — see paragraphs 10-13 and Appendix A paragraphs AG27-AG33).

except as described in paragraph 4, loan commitments that cannot be settled net in cash or another financial
instrument. A loan commitment is not regarded as settled net merely because the loan is paid out in instal-
ments (for example, a mortgage construction loan that is paid out in instalments in line with the progress of
construction). An issuer of a commitment to provide a loan at a below-market interest rate shall initially rec-
ognise it at fair value, and subsequently measure it at the higher of (i) the amount recognised under IAS 37
and (ii) the amount initially recognised less, where appropriate, cumulative amortisation recognised in accor-
dance with IAS 18. An issuer of loan commitments shall apply IAS 37 to other loan commitments that are not
within the scope of this Standard. Loan commitments are subject to the derecognition provisions of this Stan-
dard (see paragraphs 15-42 and Appendix A paragraphs AG36-AG63).

3.

4.

5.

Financial guarantee contracts are subject to this Standard if they provide for payments to be made in response to
changes in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of
prices or rates, credit rating or credit index, or other variable (sometimes called the ‘underlying’). For example, a
financial guarantee contract that provides for payments to be made if the credit rating of a debtor falls below a par-
ticular level is within the scope of this Standard.

Loan commitments that the entity designates as financial liabilities at fair value through profit or loss are within
the scope of this Standard. An entity that has a past practice of selling the assets resulting from its loan commit-
ments shortly after origination shall apply this Standard to all its loan commitments in the same class.

This Standard shall be applied to those contracts to buy or sell a non-financial item that can be settled net in cash
or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instru-
ments, with the exception of contracts that were entered into and continue to be held for the purpose of the receipt
or delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements.

6.

There are various ways in which a contract to buy or sell a non-financial item can be settled net in cash or another
financial instrument or by exchanging financial instruments. These include:

(a) when the terms of the contract permit either party to settle it net in cash or another financial instrument or by

exchanging financial instruments;

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(b) when the ability to settle net in cash or another financial instrument, or by exchanging financial instruments, is
not explicit in the terms of the contract, but the entity has a practice of settling similar contracts net in cash or
another financial instrument or by exchanging financial instruments (whether with the counterparty, by entering
into offsetting contracts or by selling the contract before its exercise or lapse);

(c) when, for similar contracts, the entity has a practice of taking delivery of the underlying and selling it within a
short period after delivery for the purpose of generating a profit from short-term fluctuations in price or dealer’s
margin;

and

(d) when the non-financial item that is the subject of the contract is readily convertible to cash.

A contract to which (b) or (c) applies is not entered into for the purpose of the receipt or delivery of the non-financial
item in accordance with the entity’s expected purchase, sale or usage requirements and, accordingly, is within the scope
of this Standard. Other contracts to which paragraph 5 applies are evaluated to determine whether they were entered
into and continue to be held for the purpose of the receipt or delivery of the non-financial item in accordance with the
entity’s expected purchase, sale or usage requirements and, accordingly, whether they are within the scope of this
Standard.

7. A written option to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or
by exchanging financial instruments, in accordance with paragraph 6(a) or (d) is within the scope of this Standard. Such
a contract cannot be entered into for the purpose of the receipt or delivery of the non-financial item in accordance with
the entity’s expected purchase, sale or usage requirements.

DEFINITIONS

8.

The terms defined in IAS 32 are used in this Standard with the meanings specified in paragraph 11 of IAS 32. IAS 32
defines the following terms:

— financial instrument

— financial asset

— financial liability

— equity instrument

and provides guidance on applying those definitions.

9.

The following terms are used in this Standard with the meanings specified:

Definition of a Derivative

A derivative is a financial instrument or other contract within the scope of this Standard (see paragraphs 2-7) with
all three of the following characteristics:

(a)

its value changes in response to the change in a specified interest rate, financial instrument price, commodity
price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable (sometimes
called the ‘underlying’);

(b)

it requires no initial net investment or an initial net investment that is smaller than would be required for other
types of contracts that would be expected to have a similar response to changes in market factors;

and

(c)

it is settled at a future date.

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Definitions of Four Categories of Financial Instruments

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A financial asset or financial liability at fair value through profit or loss is a financial asset or financial liability
that meets either of the following conditions.

(a)

It is classified as held for trading. A financial asset or financial liability is classified as held for trading if it is:

(i)

acquired or incurred principally for the purpose of selling or repurchasing it in the near term;

(ii) part of a portfolio of identified financial instruments that are managed together and for which there is

evidence of a recent actual pattern of short-term profit-taking;

or

(iii) a derivative (except for a derivative that is a designated and effective hedging instrument).

(b)

[…] Any financial asset […] within the scope of this Standard may be designated when initially recognised as
a financial asset […] at fair value through profit or loss except for investments in equity instruments that do
not have a quoted market price in an active market, and whose fair value cannot be reliably measured (see para-
graph 46(c) and Appendix A paragraphs AG80 and AG81).

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed
maturity that an entity has the positive intention and ability to hold to maturity (see Appendix A paragraphs AG16-
AG25) other than:

(a)

those that the entity upon initial recognition designates as at fair value through profit or loss;

(b)

those that the entity designates as available for sale;

and

(c)

those that meet the definition of loans and receivables.

An entity shall not classify any financial assets as held to maturity if the entity has, during the current financial
year or during the two preceding financial years, sold or reclassified more than an insignificant amount of held-to-
maturity investments before maturity (more than insignificant in relation to the total amount of held-to-maturity
investments) other than sales or reclassifications that:

(i)

are so close to maturity or the financial asset’s call date (for example, less than three months before maturity)
that changes in the market rate of interest would not have a significant effect on the financial asset’s fair value;

(ii) occur after the entity has collected substantially all of the financial asset’s original principal through sched-

uled payments or prepayments;

or

(iii) are attributable to an isolated event that is beyond the entity’s control, is non-recurring and could not have

been reasonably anticipated by the entity.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted
in an active market, other than:

(a)

those that the entity intends to sell immediately or in the near term, which shall be classified as held for trad-
ing, and those that the entity upon initial recognition designates as at fair value through profit or loss;

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(b)

those that the entity upon initial recognition designates as available for sale;

or

(c)

those for which the holder may not recover substantially all of its initial investment, other than because of
credit deterioration, which shall be classified as available for sale.

An interest acquired in a pool of assets that are not loans or receivables (for example, an interest in a mutual fund
or a similar fund) is not a loan or receivable.

Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale
or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value
through profit or loss.

Definitions Relating to Recognition and Measurement

The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial
liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation
using the effective interest method of any difference between that initial amount and the maturity amount, and
minus any reduction (directly or through the use of an allowance account) for impairment or uncollectibility.

The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liabil-
ity (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over
the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or
receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net car-
rying amount of the financial asset or financial liability. When calculating the effective interest rate, an entity shall
estimate cash flows considering all contractual terms of the financial instrument (for example, prepayment, call and
similar options) but shall not consider future credit losses. The calculation includes all fees and points paid or
received between parties to the contract that are an integral part of the effective interest rate (see IAS 18), trans-
action costs, and all other premiums or discounts. There is a presumption that the cash flows and the expected life
of a group of similar financial instruments can be estimated reliably. However, in those rare cases when it is not
possible to estimate reliably the cash flows or the expected life of a financial instrument (or group of financial
instruments), the entity shall use the contractual cash flows over the full contractual term of the financial instru-
ment (or group of financial instruments).

Derecognition is the removal of a previously recognised financial asset or financial liability from an entity’s bal-
ance sheet.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, will-
ing parties in an arm’s length transaction. (*)

A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require deliv-
ery of the asset within the time frame established generally by regulation or convention in the marketplace
concerned.

Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a finan-
cial asset or financial liability (see Appendix A paragraph AG13). An incremental cost is one that would not have
been incurred if the entity had not acquired, issued or disposed of the financial instrument.

Definitions Relating to Hedge Accounting

A firm commitment is a binding agreement for the exchange of a specified quantity of resources at a specified price
on a specified future date or dates.

(*) Paragraphs 48, 49 and AG69-AG82 of Appendix A contain requirements for determining the fair value of a financial asset or financial

liability.

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A forecast transaction is an uncommitted but anticipated future transaction.

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A hedging instrument is a designated derivative or (for a hedge of the risk of changes in foreign currency exchange
rates only) a designated non-derivative financial asset or non-derivative financial liability whose fair value or cash
flows are expected to offset changes in the fair value or cash flows of a designated hedged item (paragraphs 72-77
and Appendix A paragraphs AG94-AG97 elaborate on the definition of a hedging instrument).

A hedged item is an asset, liability, firm commitment, highly probable forecast transaction or net investment in a
foreign operation that (a) exposes the entity to risk of changes in fair value or future cash flows and (b) is desig-
nated as being hedged (paragraphs 78-84 and Appendix A paragraphs AG98-AG101 elaborate on the definition
of hedged items).

Hedge effectiveness is the degree to which changes in the fair value or cash flows of the hedged item that are attrib-
utable to a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument (see Appen-
dix A paragraphs AG105-AG113).

EMBEDDED DERIVATIVES

10. An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host
contract — with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-
alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the
contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign
exchange rate, index of prices or rates, credit rating or credit index, or other variable. A derivative that is attached to a
financial instrument but is contractually transferable independently of that instrument, or has a different counterparty
from that instrument, is not an embedded derivative, but a separate financial instrument.

11. An embedded derivative shall be separated from the host contract and accounted for as a derivative under this Stan-

dard if, and only if:

(a)

the economic characteristics and risks of the embedded derivative are not closely related to the economic char-
acteristics and risks of the host contract (see Appendix A paragraphs AG30 and AG33);

(b) a separate instrument with the same Terms as the embedded derivative would meet the definition of a

derivative;

and

(c)

the hybrid (combined) instrument is not measured at fair value with changes in fair value recognised in profit
or loss (ie a derivative that is embedded in a financial asset or financial liability at fair value through profit or
loss is not separated).

If an embedded derivative is separated, the host contract shall be accounted for under this Standard if it is a finan-
cial instrument, and in accordance with other appropriate Standards if it is not a financial instrument. This Stan-
dard does not address whether an embedded derivative shall be presented separately on the face of the financial
statements.

12.

If an entity is required by this Standard to separate an embedded derivative from its host contract, but is unable to
measure the embedded derivative separately either at acquisition or at a subsequent financial reporting date, it shall
treat the entire combined contract as a financial asset or financial liability that is held for trading.

13.

If an entity is unable to determine reliably the fair value of an embedded derivative on the basis of its terms and con-
ditions (for example, because the embedded derivative is based on an unquoted equity instrument), the fair value of the
embedded derivative is the difference between the fair value of the hybrid instrument and the fair value of the host con-
tract, if those can be determined under this Standard. If the entity is unable to determine the fair value of the embedded
derivative using this method, paragraph 12 applies and the combined instrument is treated as held for trading.

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RECOGNITION AND DERECOGNITION

Initial Recognition

14. An entity shall recognise a financial asset or a financial liability on its balance sheet when, and only when, the entity
becomes a party to the contractual provisions of the instrument. (See paragraph 38 with respect to regular way pur-
chases of financial assets.)

Derecognition of a Financial Asset

15.

In consolidated financial statements, paragraphs 16-23 and Appendix A paragraphs AG34-AG52 are applied at a con-
solidated level. Hence, an entity first consolidates all subsidiaries in accordance with IAS 27 and SIC-12 Consolidation
— Special Purpose Entities and then applies paragraphs 16-23 and Appendix A paragraphs AG34-AG52 to the resulting
group.

16. Before evaluating whether, and to what extent, derecognition is appropriate under paragraphs 17-23, an entity
determines whether those paragraphs should be applied to a part of a financial asset (or a part of a group of similar
financial assets) or a financial asset (or a group of similar financial assets) in its entirety, as follows.

(a) Paragraphs 17-23 are applied to a part of a financial asset (or a part of a group of similar financial assets) if,

and only if, the part being considered for derecognition meets one of the following three conditions.

(i) The part comprises only specifically identified cash flows from a financial asset (or a group of similar
financial assets). For example, when an entity enters into an interest rate strip whereby the counterparty
obtains the right to the interest cash flows, but not the principal cash flows from a debt instrument, para-
graphs 17-23 are applied to the interest cash flows.

(ii) The part comprises only a fully proportionate (pro rata) share of the cash flows from a financial asset (or
a group of similar financial assets). For example, when an entity enters into an arrangement whereby the
counterparty obtains the rights to a 90 per cent share of all cash flows of a debt instrument, para-
graphs 17-23 are applied to 90 per cent of those cash flows. If there is more than one counterparty, each
counterparty is not required to have a proportionate share of the cash flows provided that the transfer-
ring entity has a fully proportionate share.

(iii) The part comprises only a fully proportionate (pro rata) share of specifically identified cash flows from a
financial asset (or a group of similar financial assets). For example, when an entity enters into an arrange-
ment whereby the counterparty obtains the rights to a 90 per cent share of interest cash flows from a
financial asset, paragraphs 17-23 are applied to 90 per cent of those interest cash flows. If there is more
than one counterparty, each counterparty is not required to have a proportionate share of the specifically
identified cash flows provided that the transferring entity has a fully proportionate share.

(b)

In all other cases, paragraphs 17-23 are applied to the financial asset in its entirety (or to the group of similar
financial assets in their entirety). For example, when an entity transfers (i) the rights to the first or the last 90
per cent of cash collections from a financial asset (or a group of financial assets), or (ii) the rights to 90 per
cent of the cash flows from a group of receivables, but provides a guarantee to compensate the buyer for any
credit losses up to 8 per cent of the principal amount of the receivables, paragraphs 17-23 are applied to the
financial asset (or a group of similar financial assets) in its entirety.

In paragraphs 17-26, the term ‘financial asset’ refers to either a part of a financial asset (or a part of a group of
similar financial assets) as identified in (a) above or, otherwise, a financial asset (or a group of similar financial
assets) in its entirety.

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17. An entity shall derecognise a financial asset when, and only when:

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(a)

the contractual rights to the cash flows from the financial asset expire;

or

(b)

it transfers the financial asset as set out in paragraphs 18 and 19 and the transfer qualifies for derecognition
in accordance with paragraph 20.

(See paragraph 38 for regular way sales of financial assets.)

18. An entity transfers a financial asset if, and only if, it either:

(a)

transfers the contractual rights to receive the cash flows of the financial asset;

or

(b)

retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obli-
gation to pay the cash flows to one or more recipients in an arrangement that meets the conditions in
paragraph 19.

19. When an entity retains the contractual rights to receive the cash flows of a financial asset (the ‘original asset’), but
assumes a contractual obligation to pay those cash flows to one or more entities (the ‘eventual recipients’), the entity
treats the transaction as a transfer of a financial asset if, and only if, all of the following three conditions are met.

(a) The entity has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts
from the original asset. Short-term advances by the entity with the right of full recovery of the amount lent
plus accrued interest at market rates do not violate this condition.

(b) The entity is prohibited by the terms of the transfer contract from selling or pledging the original asset other

than as security to the eventual recipients for the obligation to pay them cash flows.

(c) The entity has an obligation to remit any cash flows it collects on behalf of the eventual recipients without
material delay. In addition, the entity is not entitled to reinvest such cash flows, except for investments in cash
or cash equivalents (as defined in IAS 7 Cash Flow Statements) during the short settlement period from the
collection date to the date of required remittance to the eventual recipients, and interest earned on such invest-
ments is passed to the eventual recipients.

20. When an entity transfers a financial asset (see paragraph 18), it shall evaluate the extent to which it retains the

risks and rewards of ownership of the financial asset. In this case:

(a)

if the entity transfers substantially all the risks and rewards of ownership of the financial asset, the entity shall
derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations cre-
ated or retained in the transfer.

(b)

if the entity retains substantially all the risks and rewards of ownership of the financial asset, the entity shall
continue to recognise the financial asset.

(c)

if the entity neither transfers nor retains substantially all the risks and rewards of ownership of the financial
asset, the entity shall determine whether it has retained control of the financial asset. In this case:

(i)

if the entity has not retained control, it shall derecognise the financial asset and recognise separately as
assets or liabilities any rights and obligations created or retained in the transfer.

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(ii)

if the entity has retained control, it shall continue to recognise the financial asset to the extent of its con-
tinuing involvement in the financial asset (see paragraph 30).

21. The transfer of risks and rewards (see paragraph 20) is evaluated by comparing the entity’s exposure, before and after
the transfer, with the variability in the amounts and timing of the net cash flows of the transferred asset. An entity has
retained substantially all the risks and rewards of ownership of a financial asset if its exposure to the variability in the
present value of the future net cash flows from the financial asset does not change significantly as a result of the trans-
fer (eg because the entity has sold a financial asset subject to an agreement to buy it back at a fixed price or the sale
price plus a lender’s return). An entity has transferred substantially all the risks and rewards of ownership of a financial
asset if its exposure to such variability is no longer significant in relation to the total variability in the present value of
the future net cash flows associated with the financial asset (eg because the entity has sold a financial asset subject only
to an option to buy it back at its fair value at the time of repurchase or has transferred a fully proportionate share of
the cash flows from a larger financial asset in an arrangement, such as a loan sub-participation, that meets the condi-
tions in paragraph 19).

22. Often it will be obvious whether the entity has transferred or retained substantially all risks and rewards of ownership
and there will be no need to perform any computations. In other cases, it will be necessary to compute and compare
the entity’s exposure to the variability in the present value of the future net cash flows before and after the transfer. The
computation and comparison is made using as the discount rate an appropriate current market interest rate. All rea-
sonably possible variability in net cash flows is considered, with greater weight being given to those outcomes that are
more likely to occur.

23. Whether the entity has retained control (see paragraph 20(c)) of the transferred asset depends on the transferee’s ability
to sell the asset. If the transferee has the practical ability to sell the asset in its entirety to an unrelated third party and
is able to exercise that ability unilaterally and without needing to impose additional restrictions on the transfer, the
entity has not retained control. In all other cases, the entity has retained control.

T r a n s f e r s t h a t Q u a l i f y f o r D e r e c o g n i t i o n

( s e e p a r a g r a p h 2 0 ( a ) a n d ( c ) ( i ) )

24.

If an entity transfers a financial asset in a transfer that qualifies for derecognition in its entirety and retains the
right to service the financial asset for a fee, it shall recognise either a servicing asset or a servicing liability for that
servicing contract. If the fee to be received is not expected to compensate the entity adequately for performing the
servicing, a servicing liability for the servicing obligation shall be recognised at its fair value. If the fee to be received
is expected to be more than adequate compensation for the servicing, a servicing asset shall be recognised for the
servicing right at an amount determined on the basis of an allocation of the carrying amount of the larger finan-
cial asset in accordance with paragraph 27.

25.

If, as a result of a transfer, a financial asset is derecognised in its entirety but the transfer results in the entity
obtaining a new financial asset or assuming a new financial liability, or a servicing liability, the entity shall rec-
ognise the new financial asset, financial liability or servicing liability at fair value.

26. On derecognition of a financial asset in its entirety, the difference between:

(a)

the carrying amount

and

(b)

the sum of (i) the consideration received (including any new asset obtained less any new liability assumed)
and (ii) any cumulative gain or loss that had been recognised directly in equity (see paragraph 55(b))

shall be recognised in profit or loss.

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27.

If the transferred asset is part of a larger financial asset (eg when an entity transfers interest cash flows that are
part of a debt instrument, see paragraph 16(a)) and the part transferred qualifies for derecognition in its entirety,
the previous carrying amount of the larger financial asset shall be allocated between the part that continues to be
recognised and the part that is derecognised, based on the relative fair values of those parts on the date of the trans-
fer. For this purpose, a retained servicing asset shall be treated as a part that continues to be recognised. The dif-
ference between:

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(a)

the carrying amount allocated to the part derecognised

and

(b)

the sum of (i) the consideration received for the part derecognised (including any new asset obtained less any
new liability assumed) and (ii) any cumulative gain or loss allocated to it that had been recognised directly in
equity (see paragraph 55(b))

shall be recognised in profit or loss. A cumulative gain or loss that had been recognised in equity is allocated
between the part that continues to be recognised and the part that is derecognised, based on the relative fair values
of those parts.

