Prospective amendment: Amendments to IAS 39 Financial Instruments: Recognition and Measurement - The Fair Value Option (June 2005) substitutes this paragraph and inserts new paragraphs BC76A and BC76B with effect for annual periods beginning on or after 1 January 2006.
BC77. An additional benefit of permitting classification by designation is that the choice in the original IAS 39 of recognising fair value gains and losses on available-for-sale financial assets either in equity or in profit or loss is no longer necessary. An entity can achieve recognition of gains and losses on such assets in profit or loss by designating the asset at fair value through profit or loss. It also increases comparability across entities in how gains and losses on available-for-sale financial assets are recognised. Accordingly, the Board decided that the choice that was in the original IAS 39 should be removed and that gains and losses on available-for-sale financial assets should be recognised in equity.
Prospective amendment: Amendments to IAS 39 Financial Instruments: Recognition and Measurement - The Fair Value Option (June 2005) substitutes this paragraph and inserts new paragraphs BC77A and BC77B with effect for annual periods beginning on or after 1 January 2006.
BC78. Permitting designation at fair value through profit or loss mitigates problems arising from a mixed measurement model when assets are measured at fair value and related liabilities are measured at amortised cost. For example, the inability to classify non-derivative liabilities as held for trading under IAS 39 creates problems for entities with matched asset and liability positions. Under IAS 39, an entity is not permitted to designate non-derivative financial assets or non-derivative financial liabilities as hedging instruments, except for foreign currency exposures, and thus cannot use hedge accounting to eliminate such a mismatch. Because financial liabilities may now be designated at fair value through profit or loss, an entity can consistently recognise fair value changes on matched financial asset and financial liability positions.

. Prospective amendment: Amendments to IAS 39 Financial Instruments: Recognition and Measurement - The Fair Value Option (June 2005) substitutes this paragraph and inserts new paragraphs BC78A, BC79 and BC79A with effect for annual periods beginning on or after 1 January 2006.
BC79. The fair value measurement option enables (but does not require) entities to measure financial instruments at fair value with changes in fair value recognised in profit or loss. Accordingly, it does not restrict an entity's ability to use other accounting methods (such as amortised cost). Some respondents to the Exposure Draft would have preferred more pervasive changes to expand the use of fair values and limit the choices available to entities, such as the elimination of the held-to-maturity category or the cash flow hedge accounting approach. Although such changes have the potential to make the principles in IAS 39 more coherent and less complex, the Board did not consider such changes as part of this project to improve IAS 39.
Prospective amendment: Amendments to IAS 39 Financial Instruments: Recognition and Measurement - The Fair Value Option (June 2005) amends and renumbers this paragraph as BC80A with effect for annual periods beginning on or after 1 January 2006.
BC80. Some comments received on the Exposure Draft suggested limiting the scope of the fair value option (eg to instruments that are traded in an active market or to exclude financial liabilities-see paragraphs BC87-BC92). The Board concluded it should not restrict the fair value option because to do so would limit its main benefits, discussed above.
BC81. Comments received on the Exposure Draft also questioned the proposal that all items measured at fair value through profit or loss should have the descriptor 'held for trading'. Some comments noted that 'held for trading' is commonly used with a narrower meaning, and it may be confusing for users if instruments designated at fair value through profit or loss are also called 'held for trading'. Therefore the Board considered using a fifth category of financial instruments-'fair value through profit or loss'-to distinguish those instruments to which the fair value option was applied from those classified as held for trading. The Board rejected this possibility because it believed adding a fifth category of financial instruments would unnecessarily complicate the Standard. Rather, the Board concluded that 'fair value though profit or loss' should be used to describe a category that encompasses financial instruments classified as held for trading and those to which the fair value option is applied.

