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CFM21610 | Accounting for corporate finance: International Financial Reporting Standards: IAS 39: measurement of financial assets

From HM Revenue & Customs · Corporate Finance Manual

For those entities applying IFRS or FRS 101 with an accounting period beginning on or after 1 January 2018 refer to IFRS 9 for the recognition and measurement of financial instruments at CFM 21800+.

Initial measurement

When a financial asset is recognised initially, a company must measure it at its fair value (see CFM21160). In the case of assets and liabilities not in the FVTPL category (see below), this also includes transaction costs (see CFM21630) that are directly attributable to the acquisition or issue of the financial asset.

Subsequent measurement

Subsequent measurement depends on which one of four categories the financial asset falls.

  • A financial asset at fair value through profit or loss (‘FVTPL’) is re-measured at fair value (CFM21160) with differences taken through the income statement. An item may fall into this category because it is held for trading (‘HFT’). All derivatives, except those accounted for as part of a hedge (see CFM27000), fall into the HFT category. A company may also designate a financial asset or financial liability as FVTPL in certain circumstances (CFM21540).

  • Held-to-maturity investments (‘HTM’). This is a restricted category for financial assets with fixed maturity and determined or determinable payments, which the company intends to hold, and is able to hold, until maturity. HTM instruments are measured at amortised cost (see CFM21170). Where the recoverable amount of such an investment is less than the carrying amount, there is an impairment loss that must be recognised in the income statement. If a company sells more than an insignificant proportion of its portfolio of held to maturity assets, other than because of a non-recurring and unpredictable circumstance, it must reclassify the remainder of its HTM assets as AFS. This ‘tainting’ (CFM21570) expires at the end of the second year following the premature sales.

  • Loans and receivables (‘L&R’). This comprises most unquoted non-derivative financial assets, other than those HFT - trade debts, for example, would fall into this category. Except those HFT, or designated as FVTPL, or accounted for as AFS, L&Rs are measured at original recorded amount less repayments of principal and amortisation. Where a company holds unquoted equity instruments, whose fair value cannot be reliably determined, it must measure the equity instrument at cost.

  • Available-for-sale financial assets (‘AFS’). Financial assets that do not fall into any of the three categories above are classified as AFS. A company may also designate a particular non-derivative financial asset as AFS. AFS assets are valued at fair value. The changes are recognised directly in equity. Where there is objective evidence that the asset is impaired, cumulative losses equivalent to the impairment are ‘recycled’ i.e. brought back into the income statement.

These rules are summarised in the following table:

AssetHow measuredTreatment of gains or losses
At fair value through profit or loss (including held-for-trading)Fair valueThrough income statement
Loans and receivablesAmortised cost, using the effective interest methodAmortisation, and any impairment losses, go through the income statement. Disposal may give rise to a gain or loss, which is recognised in the income statement.
Held-to-maturity investmentsAmortised cost, using the effective interest method.As for loans and receivables.
Available-for-sale assetsFair valueInterest is recognised in the income statement (using the effective interest method), as are any impairment losses. Fair value changes are recognised directly in equity, but are “recycled” into the income statement if the asset is sold or becomes impaired.
Derivatives (asset or liability)Fair valueThrough income statement, unless functioning as a hedge.

This table does not apply to

  • financial assets that are designated as hedged items, which are subject to measurement under the hedge accounting requirements (CFM27000), and

  • the treatment of foreign exchange gains and losses (CFM21770).

Assets other than those classified as FVTPL may be subject to impairment. This is covered in more detail at CFM21670.