IPSAS 29:FINANCIAL INSTRUMENTS

Introduction IPSAS 29 prescribes recognition and Measurement principles for financial instruments and is primarily drawn from IAS 39, Financial Instruments:Recognition and Measurement (as at December 31, 2008, including certain amendments published by the IASB as part of its Improvements to IFRSs issued in April 2009).

Scope Financial instruments are contractual arrangements that result in a financial asset for one entity and a financial liability or equity instrument in another. Rights and obligation arising out of non-contractual arrangements, such as through the exercise of legislation or through constructive obligations, are not financial instruments. The recognition and Measurement of rights and obligations arising out of these transactions are addressed in other IPSASs.

Many contracts meet the definition of a “financial asset or a financial liability.” Some of these are accounted for either by using other IPSASs, or accounted for partly using other IPSASs and partly using IPSAS 29. Some examples include rights and obligations arising from employee benefits, lease receivables and finance lease payables.

IPSAS 29 does not apply to insurance contracts, except certain financial guarantee contracts and embedded derivatives included in insurance contracts. An entity is however permitted to apply this Standard to insurance contracts that involve the transfer of financial risk. commitments to provide credit under specified conditions (loan commitments) are excluded from the scope of this Standard, with three exceptions. Notably, commitments to provide a loan at a below market interest rate are within the scope of IPSAS 29. Most other loan commitments are accounted for using IPSAS 19, Provisions, ContingentLiabilities and Contingent Assets.

IPSAS 29 applies to contracts for the purchase or sale of a non-financial item if the contract can be settled net in cash or another financial instrument, or by exchanging financial instruments. If the contracts were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with an entity’s expected purchase, sale, or usage requirements, IPSAS 29 does not apply.

Initial Recognition and Derecognition An entity recognizes financial assets and financial liabilities when it becomes a party to the contractual provisions of the instrument. Regular way purchases of financial assets can either be recognized using trade or settlement date accounting, while derivatives are always recognized using trade date accounting. Regular way purchases of financial assets are contracts that involve the exchange of the underlying instrument within a time frame established in the marketplace concerned.

IN8. An entity derecognizes regular way purchases and sales of financial assets either using trade or settlement date accounting. IN9. A financial liability is derecognized when the liability has been extinguished. An existing liability is derecognized and a new liability recognized when: (a) An entity exchanges debt instruments with another entity, and the terms of the instruments are substantially different; and (b) The terms of an existing debt instrument are substantially modified. When an entity has its debt waived, an entity considers the requirements in this Standard along with the requirements in IPSAS 23, Revenue from Non- Exchange Transactions (Taxes and Transfers) dealing with debt forgiveness. Financial assets arederecognized using the following steps:  Consolidate all controlled entities and special purpose entities.  Determine whether the derecognition principles are applied to an asset as a whole, or to a part of an asset.  Assess whether the rights to the cash flows have expired.  Assess whether the rights to receive the cash flows have been transferred to another party.  Assess whether an obligation has been assumed to pay the cash flows from the asset to another party.  Assess whether the entity has transferred substantially all the risks and rewards of ownership to another party.  If substantially all the risks and rewards of ownership have not been transferred to another party, assess whether control has been retained.

An entity subsequently measures financial assets using four categories:  Financial assets at fair value through surplus or deficit – assets are subsequently measured at fair value with changes in fair value recognized in surplus or deficit.  Held-to-maturity investments – assets are measured at amortized cost less impairment losses. Impairment losses are recognized in surplus or deficit.  Loans and receivables – assets are measured at amortized cost less impairment losses. Impairment losses are recognized in surplus or deficit.  Available-for-sale financial assets – assets are measured at fair value, with changes in fair value recognized directly in net assets/equity. Impairment losses incurred on available-for-sale instruments are recognized in surplus or deficit and not in net assets/equity.

Investments in equity instruments that cannot be measured at fair value,because fair value cannot be determined reliably, are measured at cost less impairment losses. Financial liabilities are measured at amortized cost, except for financial liabilities at fair value through surplus or deficit, financial guarantees, loan commitments, and liabilities arising from transfers of financial assets. An entity may only reclassify financial instruments between the various categories under certain circumstances.