Measurement: Fair Value Option
IN16. The Standard permits an entity to designate any financial asset or financial liability on initial recognition as one to be measured at fair value, with changes in fair value recognised in profit or loss. To impose discipline on this categorisation, an entity is precluded from reclassifying financial instruments into or out of this category.
IN17. The option previously contained in IAS 39 to recognise in profit or loss gains and losses on available-for-sale financial assets has been eliminated. Such an option is no longer necessary because under the amendments to IAS 39 an entity is now permitted by designation to measure any financial asset or financial liability at fair value with gains and losses recognised in profit or loss.

IN12. The Standard states that an entity has transferred a financial asset if, and only if, it either:
(a) retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay those cash flows to one or more recipients in an arrangement that meets three specified conditions; or
(b) transfers the contractual rights to receive the cash flows of a financial asset.
IN13. Under the Standard, if an entity has transferred a financial asset, it assesses whether it has transferred substantially all the risks and rewards of ownership of the transferred asset. If an entity has retained substantially all such risks and rewards, it continues to recognise the transferred asset. If it has transferred substantially all such risks and rewards, it derecognises the transferred asset.
IN14. The Standard specifies that if an entity has neither transferred nor retained substantially all the risks and rewards of ownership of the transferred asset, it assesses whether it has retained control over the transferred asset. If it has retained control, the entity continues to recognise the transferred asset to the extent of its continuing involvement in the transferred asset. If it has not retained control, the entity derecognises the transferred asset.
IN15. The Standard provides guidance on how to apply the concepts of risks and rewards and of control.

Definitions
IN8. The Standard amends the definition of 'originated loans and receivables' to become 'loans and receivables'. Under the revised definition, an entity is permitted to classify as loans and receivables purchased loans that are not quoted in an active market.
Derecognition of a Financial Asset
IN9. Under the original IAS 39, several concepts governed when a financial asset should be derecognised. Although the revised Standard retains the two main concepts of risks and rewards and control, it clarifies that the evaluation of the transfer of risks and rewards of ownership precedes the evaluation of the transfer of control for all derecognition transactions.
IN10. Under the Standard, an entity determines what asset is to be considered for derecognition. The Standard requires a part of a larger financial asset to be considered for derecognition if, and only if, the part is one of:
(a) specifically identified cash flows from a financial asset; or
(b) a fully proportionate (pro rata) share of the cash flows from a financial asset; or
(c) a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset.
In all other cases, the Standard requires the financial asset to be considered for derecognition in its entirety.
IN11. The Standard introduces the notion of a 'transfer' of a financial asset. A financial asset is derecognised when (a) an entity has transferred a financial asset and (b) the transfer qualifies for derecognition.

Editorial note: Last sentence substituted by IFRS 4 with effect for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. If an entity applies this IFRS for an earlier period, it shall disclose that fact. Previously "A commitment to provide a loan at a below-market interest rate is measured in the same way as a financial guarantee that is outside the scope of IAS 39 (see paragraph IN5)".
IN7. The Standard continues to require that a contract to buy or sell a non-financial item is within the scope of IAS 39 if it can be settled net in cash or another financial instrument, unless it is entered into and continues to be held for the purpose of receipt or delivery of a non- financial item in accordance with the entity's expected purchase, sale or usage requirements. However, the Standard clarifies that there are various ways in which a contract to buy or sell a non-financial asset can be settled net. These include: when the entity has a practice of settling similar contracts net in cash or another financial instrument, or by exchanging financial instruments; when 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 when the non-financial item that is the subject of the contract is readily convertible to cash. The Standard also clarifies that a written option that can be settled net in cash or another financial instrument, or by exchanging financial instruments, is within the scope of the Standard.

Editorial note: Substituted by IFRS 4 with effect for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. If an entity applies this IFRS for an earlier period, it shall disclose that fact. Previously "A scope exclusion has been added for financial guarantee contracts that meet specified conditions. The issuer of such a guarantee initially recognises it at fair value, and subsequently measures it at the higher of (a) the amount determined under IAS 37 Provisions, Contingent Liabilities and Contingent Assets and (b) the amount initially recognised and less, where appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue. ".
IN6. A second scope exclusion has been added for loan commitments that are not classified as at fair value through profit or loss and cannot be settled net. A commitment to provide a loan at a below-market interest rate is measured at the higher of
(a) the amount that would be recognised under IAS 37 and
(b) the amount initially recognised less, where appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue.