28. When an entity allocates the previous carrying amount of a larger financial asset between the part that continues to be
recognised and the part that is derecognised, the fair value of the part that continues to be recognised needs to be deter-
mined. When the entity has a history of selling parts similar to the part that continues to be recognised or other mar-
ket transactions exist for such parts, recent prices of actual transactions provide the best estimate of its fair value. When
there are no price quotes or recent market transactions to support the fair value of the part that continues to be rec-
ognised, the best estimate of the fair value is the difference between the fair value of the larger financial asset as a whole
and the consideration received from the transferee for the part that is derecognised.

T r a n s f e r s t h a t D o N o t Q u a l i f y f o r D e r e c o g n i t i o n

( s e e p a r a g r a p h 2 0 ( b ) )

29.

If a transfer does not result in derecognition because the entity has retained substantially all the risks and rewards
of ownership of the transferred asset, the entity shall continue to recognise the transferred asset in its entirety and
shall recognise a financial liability for the consideration received. In subsequent periods, the entity shall recognise
any income on the transferred asset and any expense incurred on the financial liability.

C o n t i n u i n g I n v o l v e m e n t

i n T r a n s f e r r e d A s s e t s

( s e e p a r a g r a p h 2 0 ( c ) ( i i ) )

30.

If an entity neither transfers nor retains substantially all the risks and rewards of ownership of a transferred asset,
and retains control of the transferred asset, the entity continues to recognise the transferred asset to the extent of
its continuing involvement. The extent of the entity’s continuing involvement in the transferred asset is the extent
to which it is exposed to changes in the value of the transferred asset. For example:

(a) when the entity’s continuing involvement takes the form of guaranteeing the transferred asset, the extent of
the entity’s continuing involvement is the lower of (i) the amount of the asset and (ii) the maximum amount
of the consideration received that the entity could be required to repay (‘the guarantee amount’).

(b) when the entity’s continuing involvement takes the form of a written or purchased option (or both) on the
transferred asset, the extent of the entity’s continuing involvement is the amount of the transferred asset that
the entity may repurchase. However, in case of a written put option on an asset that is measured at fair value,
the extent of the entity’s continuing involvement is limited to the lower of the fair value of the transferred
asset and the option exercise price (see paragraph AG48).

(c) when the entity’s continuing involvement takes the form of a cash-settled option or similar provision on the
transferred asset, the extent of the entity’s continuing involvement is measured in the same way as that which
results from non-cash settled options as set out in (b) above.

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31. When an entity continues to recognise an asset to the extent of its continuing involvement, the entity also recog-
nises an associated liability. Despite the other measurement requirements in this Standard, the transferred asset
and the associated liability are measured on a basis that reflects the rights and obligations that the entity has
retained. The associated liability is measured in such a way that the net carrying amount of the transferred asset
and the associated liability is:

(a)

the amortised cost of the rights and obligations retained by the entity, if the transferred asset is measured at
amortised cost;

or

(b)

equal to the fair value of the rights and obligations retained by the entity when measured on a stand-alone
basis, if the transferred asset is measured at fair value.

32. The entity shall continue to recognise any income arising on the transferred asset to the extent of its continuing

involvement and shall recognise any expense incurred on the associated liability.

33. For the purpose of subsequent measurement, recognised changes in the fair value of the transferred asset and the
associated liability are accounted for consistently with each other in accordance with paragraph 55, and shall not
be offset.

34.

If an entity’s continuing involvement is in only a part of a financial asset (eg when an entity retains an option to
repurchase part of a transferred asset, or retains a residual interest that does not result in the retention of sub-
stantially all the risks and rewards of ownership and the entity retains control), the entity allocates the previous
carrying amount of the financial asset between the part it continues to recognise under continuing involvement,
and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer.
For this purpose, the requirements of paragraph 28 apply. The difference between:

(a)

the carrying amount allocated to the part that is no longer recognised;

and

(b)

the sum of (i) the consideration received for the part no longer recognised and (ii) any cumulative gain or loss
allocated to it that had been recognised directly in equity (see paragraph 55(b))

shall be recognised in profit or loss. A cumulative gain or loss that had been recognised in equity is allocated
between the part that continues to be recognised and the part that is no longer recognised on the basis of the rela-
tive fair values of those parts.

35.

[…]

A l l T r a n s f e r s

36.

37.

If a transferred asset continues to be recognised, the asset and the associated liability shall not be offset. Similarly,
the entity shall not offset any income arising from the transferred asset with any expense incurred on the associ-
ated liability (see IAS 32 paragraph 42).

If a transferor provides non-cash collateral (such as debt or equity instruments) to the transferee, the accounting
for the collateral by the transferor and the transferee depends on whether the transferee has the right to sell or
repledge the collateral and on whether the transferor has defaulted. The transferor and transferee shall account for
the collateral as follows:

(a)

If the transferee has the right by contract or custom to sell or repledge the collateral, then the transferor shall
reclassify that asset in its balance sheet (eg as a loaned asset, pledged equity instruments or repurchase receiv-
able) separately from other assets.

(b)

If the transferee sells collateral pledged to it, it shall recognise the proceeds from the sale and a liability mea-
sured at fair value for its obligation to return the collateral.

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(c)

If the transferor defaults under the terms of the contract and is no longer entitled to redeem the collateral, it
shall derecognise the collateral, and the transferee shall recognise the collateral as its asset initially measured
at fair value or, if it has already sold the collateral, derecognise its obligation to return the collateral.

(d) Except as provided in (c), the transferor shall continue to carry the collateral as its asset, and the transferee

shall not recognise the collateral as an asset.

Regular Way Purchase or Sale of a Financial Asset

38. A regular way purchase or sale of financial assets shall be recognised and derecognised, as applicable, using trade

date accounting or settlement date accounting (see Appendix A paragraphs AG53-AG56).

Derecognition of a Financial Liability

39. An entity shall remove a financial liability (or a part of a financial liability) from its balance sheet when, and only

when, it is extinguished — ie when the obligation specified in the contract is discharged or cancelled or expires.

40. An exchange between an existing borrower and lender of debt instruments with substantially different terms shall
be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liabil-
ity. Similarly, a substantial modification of the terms of an existing financial liability or a part of it (whether or not
attributable to the financial difficulty of the debtor) shall be accounted for as an extinguishment of the original
financial liability and the recognition of a new financial liability.

41. The difference between the carrying amount of a financial liability (or part of a financial liability) extinguished or
transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities
assumed, shall be recognised in profit or loss.

42.

If an entity repurchases a part of a financial liability, the entity shall allocate the previous carrying amount of the finan-
cial liability between the part that continues to be recognised and the part that is derecognised based on the relative fair
values of those parts on the date of the repurchase. The difference between (a) the carrying amount allocated to the
part derecognised and (b) the consideration paid, including any non-cash assets transferred or liabilities assumed, for
the part derecognised shall be recognised in profit or loss.

MEASUREMENT

Initial Measurement of Financial Assets and Financial Liabilities

43. When a financial asset or financial liability is recognised initially, an entity shall measure it at its fair value plus,
in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that
are directly attributable to the acquisition or issue of the financial asset or financial liability.

44. When an entity uses settlement date accounting for an asset that is subsequently measured at cost or amortised cost,

the asset is recognised initially at its fair value on the trade date (see Appendix A paragraphs AG53-AG56).

Subsequent Measurement of Financial Assets

45. For the purpose of measuring a financial asset after initial recognition, this Standard classifies financial assets into the

following four categories defined in paragraph 9:

(a)

financial assets at fair value through profit or loss;

(b) held-to-maturity investments;

(c)

loans and receivables;

and

(d)

available-for-sale financial assets.

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These categories apply to measurement and profit or loss recognition under this Standard. The entity may use other
descriptors for these categories or other categorisations when presenting information on the face of the financial state-
ments. The entity shall disclose in the notes the information required by IAS 32.

46. After initial recognition, an entity shall measure financial assets, including derivatives that are assets, at their fair
values, without any deduction for transaction costs it may incur on sale or other disposal, except for the following
financial assets:

(a)

loans and receivables as defined in paragraph 9, which shall be measured at amortised cost using the effective
interest method;

(b) held-to-maturity investments as defined in paragraph 9, which shall be measured at amortised cost using the

effective interest method;

and

(c)

investments in equity instruments that do not have a quoted market price in an active market and whose fair
value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such
unquoted equity instruments, which shall be measured at cost (see Appendix A paragraphs AG80 and AG81).

Financial assets that are designated as hedged items are subject to measurement under the hedge accounting require-
ments in paragraphs 89-102. All financial assets except those measured at fair value through profit or loss are sub-
ject to review for impairment in accordance with paragraphs 58-70 and Appendix A paragraphs AG84-AG93.

Subsequent Measurement of Financial Liabilities

47. After initial recognition, an entity shall measure all financial liabilities at amortised cost using the effective inter-

est method, except for:

(a)

financial liabilities at fair value through profit or loss. Such liabilities, including derivatives that are liabili-
ties, shall be measured at fair value except for a derivative liability that is linked to and must be settled by deliv-
ery of an unquoted equity instrument whose fair value cannot be reliably measured, which shall be measured
at cost.

(b)

financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or is
accounted for using the continuing involvement approach. Paragraphs 29 and 31 apply to the measurement of
such financial liabilities

Financial liabilities that are designated as hedged items are subject to measurement under the hedge accounting
requirements in paragraphs 89 - 102.

Fair Value Measurement Considerations

48.

In determining the fair value of a financial asset or a financial liability for the purpose of applying this Standard
or IAS 32, an entity shall apply paragraphs AG69-AG82 of Appendix A.

49. The fair value of a financial liability with a demand feature (eg a demand deposit) is not less than the amount payable

on demand, discounted from the first date that the amount could be required to be paid.

Reclassifications

50. An entity shall not reclassify a financial instrument into or out of the fair value through profit or loss category while

it is held or issued.

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51.

If, as a result of a change in intention or ability, it is no longer appropriate to classify an investment as held to matu-
rity, it shall be reclassified as available for sale and remeasured at fair value, and the difference between its carry-
ing amount and fair value shall be accounted for in accordance with paragraph 55(b).

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52. Whenever sales or reclassifications of more than an insignificant amount of held-to-maturity investments do not
meet any of the conditions in paragraph 9, any remaining held-to-maturity investments shall be reclassified as avail-
able for sale. On such reclassification, the difference between their carrying amount and fair value shall be accounted
for in accordance with paragraph 55(b).

53.

If a reliable measure becomes available for a financial asset or financial liability for which such a measure was pre-
viously not available, and the asset or liability is required to be measured at fair value if a reliable measure is avail-
able (see paragraphs 46(c) and 47), the asset or liability shall be remeasured at fair value, and the difference between
its carrying amount and fair value shall be accounted for in accordance with paragraph 55.

54.

If, as a result of a change in intention or ability or in the rare circumstance that a reliable measure of fair value is
no longer available (see paragraphs 46(c) and 47) or because the ‘two preceding financial years’ referred to in para-
graph 9 have passed, it becomes appropriate to carry a financial asset or financial liability at cost or amortised cost
rather than at fair value, the fair value carrying amount of the financial asset or the financial liability on that date
becomes its new cost or amortised cost, as applicable. Any previous gain or loss on that asset that has been recog-
nised directly in equity in accordance with paragraph 55(b) shall be accounted for as follows:

(a)

In the case of a financial asset with a fixed maturity, the gain or loss shall be amortised to profit or loss over
the remaining life of the held-to-maturity investment using the effective interest method. Any difference
between the new amortised cost and maturity amount shall also be amortised over the remaining life of the
financial asset using the effective interest method, similar to the amortisation of a premium and a discount. If
the financial asset is subsequently impaired, any gain or loss that has been recognised directly in equity is rec-
ognised in profit or loss in accordance with paragraph 67.

(b)

In the case of a financial asset that does not have a fixed maturity, the gain or loss shall remain in equity until
the financial asset is sold or otherwise disposed of, when it shall be recognised in profit or loss. If the financial
asset is subsequently impaired any previous gain or loss that has been recognised directly in equity is recogn-
ised in profit or loss in accordance with paragraph 67.

Gains and Losses

55. A gain or loss arising from a change in the fair value of a financial asset or financial liability that is not part of a

hedging relationship (see paragraphs 89-102), shall be recognised, as follows.

(a) A gain or loss on a financial asset or financial liability classified as at fair value through profit or loss shall be

recognised in profit or loss.

(b) A gain or loss on an available-for-sale financial asset shall be recognised directly in equity, through the state-
ment of changes in equity (see IAS 1 Presentation of Financial Statements), except for impairment losses (see
paragraphs 67-70) and foreign exchange gains and losses (see Appendix A paragraph AG83), until the finan-
cial asset is derecognised, at which time the cumulative gain or loss previously recognised in equity shall be
recognised in profit or loss. However, interest calculated using the effective interest method (see paragraph 9)
is recognised in profit or loss (see IAS 18 Revenue). Dividends on an available-for-sale equity instrument are
recognised in profit or loss when the entity’s right to receive payment is established (see IAS 18).

56. For financial assets and financial liabilities carried at amortised cost (see paragraphs 46 and 47), a gain or loss is
recognised in profit or loss when the financial asset or financial liability is derecognised or impaired, and through
the amortisation process. However, for financial assets or financial liabilities that are hedged items (see para-
graphs 78-84 and Appendix A paragraphs AG98-AG101) the accounting for the gain or loss shall follow
paragraphs 89-102.

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57.

If an entity recognises financial assets using settlement date accounting (see paragraph 38 and Appendix A para-
graphs AG53 and AG56), any change in the fair value of the asset to be received during the period between the
trade date and the settlement date is not recognised for assets carried at cost or amortised cost (other than impair-
ment losses). For assets carried at fair value, however, the change in fair value shall be recognised in profit or loss
or in equity, as appropriate under paragraph 55.

Impairment and Uncollectibility of Financial Assets

58. An entity shall assess at each balance sheet date whether there is any objective evidence that a financial asset or
group of financial assets is impaired. If any such evidence exists, the entity shall apply paragraph 63 (for financial
assets carried at amortised cost), paragraph 66 (for financial assets carried at cost) or paragraph 67 (for available-
for-sale financial assets) to determine the amount of any impairment loss.

59. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is
objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset
(a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or
group of financial assets that can be reliably estimated. It may not be possible to identify a single, discrete event that
caused the impairment. Rather the combined effect of several events may have caused the impairment. Losses expected
as a result of future events, no matter how likely, are not recognised. Objective evidence that a financial asset or group
of assets is impaired includes observable data that comes to the attention of the holder of the asset about the following
loss events:

(a)

significant financial difficulty of the issuer or obligor;

(b)

a breach of contract, such as a default or delinquency in interest or principal payments;

(c)

the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower
a concession that the lender would not otherwise consider;

(d)

it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;

(e)

the disappearance of an active market for that financial asset because of financial difficulties;

or

(f)

observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of
financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the
individual financial assets in the group, including:

(i)

adverse changes in the payment status of borrowers in the group (eg an increased number of delayed pay-
ments or an increased number of credit card borrowers who have reached their credit limit and are paying
the minimum monthly amount);

or

(ii) national or local economic conditions that correlate with defaults on the assets in the group (eg an increase
in the unemployment rate in the geographical area of the borrowers, a decrease in property prices for mort-
gages in the relevant area, a decrease in oil prices for loan assets to oil producers, or adverse changes in indus-
try conditions that affect the borrowers in the group).

60. The disappearance of an active market because an entity’s financial instruments are no longer publicly traded is not
evidence of impairment. A downgrade of an entity’s credit rating is not, of itself, evidence of impairment, although it
may be evidence of impairment when considered with other available information. A decline in the fair value of a finan-
cial asset below its cost or amortised cost is not necessarily evidence of impairment (for example, a decline in the fair
value of an investment in a debt instrument that results from an increase in the risk-free interest rate).

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61.

In addition to the types of events in paragraph 59, objective evidence of impairment for an investment in an equity
instrument includes information about significant changes with an adverse effect that have taken place in the techno-
logical, market, economic or legal environment in which the issuer operates, and indicates that the cost of the invest-
ment in the equity instrument may not be recovered. A significant or prolonged decline in the fair value of an invest-
ment in an equity instrument below its cost is also objective evidence of impairment.

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62.

In some cases the observable data required to estimate the amount of an impairment loss on a financial asset may be
limited or no longer fully relevant to current circumstances. For example, this may be the case when a borrower is in
financial difficulties and there are few available historical data relating to similar borrowers. In such cases, an entity uses
its experienced judgement to estimate the amount of any impairment loss. Similarly an entity uses its experienced judge-
ment to adjust observable data for a group of financial assets to reflect current circumstances (see paragraph AG89). The
use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their
reliability.

F i n a n c i a l A s s e t s C a r r i e d a t A m o r t i s e d C o s t

63.

If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments car-
ried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s
carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not
been incurred) discounted at the financial asset’s original effective interest rate (ie the effective interest rate com-
puted at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an
allowance account. The amount of the loss shall be recognised in profit or loss.

64. An entity first assesses whether objective evidence of impairment exists individually for financial assets that are indi-
vidually significant, and individually or collectively for financial assets that are not individually significant (see para-
graph 59). If an entity determines that no objective evidence of impairment exists for an individually assessed financial
asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk character-
istics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which
an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

65.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively
to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating),
the previously recognised impairment loss shall be reversed either directly or by adjusting an allowance account.
The reversal shall not result in a carrying amount of the financial asset that exceeds what the amortised cost would
have been had the impairment not been recognised at the date the impairment is reversed. The amount of the rever-
sal shall be recognised in profit or loss.

F i n a n c i a l A s s e t s C a r r i e d a t C o s t

66.

If there is objective evidence that an impairment loss has been incurred on an unquoted equity instrument that is
not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to
and must be settled by delivery of such an unquoted equity instrument, the amount of the impairment loss is mea-
sured as the difference between the carrying amount of the financial asset and the present value of estimated future
cash flows discounted at the current market rate of return for a similar financial asset (see paragraph 46(c) and
Appendix A paragraphs AG80 and AG81). Such impairment losses shall not be reversed.

A v a i l a b l e - f o r - S a l e F i n a n c i a l A s s e t s

67. When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and
there is objective evidence that the asset is impaired (see paragraph 59), the cumulative loss that had been recog-
nised directly in equity shall be removed from equity and recognised in profit or loss even though the financial asset
has not been derecognised.

68. The amount of the cumulative loss that is removed from equity and recognised in profit or loss under paragraph 67
shall be the difference between the acquisition cost (net of any principal repayment and amortisation) and current
fair value, less any impairment loss on that financial asset previously recognised in profit or loss.

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69.

Impairment losses recognised in profit or loss for an investment in an equity instrument classified as available for
sale shall not be reversed through profit or loss.

70.

If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the
increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss,
the impairment loss shall be reversed, with the amount of the reversal recognised in profit or loss.

HEDGING

71.

If there is a designated hedging relationship between a hedging instrument and a hedged item as described in para-
graphs 85-88 and Appendix A paragraphs AG102-AG104, accounting for the gain or loss on the hedging instru-
ment and the hedged item shall follow paragraphs 89-102.

Hedging Instruments

Q u a l i f y i n g I n s t r u m e n t s

72. This Standard does not restrict the circumstances in which a derivative may be designated as a hedging instrument
provided the conditions in paragraph 88 are met, except for some written options (see Appendix A paragraph AG94).
However, a non-derivative financial asset or non-derivative financial liability may be designated as a hedging instru-
ment only for a hedge of a foreign currency risk.

73.

For hedge accounting purposes, only instruments that involve a party external to the reporting entity (ie external to
the group, segment or individual entity that is being reported on) can be designated as hedging instruments. Although
individual entities within a consolidated group or divisions within an entity may enter into hedging transactions with
other entities within the group or divisions within the entity, any such intragroup transactions are eliminated on con-
solidation. Therefore, such hedging transactions do not qualify for hedge accounting in the consolidated financial state-
ments of the group. However, they may qualify for hedge accounting in the individual or separate financial statements
of individual entities within the group or in segment reporting provided that they are external to the individual entity
or segment that is being reported on.

D e s i g n a t i o n o f H e d g i n g I n s t r u m e n t s

74. There is normally a single fair value measure for a hedging instrument in its entirety, and the factors that cause changes
in fair value are co-dependent. Thus, a hedging relationship is designated by an entity for a hedging instrument in its
entirety. The only exceptions permitted are:

(a)

separating the intrinsic value and time value of an option contract and designating as the hedging instrument only
the change in intrinsic value of an option and excluding change in its time value;

and

(b)

separating the interest element and the spot price of a forward contract.