Prospective amendment: Amendments to IAS 39 Financial Instruments: Recognition and Measurement - The Fair Value Option (June 2005) amends this paragraph with effect for annual periods beginning on or after 1 January 2006.
BC82. In addition, the Board decided to include a requirement for an entity to classify a financial liability as held for trading if it is incurred principally for the purpose of repurchasing it in the near term or it is 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. In these circumstances, the absence of a requirement to measure such financial liabilities at fair value permits cherry-picking of unrealised gains or losses. For example, if an entity wishes to recognise a gain, it can repurchase a fixed rate debt instrument that was issued in an environment where interest rates were lower than in the reporting period and if it wishes to recognise a loss, it can repurchase an issued debt instrument that was issued in an environment in which interest rates were higher than in the reporting period. However, a financial liability is not classified as held for trading merely because it funds assets that are held for trading.
BC83. The Board decided to include in revised IAS 32 a requirement to disclose the settlement amount repayable at maturity of a liability that is designated as at fair value through profit or loss. This gives users of financial statements information about the amount owed by the entity to its creditors in the event of its liquidation.
BC84. The Board also decided to include in IAS 39 the ability for entities to designate a loan or receivable as available for sale (see paragraph 9). The Board decided that, in the context of the existing mixed measurement model, there are no reasons to limit to any particular type of asset the ability to designate an asset as available for sale.
Prospective amendment: Amendments to IAS 39 Financial Instruments: Recognition and Measurement - The Fair Value Option (June 2005) amends this paragraph with effect for annual periods beginning on or after 1 January 2006.
Application of the Fair Value Measurement Option to a Portion (Rather than the Entirety) of a Financial Asset or a Financial Liability
BC85. Some comments received on the Exposure Draft argued that the fair value measurement option should be extended so that it could also be applied to a portion of a financial asset or a financial liability (eg one risk). The arguments included (a) concerns regarding inclusion of own credit risk in the measurement of financial liabilities and (b) the prohibition on using non-derivatives as hedging instruments (cash instrument hedging).

. Prospective amendment: Amendments to IAS 39 Financial Instruments: Recognition and Measurement - The Fair Value Option (June 2005) amends this paragraph, and the heading preceding it, with effect for annual periods beginning on or after 1 January 2006.
BC86. The Board concluded that IAS 39 should not extend the fair value measurement option to portions of financial assets or financial liabilities. It was concerned (a) about difficulties in measuring the change in value of the portion because of ordering issues and joint effects (ie if the portion is affected by more than one risk, it may be difficult to isolate accurately and measure the portion); (b) that the amounts recognised in the balance sheet would be neither fair value nor cost; and (c) that a fair value adjustment for a portion may move the carrying amount of an instrument away from its fair value. The Board agreed to address separately the issue of cash instrument hedging.
Prospective amendment: Amendments to IAS 39 Financial Instruments: Recognition and Measurement - The Fair Value Option (June 2005) amends this paragraph and inserts new paragraph BC86A with effect for annual periods beginning on or after 1 January 2006.
Own Credit Risk
BC87. The Board discussed the issue of including changes in own credit risk in the fair value measurement of financial liabilities. It considered responses to the Exposure Draft that expressed concern about the effect of including this component in the fair value measurement and that suggested the fair value option should be restricted to exclude all or some financial liabilities. However, the Board concluded that the fair value option could be applied to any financial liability, and decided not to restrict the option in the Standard because doing so would negate some of the benefits of the fair value option set out in paragraph BC74.

Prospective amendment: Amendments to IAS 39 Financial Instruments: Recognition and Measurement - The Fair Value Option (June 2005) amends this paragraph, and the heading preceding it, with effect for annual periods beginning on or after 1 January 2006.
BC88. The Board considered comments on the Exposure Draft that disagreed with the view that, in applying the fair value option to financial liabilities, an entity should recognise income as a result of deteriorating credit quality (and a loan expense as a result of improving credit quality). Commentators noted that it is not useful to report lower liabilities when an entity is in financial difficulty precisely because its debt levels are too high, and that it would be difficult to explain to users of financial statements the reasons why income would be recognised when an entity's creditworthiness deteriorates. These comments suggested that fair value should exclude the effects of changes in own credit risk.
Prospective amendment: Amendments to IAS 39 Financial Instruments: Recognition and Measurement - The Fair Value Option (June 2005) amends this paragraph with effect for annual periods beginning on or after 1 January 2006.
BC89. However, the Board noted that because financial statements are prepared on a going concern basis, credit risk affects the value at which liabilities could be repurchased or settled. Accordingly, the fair value of a financial liability reflects the credit risk relating to that liability. Therefore, it decided to include credit risk relating to a financial liability in the fair value measurement of that liability for the following reasons:
(a) entities realise changes in fair value, including fair value attributable to own credit risk, for example, by renegotiating or repurchasing liabilities or by using derivatives;
(b) changes in credit risk affect the observed market price of a financial liability and hence its fair value;
(c) it is difficult from a practical standpoint to exclude changes in credit risk from an observed market price; and
(d) the fair value of a financial liability (ie the price of that liability in an exchange between a knowledgeable, willing buyer and a knowledgeable, willing seller) on initial recognition reflects the credit risk relating to that liability. The Board believes that it is inappropriate to include credit risk in the initial fair value measurement of financial liabilities, but not subsequently.

