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Recognizing

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Recognizing and Measuring Financial Instruments

T he International Accounting Standards Committee (IASC) issued a discussion paper on the recognition and measurement of financial instruments. Accounting for Financial Assets and Financial Liabilities provides a comprehensive analysis of the major issues associated with accounting for transfers of financial assets, debt defeasance transactions and hedge accounting.

By 1994, the IASC had issued two exposure drafts—E40 and E48, both titled Financial Instruments —and it approved International Accounting Standard (IAS) no. 32, Financial Instruments: Disclosure and Presentation , in 1995. This discussion paper is based on the comments from both IASC exposure drafts and input from members of the IASC and Canadian Institute of Chartered Accountants (CICA) advisory committees and boards of directors. “Other standard setting bodies, such as the Financial Accounting Standards Board, were committing more research to the recognition and measurement of these instruments,” said Ian Hague, senior manager of the CICA. “The IASC developed this discussion paper in response to recent, fundamental changes in the variety and sophistication of financial instruments.”

The paper proposes that financial instruments be recognized the moment an enterprise becomes a party to a contract. “The IASC wants to apply this recognition standard more rigorously than it proposed in its previous exposure drafts,” said Hague. For example, Hague said interest rate swaps—currently not recognized in financial statements—would be recognized. “A company that signs a contract to exchange the items that make up an interest rate swap is exposed to risk that must be recognized on the financial statements,” said Hague. The discussion paper also would measure on an ongoing basis all financial assets and liabilities at fair value, and it proposes measuring all gains and losses arising from changes in fair value as income as opposed to deferring them to future periods.

An IASC steering committee will determine whether the proposed principles will be implemented in one or more international accounting standards. Comments on the discussion paper are due by July 15. A copy of the paper can be obtained by calling the IASC in London at +44-171-353-0565 or by fax at +44-171-353-0562.