These exceptions are permitted because the intrinsic value of the option and the premium on the forward can gener-
ally be measured separately. A dynamic hedging strategy that assesses both the intrinsic value and time value of an
option contract can qualify for hedge accounting.

75. A proportion of the entire hedging instrument, such as 50 per cent of the notional amount, may be designated as the
hedging instrument in a hedging relationship. However, a hedging relationship may not be designated for only a por-
tion of the time period during which a hedging instrument remains outstanding.

76. A single hedging instrument may be designated as a hedge of more than one type of risk provided that (a) the risks
hedged can be identified clearly; (b) the effectiveness of the hedge can be demonstrated; and (c) it is possible to ensure
that there is specific designation of the hedging instrument and different risk positions.

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77. Two or more derivatives, or proportions of them (or, in the case of a hedge of currency risk, two or more non-
derivatives or proportions of them, or a combination of derivatives and non-derivatives or proportions of them), may
be viewed in combination and jointly designated as the hedging instrument, including when the risk(s) arising from
some derivatives offset(s) those arising from others. However, an interest rate collar or other derivative instrument that
combines a written option and a purchased option does not qualify as a hedging instrument if it is, in effect, a net
written option (ie for which a net premium is received). Similarly, two or more instruments (or proportions of them)
may be designated as the hedging instrument only if none of them is a written option or a net written option.

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Hedged Items

Q u a l i f y i n g I t e m s

78. A hedged item can be a recognised asset or liability, an unrecognised firm commitment, a highly probable forecast
transaction or a net investment in a foreign operation. The hedged item can be (a) a single asset, liability, firm com-
mitment, highly probable forecast transaction or net investment in a foreign operation, or (b) a group of assets, liabili-
ties, firm commitments, highly probable forecast transactions or net investments in foreign operations with similar
risk characteristics or (c) in a portfolio hedge of interest rate risk only, a portion of the portfolio of financial assets or
financial liabilities that share the risk being hedged.

79. Unlike loans and receivables, a held-to-maturity investment cannot be a hedged item with respect to interest-rate risk
or prepayment risk because designation of an investment as held to maturity requires an intention to hold the invest-
ment until maturity without regard to changes in the fair value or cash flows of such an investment attributable to
changes in interest rates. However, a held-to-maturity investment can be a hedged item with respect to risks from
changes in foreign currency exchange rates and credit risk.

80.

For hedge accounting purposes, only assets, liabilities, firm commitments or highly probable forecast transactions that
involve a party external to the entity can be designated as hedged items. It follows that hedge accounting can be applied
to transactions between entities or segments in the same group only in the individual or separate financial statements
of those entities or segments and not in the consolidated financial statements of the group. As an exception, the for-
eign currency risk of an intragroup monetary item (eg a payable/receivable between two subsidiaries) may qualify as a
hedged item in the consolidated financial statements if it results in an exposure to foreign exchange rate gains or losses
that are not fully eliminated on consolidation under IAS 21 The Effects of Changes in Foreign Exchange Rates. Under
IAS 21, foreign exchange gains and losses on intragroup monetary items are not fully eliminated on consolidation
when the intragroup monetary item is transacted between two group entities that have different functional currencies.

D e s i g n a t i o n o f F i n a n c i a l

I t e m s a s H e d g e d I t e m s

81.

If the hedged item is a financial asset or financial liability, it may be a hedged item with respect to the risks associ-
ated with only a portion of its cash flows or fair value (such as one or more selected contractual cash flows or por-
tions of them or a percentage of the fair value) provided that effectiveness can be measured. For example, an iden-
tifiable and separately measurable portion of the interest rate exposure of an interest-bearing asset or interest-bearing
liability may be designated as the hedged risk (such as a risk-free interest rate or benchmark interest rate component
of the total interest rate exposure of a hedged financial instrument).

81A.

In a fair value hedge of the interest rate exposure of a portfolio of financial assets or financial liabilities (and only in
such a hedge), the portion hedged may be designated in terms of an amount of a currency (eg an amount of dollars,
euro, pounds or rand) rather than as individual assets (or liabilities). Although the portfolio may, for risk manage-
ment purposes, include assets and liabilities, the amount designated is an amount of assets or an amount of liabili-
ties. Designation of a net amount including assets and liabilities is not permitted. The entity may hedge a portion of
the interest rate risk associated with this designated amount. For example, in the case of a hedge of a portfolio con-
taining prepayable assets, the entity may hedge the change in fair value that is attributable to a change in the hedged
interest rate on the basis of expected, rather than contractual, repricing dates. […].

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D e s i g n a t i o n o f N o n - F i n a n c i a l

I t e m s a s H e d g e d I t e m s

82.

If the hedged item is a non-financial asset or non-financial liability, it shall be designated as a hedged item (a) for
foreign currency risks, or (b) in its entirety for all risks, because of the difficulty of isolating and measuring the
appropriate portion of the cash flows or fair value changes attributable to specific risks other than foreign cur-
rency risks.

D e s i g n a t i o n o f G r o u p s o f

I t e m s a s H e d g e d I t e m s

83.

Similar assets or similar liabilities shall be aggregated and hedged as a group only if the individual assets or individual
liabilities in the group share the risk exposure that is designated as being hedged. Furthermore, the change in fair value
attributable to the hedged risk for each individual item in the group shall be expected to be approximately propor-
tional to the overall change in fair value attributable to the hedged risk of the group of items.

84. Because an entity assesses hedge effectiveness by comparing the change in the fair value or cash flow of a hedging
instrument (or group of similar hedging instruments) and a hedged item (or group of similar hedged items), compar-
ing a hedging instrument with an overall net position (eg the net of all fixed rate assets and fixed rate liabilities with
similar maturities), rather than with a specific hedged item, does not qualify for hedge accounting.

Hedge Accounting

85. Hedge accounting recognises the offsetting effects on profit or loss of changes in the fair values of the hedging instru-

ment and the hedged item.

86. Hedging relationships are of three types:

(a)

fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrec-
ognised firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attrib-
utable to a particular risk and could affect profit or loss.

(b)

cash flow hedge: a hedge of the exposure to variability in cash flows that (i) is attributable to a particular risk
associated with a recognised asset or liability (such as all or some future interest payments on variable rate
debt) or a highly probable forecast transaction and (ii) could affect profit or loss.

(c) hedge of a net investment in a foreign operation as defined in IAS 21.

87. A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or as a cash flow

hedge.

88. A hedging relationship qualifies for hedge accounting under paragraphs 89-102 if, and only if, all of the following

conditions are met.

(a) At the inception of the hedge there is formal designation and documentation of the hedging relationship and
the entity’s risk management objective and strategy for undertaking the hedge. That documentation shall
include identification of the hedging instrument, the hedged item or transaction, the nature of the risk being
hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to
changes in the hedged item’s fair value or cash flows attributable to the hedged risk.

(b) The hedge is expected to be highly effective (see Appendix A paragraphs AG105-AG113) in achieving offset-
ting changes in fair value or cash flows attributable to the hedged risk, consistently with the originally docu-
mented risk management strategy for that particular hedging relationship.

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(c) For cash flow hedges, a forecast transaction that is the subject of the hedge must be highly probable and must

present an exposure to variations in cash flows that could ultimately affect profit or loss.

(d) The effectiveness of the hedge can be reliably measured, ie the fair value or cash flows of the hedged item that
are attributable to the hedged risk and the fair value of the hedging instrument can be reliably measured (see
paragraphs 46 and 47 and Appendix A paragraphs AG80 and AG81 for guidance on determining fair value).

(e) The hedge is assessed on an ongoing basis and determined actually to have been highly effective throughout

the financial reporting periods for which the hedge was designated.

F a i r V a l u e H e d g e s

89.

If a fair value hedge meets the conditions in paragraph 88 during the period, it shall be accounted for as follows:

(a)

the gain or loss from remeasuring the hedging instrument at fair value (for a derivative hedging instru-
ment) or the foreign currency component of its carrying amount measured in accordance with IAS 21 (for
a non-derivative hedging instrument) shall be recognised in profit or loss;

and

(b)

the gain or loss on the hedged item attributable to the hedged risk shall adjust the carrying amount of the
hedged item and be recognised in profit or loss. This applies if the hedged item is otherwise measured at cost.
Recognition of the gain or loss attributable to the hedged risk in profit or loss applies if the hedged item is
an available-for-sale financial asset.

89A.

For a fair value hedge of the interest rate exposure of a portion of a portfolio of financial assets or financial liabilities
(and only in such a hedge), the requirement in paragraph 89(b) may be met by presenting the gain or loss attribut-
able to the hedged item either:

(a)

in a single separate line item within assets, for those repricing time periods for which the hedged item is an
asset;

or

(b)

in a single separate line item within liabilities, for those repricing time periods for which the hedged item is a
liability.

The separate line items referred to in (a) and (b) above shall be presented next to financial assets or financial liabili-
ties. Amounts included in these line items shall be removed from the balance sheet when the assets or liabilities to
which they relate are derecognised.

90.

If only particular risks attributable to a hedged item are hedged, recognised changes in the fair value of the hedged
item unrelated to the hedged risk are recognised as set out in paragraph 55.

91.

An entity shall discontinue prospectively the hedge accounting specified in paragraph 89 if:

(a)

the hedging instrument expires or is sold, terminated or exercised (for this purpose, the replacement or roll-
over of a hedging instrument into another hedging instrument is not an expiration or termination if such
replacement or rollover is part of the entity’s documented hedging strategy);

(b)

the hedge no longer meets the criteria for hedge accounting in paragraph 88;

or

(c)

the entity revokes the designation.

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Any adjustment arising from paragraph 89(b) to the carrying amount of a hedged financial instrument that is
measured at amortised cost (or, in the case of a portfolio hedge of interest rate risk, to the separate balance sheet
line item described in paragraph 89A) shall be amortised to profit or loss. Amortisation may begin as soon as an
adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for changes in its fair
value attributable to the risk being hedged. The adjustment is based on a recalculated effective interest rate at
the date amortisation begins. However, if, in the case of a fair value hedge of the interest rate exposure of a port-
folio of financial assets or financial liabilities (and only in such a hedge), amortising using a recalculated effec-
tive interest rate is not practicable, the adjustment shall be amortised using a straight-line method. The adjust-
ment shall be amortised fully by maturity of the financial instrument or, in the case of a portfolio hedge of interest
rate risk, by expiry of the relevant repricing time period.

93. When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the
fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corre-
sponding gain or loss recognised in profit or loss (see paragraph 89(b)). The changes in the fair value of the hedging
instrument are also recognised in profit or loss.

94. When an entity enters into a firm commitment to acquire an asset or assume a liability that is a hedged item in a fair
value hedge, the initial carrying amount of the asset or liability that results from the entity meeting the firm com-
mitment is adjusted to include the cumulative change in the fair value of the firm commitment attributable to the
hedged risk that was recognised in the balance sheet.

C a s h F l o w H e d g e s

95.

If a cash flow hedge meets the conditions in paragraph 88 during the period, it shall be accounted for as follows:

(a)

the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge (see
paragraph 88) shall be recognised directly in equity through the statement of changes in equity (see IAS 1);

and

(b)

the ineffective portion of the gain or loss on the hedging instrument shall be recognised in profit or loss.

96.

More specifically, a cash flow hedge is accounted for as follows:

(a)

the separate component of equity associated with the hedged item is adjusted to the lesser of the following (in
absolute amounts):

(i)

the cumulative gain or loss on the hedging instrument from inception of the hedge;

and

(ii)

the cumulative change in fair value (present value) of the expected future cash flows on the hedged item
from inception of the hedge;

(b)

any remaining gain or loss on the hedging instrument or designated component of it (that is not an effective
hedge) is recognised in profit or loss;

and

(c)

if an entity’s documented risk management strategy for a particular hedging relationship excludes from the
assessment of hedge effectiveness a specific component of the gain or loss or related cash flows on the hedging
instrument (see paragraphs 74, 75 and 88(a)), that excluded component of gain or loss is recognised in accor-
dance with paragraph 55.

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97.

If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liabil-
ity, the associated gains or losses that were recognised directly in equity in accordance with paragraph 95 shall be
reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed
affects profit or loss (such as in the periods that interest income or interest expense is recognised). However, if an
entity expects that all or a portion of a loss recognised directly in equity will not be recovered in one or more future
periods, it shall reclassify into profit or loss the amount that is not expected to be recovered.

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98.

If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or a non-
financial liability, or a forecast transaction for a non-financial asset or non-financial liability becomes a firm com-
mitment for which fair value hedge accounting is applied, then the entity shall adopt (a) or (b) below:

(a)

It reclassifies the associated gains and losses that were recognised directly in equity in accordance with para-
graph 95 into profit or loss in the same period or periods during which the asset acquired or liability assumed
affects profit or loss (such as in the periods that depreciation expense or cost of sales is recognised). How-
ever, if an entity expects that all or a portion of a loss recognised directly in equity will not be recovered in
one or more future periods, it shall reclassify into profit or loss the amount that is not expected to be
recovered.

(b)

It removes the associated gains and losses that were recognised directly in equity in accordance with para-
graph 95, and includes them in the initial cost or other carrying amount of the asset or liability.

99.

An entity shall adopt either (a) or (b) in paragraph 98 as its accounting policy and shall apply it consistently to
all hedges to which paragraph 98 relates.

100.

For cash flow hedges other than those covered by paragraphs 97 and 98, amounts that had been recognised
directly in equity shall be recognised in profit or loss in the same period or periods during which the hedged fore-
cast transaction affects profit or loss (for example, when a forecast sale occurs).

101.

In any of the following circumstances an entity shall discontinue prospectively the hedge accounting specified in
paragraphs 95-100:

(a) The hedging instrument expires or is sold, terminated or exercised (for this purpose, the replacement or roll-
over of a hedging instrument into another hedging instrument is not an expiration or termination if such
replacement or rollover is part of the entity’s documented hedging strategy). In this case, the cumulative gain
or loss on the hedging instrument that remains recognised directly in equity from the period when the hedge
was effective (see paragraph 95(a)) shall remain separately recognised in equity until the forecast transac-
tion occurs. When the transaction occurs, paragraph 97, 98 or 100 applies.

(b) The hedge no longer meets the criteria for hedge accounting in paragraph 88. In this case, the cumulative
gain or loss on the hedging instrument that remains recognised directly in equity from the period when the
hedge was effective (see paragraph 95(a)) shall remain separately recognised in equity until the forecast
transaction occurs. When the transaction occurs, paragraph 97, 98 or 100 applies.

(c) The forecast transaction is no longer expected to occur, in which case any related cumulative gain or loss on
the hedging instrument that remains recognised directly in equity from the period when the hedge was effec-
tive (see paragraph 95(a)) shall be recognised in profit or loss. A forecast transaction that is no longer highly
probable (see paragraph 88(c)) may still be expected to occur.

(d) The entity revokes the designation. For hedges of a forecast transaction, the cumulative gain or loss on the
hedging instrument that remains recognised directly in equity from the period when the hedge was effective
(see paragraph 95(a)) shall remain separately recognised in equity until the forecast transaction occurs or is
no longer expected to occur. When the transaction occurs, paragraph 97, 98 or 100 applies. If the transac-
tion is no longer expected to occur, the cumulative gain or loss that had been recognised directly in equity
shall be recognised in profit or loss.

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H e d g e s o f a N e t

I n v e s t m e n t

102. Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as

part of the net investment (see IAS 21), shall be accounted for similarly to cash flow hedges:

(a)

the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge (see
paragraph 88) shall be recognised directly in equity through the statement of changes in equity (see IAS 1);

and

(b)

the ineffective portion shall be recognised in profit or loss.

The gain or loss on the hedging instrument relating to the effective portion of the hedge that has been recognised
directly in equity shall be recognised in profit or loss on disposal of the foreign operation.

EFFECTIVE DATE AND TRANSITIONAL PROVISIONS

103. An entity shall apply this Standard (including the amendments issued in March 2004) for annual periods begin-
ning on or after 1 January 2005. Earlier application is permitted. An entity shall not apply this Standard (includ-
ing the amendments issued in March 2004) for annual periods beginning before 1 January 2005 unless it also
applies IAS 32 (issued December 2003). If an entity applies this Standard for a period beginning before 1 January
2005, it shall disclose that fact.

104. This Standard shall be applied retrospectively except as specified in paragraphs 105-108. The opening balance of
retained earnings for the earliest prior period presented and all other comparative amounts shall be adjusted as if
this Standard had always been in use unless restating the information would be impracticable. If restatement is
impracticable, the entity shall disclose that fact and indicate the extent to which the information was restated.

105. When this Standard is first applied, an entity is permitted to designate a previously recognised financial asset or
financial liability as a financial asset or financial liability at fair value through profit or loss or available for sale
despite the requirement in paragraph 9 to make such designation upon initial recognition. For any such financial
asset designated as available for sale, the entity shall recognise all cumulative changes in fair value in a separate
component of equity until subsequent derecognition or impairment, when the entity shall transfer that cumulative
gain or loss to profit or loss. For any financial instrument designated as at fair value through profit or loss or avail-
able for sale, the entity shall:

(a)

restate the financial asset or financial liability using the new designation in the comparative financial
statements;

and

(b) disclose the fair value of the financial assets or financial liabilities designated into each category and the clas-

sification and carrying amount in the previous financial statements.

106. Except as permitted by paragraph 107, an entity shall apply the derecognition requirements in paragraphs 15-37
and Appendix A paragraphs AG36-AG52 prospectively. Accordingly, if an entity derecognised financial assets
under IAS 39 (revised 2000) as a result of a transaction that occurred before 1 January 2004 and those assets
would not have been derecognised under this Standard, it shall not recognise those assets.

107. Notwithstanding paragraph 106, an entity may apply the derecognition requirements in paragraphs 15-37 and
Appendix A paragraphs AG36-AG52 retrospectively from a date of the entity’s choosing, provided that the infor-
mation needed to apply IAS 39 to assets and liabilities derecognised as a result of past transactions was obtained
at the time of initially accounting for those transactions.

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108. An entity shall not adjust the carrying amount of non-financial assets and non-financial liabilities to exclude gains
and losses related to cash flow hedges that were included in the carrying amount before the beginning of the finan-
cial year in which this Standard is first applied. At the beginning of the financial period in which this Standard is
first applied, any amount recognised directly in equity for a hedge of a firm commitment that under this Standard
is accounted for as a fair value hedge shall be reclassified as an asset or liability, except for a hedge of foreign cur-
rency risk that continues to be treated as a cash flow hedge.

WITHDRAWAL OF OTHER PRONOUNCEMENTS

109. This Standard supersedes IAS 39 Financial Instruments: Recognition and Measurement revised in October 2000.

110. This Standard and the accompanying Implementation Guidance supersede the Implementation Guidance issued by the

IAS 39 Implementation Guidance Committee, established by the former IASC.

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This appendix is an integral part of the Standard.

APPENDIX A

Application Guidance

Scope (paragraphs 2-7)

AG1. Contracts that require a payment based on climatic, geological or other physical variables are commonly used as insur-
ance policies. (Those based on climatic variables are sometimes referred to as ‘weather derivatives’.) Under such con-
tracts, the payment made is based on the amount of loss to the insured entity. Rights and obligations under insurance
contracts that do not principally involve the transfer of financial risks are excluded from the scope of this Standard
by paragraph 2(d). The payout under some contracts that require a payment based on climatic, geological or other
physical variables is unrelated to the amount of an insured entity’s loss. Such contracts are excluded from the scope
of this Standard by paragraph 2(h).

AG2. This Standard does not change the requirements relating to employee benefit plans that comply with IAS 26 Account-
ing and Reporting by Retirement Benefit Plans and royalty agreements based on the volume of sales or service revenues
that are accounted for under IAS 18 Revenue.

AG3. Sometimes, an entity makes what it views as a ‘strategic investment’ in equity instruments issued by another entity,
with the intention of establishing or maintaining a long-term operating relationship with the entity in which the
investment is made. The investor entity uses IAS 28 Investments in Associates to determine whether the equity method
of accounting is appropriate for such an investment. Similarly, the investor entity uses IAS 31 Interests in Joint Ven-
tures to determine whether proportionate consolidation or the equity method is appropriate for such an investment.
If neither the equity method nor proportionate consolidation is appropriate, the entity applies this Standard to that
strategic investment.