 . Prospective amendment: Amendments to IAS 39 Financial Instruments: Recognition and Measurement - The Fair Value Option (June 2005) amends this paragraph with effect for annual periods beginning on or after 1 January 2006.
BC90. The Board also considered whether the portion of the fair value of a financial liability attributable to changes in credit quality should be specifically disclosed, separately presented in the income statement, or separately presented in equity. The Board decided that separately presenting or disclosing such changes would often not be practicable because it might not be possible to separate and measure reliably that part of the change in fair value. However, it noted that disclosure of such information would be useful to users of financial statements and would help alleviate the concerns expressed. Therefore, it decided in IAS 32 to require disclosure of the changes in fair value of a financial liability that is not attributable to changes in a benchmark rate. The Board believes this is a reasonable proxy for the change in fair value that is attributable to changes in the liability's credit risk, in particular when such changes are large, and will provide users with information with which to understand the profit or loss effect of such a change in credit risk.
Prospective amendment: Amendments to IAS 39 Financial Instruments: Recognition and Measurement - The Fair Value Option (June 2005) amends this paragraph with effect for annual periods beginning on or after 1 January 2006.
BC91. The Board decided to clarify that this issue relates to the credit risk of the financial liability, rather than the creditworthiness of the entity. The Board noted that this more appropriately describes the objective of what is included in the fair value measurement of financial liabilities.
BC92. The Board also noted that the fair value of liabilities secured by valuable collateral, guaranteed by third parties or ranking ahead of virtually all other liabilities is generally unaffected by changes in the entity's creditworthiness.

Measurement of Financial Liabilities with a Demand Feature
BC93. Some comments received on the Exposure Draft requested clarification of how to determine fair value for financial liabilities with a demand feature (eg demand deposits), when the fair value measurement option is applied or the liability is otherwise measured at fair value. In other words, could the fair value be less than the amount payable on demand, discounted from the first date that an amount could be required to be paid (the 'demand amount'), such as the amount of the deposit discounted for the period that the entity expects the deposit to be outstanding? Some commentators believe that the fair value of financial liabilities with a demand feature is less than the demand amount, for reasons that include the consistency of such measurement with how those financial liabilities are treated for risk management purposes.
BC94. The Board agreed that this issue should be clarified in IAS 39. It confirmed that the fair value of a financial liability with a demand feature is not less than the amount payable on demand discounted from the first date that the amount could be required to be paid. This conclusion is the same as in the original IAS 32. The Board noted that in many cases, the market price observed for such financial liabilities is the price at which they are originated between the customer and the deposit-taker-ie the demand amount. It also noted that recognising a financial liability with a demand feature at less than the demand amount would give rise to an immediate gain on the origination of such a deposit, which the Board believes is inappropriate.

