FRED 30 Third Supplement

The ASB is strongly of the view that standards on the measurement and disclosure of derivatives and other
financial instruments are important. The ASB has previously issued proposals in FRED 30 'Financial
Instruments: Disclosure and Presentation & Recognition and Measurement' and two supplements which, when taken together, mean that for accounting periods beginning on or after 1 January 2005:

• all listed entities and others choosing to adopt fair value accounting should apply the measurement and hedge accounting requirements of IAS 39 'Financial Instruments: Recognition and Measurement'; and
• all except FRSSE users should apply the requirements of IAS 32 'Financial Instruments: Presentation and Disclosure'.
• The ASB has yet to issue either standard in final form. The IASB, in the meantime, has issued four exposure drafts ('EDs') of amendments to IAS 39, which cover:
• the 'Fair Value Option': IAS 39 currently permits an entity to measure any financial instrument at fair value and take changes in these fair values immediately to the profit and loss account. This ED proposes to impose some restrictions on the use of this option, following concerns that it might be used inappropriately;
• 'Financial Guarantees and Credit Insurance': it has not proved straightforward to differentiate between items accounted for under IAS 32 and IAS 39 and those accounted for under IFRS 4 'Insurance Contracts'. This ED proposes clarifying the treatment of financial guarantee contracts;
• 'Transition and initial recognition of financial assets and financial liabilities': this ED addresses two related issues on the determination of fair value measures on initial recognition and subsequently; and
• 'Cash flow hedge accounting of forecast intra-group transactions': a principle in IAS 39 is that entities can obtain hedge accounting only for transactions that involve a party external to the entity. This ED seeks to clarify the treatment in consolidated financial statements of a foreign currency cash flow
  hedge of a highly probable forecast external transaction denominated in the functional currency of the group entity (eg a subsidiary) entering into the transaction. It proposes, inter alia, that cash flow hedge accounting could be applied to an external transaction only if the transaction is in a currency other than the group presentation currency.

On 8 July, the ASB issued these four exposure drafts for comment as FRED 30 Third Supplement 'Further Amendments'. The Third Supplement also sets out the implications of IFRS 4 for FRED 30 and contains proposals for how some of the material in IFRS 4 should be incorporated into UK standards.

The ASB is seeking comments on these proposals by 8 October. Although the IASB asked for comments on the fair value option by 21 July, the ASB is happy to receive comments on the UK implementation of these proposals by 8 October.

Financial Instruments: Disclosures

The IASB is proposing, in ED7, to amend the financial instrument disclosure requirements set out in IAS 32. The ASB has issued proposals in FRED 33 'Financial Instruments: Disclosures' that these amended requirements should be implemented in the UK.

The proposed new disclosures incorporate many of those set out in FRED 30 as well as:

• additional qualitative and quantitative disclosures on the risks arising from financial instruments; and
• new disclosures about entities' management of their capital resources.

As with the UK standard based on IAS 32 the intention is that these revised disclosure requirements would apply to all entities, except those using the FRSSE.

In line with the IASB, the ASB is proposing to implement the revised disclosure requirements in FRED 33 for accounting periods beginning on or after 1 January 2007. However, earlier adoption of the revised requirements will be permitted; this will enable UK entities to adopt them in 2005 and thus avoid having to change disclosures twice. Both Boards are seeking comments by 22 October.

Further IASB work on financial instruments

The IASB is also looking to develop longer term proposals for financial instruments and is setting up an international financial instruments working group to provide specialist advice. This will provide the IASB with the opportunity to take a fresh look at IAS 39 with a view to examining the fundamentals of the standard. The ASB will monitor the IASB project and will seek to provide input to it on a proactive basis.