AG4. This Standard applies to the financial assets and financial liabilities of insurers other than rights and obligations aris-

ing under insurance contracts that are excluded by paragraph 2(d).

Definitions (paragraphs 8-9)

Effective Interest Rate

AG5. In some cases, financial assets are acquired at a deep discount that reflects incurred credit losses. Entities include such

incurred credit losses in the estimated cash flows when computing the effective interest rate.

AG6. When applying the effective interest method, an entity generally amortises any fees, points paid or received, transac-
tion costs and other premiums or discounts included in the calculation of the effective interest rate over the expected
life of the instrument. However, a shorter period is used if this is the period to which the fees, points paid or received,
transaction costs, premiums or discounts relate. This will be the case when the variable to which the fees, points paid
or received, transaction costs, premiums or discounts relate is repriced to market rates before the expected maturity
of the instrument. In such a case, the appropriate amortisation period is the period to the next such repricing date.
For example, if a premium or discount on a floating rate instrument reflects interest that has accrued on the instru-
ment since interest was last paid, or changes in market rates since the floating interest rate was reset to market rates,
it will be amortised to the next date when the floating interest is reset to market rates. This is because the premium or
discount relates to the period to the next interest reset date because, at that date, the variable to which the premium
or discount relates (ie interest rates) is reset to market rates. If, however, the premium or discount results from a
change in the credit spread over the floating rate specified in the instrument, or other variables that are not reset to
market rates, it is amortised over the expected life of the instrument.

AG7. For floating rate financial assets and floating rate financial liabilities, periodic re-estimation of cash flows to reflect
movements in market rates of interest alters the effective interest rate. If a floating rate financial asset or floating rate
financial liability is recognised initially at an amount equal to the principal receivable or payable on maturity,
re-estimating the future interest payments normally has no significant effect on the carrying amount of the asset or
liability.

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AG8. If an entity revises its estimates of payments or receipts, the entity shall adjust the carrying amount of the financial
asset or financial liability (or group of financial instruments) to reflect actual and revised estimated cash flows. The
entity recalculates the carrying amount by computing the present value of estimated future cash flows at the financial
instrument’s original effective interest rate. The adjustment is recognised as income or expense in profit or loss.

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Derivatives

AG9. Typical examples of derivatives are futures and forward, swap and option contracts. A derivative usually has a
notional amount, which is an amount of currency, a number of shares, a number of units of weight or volume or
other units specified in the contract. However, a derivative instrument does not require the holder or writer to invest
or receive the notional amount at the inception of the contract. Alternatively, a derivative could require a fixed pay-
ment or payment of an amount that can change (but not proportionally with a change in the underlying) as a result
of some future event that is unrelated to a notional amount. For example, a contract may require a fixed payment of
CU1 000 (*) if six-month LIBOR increases by 100 basis points. Such a contract is a derivative even though a notional
amount is not specified.

AG10. The definition of a derivative in this Standard includes contracts that are settled gross by delivery of the underlying
item (eg a forward contract to purchase a fixed rate debt instrument). An entity may have a contract to buy or sell
a non-financial item that can be settled net in cash or another financial instrument or by exchanging financial instru-
ments (eg a contract to buy or sell a commodity at a fixed price at a future date). Such a contract is within the scope
of this Standard unless it was entered into and continues to be held for the purpose of delivery of a non-financial
item in accordance with the entity’s expected purchase, sale or usage requirements (see paragraphs 5-7).

AG11. One of the defining characteristics of a derivative is that it has an initial net investment that is smaller than would be
required for other types of contracts that would be expected to have a similar response to changes in market factors.
An option contract meets that definition because the premium is less than the investment that would be required to
obtain the underlying financial instrument to which the option is linked. A currency swap that requires an initial
exchange of different currencies of equal fair values meets the definition because it has a zero initial net investment.

AG12. A regular way purchase or sale gives rise to a fixed price commitment between trade date and settlement date that
meets the definition of a derivative. However, because of the short duration of the commitment it is not recognised
as a derivative financial instrument. Rather, this Standard provides for special accounting for such regular way con-
tracts (see paragraphs 38 and AG53-AG56).

Transaction Costs

AG13. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advis-
ers, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Trans-
action costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs.

Financial Assets and Financial Liabilities Held for Trading

AG14. Trading generally reflects active and frequent buying and selling, and financial instruments held for trading gener-

ally are used with the objective of generating a profit from short-term fluctuations in price or dealer’s margin.

AG15. Financial liabilities held for trading include:

(a)

derivative liabilities that are not accounted for as hedging instruments;

(b) obligations to deliver financial assets borrowed by a short seller (ie an entity that sells financial assets it has bor-

rowed and does not yet own);

(*)

In this Standard, monetary amounts are denominated in ‘currency units’ (CU).

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financial liabilities that are incurred with an intention to repurchase them in the near term (eg a quoted debt
instrument that the issuer may buy back in the near term depending on changes in its fair value);

and

(d)

financial liabilities that are part of a portfolio of identified financial instruments that are managed together and
for which there is evidence of a recent pattern of short-term profit-taking.

The fact that a liability is used to fund trading activities does not in itself make that liability one that is held for
trading.

Held-to-Maturity Investments

AG16. An entity does not have a positive intention to hold to maturity an investment in a financial asset with a fixed matu-

rity if:

(a)

the entity intends to hold the financial asset for an undefined period;

(b)

the entity stands ready to sell the financial asset (other than if a situation arises that is non-recurring and could
not have been reasonably anticipated by the entity) in response to changes in market interest rates or risks,
liquidity needs, changes in the availability of and the yield on alternative investments, changes in financing
sources and terms or changes in foreign currency risk;

or

(c)

the issuer has a right to settle the financial asset at an amount significantly below its amortised cost.

AG17. A debt instrument with a variable interest rate can satisfy the criteria for a held-to-maturity investment. Equity instru-
ments cannot be held-to-maturity investments either because they have an indefinite life (such as ordinary shares) or
because the amounts the holder may receive can vary in a manner that is not predetermined (such as for share
options, warrants and similar rights). With respect to the definition of held-to-maturity investments, fixed or deter-
minable payments and fixed maturity mean that a contractual arrangement defines the amounts and dates of pay-
ments to the holder, such as interest and principal payments. A significant risk of non-payment does not preclude
classification of a financial asset as held to maturity as long as its contractual payments are fixed or determinable
and the other criteria for that classification are met. If the terms of a perpetual debt instrument provide for interest
payments for an indefinite period, the instrument cannot be classified as held to maturity because there is no matu-
rity date.

AG18. The criteria for classification as a held-to-maturity investment are met for a financial asset that is callable by the issuer
if the holder intends and is able to hold it until it is called or until maturity and the holder would recover substan-
tially all of its carrying amount. The call option of the issuer, if exercised, simply accelerates the asset’s maturity.
However, if the financial asset is callable on a basis that would result in the holder not recovering substantially all of
its carrying amount, the financial asset cannot be classified as a held-to-maturity investment. The entity considers
any premium paid and capitalised transaction costs in determining whether the carrying amount would be substan-
tially recovered.

AG19. A financial asset that is puttable (ie the holder has the right to require that the issuer repay or redeem the financial
asset before maturity) cannot be classified as a held-to-maturity investment because paying for a put feature in a
financial asset is inconsistent with expressing an intention to hold the financial asset until maturity.

AG20. For most financial assets, fair value is a more appropriate measure than amortised cost. The held-to-maturity clas-
sification is an exception, but only if the entity has a positive intention and the ability to hold the investment to matu-
rity. When an entity’s actions cast doubt on its intention and ability to hold such investments to maturity, para-
graph 9 precludes the use of the exception for a reasonable period of time.

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AG21. A disaster scenario that is only remotely possible, such as a run on a bank or a similar situation affecting an insurer,
is not something that is assessed by an entity in deciding whether it has the positive intention and ability to hold an
investment to maturity.

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AG22. Sales before maturity could satisfy the condition in paragraph 9 — and therefore not raise a question about the enti-

ty’s intention to hold other investments to maturity — if they are attributable to any of the following:

(a)

a significant deterioration in the issuer’s creditworthiness. For example, a sale following a downgrade in a credit
rating by an external rating agency would not necessarily raise a question about the entity’s intention to hold
other investments to maturity if the downgrade provides evidence of a significant deterioration in the issuer’s
creditworthiness judged by reference to the credit rating at initial recognition. Similarly, if an entity uses inter-
nal ratings for assessing exposures, changes in those internal ratings may help to identify issuers for which there
has been a significant deterioration in creditworthiness, provided the entity’s approach to assigning internal rat-
ings and changes in those ratings give a consistent, reliable and objective measure of the credit quality of the
issuers. If there is evidence that a financial asset is impaired (see paragraphs 58 and 59), the deterioration in
creditworthiness is often regarded as significant.

(b)

a change in tax law that eliminates or significantly reduces the tax-exempt status of interest on the held-to-
maturity investment (but not a change in tax law that revises the marginal tax rates applicable to interest
income).

(c)

a major business combination or major disposition (such as a sale of a segment) that necessitates the sale or
transfer of held-to-maturity investments to maintain the entity’s existing interest rate risk position or credit risk
policy (although the business combination is an event within the entity’s control, the changes to its investment
portfolio to maintain an interest rate risk position or credit risk policy may be consequential rather than
anticipated).

(d)

a change in statutory or regulatory requirements significantly modifying either what constitutes a permissible
investment or the maximum level of particular types of investments, thereby causing an entity to dispose of a
held-to-maturity investment.

(e)

a significant increase in the industry’s regulatory capital requirements that causes the entity to downsize by sell-
ing held-to-maturity investments.

(f)

a significant increase in the risk weights of held-to-maturity investments used for regulatory risk-based capital
purposes.

AG23. An entity does not have a demonstrated ability to hold to maturity an investment in a financial asset with a fixed

maturity if:

(a)

it does not have the financial resources available to continue to finance the investment until maturity;

or

(b)

it is subject to an existing legal or other constraint that could frustrate its intention to hold the financial asset
to maturity. (However, an issuer’s call option does not necessarily frustrate an entity’s intention to hold a finan-
cial asset to maturity — see paragraph AG18.)

AG24. Circumstances other than those described in paragraphs AG16-AG23 can indicate that an entity does not have a

positive intention or the ability to hold an investment to maturity.

AG25. An entity assesses its intention and ability to hold its held-to-maturity investments to maturity not only when those

financial assets are initially recognised, but also at each subsequent balance sheet date.

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Loans and Receivables

AG26. Any non-derivative financial asset with fixed or determinable payments (including loan assets, trade receivables,
investments in debt instruments and deposits held in banks) could potentially meet the definition of loans and receiv-
ables. However, a financial asset that is quoted in an active market (such as a quoted debt instrument, see para-
graph AG71) does not qualify for classification as a loan or receivable. Financial assets that do not meet the defini-
tion of loans and receivables may be classified as held-to-maturity investments if they meet the conditions for that
classification (see paragraphs 9 and AG16-AG25). On initial recognition of a financial asset that would otherwise be
classified as a loan or receivable, an entity may designate it as a financial asset at fair value through profit or loss, or
available for sale.

Embedded Derivatives (paragraphs 10-13)

AG27.

If a host contract has no stated or predetermined maturity and represents a residual interest in the net assets of an
entity, then its economic characteristics and risks are those of an equity instrument, and an embedded derivative
would need to possess equity characteristics related to the same entity to be regarded as closely related. If the host
contract is not an equity instrument and meets the definition of a financial instrument, then its economic charac-
teristics and risks are those of a debt instrument.

AG28. An embedded non-option derivative (such as an embedded forward or swap) is separated from its host contract on
the basis of its stated or implied substantive terms, so as to result in it having a fair value of zero at initial recogni-
tion. An embedded option-based derivative (such as an embedded put, call, cap, floor or swaption) is separated from
its host contract on the basis of the stated terms of the option feature. The initial carrying amount of the host instru-
ment is the residual amount after separating the embedded derivative.

AG29. Generally, multiple embedded derivatives in a single instrument are treated as a single compound embedded deriva-
tive. However, embedded derivatives that are classified as equity (see IAS 32 Financial Instruments: Disclosure and
Presentation) are accounted for separately from those classified as assets or liabilities. In addition, if an instrument
has more than one embedded derivative and those derivatives relate to different risk exposures and are readily sepa-
rable and independent of each other, they are accounted for separately from each other.

AG30. The economic characteristics and risks of an embedded derivative are not closely related to the host contract (para-
graph 11(a)) in the following examples. In these examples, assuming the conditions in paragraph 11(b) and (c) are
met, an entity accounts for the embedded derivative separately from the host contract.

(a) A put option embedded in an instrument that enables the holder to require the issuer to reacquire the instru-
ment for an amount of cash or other assets that varies on the basis of the change in an equity or commodity
price or index is not closely related to a host debt instrument.

(b) A call option embedded in an equity instrument that enables the issuer to reacquire that equity instrument at
a specified price is not closely related to the host equity instrument from the perspective of the holder (from
the issuer’s perspective, the call option is an equity instrument provided it meets the conditions for that clas-
sification under IAS 32, in which case it is excluded from the scope of this Standard).

(c) An option or automatic provision to extend the remaining term to maturity of a debt instrument is not closely
related to the host debt instrument unless there is a concurrent adjustment to the approximate current market
rate of interest at the time of the extension. If an entity issues a debt instrument and the holder of that debt
instrument writes a call option on the debt instrument to a third party, the issuer regards the call option as
extending the term to maturity of the debt instrument provided the issuer can be required to participate in or
facilitate the remarketing of the debt instrument as a result of the call option being exercised.

(d)

Equity-indexed interest or principal payments embedded in a host debt instrument or insurance contract — by
which the amount of interest or principal is indexed to the value of equity instruments — are not closely related
to the host instrument because the risks inherent in the host and the embedded derivative are dissimilar.

(e) Commodity-indexed interest or principal payments embedded in a host debt instrument or insurance contract
— by which the amount of interest or principal is indexed to the price of a commodity (such as gold) — are
not closely related to the host instrument because the risks inherent in the host and the embedded derivative
are dissimilar.

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(f) An equity conversion feature embedded in a convertible debt instrument is not closely related to the host debt
instrument from the perspective of the holder of the instrument (from the issuer’s perspective, the equity con-
version option is an equity instrument and excluded from the scope of this Standard provided it meets the con-
ditions for that classification under IAS 32).

(g) A call, put, surrender or prepayment option embedded in a host debt instrument is not closely related to the
host instrument unless the option’s exercise price is approximately equal to the debt instrument’s amortised
cost on each exercise date. From the perspective of the issuer of a convertible debt instrument with an embed-
ded call or put option feature, the assessment of whether the call or put option is closely related to the host
debt instrument is made before separating the equity element under IAS 32.

(h) Credit derivatives that are embedded in a host debt instrument and allow one party (the ‘beneficiary’) to trans-
fer the credit risk of a particular reference asset, which it may not own, to another party (the ‘guarantor’) are
not closely related to the host debt instrument. Such credit derivatives allow the guarantor to assume the credit
risk associated with the reference asset without directly owning it.

AG31. An example of a hybrid instrument is a financial instrument that gives the holder a right to put the financial instru-
ment back to the issuer in exchange for an amount of cash or other financial assets that varies on the basis of the
change in an equity or commodity index that may increase or decrease (a ‘puttable instrument’). […] It is required
to separate an embedded derivative (ie the indexed principal payment) under paragraph 11 because the host con-
tract is a debt instrument under paragraph AG27 and the indexed principal payment is not closely related to a host
debt instrument under paragraph AG30(a). Because the principal payment can increase and decrease, the embedded
derivative is a non-option derivative whose value is indexed to the underlying variable.

AG32.

In the case of a puttable instrument that can be put back at any time for cash equal to a proportionate share of the
net asset value of an entity (such as units of an open-ended mutual fund or some unit-linked investment products),
the effect of separating an embedded derivative and accounting for each component is to measure the combined
instrument at the redemption amount that is payable at the balance sheet date if the holder exercised its right to put
the instrument back to the issuer.

AG33. The economic characteristics and risks of an embedded derivative are closely related to the economic characteristics
and risks of the host contract in the following examples. In these examples, an entity does not account for the
embedded derivative separately from the host contract.

(a) An embedded derivative in which the underlying is an interest rate or interest rate index that can change the
amount of interest that would otherwise be paid or received on an interest-bearing host debt instrument is
closely related to the host instrument unless the combined instrument can be settled in such a way that the
holder would not recover substantially all of its recognised investment or the embedded derivative could at least
double the holder’s initial rate of return on the host contract and could result in a rate of return that is at least
twice what the market return would be for a contract with the same terms as the host contract.

(b) An embedded floor or cap on the interest rate on a debt instrument is closely related to the host debt instru-
ment, provided the cap is at or above the market rate of interest and the floor is at or below the market rate of
interest when the instrument is issued, and the cap or floor is not leveraged in relation to the host instrument.
Similarly, provisions included in a contract to purchase or sell an asset (eg a commodity) that establish a cap
and a floor on the price to be paid or received for the asset are closely related to the host contract if both the
cap and floor were out of the money at inception and are not leveraged.

(c) An embedded foreign currency derivative that provides a stream of principal or interest payments that are
denominated in a foreign currency and is embedded in a host debt instrument (eg a dual currency bond) is
closely related to the host debt instrument. Such a derivative is not separated from the host instrument because
IAS 21 The Effects of Changes in Foreign Exchange Rates requires foreign currency gains and losses on monetary
items to be recognised in profit or loss.

(d) An embedded foreign currency derivative in a host contract that is not a financial instrument (such as a con-
tract for the purchase or sale of a non-financial item where the price is denominated in a foreign currency) is
closely related to the host contract provided it is not leveraged, does not contain an option feature and requires
payments denominated in one of the following currencies:

(i)

the functional currency of any substantial party to the contract;

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(ii)

the currency in which the price of the related good or service that is acquired or delivered is routinely
denominated in commercial transactions around the world (such as the US dollar for crude oil
transactions);

or

(iii) a currency that is commonly used in contracts to purchase or sell non-financial items in the economic
environment in which the transaction takes place (eg a relatively stable and liquid currency that is com-
monly used in local business transactions or external trade).

(Such a contract is not a host contract with an embedded foreign currency derivative.)

(e) An embedded prepayment option in an interest-only or principal-only strip is closely related to the host con-
tract provided the host contract (i) initially resulted from separating the right to receive contractual cash flows
of a financial instrument that, in and of itself, did not contain an embedded derivative, and (ii) does not con-
tain any terms not present in the original host debt contract.

(f) An embedded derivative in a host lease contract is closely related to the host contract if the embedded deriva-
tive is (i) an inflation-related index such as an index of lease payments to a consumer price index (provided
that the lease is not leveraged and the index relates to inflation in the entity’s own economic environment), (ii)
contingent rentals based on related sales or (iii) contingent rentals based on variable interest rates.

Recognition and Derecognition (paragraphs 14-42)

Initial Recognition (paragraph 14)

AG34. As a consequence of the principle in paragraph 14, an entity recognises all of its contractual rights and obligations
under derivatives in its balance sheet as assets and liabilities, respectively, except for derivatives that prevent a trans-
fer of financial assets from being accounted for as a sale (see paragraph AG49). If a transfer of a financial asset does
not qualify for derecognition, the transferee does not recognise the transferred asset as its asset (see paragraph AG50).

AG35. The following are examples of applying the principle in paragraph 14:

(a)

unconditional receivables and payables are recognised as assets or liabilities when the entity becomes a party
to the contract and, as a consequence, has a legal right to receive or a legal obligation to pay cash.

(b)

assets to be acquired and liabilities to be incurred as a result of a firm commitment to purchase or sell goods or
services are generally not recognised until at least one of the parties has performed under the agreement. For
example, an entity that receives a firm order does not generally recognise an asset (and the entity that places
the order does not recognise a liability) at the time of the commitment but, rather, delays recognition until the
ordered goods or services have been shipped, delivered or rendered. If a firm commitment to buy or sell non-
financial items is within the scope of this Standard under paragraphs 5-7, its net fair value is recognised as an
asset or liability on the commitment date (see (c) below). In addition, if a previously unrecognised firm com-
mitment is designated as a hedged item in a fair value hedge, any change in the net fair value attributable to the
hedged risk is recognised as an asset or liability after the inception of the hedge (see paragraphs 93 and 94).

