International Accounting Standards 32 (IAS 32)

IAS 32, or International Accounting Standard 32, is a financial reporting standard developed by the
International Accounting Standards Board (IASB). The standard primarily deals with the presentation and
disclosure of financial instruments. Financial instruments include items such as equity instruments,
financial liabilities, and derivatives.

Key aspects covered by IAS 32 include:

Classification of Financial Instruments:

IAS 32 outlines the criteria for classifying financial instruments as either financial assets, financial
liabilities, or equity instruments. The classification is based on the contractual rights and obligations of
the parties involved.

Presentation of Financial Instruments:

The standard provides guidance on how different types of financial instruments should be presented in
the financial statements. It distinguishes between financial assets and financial liabilities, emphasizing
the importance of clarity in financial reporting.

Offsetting Financial Assets and Financial Liabilities:

IAS 32 addresses the conditions under which a company is allowed to offset financial assets and financial
liabilities in the balance sheet. Offsetting involves presenting the net amount of related assets and
liabilities when certain criteria are met.

Derecognition of Financial Instruments:

The standard outlines the conditions for derecognizing financial assets and financial liabilities.
Derecognition refers to removing a previously recognized financial instrument from the balance sheet
when the entity no longer has rights to the cash flows associated with the instrument.

Embedded Derivatives:

IAS 32 provides guidance on the identification and accounting for embedded derivatives within financial
instruments. An embedded derivative is a component of a financial instrument that has characteristics
of a derivative.

Equity Instruments:

The standard specifies the accounting treatment for equity instruments, including the distinction
between equity and liability components in complex financial instruments that have both features.
Disclosures:

IAS 32 includes extensive disclosure requirements related to financial instruments. Companies are
required to provide information about the nature and extent of their exposure to risks arising from
financial instruments, as well as the accounting policies adopted.

International Accounting Standards 39 (IAS 39)

IAS 39, or International Accounting Standard 39, is another financial reporting standard developed by
the International Accounting Standards Board (IASB). IAS 39 addresses the recognition and
measurement of financial instruments and how they should be accounted for in an entity's financial
statements. Financial instruments include items such as loans, receivables, payables, equity instruments,
and derivatives.

Key aspects covered by IAS 39 include:

Classification of Financial Instruments:

IAS 39 provides guidance on the classification of financial instruments into various categories, including
financial assets, financial liabilities, and equity instruments. The classification determines how the
instruments are subsequently measured and accounted for.

Measurement of Financial Instruments:

The standard introduces different measurement categories for financial instruments, including:

Amortized Cost: Applicable to financial assets held for collection of contractual cash flows.

Fair Value through Profit or Loss (FVTPL): Applied to financial assets or liabilities held for trading and
certain financial instruments designated at fair value through profit or loss.

Available-for-Sale (AFS): Relevant for non-derivative financial instruments not classified as held for
trading or designated as FVTPL.

Hedge Accounting:

IAS 39 provides guidance on hedge accounting for entities using derivative instruments to hedge specific
risks. It outlines the criteria for qualifying and accounting for hedging relationships and how hedge
accounting should be applied.

Derecognition of Financial Instruments:

Similar to IAS 32, IAS 39 addresses the conditions for derecognizing financial assets and financial
liabilities. Derecognition occurs when an entity transfers its rights to receive cash flows from the
financial asset, or when it retains the rights but assumes a contractual obligation to pay them to another
party.
Embedded Derivatives:

The standard provides guidance on the identification and accounting for embedded derivatives within
financial instruments. Similar to IAS 32, an embedded derivative is a component of a financial
instrument that has characteristics of a derivative.

Impairment of Financial Assets:

IAS 39 sets out the principles for recognizing and measuring impairment losses on financial assets,
including loans and receivables.

Disclosures:

The standard includes extensive disclosure requirements related to financial instruments. Entities are
required to provide information about the nature and extent of risks arising from financial instruments,
as well as details about their accounting policies.

