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 Consolidated 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 AG36-52 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 AG57-63); and
(iii) derivatives that are embedded in leases are subject to the embedded derivatives provisions of this Standard (see paragraphs 10-13 and Appendix A paragraphs AG27-33).
(c) employers' rights and obligations under employee benefit plans, to which IAS 19 Employee Benefits applies.
(d) financial instruments issued by the entity that meet the definition of an equity instrument in IAS 32 (including 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.
(e) rights and obligations under an insurance contract as defined in IFRS 4 Insurance Contracts or under a contract that is within the scope of IFRS 4 because it contains a discretionary participation feature. However, this Standard applies to a derivative that is embedded in such a contract if the derivative is not itself a contract within the scope of IFRS 4 (see paragraphs 10-13 and Appendix A paragraphs AG23-AG33). Furthermore, if an insurance contract is a financial guarantee contract entered into, or retained, on transferring to another party financial assets or financial liabilities within the scope of this Standard, the issuer shall apply this Standard to the contract (see paragraph 3 and Appendix A paragraph AG4A).

International Accounting Standard 39 Financial Instruments: Recognition and Measurement
International Accounting Standard 39 Financial Instruments: Recognition and Measurement (IAS 39) is set out in paragraphs 1-110 and Appendices A and B. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 39 should be read in the context of its objective and the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Framework for the Preparation and Presentation of Financial Statements. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.
Objective
1. The objective of this Standard is to establish principles for recognising and measuring financial assets, financial liabilities 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

Potential Impact of Proposals in Exposure Drafts
IN27. [...]
Editorial note: Deleted by Amendments to IAS 39, March 2004 with effect for annual periods beginning on or after 1 January 2005. An entity shall apply the amendments to an earlier period when it applies IAS 39 (as revised in 2003) and IAS 32 (as revised in 2003) to that period. Previously "At the time when the Board completed the revised IAS 39 it was still considering the responses to four Exposure Drafts that contained proposals for further amendments to IAS 39. Those proposals are described below. The Board expects that any amendments will be effective no later than the revised IAS 39. (a) ED 2 Share-based Payment proposes the addition of a scope exclusion for financial instruments, contracts and obligations under the scope of ED 2. (b) ED 5 Insurance Contracts proposes an amendment to the scope of IAS 39: (i) by amending the definition of insurance contracts (insurance contracts are outside the scope of IAS 39); (i) to delete the scope exclusion for derivatives based on climatic, geological or other physical variables; and (ii) to clarify which financial guarantee contracts are within the scope of IAS 39 and which are within the scope of ED 5. Additionally, ED 5 proposes to replace "insurance policy" by "insurance contract" and "insurance company" or "insurance entity" by "insurer" where applicable. (c) The Exposure Draft of Proposed Amendments to IAS 36 Impairment of Assets and IAS 38 Intangible Assets proposes to clarify that a loan acquired by an entity in a business combination is measured at the acquisition date. (d) The Exposure Draft of Proposed Amendments to IAS 39 Financial Instruments: Recognition and Measurement-Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk proposes: (i) to amend IAS 39 to facilitate fair value hedge accounting for a portfolio hedge of interest rate risk; and (ii) to add related Application Guidance and an Illustrative Example.".

Editorial note: Inserted by Amendments to IAS 39, March 2004 with effect for annual periods beginning on or after 1 January 2005. An entity shall apply the amendments to an earlier period when it applies IAS 39 (as revised in 2003) and IAS 32 (as revised in 2003) to that period.
Disclosure
IN25. The disclosure requirements previously in IAS 39 have been moved to IAS 32.
Amendments to and Withdrawal of Other Pronouncements
IN26. As a consequence of the revisions to this Standard, the Implementation Guidance developed by IASC's IAS 39 Implementation Guidance Committee is superseded by this Standard and its accompanying Implementation Guidance.