Fair Value Measurement Guidance
(paragraphs AG69-AG82)
BC95. The Board decided to include in the revised IAS 39 expanded guidance about how to determine fair values, in particular for financial instruments for which no quoted market price is available (Appendix A paragraphs AG74-AG82). The Board decided that it is desirable to provide clear and reasonably detailed guidance about the objective and use of valuation techniques to achieve reliable and comparable fair value estimates when financial instruments are measured at fair value.
Use of Quoted Prices in Active Markets
(paragraphs AG71-AG73)
BC96. The Board considered comments received that disagreed with the proposal in the Exposure Draft that a quoted price is the appropriate measure of fair value for an instrument quoted in an active market. Some respondents argued that (a) valuation techniques are more appropriate for measuring fair value than a quoted price in an active market (eg for derivatives) and (b) valuation models are consistent with industry best practice, and are justified because of their acceptance for regulatory capital purposes.
BC97. However, the Board confirmed that a quoted price is the appropriate measure of fair value for an instrument quoted in an active market, notably because (a) in an active market, the quoted price is the best evidence of fair value, given that fair value is defined in terms of a price agreed by a knowledgeable, willing buyer and a knowledgeable, willing seller; (b) it results in consistent measurement across entities; and (c) fair value as defined in the Standard does not depend on entity-specific factors. The Board further clarified that a quoted price includes market-quoted rates as well as prices.

Entities that have access to more than one active market
(paragraph AG71)
BC98. The Board considered situations in which entities operate in different markets. An example is a trader that originates a derivative with a corporate in an active corporate retail market and offsets the derivative by taking out a derivative with a dealer in an active dealers' wholesale market. The Board decided to clarify that the objective of fair value measurement is to arrive at the price at which a transaction would occur at the balance sheet date in the same instrument (ie without modification or repackaging) in the most advantageous active market to which an entity has immediate access. Thus, if a dealer enters into a derivative instrument with the corporate, but has immediate access to a more advantageously priced dealers' market, the entity recognises a profit on initial recognition of the derivative instrument. However, the entity adjusts the price observed in the dealer market for any differences in counterparty credit risk between the derivative instrument with the corporate and that with the dealers' market.
Bid-ask spreads in active markets
(paragraph AG72)
BC99. The Board confirmed the proposal in the Exposure Draft that 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. It concluded that applying mid-market prices to an individual instrument is not appropriate because it would result in entities recognising up-front gains or losses for the difference between the bid-ask price and the mid-market price.
BC100. The Board discussed whether the bid-ask spread should be applied to the net open position of a portfolio containing offsetting market risk positions, or to each instrument in the portfolio. It noted the concerns raised by constituents that applying the bid-ask spread to the net open position better reflects the fair value of the risk retained in the portfolio. The Board concluded that for offsetting risk positions, entities could use mid-market prices to determine fair value, and hence may apply the bid or asking price to the net open position as appropriate. The Board believes that when an entity has offsetting risk positions, using the mid-market price is appropriate because the entity (a) has locked in its cash flows from the asset and liability and (b) potentially could sell the matched position without incurring the bid-ask spread.
BC101. Comments received on the Exposure Draft revealed that some interpret the term 'bid-ask spread' differently from others and from the Board. Thus, IAS 39 clarifies that the spread represents only transaction costs.

No Active Market
(paragraphs AG74-AG82)
BC102. The Exposure Draft proposed a three-tier fair value measurement hierarchy as follows:
(a) For instruments traded in active markets, use a quoted price.
(b) For instruments for which there is not an active market, use a recent market transaction.
(c) For instruments for which there is neither an active market nor a recent market transaction, use a valuation technique.
BC103. The Board decided to simplify the proposed fair value measurement hierarchy by requiring the fair value of financial instruments for which there is not an active market to be determined on the basis of valuation techniques, including the use of recent market transactions between knowledgeable, willing parties in an arm's length transaction.
BC104. The Board also considered constituents' comments regarding whether an instrument should always be recognised on initial recognition at the transaction price or whether gains or losses may be recognised on initial recognition when an entity uses a valuation technique to estimate fair value. The Board concluded that an entity may recognise a gain or loss at inception only if fair value is evidenced by comparison with other observable current market transactions in the same instrument (ie without modification or repackaging) or is based on a valuation technique incorporating only observable market data. The Board concluded that those conditions were necessary and sufficient to provide reasonable assurance that fair value was other than the transaction price for the purpose of recognising up-front gains or losses. The Board decided that in other cases, the transaction price gave the best evidence of fair value. The Board also noted that its decision achieved convergence with US GAAP.
Impairment and Uncollectibility of Financial Assets
Impairment of Investments in Equity Instruments
(paragraph 61)