IAS 39 was part of the broader framework of International Financial Reporting Standards (IFRS) and
was widely used until the introduction of IFRS 9, which replaced IAS 39.

IFRS 7
IFRS 7 refers to the International Financial Reporting Standard 7, which is a standard issued by the
International Accounting Standards Board (IASB). The full title of IFRS 7 is "Financial Instruments:
Disclosures." It is part of the International Financial Reporting Standards (IFRS), which are a set of
accounting standards developed by the IASB to provide a common global language for business affairs.

IFRS 7 focuses specifically on the disclosure requirements for financial instruments. Financial
instruments include items such as cash, deposits, loans, bonds, derivatives, and other contractual
agreements that give rise to financial assets for one entity and financial liabilities or equity instruments
for another entity.

The standard requires entities to provide extensive disclosures in their financial statements to enable
users to evaluate the significance of financial instruments for the entity's financial position and
performance. Some of the key areas covered by IFRS 7 include:

 Qualitative Disclosures:
o Objectives, policies, and processes for managing financial risks.
o Information about the nature and extent of risks arising from financial instruments.
 Quantitative Disclosures:
o Information about the carrying amounts of various types of financial instruments.
o Fair value measurements of financial instruments.
o Information about credit risk, liquidity risk, and market risk.
 Hedge Accounting:
o Disclosures related to hedge accounting, if applicable.
  Transition Disclosures:
o Disclosures about the transition from previous accounting policies to IFRS 7.

The objective of these disclosures is to provide users of financial statements with a comprehensive
understanding of an entity's exposure to risks and how it manages those risks through its use of financial
instruments.

IFRS 9
IFRS 9 refers to the International Financial Reporting Standard 9, which is a standard issued by the
International Accounting Standards Board (IASB). IFRS 9 sets out the accounting rules and principles for
the classification, measurement, and recognition of financial instruments. The standard replaces the
earlier IAS 39 and introduces a new approach to the classification and measurement of financial assets
and liabilities.

Key features of IFRS 9 include:

Classification and Measurement:

IFRS 9 introduces a new classification and measurement model for financial assets that is based on the
entity's business model for managing financial instruments and the contractual cash flow characteristics
of the financial assets.

Three Main Categories of Financial Assets:

The standard categorizes financial assets into three main categories:

Amortized Cost: Financial assets that are held to collect contractual cash flows and that have
characteristics consistent with a basic lending arrangement.

Fair Value through Other Comprehensive Income (OCI): Financial assets that are held to collect
contractual cash flows and for which the business model is to hold and sell.

Fair Value through Profit or Loss (FVPL): Financial assets that do not meet the criteria for amortized cost
or OCI measurement.

Impairment:

IFRS 9 introduces an expected credit loss model for the recognition of impairment losses on financial
assets. This model requires entities to recognize expected credit losses based on historical experience,
current conditions, and reasonable and supportable forecasts.

Hedge Accounting:

IFRS 9 includes improvements to hedge accounting to align the accounting treatment more closely with
risk management activities. It introduces changes to the recognition and presentation of hedging
instruments and hedged items.
Financial Liabilities:

The standard retains most of the requirements for the classification and measurement of financial
liabilities from IAS 39. However, changes in the credit risk of financial liabilities designated at fair value
through profit or loss are now recognized in other comprehensive income.

Transition:

IFRS 9 has a mandatory effective date for annual periods beginning on or after January 1, 2018. The
standard includes transitional provisions for entities adopting IFRS 9 for the first time.

Disclosures:

IFRS 9 introduces enhanced disclosure requirements related to financial instruments. Entities are
required to provide information about the judgments made in applying the new expected credit loss
model and other relevant information about their financial instruments.

Financial Accounting Standards Board Statements (FAS or SFAS)

The Financial Accounting Standards Board (FASB) issues Statements of Financial Accounting Standards
(SFAS), which are authoritative statements governing financial accounting and reporting standards in the
United States. In 2009, the FASB transitioned from issuing SFAS to the Accounting Standards Codification
(ASC). The ASC is the source of authoritative U.S. generally accepted accounting principles (GAAP)
recognized by the FASB to be applied by nongovernmental entities.

