Chapter 5: Financial Instruments - Cash and Receivables

Perspective and Issues

Cash and receivables meet the definition of a financial instrument under international accounting standards. The accounting for financial instruments has received a great deal of attention by the IASC. The original intent, to address all matters of recognition, measurement, derecognition, presentation, and disclosure in a single comprehensive standard, proved to be unworkable (as was also the case under US GAAP), and thus the first standard, IAS 32, which became effective in 1996, addressed only the less complex issues of presentation and disclosure. The more intractable problems of recognition, measurement, and derecognition were dealt with by IAS 39, which became mandatory in 2001. IAS 39 is viewed as being only an interim standard, since it failed to comprehensively embrace fair value accounting for all financial assets and liabilities, which was promised to be the ultimate financial reporting goal to which the IASC is committed.

IAS 39 established extensive new requirements for the recognition, derecognition, and measurement of financial assets and liabilities, and furthermore addresses special hedging accounting procedures which are to be applied in defined sets of circumstances. Hedge accounting, which is designed to improve the matching of income statement recognition of related gains and losses, is necessitated by the use of a "mixed attribute" accounting model, whereby some assets and liabilities are reported at (amortized) historical costs, and others are reported at fair values. In other words, hedge accounting would be neither appropriate nor necessary if all financial assets and liabilities were simply carried at fair value. IASB had, at the time it issued IAS 39, signaled its intention to impose a full fair value accounting model, but this now appears to be a longer-term project and is not expected to bear fruit until 2004 at the earliest.

IAS 39 also superseded certain disclosure requirements set forth by IAS 32.

Because of the complexity of IAS 39, a number of implementation issues have arisen, and in response the IASC has constituted an IAS 39 Implementation Guidance Committee (IGC). Several hundred questions and answers have been published, which constitute the best thinking on the various fact-specific matters addressed. These responses do not, however, represent official guidance of the IASB. The IASB has undertaken a major project to improve IAS 32 and IAS 39, which, among other things, would simplify the application of selected portions of these standards. It would also result in incorporating much of the supplementary guidance (that contained in SIC and the implementation aids offered by the IAS 39 IGC) directly into the standards. The project would not alter the fundamental approach taken by these standards, however.

In this chapter, the overall requirements of IAS 32 and 39 will be set forth, while detailed application of IAS 39 is set forth in Chapter 10. In addition, this chapter will present detailed examples on a range of topics involving cash and receivables (e.g., the accounting for factored receivables) that are derived from the most widespread and venerable practices in these areas, even if not codified in the IAS. Some of the more generally applicable of the IGC responses are also incorporated in this chapter, as well as in Chapters 10, 12, 17, and elsewhere, as appropriate.

Sources of IAS

IAS 32, 39

SIC 17