(c)

a forward contract that is within the scope of this Standard (see paragraphs 2-7) is recognised as an asset or a
liability on the commitment date, rather than on the date on which settlement takes place. When an entity
becomes a party to a forward contract, the fair values of the right and obligation are often equal, so that the net
fair value of the forward is zero. If the net fair value of the right and obligation is not zero, the contract is rec-
ognised as an asset or liability.

(d) option contracts that are within the scope of this Standard (see paragraphs 2-7) are recognised as assets or

liabilities when the holder or writer becomes a party to the contract.

(e)

planned future transactions, no matter how likely, are not assets and liabilities because the entity has not
become a party to a contract.

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Derecognition of a Financial Asset (paragraphs 15-37)

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AG36. The following flow chart illustrates the evaluation of whether and to what extent a financial asset is derecognised.

Consolidate all subsidiaries (including any SPE)
[Paragraph 15]

Determine whether the derecognition principles below are applied to a
part or all of an asset (or group of similar assets) [Paragraph 16]

Have the rights to the cash flows from the
asset expired? [Paragraph 17(a)]

Yes

Derecognise
the asset

No

Yes

Has the entity transferred its rights to receive the
cash flows from the asset? [Paragraph 18(a)]

No

Has the entity assumed an obligation to
pay the cash flows from the asset that meets the
conditions in paragraph 19? [Paragraph 18(b)]

Yes

Has the entity transferred substantially all
risks and rewards? [Paragraph 20(a)]

No

Has the entity retained substantially all risks and
rewards? [Paragraph 20(b)]

No

No

Yes

Yes

Continue to
recognise
the asset

Derecognise
the asset

Continue to
recognise
the asset

Has the entity retained control of
the asset? [Paragraph 20(c)]

No

Derecognise
the asset

Yes

Continue to recognise the asset to the extent of the entity’s continuing involvement

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Arrangements under which an entity retains the contractual rights to receive the cash flows of a financial asset, but assumes a contractual
obligation to pay the cash flows to one or more recipients (paragraph 18(b))

AG37. The situation described in paragraph 18(b) (when an entity retains the contractual rights to receive the cash flows of
the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients) occurs, for
example, if the entity is a special purpose entity or trust, and issues to investors beneficial interests in the underlying
financial assets that it owns and provides servicing of those financial assets. In that case, the financial assets qualify
for derecognition if the conditions in paragraphs 19 and 20 are met.

AG38. In applying paragraph 19, the entity could be, for example, the originator of the financial asset, or it could be a group
that includes a consolidated special purpose entity that has acquired the financial asset and passes on cash flows to
unrelated third party investors.

Evaluation of the transfer of risks and rewards of ownership (paragraph 20)

AG39. Examples of when an entity has transferred substantially all the risks and rewards of ownership are:

(a)

an unconditional sale of a financial asset;

(b)

a sale of a financial asset together with an option to repurchase the financial asset at its fair value at the time of
repurchase;

and

(c)

a sale of a financial asset together with a put or call option that is deeply out of the money (ie an option that
is so far out of the money it is highly unlikely to go into the money before expiry).

AG40. Examples of when an entity has retained substantially all the risks and rewards of ownership are:

(a)

a sale and repurchase transaction where the repurchase price is a fixed price or the sale price plus a lender’s
return;

(b)

a securities lending agreement;

(c)

a sale of a financial asset together with a total return swap that transfers the market risk exposure back to the
entity;

(d)

a sale of a financial asset together with a deep in-the-money put or call option (ie an option that is so far in the
money that it is highly unlikely to go out of the money before expiry);

and

(e)

a sale of short-term receivables in which the entity guarantees to compensate the transferee for credit losses
that are likely to occur.

AG41. If an entity determines that as a result of the transfer, it has transferred substantially all the risks and rewards of own-
ership of the transferred asset, it does not recognise the transferred asset again in a future period, unless it reacquires
the transferred asset in a new transaction.

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Evaluation of the transfer of control

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AG42. An entity has not retained control of a transferred asset if the transferee has the practical ability to sell the trans-
ferred asset. An entity has retained control of a transferred asset if the transferee does not have the practical ability
to sell the transferred asset. A transferee has the practical ability to sell the transferred asset if it is traded in an active
market because the transferee could repurchase the transferred asset in the market if it needs to return the asset to
the entity. For example, a transferee may have the practical ability to sell a transferred asset if the transferred asset is
subject to an option that allows the entity to repurchase it, but the transferee can readily obtain the transferred asset
in the market if the option is exercised. A transferee does not have the practical ability to sell the transferred asset if
the entity retains such an option and the transferee cannot readily obtain the transferred asset in the market if the
entity exercises its option.

AG43. The transferee has the practical ability to sell the transferred asset only if the transferee can sell the transferred asset
in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without imposing addi-
tional restrictions on the transfer. The critical question is what the transferee is able to do in practice, not what con-
tractual rights the transferee has concerning what it can do with the transferred asset or what contractual prohibi-
tions exist. In particular:

(a)

a contractual right to dispose of the transferred asset has little practical effect if there is no market for the trans-
ferred asset;

and

(b)

an ability to dispose of the transferred asset has little practical effect if it cannot be exercised freely. For that
reason:

(i)

the transferee’s ability to dispose of the transferred asset must be independent of the actions of others (ie
it must be a unilateral ability);

and

(ii)

the transferee must be able to dispose of the transferred asset without needing to attach restrictive con-
ditions or ‘strings’ to the transfer (eg conditions about how a loan asset is serviced or an option giving the
transferee the right to repurchase the asset).

AG44. That the transferee is unlikely to sell the transferred asset does not, of itself, mean that the transferor has retained
control of the transferred asset. However, if a put option or guarantee constrains the transferee from selling the trans-
ferred asset, then the transferor has retained control of the transferred asset. For example, if a put option or guar-
antee is sufficiently valuable it constrains the transferee from selling the transferred asset because the transferee
would, in practice, not sell the transferred asset to a third party without attaching a similar option or other restric-
tive conditions. Instead, the transferee would hold the transferred asset so as to obtain payments under the guaran-
tee or put option. Under these circumstances the transferor has retained control of the transferred asset.

T r a n s f e r s t h a t Q u a l i f y f o r D e r e c o g n i t i o n

AG45. An entity may retain the right to a part of the interest payments on transferred assets as compensation for servic-
ing those assets. The part of the interest payments that the entity would give up upon termination or transfer of
the servicing contract is allocated to the servicing asset or servicing liability. The part of the interest payments that
the entity would not give up is an interest-only strip receivable. For example, if the entity would not give up any
interest upon termination or transfer of the servicing contract, the entire interest spread is an interest-only strip
receivable. For the purposes of applying paragraph 27, the fair values of the servicing asset and interest-only strip
receivable are used to allocate the carrying amount of the receivable between the part of the asset that is derec-
ognised and the part that continues to be recognised. If there is no servicing fee specified or the fee to be received
is not expected to compensate the entity adequately for performing the servicing, a liability for the servicing obli-
gation is recognised at fair value.

AG46.

In estimating the fair values of the part that continues to be recognised and the part that is derecognised for the
purposes of applying paragraph 27, an entity applies the fair value measurement requirements in paragraphs 48,
49 and AG69-AG82 in addition to paragraph 28.

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T r a n s f e r s t h a t D o N o t Q u a l i f y f o r D e r e c o g n i t i o n

AG47.

The following is an application of the principle outlined in paragraph 29. If a guarantee provided by the entity for
default losses on the transferred asset prevents a transferred asset from being derecognised because the entity has
retained substantially all the risks and rewards of ownership of the transferred asset, the transferred asset contin-
ues to be recognised in its entirety and the consideration received is recognised as a liability.

C o n t i n u i n g I n v o l v e m e n t

i n T r a n s f e r r e d A s s e t s

AG48.

The following are examples of how an entity measures a transferred asset and the associated liability under
paragraph 30.

All assets

(a)

If a guarantee provided by an entity to pay for default losses on a transferred asset prevents the transferred
asset from being derecognised to the extent of the continuing involvement, the transferred asset at the date
of the transfer is measured at the lower of (i) the carrying amount of the asset and (ii) the maximum amount
of the consideration received in the transfer that the entity could be required to repay (‘the guarantee amount’).
The associated liability is initially measured at the guarantee amount plus the fair value of the guarantee
(which is normally the consideration received for the guarantee). Subsequently, the initial fair value of the
guarantee is recognised in profit or loss on a time proportion basis (see IAS 18) and the carrying value of the
asset is reduced by any impairment losses.

Assets measured at amortised cost

(b)

If a put option obligation written by an entity or call option right held by an entity prevents a transferred
asset from being derecognised and the entity measures the transferred asset at amortised cost, the associated
liability is measured at its cost (ie the consideration received) adjusted for the amortisation of any difference
between that cost and the amortised cost of the transferred asset at the expiration date of the option. For
example, assume that the amortised cost and carrying amount of the asset on the date of the transfer is CU98
and that the consideration received is CU95. The amortised cost of the asset on the option exercise date will
be CU100. The initial carrying amount of the associated liability is CU95 and the difference between CU95
and CU100 is recognised in profit or loss using the effective interest method. If the option is exercised, any
difference between the carrying amount of the associated liability and the exercise price is recognised in profit
or loss.

Assets measured at fair value

(c)

(d)

If a call option right retained by an entity prevents a transferred asset from being derecognised and the entity
measures the transferred asset at fair value, the asset continues to be measured at its fair value. The associated
liability is measured at (i) the option exercise price less the time value of the option if the option is in or at
the money, or (ii) the fair value of the transferred asset less the time value of the option if the option is out of
the money. The adjustment to the measurement of the associated liability ensures that the net carrying
amount of the asset and the associated liability is the fair value of the call option right. For example, if the fair
value of the underlying asset is CU80, the option exercise price is CU95 and the time value of the option is
CU5, the carrying amount of the associated liability is CU75 (CU80 - CU5) and the carrying amount of the
transferred asset is CU80 (ie its fair value).

If a put option written by an entity prevents a transferred asset from being derecognised and the entity mea-
sures the transferred asset at fair value, the associated liability is measured at the option exercise price plus
the time value of the option. The measurement of the asset at fair value is limited to the lower of the fair
value and the option exercise price because the entity has no right to increases in the fair value of the trans-
ferred asset above the exercise price of the option. This ensures that the net carrying amount of the asset and
the associated liability is the fair value of the put option obligation. For example, if the fair value of the under-
lying asset is CU120, the option exercise price is CU100 and the time value of the option is CU5, the carry-
ing amount of the associated liability is CU105 (CU100 + CU5) and the carrying amount of the asset is
CU100 (in this case the option exercise price).

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Official Journal of the European Union

If a collar, in the form of a purchased call and written put, prevents a transferred asset from being derecog-
nised and the entity measures the asset at fair value, it continues to measure the asset at fair value. The asso-
ciated liability is measured at (i) the sum of the call exercise price and fair value of the put option less the
time value of the call option, if the call option is in or at the money, or (ii) the sum of the fair value of the
asset and the fair value of the put option less the time value of the call option if the call option is out of the
money. The adjustment to the associated liability ensures that the net carrying amount of the asset and the
associated liability is the fair value of the options held and written by the entity. For example, assume an entity
transfers a financial asset that is measured at fair value while simultaneously purchasing a call with an exer-
cise price of CU120 and writing a put with an exercise price of CU80. Assume also that the fair value of the
asset is CU100 at the date of the transfer. The time value of the put and call are CU1 and CU5 respectively. In
this case, the entity recognises an asset of CU100 (the fair value of the asset) and a liability of CU96 [(CU100
+ CU1) – CU5]. This gives a net asset value of CU4, which is the fair value of the options held and written by
the entity.

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A l l T r a n s f e r s

AG49.

To the extent that a transfer of a financial asset does not qualify for derecognition, the transferor’s contractual rights
or obligations related to the transfer are not accounted for separately as derivatives if recognising both the deriva-
tive and either the transferred asset or the liability arising from the transfer would result in recognising the same
rights or obligations twice. For example, a call option retained by the transferor may prevent a transfer of financial
assets from being accounted for as a sale. In that case, the call option is not separately recognised as a derivative
asset.

AG50.

To the extent that a transfer of a financial asset does not qualify for derecognition, the transferee does not recog-
nise the transferred asset as its asset. The transferee derecognises the cash or other consideration paid and recog-
nises a receivable from the transferor. If the transferor has both a right and an obligation to reacquire control of
the entire transferred asset for a fixed amount (such as under a repurchase agreement), the transferee may account
for its receivable as a loan or receivable.

E x a m p l e s

AG51.

The following examples illustrate the application of the derecognition principles of this Standard.

(a) Repurchase agreements and securities lending. If a financial asset is sold under an agreement to repurchase it at a
fixed price or at the sale price plus a lender’s return or if it is loaned under an agreement to return it to the
transferor, it is not derecognised because the transferor retains substantially all the risks and rewards of own-
ership. If the transferee obtains the right to sell or pledge the asset, the transferor reclassifies the asset on its
balance sheet, for example, as a loaned asset or repurchase receivable.

(b) Repurchase agreements and securities lending — assets that are substantially the same. If a financial asset is sold under
an agreement to repurchase the same or substantially the same asset at a fixed price or at the sale price plus
a lender’s return or if a financial asset is borrowed or loaned under an agreement to return the same or sub-
stantially the same asset to the transferor, it is not derecognised because the transferor retains substantially
all the risks and rewards of ownership.

(c) Repurchase agreements and securities lending — right of substitution. If a repurchase agreement at a fixed repur-
chase price or a price equal to the sale price plus a lender’s return, or a similar securities lending transaction,
provides the transferee with a right to substitute assets that are similar and of equal fair value to the trans-
ferred asset at the repurchase date, the asset sold or lent under a repurchase or securities lending transaction
is not derecognised because the transferor retains substantially all the risks and rewards of ownership.

(d) Repurchase right of first refusal at fair value. If an entity sells a financial asset and retains only a right of first
refusal to repurchase the transferred asset at fair value if the transferee subsequently sells it, the entity derec-
ognises the asset because it has transferred substantially all the risks and rewards of ownership.

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(e) Wash sale transaction. The repurchase of a financial asset shortly after it has been sold is sometimes referred to
as a wash sale. Such a repurchase does not preclude derecognition provided that the original transaction met
the derecognition requirements. However, if an agreement to sell a financial asset is entered into concur-
rently with an agreement to repurchase the same asset at a fixed price or the sale price plus a lender’s return,
then the asset is not derecognised.

(f)

Put options and call options that are deeply in the money. If a transferred financial asset can be called back by the
transferor and the call option is deeply in the money, the transfer does not qualify for derecognition because
the transferor has retained substantially all the risks and rewards of ownership. Similarly, if the financial asset
can be put back by the transferee and the put option is deeply in the money, the transfer does not qualify for
derecognition because the transferor has retained substantially all the risks and rewards of ownership.

(g)

Put options and call options that are deeply out of the money. A financial asset that is transferred subject only to a
deep out-of-the-money put option held by the transferee or a deep out-of-the-money call option held by the
transferor is derecognised. This is because the transferor has transferred substantially all the risks and rewards
of ownership.

(h) Readily obtainable assets subject to a call option that is neither deeply in the money nor deeply out of the money. If an
entity holds a call option on an asset that is readily obtainable in the market and the option is neither deeply
in the money nor deeply out of the money, the asset is derecognised. This is because the entity (i) has neither
retained nor transferred substantially all the risks and rewards of ownership, and (ii) has not retained control.
However, if the asset is not readily obtainable in the market, derecognition is precluded to the extent of the
amount of the asset that is subject to the call option because the entity has retained control of the asset.

(i) A not readily obtainable asset subject to a put option written by an entity that is neither deeply in the money nor deeply
out of the money. If an entity transfers a financial asset that is not readily obtainable in the market, and writes
a put option that is not deeply out of the money, the entity neither retains nor transfers substantially all the
risks and rewards of ownership because of the written put option. The entity retains control of the asset if
the put option is sufficiently valuable to prevent the transferee from selling the asset, in which case the asset
continues to be recognised to the extent of the transferor’s continuing involvement (see paragraph AG44). The
entity transfers control of the asset if the put option is not sufficiently valuable to prevent the transferee from
selling the asset, in which case the asset is derecognised.

(j) Assets subject to a fair value put or call option or a forward repurchase agreement. A transfer of a financial asset that
is subject only to a put or call option or a forward repurchase agreement that has an exercise or repurchase
price equal to the fair value of the financial asset at the time of repurchase results in derecognition because of
the transfer of substantially all the risks and rewards of ownership.

(k) Cash settled call or put options. An entity evaluates the transfer of a financial asset that is subject to a put or call
option or a forward repurchase agreement that will be settled net in cash to determine whether it has retained
or transferred substantially all the risks and rewards of ownership. If the entity has not retained substantially
all the risks and rewards of ownership of the transferred asset, it determines whether it has retained control
of the transferred asset. That the put or the call or the forward repurchase agreement is settled net in cash
does not automatically mean that the entity has transferred control (see paragraphs AG44 and (g), (h) and (i)
above).

(l)

Removal of accounts provision. A removal of accounts provision is an unconditional repurchase (call) option
that gives an entity the right to reclaim assets transferred subject to some restrictions. Provided that such an
option results in the entity neither retaining nor transferring substantially all the risks and rewards of own-
ership, it precludes derecognition only to the extent of the amount subject to repurchase (assuming that the
transferee cannot sell the assets). For example, if the carrying amount and proceeds from the transfer of loan
assets are CU100 000 and any individual loan could be called back but the aggregate amount of loans that
could be repurchased could not exceed CU10 000, CU90 000 of the loans would qualify for derecognition.

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(m) Clean-up calls. An entity, which may be a transferor, that services transferred assets may hold a clean-up call
to purchase remaining transferred assets when the amount of outstanding assets falls to a specified level at
which the cost of servicing those assets becomes burdensome in relation to the benefits of servicing. Pro-
vided that such a clean-up call results in the entity neither retaining nor transferring substantially all the risks
and rewards of ownership and the transferee cannot sell the assets, it precludes derecognition only to the
extent of the amount of the assets that is subject to the call option.

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(n) Subordinated retained interests and credit guarantees. An entity may provide the transferee with credit enhance-
ment by subordinating some or all of its interest retained in the transferred asset. Alternatively, an entity may
provide the transferee with credit enhancement in the form of a credit guarantee that could be unlimited or
limited to a specified amount. If the entity retains substantially all the risks and rewards of ownership of the
transferred asset, the asset continues to be recognised in its entirety. If the entity retains some, but not sub-
stantially all, of the risks and rewards of ownership and has retained control, derecognition is precluded to
the extent of the amount of cash or other assets that the entity could be required to pay.

(o) Total return swaps. An entity may sell a financial asset to a transferee and enter into a total return swap with
the transferee, whereby all of the interest payment cash flows from the underlying asset are remitted to the
entity in exchange for a fixed payment or variable rate payment and any increases or declines in the fair value
of the underlying asset are absorbed by the entity. In such a case, derecognition of all of the asset is prohibited.

(p)

Interest rate swaps. An entity may transfer to a transferee a fixed rate financial asset and enter into an interest
rate swap with the transferee to receive a fixed interest rate and pay a variable interest rate based on a notional
amount that is equal to the principal amount of the transferred financial asset. The interest rate swap does
not preclude derecognition of the transferred asset provided the payments on the swap are not conditional
on payments being made on the transferred asset.

(q) Amortising interest rate swaps. An entity may transfer to a transferee a fixed rate financial asset that is paid off
over time, and enter into an amortising interest rate swap with the transferee to receive a fixed interest rate
and pay a variable interest rate based on a notional amount. If the notional amount of the swap amortises so
that it equals the principal amount of the transferred financial asset outstanding at any point in time, the swap
would generally result in the entity retaining substantial prepayment risk, in which case the entity either con-
tinues to recognise all of the transferred asset or continues to recognise the transferred asset to the extent of
its continuing involvement. Conversely, if the amortisation of the notional amount of the swap is not linked
to the principal amount outstanding of the transferred asset, such a swap would not result in the entity retain-
ing prepayment risk on the asset. Hence, it would not preclude derecognition of the transferred asset pro-
vided the payments on the swap are not conditional on interest payments being made on the transferred asset
and the swap does not result in the entity retaining any other significant risks and rewards of ownership on
the transferred asset.

AG52.

This paragraph illustrates the application of the continuing involvement approach when the entity’s continuing
involvement is in a part of a financial asset.

