IAS 39
Superseded
Financial Instruments: Recognition and Measurement
Recognition, measurement, impairment and derecognition of financial assets and liabilities, plus hedge accounting. Withdrawn and replaced by IFRS 9 Financial Instruments.
Superseded Standard
IAS 39 was withdrawn and replaced by IFRS 9 Financial Instruments, effective for periods beginning on or after 1 January 2018.
It is retained here for historical reference and because its core recognition, derecognition, and hedge accounting concepts still underpin IFRS 9 in modified form. For current financial instrument accounting, always apply IFRS 9 (and IAS 32/IFRS 7 for presentation and disclosure).
Current Standard
IFRS 9 Financial Instruments 1
Conceptual Framework Linkage
Why a rules-based classification system emerged, and why it was replaced
The Conceptual Framework requires financial assets to be measured in a way that faithfully represents the economic benefits an entity expects to derive from them. IAS 39 attempted this through FOUR separate classification categories, each with DETAILED, RULES-BASED criteria – a structure that grew increasingly complex and was ultimately judged to depart from the Framework's preference for PRINCIPLES-BASED classification.
HOW IAS 39 MAPPED TO THE FRAMEWORK
Faithful representation – different measurement bases (FVTPL, amortised cost, AFS) attempted to match measurement to the entity's genuine intention and business purpose for holding each instrument Complexity vs relevance trade-off – the FOUR-category system, with detailed rules for reclassification and tainting, became so complex that preparers and users struggled to apply/understand it – a direct tension with the Framework's understandability characteristic The "incurred loss" impairment weakness – IAS 39 required objective evidence a loss event had ALREADY occurred before any impairment could be recognised, a backward-looking approach criticised (especially after the 2008 financial crisis) for recognising credit losses "too little, too late"
IAS 39's replacement by IFRS 9 was directly triggered by the GLOBAL FINANCIAL CRISIS – the incurred loss impairment model was widely blamed for delaying recognition of credit losses on financial assets until losses had already crystallised, prompting the G20 and international regulators to demand a more FORWARD-LOOKING replacement.
The four-category measurement structure
IAS 39's classification categories drove fundamentally different measurement bases, adding a layer of rules-based complexity that IFRS 9 later simplified into just two principal categories (plus FVTPL as a residual).
CategoryMeasurement basis
FVTPL (held for trading or designated)Fair value; gains/losses through profit or loss
Held-to-maturity (HTM)Amortised cost, using the effective interest method
Loans and receivablesAmortised cost, using the effective interest method
Available-for-sale (AFS)Fair value; gains/losses through OCI (recycled to SOPL on disposal/impairment)
Qualitative characteristics in action: AFS as a "default" residual category for assets not fitting the other three reflected a pragmatic but ultimately unsatisfying compromise – it lacked a clear PRINCIPLE for WHY those assets deserved OCI treatment, a gap IFRS 9's business-model/cash-flow test later closed.
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Scope & Applicability (Historical)
What IAS 39 covered
IAS 39 established principles for recognising and measuring financial assets, financial liabilities, and some contracts to buy/sell non-financial items – applicable to virtually all entities and all types of financial instruments, with specific scope exclusions.
SCOPE EXCLUSIONS (LARGELY CARRIED FORWARD TO IFRS 9)
Interests in subsidiaries, associates, and joint ventures accounted for under IFRS 10/IAS 27/IAS 28 Employers' rights and obligations under employee benefit plans (IAS 19) Insurance contracts, except embedded derivatives within them (IFRS 4, later IFRS 17) Share-based payment transactions (IFRS 2), except for certain specific instruments
The general scope architecture of IAS 39 – and most of its exclusions – carried forward largely UNCHANGED into IFRS 9, since the scope boundary itself was not the source of the standard's widely criticised weaknesses.
Key definitions you must know
Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments and a fixed maturity, which the entity has the POSITIVE INTENTION and ABILITY to hold to maturity.
Loans and receivables
Non-derivative financial assets with fixed or determinable payments that are NOT quoted in an active market.
