International Accounting


IASC Puts Derivatives on the Balance Sheet

The International Accounting Standards Committee issued in March its long-awaited standard on accounting for financial instruments. International Accounting Standard no. 39, Financial Instruments: Recognition and Measurement, clarifies the need for disclosing derivatives and other hedge transactions, as well as conventional financial assets and liabilities, such as cash, trade receivables and payables, investments in debt and equity securities, and notes, bonds and loans payable.

The standard had been in development since 1989. It was preceded by exposure drafts in 1991, 1994 and 1998, as well as a steering committee discussion paper in 1997. Why did it take so long? According to Paul Pacter, IASC project manager, the IASC in conjunction with FASB, has been working to change the basic accounting model for many financial instruments from a historical cost model to a fair-value model. “That kind of dramatic change requires careful study and a process of education and systems changes,” said Pacter.

According to IASC secretary general Sir Bryan Carsberg, publication of the standard fills the “biggest void” in accounting standards in virtually every one of the 103 member countries of the IASC. “Financial instruments are often the most substantial component of many companies’ assets and liabilities,” said Carsberg. “Only in the United States is there a comparable, comprehensive standard on recognition and measurement of financial instruments and hedge accounting.”

Publication of IAS no. 39 formally completes the set of core financial accounting standards that will be presented to the International Organization of Securities Commissions (IOSCO) for approval. An approval will clear the way for IOSCO to endorse IASC standards for cross-border stock market listings.

Global clarity

Accounting practices for financial instruments vary around the world, and many regulators do not require companies to recognize derivatives in financial statements at all. According to Pacter, even when financial assets such as investments have been recognized, some companies have measured them at cost, others at the lower of cost and market and still others at fair value.

IAS no. 39 requires that all financial assets and liabilities be recognized on the balance sheet—derivatives no longer can be off-balance-sheet items. The standard significantly increases the use of fair value in accounting for financial instruments, particularly for assets. It also establishes conditions for determining when control over a financial asset or liability has been transferred to another party. IAS no. 39 is effective for annual financial statements covering periods beginning on or after January 1, 2001. Earlier application is permitted. Copies of the standard are available directly from the IASC for $25 each. Orders can be placed by phone at 44-171-427-5927 and by e-mail at publications@iasc. org.uk. A summary of the standard is available online at www.iasc.org.uk .

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