(c) prepayment risk to be incorporated by scheduling prepayable items into repricing time periods based on expected, rather than contractual, repricing dates. However, when the portion hedged is based on expected repricing dates, the effect that changes in the hedged interest rate have on those expected repricing dates are included when determining the change in the fair value of the hedged item. Consequently, if a portfolio that contains prepayable items is hedged with a non-prepayable derivative, ineffectiveness arises if the dates on which items in the hedged portfolio are expected to prepay are revised, or actual prepayment dates differ from those expected.

IN24A. This Standard permits fair value hedge accounting to be used more readily for a portfolio hedge of interest rate risk than previous versions of IAS 39. In particular, for such a hedge, it allows:
(a) the hedged item to be designated as an amount of a currency (eg an amount of dollars, euro, pounds or rand) rather than as individual assets (or liabilities).
(b) the gain or loss attributable to the hedged item to be presented either:
(i) in a single separate line item within assets, for those repricing time periods for which the hedged item is an asset; or
(ii) in a single separate line item within liabilities, for those repricing time periods for which the hedged item is a liability.

Hedge Accounting
IN23. Hedges of firm commitments are now treated as fair value hedges rather than cash flow hedges. However, the Standard clarifies that a hedge of the foreign currency risk of a firm commitment can be treated as either a cash flow hedge or a fair value hedge.
IN24. The Standard requires that when a hedged forecast transaction occurs and results in the recognition of a financial asset or a financial liability, the gain or loss deferred in equity does not adjust the initial carrying amount of the asset or liability (ie basis adjustment is prohibited), but remains in equity and is recognised in profit or loss consistently with the recognition of gains and losses on the asset or liability. For hedges of forecast transactions that result in the recognition of a non-financial asset or a non-financial liability, the entity has a choice of whether to apply basis adjustment or retain the hedging gain or loss in equity and report it in profit or loss when the asset or liability affects profit or loss.

•   Contractual cash flows and historical loss experience provide the basis for estimating expected cash flows. Historical loss rates are adjusted on the basis of relevant observable data that reflect current economic conditions.
•   The methodology for measuring impairment should ensure that an impairment loss is not recognised on the initial recognition of an asset.
IN22. The Standard requires that impairment losses on available-for-sale equity instruments cannot be reversed through profit or loss, ie any subsequent increase in fair value is recognised in equity.

IN19. The Standard also clarifies that the fair value of a 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.
Impairment of Financial Assets
IN20. The Standard clarifies that an impairment loss is recognised only when it has been incurred. It also provides additional guidance on what events provide objective evidence of impairment for investments in equity instruments.
IN21. The Standard provides additional guidance about how to evaluate impairment that is inherent in a group of loans, receivables or held-to-maturity investments, but cannot yet be identified with any individual financial asset in the group, as follows:
•   An asset that is individually assessed for impairment and found to be impaired should not be included in a group of assets that are collectively assessed for impairment.
•   An asset that has been individually assessed for impairment and found not to be individually impaired should be included in a collective assessment of impairment. The occurrence of an event or a combination of events should not be a precondition for including an asset in a group of assets that are collectively evaluated for impairment.
•   When performing a collective assessment of impairment, an entity groups assets by similar credit risk characteristics that are indicative of the debtors' ability to pay all amounts due according to the contractual terms.

How to Determine Fair Value
IN18. The Standard provides the following additional guidance about how to determine fair values using valuation techniques.
•   The objective is to establish what the transaction price would have been on the measurement date in an arm's length exchange motivated by normal business considerations.
•   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.
•   In applying valuation techniques, an entity uses estimates and assumptions that are consistent with available information about the estimates and assumptions that market participants would use in setting a price for the financial instrument.
•   The best estimate of fair value at initial recognition of a financial instrument that is not quoted in an active market is the transaction price unless the fair value of the instrument is evidenced by other observable market transactions or is based on a valuation technique whose variables include only data from observable markets.