The IASB has set itself the ambitious task of revising IAS 39, the troublesome financial instruments standard, by the end of the year.  Well when I say ‘set itself’ we should recognise that it came under considerable pressure from G20 leaders, the EU, the US Congress and others to accept this onerous task.  So far the project seems on track with the latest exposure draft on classification and measurement issued in July.

The ED is proposing that financial instruments should be classified into two primary measurement categories: fair value and amortised cost. The amortised cost category would be available for financial instruments if two conditions are met:

• - they contain only basic loan features; and
• - they are managed on a contractual yield basis.

All other financial instruments would be measured at fair value with gains and losses recognised in profit or loss.  The changes should reduce the complexity that results from many categories and related impairment methods in the current IAS 39.

Accounting for embedded derivatives is another source of complexity in corporate reporting and one which the ED plans to eliminate.  The proposals would simplify accounting requirements by proposing a single classification approach for the entire financial instrument.

The ED retains the fair value option that permits an entity to elect at initial recognition to measure any financial asset or financial liability within the scope of the ED at fair value through profit and loss if such a designation eliminates or significantly reduces an accounting mismatch.

Although the IASB propose to have the new standard available for 2009 year-ends it is unlikely to make the standard mandatory before January 2012.

There is a clear need for IAS 39 to be simplified, and this seems to be a welcome step in the right direction. But as usual - no gain without pain.  The changes are fundamental and will have significant implications for companies with considerable financial instrument portfolios. But this is exactly what the IASB is being called on to deliver.

The IASB now needs to be told whether the benefit of simplification outweighs the cost of change.  The accelerated timetable results in a short comment period - comments are due by 14 September – CIMA will be responding to this ED and I will return with some preliminary views once I have had the chance to read the full paper.  In the mean-time, I suggest that those of you who have significant portfolios of financial instruments take a look at the proposals (available from the IASB website).

I would be interested in your thoughts.