Statements of Financial Accounting Standards (SFAS):

 SFAS were the primary type of pronouncement issued by the FASB before the transition to the
Accounting Standards Codification.
 Each SFAS addressed a specific accounting issue or topic, providing guidance on how to account
for and report financial transactions.

Accounting Standards Codification (ASC):

 In 2009, the FASB introduced the ASC, which organizes U.S. GAAP into a consistent framework.
 The ASC includes all authoritative accounting and reporting standards issued by the FASB. It is
organized by topic and is updated periodically to incorporate new standards and amendments.

FAS 133: Accounting for Derivative Instruments and Hedging Activities

FAS 133 refers to Statement of Financial Accounting Standards (FAS) No. 133, titled "Accounting for
Derivative Instruments and Hedging Activities." FAS 133 was issued by the Financial Accounting
Standards Board (FASB) and established accounting and reporting standards for derivatives and hedging
activities. The standard aimed to enhance transparency in financial reporting and improve consistency in
the accounting treatment of derivatives.
Objective:

The primary objective of FAS 133 was to provide guidelines for recognizing, measuring, and disclosing
information about derivatives and hedging activities in the financial statements of companies.

Scope:

FAS 133 applied to all entities, including both public and private companies, that engaged in derivative
transactions or hedging activities.

Recognition and Measurement:

FAS 133 introduced the concept of fair value accounting for derivatives. Derivative instruments were
required to be recognized on the balance sheet at fair value, and changes in fair value were recognized
in the income statement.

Hedging:

The standard provided detailed guidance on hedge accounting, specifying criteria for the identification
and documentation of hedging relationships.

It categorized hedges into three main types: fair value hedges, cash flow hedges, and hedges of a net
investment in a foreign operation.

Effectiveness Testing:

Entities were required to assess and document the effectiveness of hedging relationships.
Ineffectiveness was recognized in current earnings.

Disclosures:

FAS 133 mandated extensive disclosures about an entity's use of derivatives and its risk management
activities. Disclosures included information about the fair values, gains and losses, and the objectives of
using derivatives.

Subsequent Amendments:

The standard underwent subsequent amendments and improvements over time, including updates to
address certain implementation issues and complexities in hedging strategies.

SFAS 138: An amendment to SFAS 133

It includes the four major amendments:

 Normal Purchases and Normal Sales Excel

 o FASB decided contracts that permit but do not require settlement by delivery of a
commodity are often used interchangeably with other derivatives and present similar
risks; therefore, they should be considered derivatives.
 Interest Rate
o It sought to reduce the implementation confusion caused by the definition of interest
rate risk used in SFAS 133. The new standard combines all components of risk into
interest rate risk and credit risk, and broadens the concept of interest rate risk to
include the interest rate benchmarked in the hedged item’s index, including the popular
LIBOR (London Interbank Offer Rate) hedging rate that also captures risk movements
beyond risk free rate.
 Hedging Foreign Currency Denominated Items
o It allows joint hedging of interest rate risk and foreign exchange in one compound
hedge.
 Incompany Exposures
o SFAS 133 discouraged hedge accounting by treasury centers because it required
individual members of a consolidated group to enter individual offsetting derivative
contracts with third parties, which nullifies the cost savings benefits. The SFAS 138
amendments allow certain intercompany derivatives that are offset by unrelated third-
party contracts to be designated as the hedging instrument in cash flow hedges of
foreign currency risk in the consolidated financial statements.

Hedging in Derivatives

Hedging in derivative instruments refers to the use of financial contracts, known as derivatives, to
mitigate or offset the risks associated with changes in the value of underlying assets, liabilities, or future
cash flows. The primary purpose of hedging is to reduce or eliminate the impact of price fluctuations,
interest rate movements, currency exchange rate changes, or other risk factors that may affect the
financial position or performance of an entity.