Financial Instruments

A New Accounting Framework for Financial Instruments

New financial instruments accounting framework adopted by the CICA is effective for fiscal years commencing on or after October 1, 2006 for publicly accountable entities and encompasses four new CICA Handbook Sections :

  1. Section 3855, Financial Instruments - Recognition and Measurement
  2. Section 3865, Hedges
  3. Section 1530, Comprehensive Income and
  4. Section 3861, Financial Instruments - Disclosure and Presentation

New proposed disclosures requirements would be effective for fiscal years commencing on or after October 1, 2007 and encompass three new sections:

  1. Section 3862, Financial Instruments - Disclosures
  2. Section 3863, Financial Instruments - Presentation and
  3. Section 1535, Capital Disclosures

This new framework has broad scope that will affect virtually all entities.  The new classification and measurement requirements apply to all financial instruments, which may result in possible changes to accounting and management systems.  It increases the use of fair value measurement; therefore, significant analysis have to be performed, and several decisions need to be made, and detailed documentation should be prepared prior to implementation of these standards.

The financial instruments framework is built on four cornerstones.

Cornerstones Implication for Framework
All financial instruments, including both financial and non-financial derivatives, are assets and liabilities
  • All derivatives recorded on balance sheet
  • Separate derivative features that are embedded in non-derivative contracts and recognize accordingly
Fair value is the most relevant measure for financial instruments and the only relevant measure for derivative financial instruments
  • All derivatives measured at fair value, initially and on an ongoing basis
  • Choice available to measure any non-derivative financial instrument at fair value (conditions apply)
  • Only qualifying financial assets may be measured at cost
  • Financial liabilities may be recorded at cost
Only items that are assets or liabilities should be reported as such in the financial statements
  • Unrealized gains and losses will be recognized in current earnings or other comprehensive income
  • Gains and losses previously deferred under Hedge accounting should not be reported as assets and liabilities
  • New "Statement of Comprehensive Income" used to show unrealized gains and losses that are not included in income
Hedge accounting should be applied only for specifically qualifying items
  • Specific documentation, designation and effectiveness criteriamust be met to be eligible for Hedge accounting

While many financial instruments are clearly financial assets or financial liabilities, certain derivative financial instruments have the potential to be either assets or liabilities depending on market conditions.

  Financial Asset Financial Liability
Primary Financial Instruments
  • Cash
  • Accounts receivable
  • Equity-portfolio investment
  • Loan receivable
  • Accounts payable
  • Bank indebtedness
  • Bonds and debentures
Derivative Financial Instruments
  • Purchased option
  • Written option
  • Forward contract
  • Interest rate swap
  • Cross currency swap
  • Combinations of written and purchased options

An enterprise must concurrently adopt Sections 1530, 3855, 3865 and Section 3861..

Other Related Deloitte Financial Instruments Series are available in the top right column.

Do you have a clear understanding of what the impact of the new financial instruments standards will be on your company’s financial statements and disclosures?

  • Yes

  • No

Deloitte Publications

New IFRS rules for fair value measurement

How will the new fair value measurement rules affect your financial statements and reporting processes?

Publication date: 8/2011 | File size: 108 KB

Dig Deeper

Learning Materials

Resources

Authoritative Guidance

Thought Leadership