The Main Changes
IN4. The main changes from the previous version of IAS 39 are described below.
Scope
IN5. The treatment of financial guarantee contracts has been reviewed.
Such a contract is within the scope of this Standard if it is not an insurance contract, as defined in IFRS 4 Insurance Contracts. Furthermore, if an entity entered into, or retained, a financial guarantee on transferring to another party financial assets or financial liabilities within the scope of the Standard, the entity applies the Standard to that contract, even if the contract meets the definition of an insurance contract. The Board expects to issue in the near future an Exposure Draft proposing amendments to the treatment of financial guarantees within the scope of IFRS 4.

Introduction
Reasons for Revising IAS 39
IN1. International Accounting Standard 39 Financial Instruments: Recognition and Measurement (IAS 39) replaces IAS 39 Financial Instruments: Recognition and Measurement (revised in 2000) and should be applied for annual periods beginning on or after 1 January 2005. Earlier application is permitted. Implementation Guidance accompanying this revised IAS 39 replaces the Questions and Answers published by the former Implementation Guidance Committee (IGC).
IN2. The International Accounting Standards Board has developed this revised IAS 39 as part of its project to improve IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39. The objective of this project was to reduce complexity by clarifying and adding guidance, eliminating internal inconsistencies and incorporating into the Standard elements of Standing Interpretations Committee (SIC) Interpretations and Questions and Answers published by the IGC.
IN3. For IAS 39, the Board's main objective was a limited revision to provide additional guidance on selected matters such as derecognition, when financial assets and financial liabilities may be measured at fair value, how to assess impairment, how to determine fair value and some aspects of hedge accounting. The Board did not reconsider the fundamental approach to the accounting for financial instruments contained in IAS 39.

Amendments to IAS 39 Financial Instruments: Recognition and Measurement - The Fair Value Option
IAS 39 Financial Instruments: Recognition and Measurement and its accompanying Implementation Guidance (see separate booklet) are issued by the International Accounting Standards Board, 30 Cannon Street, London EC4M 6XH, United Kingdom.
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Consideration of the Shortcut Method in SFAS 133 BC132-BC135
Expected Effectiveness BC136
Hedges of Portions of Non-Financial Assets and Non-Financial Liabilities for Risk Other Than Foreign Currency Risk BC137-BC139
Loan Servicing Rights BC140-BC143
Whether to Permit Hedge Accounting Using Cash Instruments BC144-BC145
Whether to Treat Hedges of Forecast Transactions as Fair Value Hedges BC146-BC148
Hedges of Firm Commitments BC149-BC154
Basis Adjustments BC155-BC164
Hedging Using Internal Contracts BC165-BC172
Elimination of Selected Differences from US GAAP BC173
Summary of changes from the exposure draft BC174
Dissenting Opinions DO1-DO15
Table of Concordance
Implementation Guidance
Illustrative example
Amendments
Amendment to IAS 39 - Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk
Amendments to IAS 39 - Transition and Initial Recognition of Financial Assets and Financial Liabilities
Amendment to IAS 39 - Cash Flow Hedge Accounting of Forecast Intragroup Transactions
IAS 39 State of play - Proposal for a Draft Commission Regulation - annotated version

Recognition and Derecognition BC41-BC70
Derecognition of a Financial Asset BC41-BC53
The Original IAS 39 BC41-BC43
Exposure Draft BC44-BC45
Comments Received BC46-BC47
Revisions to IAS 39 BC48-BC53
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 BC54-BC64
Transfers that Do Not Qualify for Derecognition BC65-BC66
Continuing Involvement in a Transferred Asset BC67-BC70
Measurement BC71-BC174
Fair Value Measurement Option BC71-BC94
Application of the Fair Value Measurement Option to a Portion (Rather than the Entirety) of a Financial Asset or a Financial Liability BC85-BC86
Own Credit Risk BC87-BC92
Measurement of Financial Liabilities with a Demand Feature BC93-BC94
Fair Value Measurement Guidance BC95-BC104
Use of Quoted Prices in Active Markets BC96-BC97
No Active Market BC102-BC104
Impairment and Uncollectibility of Financial Assets BC105-BC130
Impairment of Investments in Equity Instruments BC105-BC130
Hedging BC131-BC172