Financial Instruments Measure Gains and Losses

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Recommended: Strengths and weaknesses of fair value accounting

According to IAS 32 Financial Instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

The global financial crisis has brought significant focus on the accounting model for financial instruments, both in the United States and around the world. The significant rise in the volumes of asset securitizations and derivative financial instrument transactions has served to bring attention to particular features of accounting standards. The harshest criticisms often relate to the substantial use of fair value accounting for many financial instruments.

The introduction of International Financial Reporting Standards, users of financial statements are facing a wide range of information on financial instruments yet it is becoming increasingly difficult to understand what is most important.

This research focuses on the main causes of complexity in reporting Financial Instruments, how current measurement causes complexity, discusses ways it might be reduced in the intermediate term and suggests how using a single measurement attribute, such as fair value, could reduce complexity.

This research elaborates on the long-term solution of measuring all financial instruments at fair value. An intermediate approach is required to reduce the current complexity of IAS 39.

Many respondents commented on complexity and noted that reducing complexity in the accounting for financial instruments was one of the IASB’s original objectives in replacing IAS 39.

FASB is seeking comments on reducing complexity in reporting financial instruments to simplify measurement requirements for financial instruments while providing clearer and more complete information to us...

... middle of paper ...

...ents and report unrealized gains and losses may result in:

 two identical instruments being measured differently by the same

entity, because

• management’s intentions for realizing the value of an instrument may determine the way it is measured.

• management has the option of measuring many financial instruments at fair value.

• the way in which an instrument was acquired may affect its measurement (for example, interests received by the transferor in securitization transactions).

• the percentage of total ownership interests that an investor holds in an investee affects how the investment is accounted for.

 two identical instruments being measured differently by entities in different industries. Under US GAAP, specialized measurement practices apply to broker-dealers, investment companies, pension plans, mortgage bankers, insurance companies and others.

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