The effect of international accounting standard 39, "Financial instruments : recognition and measurement", on financial reporting within the banking sector

Abstract

International Accounting Standard 39 (IAS 39), Financial Instruments: Recognition and Measurement, completes the major projects in the International Accounting Standards Board's (IASB, former IASC) programme of 'core' standards agreed with the International Organisation of Securities Commission (IOSCO). The standard treats one of the most controversial aspects of accounting - financial instruments - an area where accounting had not kept pace with market developments, especially with the ever-wider range of derivative instruments used to manage risks and for other speculative purposes. The IASB and other standard-setters began developing requirements for financial instruments over ten years ago. The timescale confirms the difficulties involved in reaching an agreement. IAS 39 was issued in March 1999 and is regarded to be an interim solution as a Joint Working Group of Standard Setters on Financial Instruments (JWG) is still working on a more fundamental approach. Notwithstanding, businesses need to comply by such a revolutionary standard, likely to be in place for some time, setting out new recognition and measurement criteria. The change will be a major one for banks with significant investments or trading activities, and those with treasury functions that are actively managing market risk. Unlike most other new standards, implementation will require considerable resources, both within local and foreign banks, to cater for newly introduced concepts such as fair values, complex hedging requirements, etc. The impact on reporting content itself will be considerable and might also bring banks to revise their treasury's strategy under certain circumstances. Due to the relatively simpler nature of operations within local banks, as against larger worldwide banks, such an impact proved to be somewhat less substantial.