Assume an entity has a portfolio of prepayable loans whose coupon and effective interest rate is 10 per cent and whose
principal amount and amortised cost is CU10 000. It enters into a transaction in which, in return for a payment of
CU9 115, the transferee obtains the right to CU9 000 of any collections of principal plus interest thereon at 9.5 per
cent. The entity retains rights to CU1 000 of any collections of principal plus interest thereon at 10 per cent, plus the
excess spread of 0.5 per cent on the remaining CU9 000 of principal. Collections from prepayments are allocated
between the entity and the transferee proportionately in the ratio of 1:9, but any defaults are deducted from the enti-
ty’s interest of CU1 000 until that interest is exhausted. The fair value of the loans at the date of the transaction is
CU10 100 and the estimated fair value of the excess spread of 0.5 per cent is CU40.

The entity determines that it has transferred some significant risks and rewards of ownership (for example, significant
prepayment risk) but has also retained some significant risks and rewards of ownership (because of its subordinated
retained interest) and has retained control. It therefore applies the continuing involvement approach.

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To apply this Standard, the entity analyses the transaction as (a) a retention of a fully proportionate retained interest
of CU1 000, plus (b) the subordination of that retained interest to provide credit enhancement to the transferee for
credit losses.

The entity calculates that CU9 090 (90 per cent CU10 100) of the consideration received of CU9 115 represents the
consideration for a fully proportionate 90 per cent share. The remainder of the consideration received (CU25) repre-
sents consideration received for subordinating its retained interest to provide credit enhancement to the transferee for
credit losses. In addition, the excess spread of 0.5 per cent represents consideration received for the credit enhance-
ment. Accordingly, the total consideration received for the credit enhancement is CU65 (CU25+CU40).

The entity calculates the gain or loss on the sale of the 90 per cent share of cash flows. Assuming that separate fair
values of the 10 per cent part transferred and the 90 per cent part retained are not available at the date of the transfer,
the entity allocates the carrying amount of the asset in accordance with paragraph 28 as follows:

Portion transferred

Portion retained

Estimated Fair
Value

Percentage

Allocated Carrying
Amount

9 090

1 010

90 %

10 %

Total

10 100

9 000

1 000

10 000

The entity computes its gain or loss on the sale of the 90 per cent share of the cash flows by deducting the allocated
carrying amount of the portion transferred from the consideration received, ie CU90 (CU9 090 - CU9 000). The car-
rying amount of the portion retained by the entity is CU1 000.

In addition, the entity recognises the continuing involvement that results from the subordination of its retained inter-
est for credit losses. Accordingly, it recognises an asset of CU1 000 (the maximum amount of the cash flows it would
not receive under the subordination), and an associated liability of CU1 065 (which is the maximum amount of the
cash flows it would not receive under the subordination, ie CU1 000 plus the fair value of the subordination of CU65).

The entity uses all of the above information to account for the transaction as follows:

Original asset

Asset recognised for subordination or the residual interest

Asset for the consideration received in the form of excess spread

Profit or loss (gain on transfer)

Liability

Cash received

Debit

–

1 000

40

–

–

9 115

Credit

9 000

–

–

90

1 065

–

Total

10 155

10 155

Immediately following the transaction, the carrying amount of the asset is CU2 040 comprising CU1 000, represent-
ing the allocated cost of the portion retained, and CU1 040, representing the entity’s additional continuing involve-
ment from the subordination of its retained interest for credit losses (which includes the excess spread of CU40).

In subsequent periods, the entity recognises the consideration received for the credit enhancement (CU65) on a time
proportion basis, accrues interest on the recognised asset using the effective interest method and recognises any credit
impairment on the recognised assets. As an example of the latter, assume that in the following year there is a credit
impairment loss on the underlying loans of CU300. The entity reduces its recognised asset by CU600 (CU300 relating
to its retained interest and CU300 relating to the additional continuing involvement that arises from the subordina-
tion of its retained interest for credit losses), and reduces its recognised liability by CU300. The net result is a charge
to profit or loss for credit impairment of CU300.

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Regular Way Purchase or Sale of a Financial Asset (paragraph 38)

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AG53. A regular way purchase or sale of financial assets is recognised using either trade date accounting or settlement date
accounting as described in paragraphs AG55 and AG56. The method used is applied consistently for all purchases
and sales of financial assets that belong to the same category of financial assets defined in paragraph 9. For this pur-
pose assets that are held for trading form a separate category from assets designated at fair value through profit and
loss.

AG54. A contract that requires or permits net settlement of the change in the value of the contract is not a regular way
contract. Instead, such a contract is accounted for as a derivative in the period between the trade date and the settle-
ment date.

AG55. The trade date is the date that an entity commits itself to purchase or sell an asset. Trade date accounting refers to (a)
the recognition of an asset to be received and the liability to pay for it on the trade date, and (b) derecognition of an
asset that is sold, recognition of any gain or loss on disposal and the recognition of a receivable from the buyer for
payment on the trade date. Generally, interest does not start to accrue on the asset and corresponding liability until
the settlement date when title passes.

AG56. The settlement date is the date that an asset is delivered to or by an entity. Settlement date accounting refers to (a)
the recognition of an asset on the day it is received by the entity, and (b) the derecognition of an asset and recog-
nition of any gain or loss on disposal on the day that it is delivered by the entity. When settlement date accounting
is applied an entity accounts for any change in the fair value of the asset to be received during the period between
the trade date and the settlement date in the same way as it accounts for the acquired asset. In other words, the
change in value is not recognised for assets carried at cost or amortised cost; it is recognised in profit or loss for
assets classified as financial assets at fair value through profit or loss; and it is recognised in equity for assets classi-
fied as available for sale.

Derecognition of a Financial Liability (paragraphs 39-42)

AG57. A financial liability (or part of it) is extinguished when the debtor either:

(a)

discharges the liability (or part of it) by paying the creditor, normally with cash, other financial assets, goods or
services;

or

(b)

is legally released from primary responsibility for the liability (or part of it) either by process of law or by the
creditor. (If the debtor has given a guarantee this condition may still be met.)

AG58. If an issuer of a debt instrument repurchases that instrument, the debt is extinguished even if the issuer is a market

maker in that instrument or intends to resell it in the near term.

AG59. Payment to a third party, including a trust (sometimes called ‘in-substance defeasance’), does not, by itself, relieve

the debtor of its primary obligation to the creditor, in the absence of legal release.

AG60. If a debtor pays a third party to assume an obligation and notifies its creditor that the third party has assumed its
debt obligation, the debtor does not derecognise the debt obligation unless the condition in paragraph AG57(b) is
met. If the debtor pays a third party to assume an obligation and obtains a legal release from its creditor, the debtor
has extinguished the debt. However, if the debtor agrees to make payments on the debt to the third party or direct
to its original creditor, the debtor recognises a new debt obligation to the third party.

AG61. Although legal release, whether judicially or by the creditor, results in derecognition of a liability, the entity may
recognise a new liability if the derecognition criteria in paragraphs 15-37 are not met for the financial assets trans-
ferred. If those criteria are not met, the transferred assets are not derecognised, and the entity recognises a new liabil-
ity relating to the transferred assets.

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AG62. For the purpose of paragraph 40, the terms are substantially different if the discounted present value of the cash
flows under the new terms, including any fees paid net of any fees received and discounted using the original effec-
tive interest rate, is at least 10 per cent different from the discounted present value of the remaining cash flows of
the original financial liability. If an exchange of debt instruments or modification of terms is accounted for as an
extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the
exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying
amount of the liability and are amortised over the remaining term of the modified liability.

AG63. In some cases, a creditor releases a debtor from its present obligation to make payments, but the debtor assumes a
guarantee obligation to pay if the party assuming primary responsibility defaults. In this circumstance the debtor:

(a)

recognises a new financial liability based on the fair value of its obligation for the guarantee;

and

(b)

recognises a gain or loss based on the difference between (i) any proceeds paid and (ii) the carrying amount of
the original financial liability less the fair value of the new financial liability.

Measurement (paragraphs 43-70)

Initial Measurement of Financial Assets and Financial Liabilities (paragraph 43)

AG64. The fair value of a financial instrument on initial recognition is normally the transaction price (ie the fair value of
the consideration given or received, see also paragraph AG76). However, if part of the consideration given or
received is for something other than the financial instrument, the fair value of the financial instrument is estimated,
using a valuation technique (see paragraphs AG74-AG79). For example, the fair value of a long-term loan or receiv-
able that carries no interest can be estimated as the present value of all future cash receipts discounted using the pre-
vailing market rate(s) of interest for a similar instrument (similar as to currency, term, type of interest rate and other
factors) with a similar credit rating. Any additional amount lent is an expense or a reduction of income unless it quali-
fies for recognition as some other type of asset.

AG65. If an entity originates a loan that bears an off-market interest rate (eg 5 per cent when the market rate for similar
loans is 8 per cent), and receives an up-front fee as compensation, the entity recognises the loan at its fair value, ie
net of the fee it receives. The entity accretes the discount to profit or loss using the effective interest rate method.

Subsequent Measurement of Financial Assets (paragraphs 45 and 46)

AG66. If a financial instrument that was previously recognised as a financial asset is measured at fair value and its fair value

falls below zero, it is a financial liability in accordance with paragraph 47.

AG67. The following example illustrates the accounting for transaction costs on the initial and subsequent measurement of
an available-for-sale financial asset. An asset is acquired for CU100 plus a purchase commission of CU2. Initially,
the asset is recognised at CU102. The next financial reporting date occurs one day later, when the quoted market
price of the asset is CU100. If the asset were sold, a commission of CU3 would be paid. On that date, the asset is
measured at CU100 (without regard to the possible commission on sale) and a loss of CU2 is recognised in equity. If
the available-for-sale financial asset has fixed or determinable payments, the transaction costs are amortised to profit
or loss using the effective interest method. If the available-for-sale financial asset does not have fixed or determin-
able payments, the transaction costs are recognised in profit or loss when the asset is derecognised or becomes
impaired.

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AG68. Instruments that are classified as loans and receivables are measured at amortised cost without regard to the entity’s

intention to hold them to maturity.

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Fair Value Measurement Considerations (paragraphs 48 and 49)

AG69. Underlying the definition of fair value is a presumption that an entity is a going concern without any intention or
need to liquidate, to curtail materially the scale of its operations or to undertake a transaction on adverse terms. Fair
value is not, therefore, the amount that an entity would receive or pay in a forced transaction, involuntary liquida-
tion or distress sale. However, fair value reflects the credit quality of the instrument.

AG70. This Standard uses the terms ‘bid price’ and ‘asking price’ (sometimes referred to as ‘current offer price’) in the con-
text of quoted market prices, and the term ‘the bid-ask spread’ to include only transaction costs. Other adjustments
to arrive at fair value (eg for counterparty credit risk) are not included in the term ‘bid-ask spread’.

A c t i v e M a r k e t : Q u o t e d P r i c e

AG71. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available
from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent
actual and regularly occurring market transactions on an arm’s length basis. Fair value is defined in terms of a price
agreed by a willing buyer and a willing seller in an arm’s length transaction. The objective of determining fair value
for a financial instrument that is traded in an active market is to arrive at the price at which a transaction would
occur at the balance sheet date in that instrument (ie without modifying or repackaging the instrument) in the most
advantageous active market to which the entity has immediate access. However, the entity adjusts the price in the
more advantageous market to reflect any differences in counterparty credit risk between instruments traded in that
market and the one being valued. The existence of published price quotations in an active market is the best evi-
dence of fair value and when they exist they are used to measure the financial asset or financial liability.

AG72.

The appropriate quoted market price for an asset held or liability to be issued is usually the current bid price and,
for an asset to be acquired or liability held, the asking price. When an entity has assets and liabilities with offset-
ting market risks, it may use mid-market prices as a basis for establishing fair values for the offsetting risk posi-
tions and apply the bid or asking price to the net open position as appropriate. When current bid and asking prices
are unavailable, the price of the most recent transaction provides evidence of the current fair value as long as there
has not been a significant change in economic circumstances since the time of the transaction. If conditions have
changed since the time of the transaction (eg a change in the risk-free interest rate following the most recent price
quote for a corporate bond), the fair value reflects the change in conditions by reference to current prices or rates
for similar financial instruments, as appropriate. Similarly, if the entity can demonstrate that the last transaction
price is not fair value (eg because it reflected the amount that an entity would receive or pay in a forced transac-
tion, involuntary liquidation or distress sale), that price is adjusted. The fair value of a portfolio of financial instru-
ments is the product of the number of units of the instrument and its quoted market price. If a published price
quotation in an active market does not exist for a financial instrument in its entirety, but active markets exist for
its component parts, fair value is determined on the basis of the relevant market prices for the component parts.

AG73.

If a rate (rather than a price) is quoted in an active market, the entity uses that market-quoted rate as an input into
a valuation technique to determine fair value. If the market-quoted rate does not include credit risk or other fac-
tors that market participants would include in valuing the instrument, the entity adjusts for those factors.

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N o A c t i v e M a r k e t : V a l u a t i o n T e c h n i q u e

AG74.

If the market for a financial instrument is not active, an entity establishes fair value by using a valuation technique.
Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing par-
ties, if available, reference to the current fair value of another instrument that is substantially the same, discounted
cash flow analysis and option pricing models. If there is a valuation technique commonly used by market partici-
pants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices
obtained in actual market transactions, the entity uses that technique.

AG75.

The objective of using a valuation technique is to establish what the transaction price would have been on the mea-
surement date in an arm’s length exchange motivated by normal business considerations. Fair value is estimated
on the basis of the results of a valuation technique that makes maximum use of market inputs, and relies as little
as possible on entity-specific inputs. A valuation technique would be expected to arrive at a realistic estimate of
the fair value if (a) it reasonably reflects how the market could be expected to price the instrument and (b) the
inputs to the valuation technique reasonably represent market expectations and measures of the risk-return fac-
tors inherent in the financial instrument.

AG76.

AG77.

Therefore, a valuation technique (a) incorporates all factors that market participants would consider in setting a
price and (b) is consistent with accepted economic methodologies for pricing financial instruments. Periodically,
an entity calibrates the valuation technique and tests it for validity using prices from any observable current mar-
ket transactions in the same instrument (ie without modification or repackaging) or based on any available observ-
able market data. An entity obtains market data consistently in the same market where the instrument was origi-
nated or purchased. The best evidence of the fair value of a financial instrument at initial recognition is the
transaction price (ie the fair value of the consideration given or received) unless the fair value of that instrument is
evidenced by comparison with other observable current market transactions in the same instrument (ie without
modification or repackaging) or based on a valuation technique whose variables include only data from observ-
able markets.

The initial acquisition or origination of a financial asset or incurrence of a financial liability is a market transaction
that provides a foundation for estimating the fair value of the financial instrument. In particular, if the financial
instrument is a debt instrument (such as a loan), its fair value can be determined by reference to the market con-
ditions that existed at its acquisition or origination date and current market conditions or interest rates currently
charged by the entity or by others for similar debt instruments (ie similar remaining maturity, cash flow pattern,
currency, credit risk, collateral and interest basis). Alternatively, provided there is no change in the credit risk of
the debtor and applicable credit spreads after the origination of the debt instrument, an estimate of the current
market interest rate may be derived by using a benchmark interest rate reflecting a better credit quality than the
underlying debt instrument, holding the credit spread constant, and adjusting for the change in the benchmark
interest rate from the origination date. If conditions have changed since the most recent market transaction, the
corresponding change in the fair value of the financial instrument being valued is determined by reference to cur-
rent prices or rates for similar financial instruments, adjusted as appropriate, for any differences from the instru-
ment being valued.

AG78.

The same information may not be available at each measurement date. For example, at the date that an entity
makes a loan or acquires a debt instrument that is not actively traded, the entity has a transaction price that is also
a market price. However, no new transaction information may be available at the next measurement date and,
although the entity can determine the general level of market interest rates, it may not know what level of credit
or other risk market participants would consider in pricing the instrument on that date. An entity may not have
information from recent transactions to determine the appropriate credit spread over the basic interest rate to use
in determining a discount rate for a present value computation. It would be reasonable to assume, in the absence
of evidence to the contrary, that no changes have taken place in the spread that existed at the date the loan was
made. However, the entity would be expected to make reasonable efforts to determine whether there is evidence
that there has been a change in such factors. When evidence of a change exists, the entity would consider the effects
of the change in determining the fair value of the financial instrument.

AG79.

In applying discounted cash flow analysis, an entity uses one or more discount rates equal to the prevailing rates
of return for financial instruments having substantially the same terms and characteristics, including the credit
quality of the instrument, the remaining term over which the contractual interest rate is fixed, the remaining term
to repayment of the principal and the currency in which payments are to be made. Short-term receivables and pay-
ables with no stated interest rate may be measured at the original invoice amount if the effect of discounting is
immaterial.

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AG80.

The fair value of investments in equity instruments that do not have a quoted market price in an active market
and derivatives that are linked to and must be settled by delivery of such an unquoted equity instrument (see para-
graphs 46(c) and 47) is reliably measurable if (a) the variability in the range of reasonable fair value estimates is
not significant for that instrument or (b) the probabilities of the various estimates within the range can be rea-
sonably assessed and used in estimating fair value.

AG81.

There are many situations in which the variability in the range of reasonable fair value estimates of investments in
equity instruments that do not have a quoted market price and derivatives that are linked to and must be settled
by delivery of such an unquoted equity instrument (see paragraphs 46(c) and 47) is likely not to be significant.
Normally it is possible to estimate the fair value of a financial asset that an entity has acquired from an outside
party. However, if the range of reasonable fair value estimates is significant and the probabilities of the various
estimates cannot be reasonably assessed, an entity is precluded from measuring the instrument at fair value.

I n p u t s t o V a l u a t i o n T e c h n i q u e s

AG82. An appropriate technique for estimating the fair value of a particular financial instrument would incorporate
observable market data about the market conditions and other factors that are likely to affect the instrument’s fair
value. The fair value of a financial instrument will be based on one or more of the following factors (and perhaps
others).

(a)

The time value of money (ie interest at the basic or risk-free rate). Basic interest rates can usually be derived from
observable government bond prices and are often quoted in financial publications. These rates typically vary
with the expected dates of the projected cash flows along a yield curve of interest rates for different time hori-
zons. For practical reasons, an entity may use a well-accepted and readily observable general rate, such as
LIBOR or a swap rate, as the benchmark rate. (Because a rate such as LIBOR is not the risk-free interest rate,
the credit risk adjustment appropriate to the particular financial instrument is determined on the basis of its
credit risk in relation to the credit risk in this benchmark rate.) In some countries, the central government’s
bonds may carry a significant credit risk and may not provide a stable benchmark basic interest rate for instru-
ments denominated in that currency. Some entities in these countries may have a better credit standing and
a lower borrowing rate than the central government. In such a case, basic interest rates may be more appro-
priately determined by reference to interest rates for the highest rated corporate bonds issued in the currency
of that jurisdiction.

(b) Credit risk. The effect on fair value of credit risk (ie the premium over the basic interest rate for credit risk)
may be derived from observable market prices for traded instruments of different credit quality or from
observable interest rates charged by lenders for loans of various credit ratings.

(c)

Foreign currency exchange prices. Active currency exchange markets exist for most major currencies, and prices
are quoted daily in financial publications.

(d) Commodity prices. There are observable market prices for many commodities.

(e)

Equity prices. Prices (and indexes of prices) of traded equity instruments are readily observable in some mar-
kets. Present value based techniques may be used to estimate the current market price of equity instruments
for which there are no observable prices.

(f) Volatility (ie magnitude of future changes in price of the financial instrument or other item). Measures of the volatility
of actively traded items can normally be reasonably estimated on the basis of historical market data or by
using volatilities implied in current market prices.

(g)

Prepayment risk and surrender risk. Expected prepayment patterns for financial assets and expected surrender
patterns for financial liabilities can be estimated on the basis of historical data. (The fair value of a financial
liability that can be surrendered by the counterparty cannot be less than the present value of the surrender
amount — see paragraph 49.)

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(h) Servicing costs for a financial asset or a financial liability. Costs of servicing can be estimated using comparisons
with current fees charged by other market participants. If the costs of servicing a financial asset or financial
liability are significant and other market participants would face comparable costs, the issuer would consider
them in determining the fair value of that financial asset or financial liability. It is likely that the fair value at
inception of a contractual right to future fees equals the origination costs paid for them, unless future fees
and related costs are out of line with market comparables.

