Financial Instruments:

Recognition and Measurement

PAS 39

PSBA – JPIA
Accountancy Week

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 Objective
To establish principles for recognizing and
measuring financial assets, financial
liabilities and some contracts to buy or sell
non-financial items.

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 Definition
• Financial instrument – any contract that
gives rise to both a financial asset of one
entity and a financial liability or equity
instrument of another entity.

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 Definition
• Financial asset is defined as cash, an
equity instrument of another entity, a
contractual right to receive cash or
another financial asset from another entity,
or a contractual right to exchange financial
instruments with another entity under
conditions that are potentially favourable.

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 Definition
• Financial liability is any contractual
obligation to deliver cash or another
financial asset to another entity, or to
exchange financial instruments with
another entity under conditions that are
potentially unfavourable.

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 Definition
• Equity instrument is any contract that
evidences a residual interest in the assets
of an entity after deducting all of its
liabilities.

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 Definition
• Derivative is a financial instrument with the
following three characteristics:
– Its value changes in response to a change in
price of, or index on, a specified underlying
financial or non-financial item or other
variable;
– It requires no, or comparatively little, initial
investment; and
– It is to be settled at a future date.
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 Scope
• Covers all financial instruments except where specifically addressed by another standard such as:
– Interests in subsidiaries, associates, and joint ventures as covered by IAS 27, IAS 28, and IAS
31
– Interests in leases as covered by IAS 17 except for any embedded derivatives and the
derecognition and impairment provisions of IAS 39 relating to receivables and payables
– Assets and liabilities under employee benefit plans as covered by IAS 19
– The subsequent measurement of financial guarantees that provide for specified payment to be
made to reimburse specified debtor defaults as covered by IAS 37
– Contracts for contingent consideration in a business combination as covered by IAS 22
– Loan commitments as covered by IAS 37 unless they can be settled net in cash or another
financial instrument, are designated as trading, or the entity has a past practice of selling the
resulting loans shortly after origination
– Insurance contracts are excluded where they provide for reimbursement of an incurred loss
specific to the insured party. However, such contracts are included where a financial risk is
ensured

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 Classification and Measurement
Category
Loans and receivables
Held to maturity ("HTM")
Held "at fair value through profit and All derivatives (except for those
loss" ("FVP")
Available for sale ("AFS")
Non-trading liabilities
18/07/2008
Description Measured at fair value Measured at amortised cost
Unquoted loan assets, whether X 
originated or acquired,
where there is no intent to
sell the asset in the short
term
Debt assets acquired by the X 
entity to be held to
maturity
 Record at cost if fair value cannot be
eligible for hedge reliably measured (very limited -
accounting) use only for unquoted equity
instruments and derivatives
thereon)
Other items intended to be To p&l
actively traded
Any item designated as such at
origination, including
liabilities
All assets not in the above To equity - unless impaired - but Record at cost if fair value cannot be
categories interest is recorded in p & l reliably measured (very limited -
based on the asset's effective use only for unquoted equity
yeild instruments and derivatives
thereon)
Other liabilities X 
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 Fair Value
• Defined as the amount for which an asset
could be exchanged, or a liability settled,
between knowledgeable, willing parties in
an arm’s length transaction. However, it is
not the amount an entity would receive or
pay in a forced transaction or distressed
sale.

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 Fair Value
• “Quoted on active market” – wherein quoted prices are
readily available and representative of the prices of
actual and regularly occurring transactions.
• “No active market” – wherein fair value has to be
established using a valuation technique, such as recent
transactions, the current fair value of similar instruments,
discounted cash flow analysis and option pricing models.
However, wherever there is a technique commonly used
in the market, which has been demonstrated to provide
reliable price estimates, that approach should be
followed.

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 Amortised Cost
• Recording the asset or liability so that the
recorded income or expense (including
amortisation of any discount or premium,
or directly attributable acquisition or issue
expenses, or fees received at inception) is
equal to the effective interest rate or yield.

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 Impairment
• Should be recognised when and only when there
is objective evidence that an impairment has
occurred. Objective evidence of impairment of
an asset will include indicators of financial
difficulty or delinquency on the part of the debtor,
any concessions made by the lender, a high
probability of bankruptcy of financial
reorganisation of the debtor, or disappearance of
an active market in the investment arising from a
financial problem.
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“Not as man sees does God
see, because man sees
the appearance, but the
Lord looks into the
HEART.”

- Samuel 16:7

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