Available-for-sale financial assets
Non-derivative financial assets designated as available for sale, or NOT classified into any of the other three categories.
Effective interest method
A method of calculating the amortised cost of a financial asset/liability, and of allocating interest income/expense over the relevant period – carried forward unchanged into IFRS 9.
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The Four Classification Categories (with worked example)
Classification criteria and the "tainting" rule
Classification into HTM required a genuine positive INTENTION and ABILITY to hold to maturity – sales/reclassifications of MORE than an insignificant amount of HTM assets BEFORE maturity (outside narrow permitted exceptions) triggered "TAINTING," requiring the entity to RECLASSIFY its ENTIRE remaining HTM portfolio to AFS, and PROHIBITING use of the HTM category for TWO FULL FINANCIAL YEARS thereafter.
Example 1: HTM tainting consequence
An entity holds a portfolio of HTM bonds worth $5,000,000. During the year, it sells $600,000 of these bonds before maturity, for reasons NOT qualifying for the narrow permitted exceptions (e.g. not due to a significant deterioration in the issuer's creditworthiness).
Since the $600,000 disposal is MORE than insignificant relative to the total HTM portfolio, the ENTIRE remaining HTM portfolio ($4,400,000) must be RECLASSIFIED to available-for-sale, remeasured to fair value, with the difference recognised in OCI – and the entity is PROHIBITED from classifying ANY financial assets as HTM for the CURRENT and following TWO financial years.
This severe "tainting" penalty – a hallmark of IAS 39's rules-based complexity – has NO direct equivalent under IFRS 9, which replaced the HTM category (and its intention-based test) with a business model assessment that is reviewed but does not carry the same automatic, portfolio-wide, multi-year punitive consequence.
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Recognition & Initial Measurement
Trade date vs settlement date accounting
A "regular way" purchase or sale of a financial asset was recognised using EITHER trade date accounting (recognising the asset/liability on the date the entity commits to purchase/sell) OR settlement date accounting (on the date the asset is actually delivered) – a genuine, consistently applied POLICY CHOICE, carried forward into IFRS 9 largely unchanged.
Initial measurement
Initial measurement = Fair value + (for items NOT at FVTPL) transaction costs directly attributable to the acquisition/issue
Transaction costs were EXPENSED immediately for FVTPL instruments, but CAPITALISED into the initial carrying amount for all other categories – a distinction that survives essentially unchanged under IFRS 9 today.
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Subsequent Measurement by Category (with worked example)
Where gains and losses landed, by category
Example 2: AFS fair value gain, recognised in OCI
An entity holds an AFS equity investment purchased for $200,000. At year end, its fair value has risen to $235,000.
Fair value gain = 235,000 − 200,000 = $35,000, recognised in OCI and accumulated in a separate AFS reserve within equity – NOT through profit or loss – UNTIL the asset was sold or became impaired, at which point the CUMULATIVE gain/loss was RECYCLED (reclassified) to profit or loss.
This "recycling on disposal or impairment" mechanic for AFS assets has NO direct equivalent for FVOCI EQUITY investments under IFRS 9 – under IFRS 9, gains/losses on FVOCI equity instruments are NEVER recycled to profit or loss, even on disposal, a deliberate and significant departure from IAS 39's approach.
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Impairment – The Incurred Loss Model (with worked example)
Objective evidence of a loss event was required BEFORE recognition
Under IAS 39, an impairment loss was recognised ONLY if there was OBJECTIVE EVIDENCE of impairment as a result of ONE OR MORE events that occurred AFTER initial recognition (a "loss event"), and that loss event had an impact on the estimated future cash flows that could be RELIABLY ESTIMATED. Losses EXPECTED to result from FUTURE events, no matter how likely, were NOT recognised.
Example 3: The incurred loss trigger
At year end, a bank holds a loan portfolio. Economic forecasts strongly suggest a recession is imminent, likely increasing defaults significantly next year, but no specific loss events (e.g. actual missed payments, bankruptcy filings) have yet occurred for any individual loan.