Gains and Losses (paragraphs 55-57)

AG83. An entity applies IAS 21 to financial assets and financial liabilities that are monetary items in accordance with IAS 21
and denominated in a foreign currency. Under IAS 21, any foreign exchange gains and losses on monetary assets
and monetary liabilities are recognised in profit or loss. An exception is a monetary item that is designated as a hedg-
ing instrument in either a cash flow hedge (see paragraphs 95-101) or a hedge of a net investment (see para-
graph 102). For the purpose of recognising foreign exchange gains and losses under IAS 21, a monetary available-
for-sale financial asset is treated as if it were carried at amortised cost in the foreign currency. Accordingly, for such
a financial asset, exchange differences resulting from changes in amortised cost are recognised in profit or loss and
other changes in carrying amount are recognised in accordance with paragraph 55(b). For available-for-sale finan-
cial assets that are not monetary items under IAS 21 (for example, equity instruments), the gain or loss that is rec-
ognised directly in equity under paragraph 55(b) includes any related foreign exchange component. If there is a hedg-
ing relationship between a non-derivative monetary asset and a non-derivative monetary liability, changes in the
foreign currency component of those financial instruments are recognised in profit or loss.

Impairment and Uncollectibility of Financial Assets (paragraphs 58-70)

F i n a n c i a l A s s e t s C a r r i e d a t A m o r t i s e d C o s t

( p a r a g r a p h s 6 3 - 6 5 )

AG84.

Impairment of a financial asset carried at amortised cost is measured using the financial instrument’s original effec-
tive interest rate because discounting at the current market rate of interest would, in effect, impose fair value mea-
surement on financial assets that are otherwise measured at amortised cost. If the terms of a loan, receivable or
held-to-maturity investment are renegotiated or otherwise modified because of financial difficulties of the bor-
rower or issuer, impairment is measured using the original effective interest rate before the modification of
terms. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. If
a loan, receivable or held-to-maturity investment has a variable interest rate, the discount rate for measuring any
impairment loss under paragraph 63 is the current effective interest rate(s) determined under the contract. As a
practical expedient, a creditor may measure impairment of a financial asset carried at amortised cost on the basis
of an instrument’s fair value using an observable market price. The calculation of the present value of the esti-
mated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure
less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

AG85.

The process for estimating impairment considers all credit exposures, not only those of low credit quality. For
example, if an entity uses an internal credit grading system it considers all credit grades, not only those reflecting
a severe credit deterioration.

AG86.

The process for estimating the amount of an impairment loss may result either in a single amount or in a range of
possible amounts. In the latter case, the entity recognises an impairment loss equal to the best estimate within the
range (*) taking into account all relevant information available before the financial statements are issued about con-
ditions existing at the balance sheet date.

(*)

IAS 37, paragraph 39 contains guidance on how to determine the best estimate in a range of possible outcomes.

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AG87.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit
risk characteristics that are indicative of the debtors’ ability to pay all amounts due according to the contractual
terms (for example, on the basis of a credit risk evaluation or grading process that considers asset type, industry,
geographical location, collateral type, past-due status and other relevant factors). The characteristics chosen are
relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability
to pay all amounts due according to the contractual terms of the assets being evaluated. However, loss probabili-
ties and other loss statistics differ at a group level between (a) assets that have been individually evaluated for
impairment and found not to be impaired and (b) assets that have not been individually evaluated for impairment,
with the result that a different amount of impairment may be required. If an entity does not have a group of assets
with similar risk characteristics, it does not make the additional assessment.

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AG88.

Impairment losses recognised on a group basis represent an interim step pending the identification of impairment
losses on individual assets in the group of financial assets that are collectively assessed for impairment. As soon as
information is available that specifically identifies losses on individually impaired assets in a group, those assets
are removed from the group.

AG89.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the
basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Entities
that have no entity-specific loss experience or insufficient experience, use peer group experience for comparable
groups of financial assets. Historical loss experience is adjusted on the basis of current observable data to reflect
the effects of current conditions that did not affect the period on which the historical loss experience is based and
to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in
future cash flows reflect and are directionally consistent with changes in related observable data from period to
period (such as changes in unemployment rates, property prices, commodity prices, payment status or other fac-
tors that are indicative of incurred losses in the group and their magnitude). The methodology and assumptions
used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and
actual loss experience.

AG90. As an example of applying paragraph AG89, an entity may determine, on the basis of historical experience, that
one of the main causes of default on credit card loans is the death of the borrower. The entity may observe that
the death rate is unchanged from one year to the next. Nevertheless, some of the borrowers in the entity’s group
of credit card loans may have died in that year, indicating that an impairment loss has occurred on those loans,
even if, at the year-end, the entity is not yet aware which specific borrowers have died. It would be appropriate for
an impairment loss to be recognised for these ‘incurred but not reported’ losses. However, it would not be appro-
priate to recognise an impairment loss for deaths that are expected to occur in a future period, because the nec-
essary loss event (the death of the borrower) has not yet occurred.

AG91. When using historical loss rates in estimating future cash flows, it is important that information about historical
loss rates is applied to groups that are defined in a manner consistent with the groups for which the historical loss
rates were observed. Therefore, the method used should enable each group to be associated with information about
past loss experience in groups of assets with similar credit risk characteristics and relevant observable data that
reflect current conditions.

AG92.

Formula-based approaches or statistical methods may be used to determine impairment losses in a group of finan-
cial assets (eg for smaller balance loans) as long as they are consistent with the requirements in paragraphs 63-65
and AG87-AG91. Any model used would incorporate the effect of the time value of money, consider the cash
flows for all of the remaining life of an asset (not only the next year), consider the age of the loans within the port-
folio and not give rise to an impairment loss on initial recognition of a financial asset.

Interest Income After Impairment Recognition

AG93. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss,
interest income is thereafter recognised using the rate of interest used to discount the future cash flows for the pur-
pose of measuring the impairment loss.

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Hedging (paragraphs 71-102)

Hedging Instruments (paragraphs 72-77)

Q u a l i f y i n g I n s t r u m e n t s ( p a r a g r a p h s 7 2 a n d 7 3 )

AG94.

The potential loss on an option that an entity writes could be significantly greater than the potential gain in value
of a related hedged item. In other words, a written option is not effective in reducing the profit or loss exposure of
a hedged item. Therefore, a written option does not qualify as a hedging instrument unless it is designated as an
offset to a purchased option, including one that is embedded in another financial instrument (for example, a writ-
ten call option used to hedge a callable liability). In contrast, a purchased option has potential gains equal to or
greater than losses and therefore has the potential to reduce profit or loss exposure from changes in fair values or
cash flows. Accordingly, it can qualify as a hedging instrument.

AG95. A held-to-maturity investment carried at amortised cost may be designated as a hedging instrument in a hedge of

foreign currency risk.

AG96. An investment in an unquoted equity instrument that is not carried at fair value because its fair value cannot be
reliably measured or a derivative that is linked to and must be settled by delivery of such an unquoted equity instru-
ment (see paragraphs 46(c) and 47) cannot be designated as a hedging instrument.

AG97. An entity’s own equity instruments are not financial assets or financial liabilities of the entity and therefore cannot

be designated as hedging instruments.

Hedged Items (paragraphs 78-84)

Q u a l i f y i n g I t e m s ( p a r a g r a p h s 7 8 - 8 0 )

AG98. A firm commitment to acquire a business in a business combination cannot be a hedged item, except for foreign
exchange risk, because the other risks being hedged cannot be specifically identified and measured. These other
risks are general business risks.

AG99. An equity method investment cannot be a hedged item in a fair value hedge because the equity method recognises
in profit or loss the investor’s share of the associate’s profit or loss, rather than changes in the investment’s fair
value. For a similar reason, an investment in a consolidated subsidiary cannot be a hedged item in a fair value hedge
because consolidation recognises in profit or loss the subsidiary’s profit or loss, rather than changes in the invest-
ment’s fair value. A hedge of a net investment in a foreign operation is different because it is a hedge of the foreign
currency exposure, not a fair value hedge of the change in the value of the investment.

D e s i g n a t i o n o f F i n a n c i a l

I t e m s a s H e d g e d I t e m s ( p a r a g r a p h s 8 1 a n d 8 1 A )

AG99A.

[…] The entity may designate all of the cash flows of the entire financial asset or financial liability as the hedged
item and hedge them for only one particular risk (eg only for changes that are attributable to changes in LIBOR).
For example, in the case of a financial liability whose effective interest rate is 100 basis points below LIBOR, an
entity can designate as the hedged item the entire liability (ie principal plus interest at LIBOR minus 100 basis
points) and hedge the change in the fair value or cash flows of that entire liability that is attributable to changes
in LIBOR. The entity may also choose a hedge ratio of other than one to one in order to improve the effective-
ness of the hedge as described in paragraph AG100.

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AG99B.

In addition, if a fixed rate financial instrument is hedged some time after its origination and interest rates have
changed in the meantime, the entity can designate a portion equal to a benchmark rate […]. For example, assume
an entity originates a fixed rate financial asset of CU100 that has an effective interest rate of 6 per cent at a time
when LIBOR is 4 per cent. It begins to hedge that asset some time later when LIBOR has increased to 8 per cent
and the fair value of the asset has decreased to CU90. The entity calculates that if it had purchased the asset on
the date it first designates it as the hedged item for its then fair value of CU90, the effective yield would have
been 9.5 per cent. […] The entity can designate a LIBOR portion of 8 per cent that consists partly of the con-
tractual interest cash flows and partly of the difference between the current fair value (ie CU90) and the amount
repayable on maturity (ie CU100).

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D e s i g n a t i o n o f N o n - F i n a n c i a l

I t e m s a s H e d g e d I t e m s ( p a r a g r a p h 8 2 )

AG100.

Changes in the price of an ingredient or component of a non-financial asset or non-financial liability generally
do not have a predictable, separately measurable effect on the price of the item that is comparable to the effect
of, say, a change in market interest rates on the price of a bond. Thus, a non-financial asset or non-financial liabil-
ity is a hedged item only in its entirety or for foreign exchange risk. If there is a difference between the terms of
the hedging instrument and the hedged item (such as for a hedge of the forecast purchase of Brazilian coffee using
a forward contract to purchase Colombian coffee on otherwise similar terms), the hedging relationship none-
theless can qualify as a hedge relationship provided all the conditions in paragraph 88 are met, including that
the hedge is expected to be highly effective. For this purpose, the amount of the hedging instrument may be
greater or less than that of the hedged item if this improves the effectiveness of the hedging relationship. For
example, a regression analysis could be performed to establish a statistical relationship between the hedged item
(eg a transaction in Brazilian coffee) and the hedging instrument (eg a transaction in Columbian coffee). If there
is a valid statistical relationship between the two variables (ie between the unit prices of Brazilian coffee and
Columbian coffee), the slope of the regression line can be used to establish the hedge ratio that will maximise
expected effectiveness. For example, if the slope of the regression line is 1.02, a hedge ratio based on 0.98 quan-
tities of hedged items to 1.00 quantities of the hedging instrument maximises expected effectiveness. However,
the hedging relationship may result in ineffectiveness that is recognised in profit or loss during the term of the
hedging relationship.

D e s i g n a t i o n o f G r o u p s o f

I t e m s a s H e d g e d I t e m s ( p a r a g r a p h s 8 3 a n d 8 4 )

AG101.

A hedge of an overall net position (eg the net of all fixed rate assets and fixed rate liabilities with similar matu-
rities), rather than of a specific hedged item, does not qualify for hedge accounting. However, almost the same
effect on profit or loss of hedge accounting for this type of hedging relationship can be achieved by designating
as the hedged item part of the underlying items. For example, if a bank has CU100 of assets and CU90 of liabili-
ties with risks and terms of a similar nature and hedges the net CU10 exposure, it can designate as the hedged
item CU10 of those assets. This designation can be used if such assets and liabilities are fixed rate instruments,
in which case it is a fair value hedge, or if they are variable rate instruments, in which case it is a cash flow hedge.
Similarly, if an entity has a firm commitment to make a purchase in a foreign currency of CU100 and a firm
commitment to make a sale in the foreign currency of CU90, it can hedge the net amount of CU10 by acquiring
a derivative and designating it as a hedging instrument associated with CU10 of the firm purchase commitment
of CU100.

Hedge Accounting (paragraphs 85-102)

AG102. An example of a fair value hedge is a hedge of exposure to changes in the fair value of a fixed rate debt instrument
as a result of changes in interest rates. Such a hedge could be entered into by the issuer or by the holder.

AG103. An example of a cash flow hedge is the use of a swap to change floating rate debt to fixed rate debt (ie a hedge of

a future transaction where the future cash flows being hedged are the future interest payments).

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AG104. A hedge of a firm commitment (eg a hedge of the change in fuel price relating to an unrecognised contractual com-
mitment by an electric utility to purchase fuel at a fixed price) is a hedge of an exposure to a change in fair value.
Accordingly, such a hedge is a fair value hedge. However, under paragraph 87 a hedge of the foreign currency risk
of a firm commitment could alternatively be accounted for as a cash flow hedge.

A s s e s s i n g H e d g e E f f e c t i v e n e s s

AG105.

A hedge is regarded as highly effective only if both of the following conditions are met:

(a) At the inception of the hedge and in subsequent periods, the hedge is expected to be highly effective in
achieving offsetting changes in fair value or cash flows attributable to the hedged risk during the period
for which the hedge is designated. Such an expectation can be demonstrated in various ways, including a
comparison of past changes in the fair value or cash flows of the hedged item that are attributable to the
hedged risk with past changes in the fair value or cash flows of the hedging instrument, or by demon-
strating a high statistical correlation between the fair value or cash flows of the hedged item and those of
the hedging instrument. The entity may choose a hedge ratio of other than one to one in order to improve
the effectiveness of the hedge as described in paragraph AG100.

(b) The actual results of the hedge are within a range of 80-125 per cent. For example, if actual results are
such that the loss on the hedging instrument is CU120 and the gain on the cash instruments CU100, off-
set can be measured by 120/100, which is 120 per cent, or by 100/120, which is 83 per cent. In this
example, assuming the hedge meets the condition in (a) the entity would conclude that the hedge has been
highly effective.

AG106.

Effectiveness is assessed, at a minimum, at the time an entity prepares its annual or interim financial statements.

AG107.

This Standard does not specify a single method for assessing hedge effectiveness. The method an entity adopts
for assessing hedge effectiveness depends on its risk management strategy. For example, if the entity’s risk man-
agement strategy is to adjust the amount of the hedging instrument periodically to reflect changes in the
hedged position, the entity needs to demonstrate that the hedge is expected to be highly effective only for the
period until the amount of the hedging instrument is next adjusted. In some cases, an entity adopts different
methods for different types of hedges. An entity’s documentation of its hedging strategy includes its proce-
dures for assessing effectiveness. Those procedures state whether the assessment includes all of the gain or loss
on a hedging instrument or whether the instrument’s time value is excluded.

AG107A.

[…].

AG108.

If the principal terms of the hedging instrument and of the hedged asset, liability, firm commitment or highly
probable forecast transaction are the same, the changes in fair value and cash flows attributable to the risk
being hedged may be likely to offset each other fully, both when the hedge is entered into and afterwards. For
example, an interest rate swap is likely to be an effective hedge if the notional and principal amounts, term,
repricing dates, dates of interest and principal receipts and payments, and basis for measuring interest rates
are the same for the hedging instrument and the hedged item. In addition, a hedge of a highly probable fore-
cast purchase of a commodity with a forward contract is likely to be highly effective if:

(a)

the forward contract is for the purchase of the same quantity of the same commodity at the same time
and location as the hedged forecast purchase;

(b)

the fair value of the forward contract at inception is zero;

and

(c)

either the change in the discount or premium on the forward contract is excluded from the assessment of
effectiveness and recognised in profit or loss or the change in expected cash flows on the highly probable
forecast transaction is based on the forward price for the commodity.

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AG109.

Sometimes the hedging instrument offsets only part of the hedged risk. For example, a hedge would not be
fully effective if the hedging instrument and hedged item are denominated in different currencies that do not
move in tandem. Also, a hedge of interest rate risk using a derivative would not be fully effective if part of the
change in the fair value of the derivative is attributable to the counterparty’s credit risk.

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IAS 39

AG110.

To qualify for hedge accounting, the hedge must relate to a specific identified and designated risk, and not
merely to the entity’s general business risks, and must ultimately affect the entity’s profit or loss. A hedge of
the risk of obsolescence of a physical asset or the risk of expropriation of property by a government is not
eligible for hedge accounting; effectiveness cannot be measured because those risks are not measurable reliably.

AG111.

In the case of interest rate risk, hedge effectiveness may be assessed by preparing a maturity schedule for finan-
cial assets and financial liabilities that shows the net interest rate exposure for each time period, provided that
the net exposure is associated with a specific asset or liability (or a specific group of assets or liabilities or a
specific portion of them) giving rise to the net exposure, and hedge effectiveness is assessed against that asset
or liability.

AG112.

In assessing the effectiveness of a hedge, an entity generally considers the time value of money. The fixed inter-
est rate on a hedged item need not exactly match the fixed interest rate on a swap designated as a fair value
hedge. Nor does the variable interest rate on an interest-bearing asset or liability need to be the same as the
variable interest rate on a swap designated as a cash flow hedge. A swap’s fair value derives from its net settle-
ments. The fixed and variable rates on a swap can be changed without affecting the net settlement if both are
changed by the same amount.

AG113.

If an entity does not meet hedge effectiveness criteria, the entity discontinues hedge accounting from the last
date on which compliance with hedge effectiveness was demonstrated. However, if the entity identifies the
event or change in circumstances that caused the hedging relationship to fail the effectiveness criteria, and dem-
onstrates that the hedge was effective before the event or change in circumstances occurred, the entity discon-
tinues hedge accounting from the date of the event or change in circumstances.

F a i r V a l u e H e d g e A c c o u n t i n g f o r a P o r t f o l i o H e d g e o f

I n t e r e s t R a t e R i s k

AG114.

For a fair value hedge of interest rate risk associated with a portfolio of financial assets or financial liabilities, an
entity would meet the requirements of this Standard if it complies with the procedures set out in (a)-(i) and para-
graphs AG115-AG132 below.

(a) As part of its risk management process the entity identifies a portfolio of items whose interest rate risk it
wishes to hedge. The portfolio may comprise only assets, only liabilities or both assets and liabilities. The
entity may identify two or more portfolios (eg the entity may group its available-for-sale assets into a sepa-
rate portfolio), in which case it applies the guidance below to each portfolio separately.

(b) The entity analyses the portfolio into repricing time periods based on expected, rather than contractual,
repricing dates. The analysis into repricing time periods may be performed in various ways including sched-
uling cash flows into the periods in which they are expected to occur, or scheduling notional principal
amounts into all periods until repricing is expected to occur.

(c) On the basis of this analysis, the entity decides the amount it wishes to hedge. The entity designates as the
hedged item an amount of assets or liabilities (but not a net amount) from the identified portfolio equal to
the amount it wishes to designate as being hedged. […].

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(d) The entity designates the interest rate risk it is hedging. This risk could be a portion of the interest rate risk

in each of the items in the hedged position, such as a benchmark interest rate (eg LIBOR).

(e) The entity designates one or more hedging instruments for each repricing time period.

(f) Using the designations made in (c)-(e) above, the entity assesses at inception and in subsequent periods,
whether the hedge is expected to be highly effective during the period for which the hedge is designated.

(g)

Periodically, the entity measures the change in the fair value of the hedged item (as designated in (c)) that is
attributable to the hedged risk (as designated in (d)), […]. Provided that the hedge is determined actually to
have been highly effective when assessed using the entity’s documented method of assessing effectiveness,
the entity recognises the change in fair value of the hedged item as a gain or loss in profit or loss and in one
of two line items in the balance sheet as described in paragraph 89A. The change in fair value need not be
allocated to individual assets or liabilities.

(h) The entity measures the change in fair value of the hedging instrument(s) (as designated in (e)) and recog-
nises it as a gain or loss in profit or loss. The fair value of the hedging instrument(s) is recognised as an
asset or liability in the balance sheet.

(i) Any ineffectiveness (*) will be recognised in profit or loss as the difference between the change in fair value

referred to in (g) and that referred to in (h).

AG115.

This approach is described in more detail below. The approach shall be applied only to a fair value hedge of the
interest rate risk associated with a portfolio of financial assets or financial liabilities.

AG116.

The portfolio identified in paragraph AG114(a) could contain assets and liabilities. Alternatively, it could be a
portfolio containing only assets, or only liabilities. The portfolio is used to determine the amount of the assets or
liabilities the entity wishes to hedge. However, the portfolio is not itself designated as the hedged item.

AG117.

In applying paragraph AG114(b), the entity determines the expected repricing date of an item as the earlier of
the dates when that item is expected to mature or to reprice to market rates. The expected repricing dates are
estimated at the inception of the hedge and throughout the term of the hedge, based on historical experience
and other available information, including information and expectations regarding prepayment rates, interest
rates and the interaction between them. Entities that have no entity-specific experience or insufficient experience
use peer group experience for comparable financial instruments. These estimates are reviewed periodically and
updated in the light of experience. In the case of a fixed rate item that is prepayable, the expected repricing date
is the date on which the item is expected to prepay unless it reprices to market rates on an earlier date. For a
group of similar items, the analysis into time periods based on expected repricing dates may take the form of
allocating a percentage of the group, rather than individual items, to each time period. An entity may apply other
methodologies for such allocation purposes. For example, it may use a prepayment rate multiplier for allocating
amortising loans to time periods based on expected repricing dates. However, the methodology for such an allo-
cation shall be in accordance with the entity’s risk management procedures and objectives.

AG118.

As an example of the designation set out in paragraph AG114(c), if in a particular repricing time period an entity
estimates that it has fixed rate assets of CU100 and fixed rate liabilities of CU80 and decides to hedge all of the
net position of CU20, it designates as the hedged item assets in the amount of CU20 (a portion of the assets) (**).
The designation is expressed as an ‘amount of a currency’ (eg an amount of dollars, euro, pounds or rand) rather
than as individual assets. It follows that all of the assets (or liabilities) from which the hedged amount is drawn
— ie all of the CU100 of assets in the above example — must be items whose fair value changes in response to
changes in the interest rate being hedged […].

(*) The same materiality considerations apply in this context as apply throughout IFRSs.
(**) The Standard permits an entity to designate any amount of the available qualifying assets or liabilities, ie in this example any amount of

assets between CU0 and CU100.

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AG119.

The entity also complies with the other designation and documentation requirements set out in paragraph 88(a).
For a portfolio hedge of interest rate risk, this designation and documentation specifies the entity’s policy for all
of the variables that are used to identify the amount that is hedged and how effectiveness is measured, including
the following:

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(a) which assets and liabilities are to be included in the portfolio hedge and the basis to be used for removing

them from the portfolio.

(b) how the entity estimates repricing dates, including what interest rate assumptions underlie estimates of pre-
payment rates and the basis for changing those estimates. The same method is used for both the initial esti-
mates made at the time an asset or liability is included in the hedged portfolio and for any later revisions to
those estimates.

(c)

the number and duration of repricing time periods.

(d) how often the entity will test effectiveness […].

(e)

the methodology used by the entity to determine the amount of assets or liabilities that are designated as
the hedged item […].

(f)

[…]whether the entity will test effectiveness for each repricing time period individually, for all time periods
in aggregate, or by using some combination of the two.

The policies specified in designating and documenting the hedging relationship shall be in accordance with the
entity’s risk management procedures and objectives. Changes in policies shall not be made arbitrarily. They shall
be justified on the basis of changes in market conditions and other factors and be founded on and consistent
with the entity’s risk management procedures and objectives.

AG120.

The hedging instrument referred to in paragraph AG114(e) may be a single derivative or a portfolio of deriva-
tives all of which contain exposure to the hedged interest rate risk designated in paragraph AG114(d) (eg a port-
folio of interest rate swaps all of which contain exposure to LIBOR). Such a portfolio of derivatives may contain
offsetting risk positions. However, it may not include written options or net written options, because the
Standard (*) does not permit such options to be designated as hedging instruments (except when a written option
is designated as an offset to a purchased option). If the hedging instrument hedges the amount designated in para-
graph AG114(c) for more than one repricing time period, it is allocated to all of the time periods that it hedges.
However, the whole of the hedging instrument must be allocated to those repricing time periods because the
Standard (**) does not permit a hedging relationship to be designated for only a portion of the time period dur-
ing which a hedging instrument remains outstanding.

AG121. When the entity measures the change in the fair value of a prepayable item in accordance with para-
graph AG114(g), a change in interest rates affects the fair value of the prepayable item in two ways: it affects the
fair value of the contractual cash flows and the fair value of the prepayment option that is contained in a pre-
payable item. Paragraph 81 of the Standard permits an entity to designate a portion of a financial asset or finan-
cial liability, sharing a common risk exposure, as the hedged item, provided effectiveness can be measured. […].

AG122.

The Standard does not specify the techniques used to determine the amount referred to in paragraph AG114(g),
namely the change in the fair value of the hedged item that is attributable to the hedged risk. […]. It is not appro-
priate to assume that changes in the fair value of the hedged item equal changes in the value of the hedging
instrument.

AG123.

Paragraph 89A requires that if the hedged item for a particular repricing time period is an asset, the change in its
value is presented in a separate line item within assets. Conversely, if the hedged item for a particular repricing
time period is a liability, the change in its value is presented in a separate line item within liabilities. These are
the separate line items referred to in paragraph AG114(g). Specific allocation to individual assets (or liabilities) is
not required.

see paragraphs 77 and AG94

(*)
(**) see paragraph 75

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AG124.

Paragraph AG114(i) notes that ineffectiveness arises to the extent that the change in the fair value of the hedged
item that is attributable to the hedged risk differs from the change in the fair value of the hedging derivative.
Such a difference may arise for a number of reasons, including:

(a)

[…];

(b)

items in the hedged portfolio becoming impaired or being derecognised;

(c)

the payment dates of the hedging instrument and the hedged item being different;

and

(d) other causes […].

Such ineffectiveness (*) shall be identified and recognised in profit or loss.

AG125.

Generally, the effectiveness of the hedge will be improved:

(a)

if the entity schedules items with different prepayment characteristics in a way that takes account of the
differences in prepayment behaviour.

(b) when the number of items in the portfolio is larger. When only a few items are contained in the portfolio,
relatively high ineffectiveness is likely if one of the items prepays earlier or later than expected. Conversely,
when the portfolio contains many items, the prepayment behaviour can be predicted more accurately.

(c) when the repricing time periods used are narrower (eg 1-month as opposed to 3-month repricing time peri-
ods). Narrower repricing time periods reduces the effect of any mismatch between the repricing and pay-
ment dates (within the repricing time period) of the hedged item and those of the hedging instrument.

(d)

the greater the frequency with which the amount of the hedging instrument is adjusted to reflect changes
in the hedged item (eg because of changes in prepayment expectations).

AG126.

An entity tests effectiveness periodically. […].

AG127. When measuring effectiveness, the entity distinguishes revisions to the estimated repricing dates of existing assets
(or liabilities) from the origination of new assets (or liabilities), with only the former giving rise to ineffective-
ness. […]. Once ineffectiveness has been recognised as set out above, the entity establishes a new estimate of the
total assets (or liabilities) in each repricing time period, including new assets (or liabilities) that have been origi-
nated since it last tested effectiveness, and designates a new amount as the hedged item and a new percentage as
the hedged percentage. […].

AG128.

Items that were originally scheduled into a repricing time period may be derecognised because of earlier than
expected prepayment or writeoffs caused by impairment or sale. When this occurs, the amount of change in fair
value included in the separate line item referred to in paragraph AG114(g) that relates to the derecognised item
shall be removed from the balance sheet, and included in the gain or loss that arises on derecognition of the item.
For this purpose, it is necessary to know the repricing time period(s) into which the derecognised item was sched-
uled, because this determines the repricing time period(s) from which to remove it and hence the amount to
remove from the separate line item referred to in paragraph AG114(g). When an item is derecognised, if it can
be determined in which time period it was included, it is removed from that time period. If not, it is removed
from the earliest time period if the derecognition resulted from higher than expected prepayments, or allocated
to all time periods containing the derecognised item on a systematic and rational basis if the item was sold or
became impaired.

AG129.

In addition, any amount relating to a particular time period that has not been derecognised when the time period
expires is recognised in profit or loss at that time (see paragraph 89A). […].

AG130.

[…].

(*) The same materiality considerations apply in this context as apply throughout IFRSs.

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AG131.

If the hedged amount for a repricing time period is reduced without the related assets (or liabilities) being derec-
ognised, the amount included in the separate line item referred to in paragraph AG114(g) that relates to the
reduction shall be amortised in accordance with paragraph 92.

AG132.

An entity may wish to apply the approach set out in paragraphs AG114-AG131 to a portfolio hedge that had
previously been accounted for as a cash flow hedge in accordance with IAS 39. Such an entity would revoke the
previous designation of a cash flow hedge in accordance with paragraph 101(d), and apply the requirements set
out in that paragraph. It would also redesignate the hedge as a fair value hedge and apply the approach set out
in paragraphs AG114-AG131 prospectively to subsequent accounting periods.

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APPENDIX B

Amendments to Other Pronouncements

The amendments in this appendix shall be applied for annual periods beginning on or after 1 January 2005. If an entity applies this
Standard for an earlier period, these amendments shall be applied for that earlier period.

B1.

IFRS 1 First-time Adoption of International Financial Reporting Standards is amended as described below.

Amendments to IFRS 1

Standard

Paragraphs 25A, 27A, 36A and 47A are added and paragraphs 13, 27 and 30 are amended to read as follows:

13 An entity may elect to use one or more of the following exemptions:

(a) …

(e)

compound financial instruments (paragraph 23);

(f)

assets and liabilities of subsidiaries, associates and joint ventures (paragraphs 24 and 25);

and

(g)

designation of previously recognised financial instruments (paragraph 25A).

Designation of previously recognised financial instruments

25A IAS 39 Financial Instruments: Recognition and Measurement permits a financial instrument to be designated on ini-
tial recognition as a financial asset or financial liability at fair value through profit or loss or as available for sale.
Despite this requirement, an entity is permitted to make such a designation at the date of transition to IFRSs.

27

Except as permitted by paragraph 27A, a first-time adopter shall apply the derecognition requirements in IAS 39
prospectively for transactions occurring on or after 1 January 2004. In other words, if a first-time adopter derec-
ognised non-derivative financial assets or non-derivative financial liabilities under its previous GAAP as a result
of a transaction that occurred before 1 January 2004, it shall not recognise those assets and liabilities under IFRSs
(unless they qualify for recognition as a result of a later transaction or event).

27A Notwithstanding paragraph 27, an entity may apply the derecognition requirements in IAS 39 retrospectively
from a date of the entity’s choosing, provided that the information needed to apply IAS 39 to financial assets and
financial liabilities derecognised as a result of past transactions was obtained at the time of initially accounting
for those transactions.

30

If, before the date of transition to IFRSs, an entity had designated a transaction as a hedge but the hedge does not
meet the conditions for hedge accounting in IAS 39 the entity shall apply paragraphs 91 and 101 of IAS 39 to
discontinue hedge accounting. Transactions entered into before the date of transition to IFRSs shall not be ret-
rospectively designated as hedges.

Exemption from the requirement to restate comparative information for IAS 39

36A In its first IFRS financial statements, an entity that adopts IFRSs before 1 January 2006 shall present at least one
year of comparative information, but this comparative information need not comply with IAS 32 and IAS 39.
An entity that chooses to present comparative information that does not comply with IAS 32 and IAS 39 in its
first year of transition shall:

(a)

apply its previous GAAP to financial instruments within the scope of IAS 32 and IAS 39 in the comparative
information;

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(b) disclose this fact together with the basis used to prepare this information;

and

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(c)

disclose the nature of the main adjustments that would make the information comply with IAS 32 and
IAS 39. The entity need not quantify those adjustments. However, the entity shall treat any adjustment
between the balance sheet at the comparative period’s reporting date (ie the balance sheet that includes com-
parative information under previous GAAP) and the balance sheet at the start of the first IFRS reporting
period (ie the first period that includes information that complies with IAS 32 and IAS 39) as arising from
a change in accounting policy and give the disclosures required by paragraph 28(a)-(f) of IAS 8. Para-
graph 28(f) applies only to amounts presented in the balance sheet at the comparative period’s reporting
date.

In the case of an entity that chooses to present comparative information that does not comply with IAS 32 and
IAS 39, references to the ‘date of transition to IFRSs’ shall mean, in the case of IAS 32 and IAS 39 only, the begin-
ning of the first IFRS reporting period.

Designation of financial assets or financial liabilities

43A An entity is permitted to designate a previously recognised financial asset or financial liability as a financial asset
or financial liability at fair value through profit or loss or as available for sale in accordance with paragraph 25A.
The entity shall disclose the fair value of any financial assets or financial liabilities designated into each category
and the classification and carrying amount in the previous financial statements.

Appendix A

The following definition is added:

first IFRS reporting period

The reporting period ending on the reporting date of an entity’s first IFRS financial
statements.

Amendments to IAS 12

B2.

IAS 12 Income Taxes is amended as described below.

The first sentence of paragraph 20 is amended to read as follows:

20.

IFRSs permit or require certain assets to be carried at fair value or to be revalued (see, for example, IAS 16 Prop-
erty, Plant and Equipment, IAS 38 Intangible Assets, IAS 39 Financial Instruments: Recognition and Measurement and
IAS 40 Investment Property).

Amendments to IAS 18

B3.

IAS 18 Revenue is amended as described below.

Paragraph 30 is amended to read as follows:

30. Revenue shall be recognised on the following bases:

(a)

interest shall be recognised using the effective interest method as set out in IAS 39, paragraphs 9 and
AG5-AG8;

(b)

royalties shall be recognised on an accrual basis in accordance with the substance of the relevant
agreement;

and

(c) dividends shall be recognised when the shareholder’s right to receive payment is established.

Paragraph 31 is deleted.

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Amendments to IAS 19

B4.

[Amendment not applicable to bare Standards].

Amendments to IAS 30

B5.

IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions is amended as described below.

Paragraph 8 is amended to read as follows:

8.

Banks use differing methods for the recognition and measurement of items in their financial statements. While
harmonisation of these methods is desirable, it is beyond the scope of this Standard. In order to comply with IAS 1
Presentation of Financial Statements and thereby enable users to understand the basis on which the financial state-
ments of a bank are prepared, accounting policies dealing with the following items may need to be disclosed:

….

(d)

….

the basis for the determination of impairment losses on loans and advances and for writing off uncollectible
loans and advances (see paragraphs 43-49);

and

Paragraph 10 is amended to read as follows:

10.

In addition to the requirements of other Standards, the disclosures in the income statement or the notes to the
financial statements shall include, but are not limited to, the following items of income and expenses:

Interest and similar income;

Interest expense and similar charges;

Dividend income;

Fee and commission income;

Fee and commission expense;

Gains less losses arising from dealing securities;

Gains less losses arising from investment securities;

Gains less losses arising from dealing in foreign currencies;

Other operating income;

Impairment losses on loans and advances;

General administrative expenses;

and

Other operating expenses.

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Paragraph 13 is amended to read as follows:

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13.

Income and expense items shall not be offset except for those relating to hedges and to assets and liabilities
that have been offset in accordance with IAS 32.

Paragraph 14 is amended to read as follows:

14. Offsetting in cases other than those relating to hedges and to assets and liabilities that have been offset as described
in IAS 32 prevents users from assessing the performance of the separate activities of a bank and the return that it
obtains on particular classes of assets.

Paragraph 23 is deleted.

Paragraphs 24 and 25 are amended to read as follows:

24. A bank shall disclose the fair values of each class of its financial assets and liabilities as required by IAS 32

Financial Instruments: Disclosure and Presentation.

25.

IAS 39 provides for four classifications of financial assets: loans and receivables, held-to-maturity investments,
financial assets at fair value through profit or loss, and available-for-sale financial assets. A bank shall disclose the
fair values of its financial assets for these four classifications, as a minimum.

In paragraph 26, subparagraphs (b)(iv) and (v) are deleted.

In paragraph 28 the last sentence is deleted.

Paragraphs 43 and 44 are amended to read as follows:

43. A bank shall disclose the following:

(a)

the accounting policy that describes the basis on which uncollectible loans and advances are recognised as
an expense and written off.

(b) details of the movements in any allowance account for impairment losses on loans and advances during
the period. It shall disclose separately the amount recognised as an expense in the period for impairment
losses on uncollectible loans and advances, the amount charged in the period for loans and advances writ-
ten off and the amount credited in the period for loans and advances previously written off that have been
recovered.

(c)

the aggregate amount of any allowance account for impairment losses on loans and advances at the bal-
ance sheet date.

44. Any amounts set aside in respect of losses on loans and advances in addition to impairment losses recognised
under IAS 39 on loans and advances shall be accounted for as appropriations of retained earnings. Any credits
resulting from the reduction of such amounts result in an increase in retained earnings and are not included in
the determination of profit or loss for the period.

Paragraph 45 is deleted.

Paragraph 46 is amended to read as follows:

46. Local circumstances or legislation may require or allow a bank to set aside amounts for impairment losses on loans
and advances in addition to those losses that have been recognised under IAS 39. Any such amounts set aside
represent appropriations of retained earnings and not expenses in determining profit or loss. Similarly, any cred-
its resulting from the reduction of such amounts result in an increase in retained earnings and are not included in
the determination of profit or loss.

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Paragraph 47 is amended to read as follows:

47. Users of the financial statements of a bank need to know the impact that impairment losses on loans and advances
have had on the financial position and performance of the bank; this helps them judge the effectiveness with which
the bank has employed its resources. Therefore a bank discloses the aggregate amount of any allowance account
for impairment losses on loans and advances at the balance sheet date and the movements in the allowance
account during the period. The movements in the allowance account, including the amounts previously written
off that have been recovered during the reporting period, are shown separately.

Paragraph 48 is deleted.

Paragraph 49 is amended to read as follows:

49. When loans and advances cannot be recovered, they are written off and charged against any allowance account
for impairment losses. In some cases, they are not written off until all the necessary legal procedures have been
completed and the amount of the impairment loss is finally determined. In other cases, they are written off earlier,
for example when the borrower has not paid any interest or repaid any principal that was due in a specified period.
As the time at which uncollectible loans and advances are written off differs, the gross amount of loans and
advances and of the allowance account for impairment losses may vary considerably in similar circumstances. As
a result, a bank discloses its policy for writing off uncollectibleloans and advances.

In paragraph 58, subparagraph (c) is amended to read as follows:

(c)

the amount of the expense recognised in the period for impairment losses on loans and advances and the amount
of any allowance account at the balance sheet date;

and

…

Amendments to IAS 32

B6.

IAS 32 Financial Instruments: Disclosure and Presentation is amended as described below.

Paragraph 96 is amended to read as follows (new text is underlined).

96. An entity shall apply this Standard for annual periods beginning on or after 1 January 2005. Earlier appli-
cation is permitted. An entity shall not apply this Standard for annual periods beginning before 1 January
2005 unless it also applies IAS 39 (as revised in 2003), including the amendments issued in March 2004. If
an entity applies this Standard for a period beginning before 1 January 2005, it shall disclose that fact.

Amendments to IAS 36

B7.

IAS 36 Impairment of Assets is amended as described below:

Standard

Paragraph 1 is amended to read as follows:

1.

This Standard shall be applied in accounting for the impairment of all assets, other than:

…

(e)

…

financial assets that are included in the scope of IAS 39 Financial Instruments: Recognition and
Measurement;

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Amendments to IAS 37

B8.

IAS 37 Provisions, Contingent Liabilities and Contingent Assets is amended as described below.

Paragraphs 1 and 2 are amended to read as follows:

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1.

This Standard shall be applied by all entities in accounting for provisions, contingent liabilities and contin-
gent assets, except:

(a)

those resulting from executory contracts, except where the contract is onerous;

(b)

those arising in insurance entities from contracts with policyholders;

and

(c)

those covered by another Standard.

2.

This Standard does not apply to financial instruments (including guarantees) that are within the scope of IAS 39
Financial Instruments: Recognition and Measurement. For financial guarantees excluded from the scope of IAS 39, this
Standard applies as set out in paragraph 2(f) of IAS 39.

B9.

[Amendment not applicable to bare Standard]

Amendments to SIC 27