Under IAS 39's incurred loss model, NO impairment provision could be recognised for these FORWARD-LOOKING, purely anticipated future losses – only losses evidenced by an ACTUAL loss event that had ALREADY occurred qualified for recognition. This is precisely the "too little, too late" criticism that led to IFRS 9's expected credit loss (ECL) model.
This is the single most significant conceptual difference between IAS 39 and IFRS 9 – IFRS 9's ECL model requires forward-looking provisioning from initial recognition, entirely reversing IAS 39's "wait for a loss event" philosophy.
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Derecognition
The risks-and-rewards / control test – carried forward largely unchanged
A financial asset was derecognised when the CONTRACTUAL RIGHTS to the cash flows expired, OR the entity TRANSFERRED substantially all the risks and rewards of ownership. Where risks/rewards were neither substantially transferred nor retained, the test moved to whether CONTROL had been surrendered. This multi-step derecognition decision tree is one of the FEW major areas IFRS 9 carried forward almost entirely UNCHANGED from IAS 39, since it was not identified as a source of the standard's key weaknesses.
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Embedded Derivatives & Hedge Accounting (Historical)
Embedded derivatives – the "bifurcation" requirement
An embedded derivative within a HOST CONTRACT was SEPARATED ("bifurcated") from the host and accounted for as a standalone derivative if its economic characteristics/risks were NOT closely related to those of the host contract, and the combined instrument was NOT already measured at FVTPL – a complex, widely criticised requirement.
Hedge accounting – three types, rules-based effectiveness testing
IAS 39 permitted FAIR VALUE hedges, CASH FLOW hedges, and hedges of a NET INVESTMENT in a foreign operation – but REQUIRED a strict, retrospective 80%–125% QUANTITATIVE effectiveness testing range to continue applying hedge accounting, widely seen as arbitrary and disconnected from genuine risk management practice.
IFRS 9 REPLACED IAS 39's rigid 80-125% quantitative bright-line test with a more principles-based, forward-looking "economic relationship" assessment more closely aligned to an entity's actual risk management strategy – one of IFRS 9's most significant substantive reforms.
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Disclosure Requirements (Historical)
Required disclosures (largely migrated to IFRS 7 even before IAS 39's withdrawal)
CLASSIFICATION-RELATED
Carrying amounts of each of the four categories of financial assets/liabilities Reclassifications between categories, and the reasons for them
IMPAIRMENT & HEDGE-RELATED
Amount of impairment losses recognised, and objective evidence supporting recognition Hedge effectiveness test results and hedge accounting designations applied
Most detailed financial instrument disclosures were ALREADY housed in the separate IFRS 7 standard by the time IAS 39 was withdrawn – IAS 39's own residual disclosure requirements were comparatively modest.
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Critical Judgments & Estimates (Historical)
Where management judgement mattered most
SIGNIFICANT JUDGEMENTS
Classification into one of the four categories, and genuine intention/ability assessments for HTM Whether an embedded derivative required bifurcation from its host contract Identifying objective evidence of a genuine "loss event" for impairment recognition
SIGNIFICANT ESTIMATES
Fair value of financial instruments without an observable market price Hedge effectiveness testing calculations against the strict 80-125% range
The complexity of IAS 39's rules-based structure – four categories, tainting rules, bright-line hedge effectiveness tests – made it one of the most widely criticised and difficult-to-apply standards in the entire IFRS suite, directly motivating its eventual complete replacement rather than incremental amendment.
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IAS 39 vs IFRS 9 – What Changed
Comparison – the transition from IAS 39 to IFRS 9
FeatureIAS 39 (superseded)IFRS 9 (current)
Classification categoriesFOUR: FVTPL, HTM, loans and receivables, AFSSimplified: amortised cost, FVOCI, and FVTPL, driven by a business model AND contractual cash flow characteristics test
Impairment modelINCURRED loss – requires objective evidence a loss event has already occurredEXPECTED credit loss (ECL) – forward-looking, recognised from initial recognition, updated for changes in credit risk
Reclassification / "tainting"Severe HTM tainting penalty – entire portfolio reclassified, 2-year prohibitionReclassification only permitted when the BUSINESS MODEL genuinely changes, a rare event, without the punitive tainting mechanism
Hedge accounting effectiveness testingRigid 80%-125% quantitative bright-line testPrinciples-based "economic relationship" assessment, more closely aligned to actual risk management
Equity investment gains/losses in OCIAFS gains/losses recycled to SOPL on disposal or impairmentFVOCI equity investments (irrevocable election) NEVER recycled, even on disposal
DerecognitionRisks/rewards and control-based multi-step testLARGELY UNCHANGED – one of the few areas carried forward essentially intact
The impairment model overhaul (incurred loss → expected credit loss) and the classification simplification (four categories → business-model-driven principles) were the TWO most consequential reforms – both direct responses to lessons learned from the 2008 global financial crisis.
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Statement Mapping – Where Every Financial Instrument Event Landed (Historical, Under IAS 39)
Comprehensive event-to-statement mapping table
Event / transactionStatement(s) affectedNotes
Initial recognition of a financial assetSOFPAt fair value plus transaction costs (unless FVTPL)
FVTPL remeasurementSOPL SOFPFair value change recognised immediately in profit or loss
HTM / loans and receivables – amortised cost accretionSOPL SOFPEffective interest method
AFS fair value remeasurementOCI SOFPAccumulated in a separate AFS reserve; recycled on disposal/impairment
Impairment loss recognised (objective evidence of a loss event)SOPL SOFPIncurred loss model; backward-looking trigger
HTM tainting – portfolio reclassified to AFSOCI SOFPEntire remaining portfolio remeasured to fair value
Fair value hedge – hedged item remeasurementSOPL SOFPOffsetting gain/loss on the hedging instrument, also through SOPL
Cash flow hedge – effective portionOCIDeferred until the hedged transaction affects profit or loss
Derecognition on disposal/settlementSOPL SOFPGain/loss recognised; cumulative OCI recycled where applicable
Cash movements on financial instrumentsCash Flow StatementClassified per IAS 7's normal rules
Category carrying amounts, hedge designations, impairment evidenceNotesMandatory disclosure, largely supplemented by IFRS 7
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Related Standards – Cross-Reference Map
How IAS 39's legacy connects across the IFRS body of literature
StandardNature of the connection
IFRS 9The DIRECT successor standard – replaced classification, impairment, and hedge accounting, while retaining IAS 39's derecognition model largely intact
IAS 32Continued to supply the liability/equity classification framework, which IAS 39 relied upon and which remains unchanged under IFRS 9's regime
IFRS 7Supplied (and continues to supply) the detailed disclosure framework for financial instruments, largely independent of whether IAS 39 or IFRS 9 governs recognition/measurement
IFRS 13Introduced later, supplying a unified fair value measurement framework that IAS 39's fair value requirements were subsequently interpreted through
IFRS 1Provided (and continues to provide) transition relief for first-time adopters regarding retrospective application of financial instrument derecognition and classification rules
IAS 21Governed foreign currency-denominated financial instruments' translation, interacting with IAS 39's classification and measurement rules
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Quick-Reference Glossary
Tainting
The consequence of selling more than an insignificant amount of HTM assets before maturity without a qualifying exception – reclassification of the entire remaining HTM portfolio to AFS, with a two-year prohibition on future HTM use.
Objective evidence of impairment
A specific 'loss event' (e.g. significant financial difficulty of the issuer, default, bankruptcy) that had ALREADY occurred, required before any impairment could be recognised under the incurred loss model.
Embedded derivative
A component of a hybrid (combined) instrument that also includes a non-derivative host contract, causing some cash flows to vary in a way similar to a standalone derivative.
Bifurcation
Separating an embedded derivative from its host contract for separate accounting, required when the embedded derivative's risks were not closely related to the host.
Hedge effectiveness
Under IAS 39, measured using a strict retrospective 80%-125% quantitative offset range, required to continue applying hedge accounting.
Regular way purchase or sale
A purchase/sale of a financial asset under a contract requiring delivery within the timeframe generally established by regulation/convention in the marketplace – subject to trade date or settlement date accounting.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows