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FRS 26 (IAS 39) Financial Instruments: Recognition and Measurement

FRS 26 implements the recognition, measurement and hedge accounting requirements of the international standard IAS 39.

FRS 26 applies to accounting periods commencing on or after 1 January 2005 for all listed entities following UK standards, and to those commencing on or after 1 January 2006 for unlisted entities whose financial statements are prepared in accordance with the fair value accounting rules set out in the Companies Act. The Board intends to extend this scope to include other entities.

FRS 26 requires:
  • all derivatives and all financial assets and financial liabilities that are held for trading to be recognised and measured at fair value. All changes in those fair values to be recognised immediately in the profit and loss account (P&L);
  • all loans and receivables held as assets and all financial assets that are being held to maturity to be initially recognised at fair value but subsequently measured at cost-based amounts;
  • all other financial assets ('available-for-sale financial assets') to be recognised and measured at fair value with gains and losses recognised immediately in the statement of total recognised gains and losses (STRGL); and
  • all other financial liabilities to be recognised at fair value but subsequently measured at cost-based amount
There are two exceptions to this.
  • The entity can choose to measure at fair value any financial asset or financial liability that would otherwise be measured at a cost-based amount, as long as this choice is made on initial recognition and provides more relevant information either by eliminating a measurement inconsistency or where a group of financial items are managed and evaluated on a fair value basis. If this 'fair value option' is chosen, all changes in fair value should be recognised immediately in the P&L.
  • The requirements may be modified by the use of hedge accounting techniques.

Hedge accounting is a special type of accounting that generally involves deferring the recognition in the P&L of gains and losses that would otherwise be recognised there immediately. FRS 26 permits the use of hedge accounting in accounting for financial instruments, but only if:
  • the hedging relationship involved was designated at the outset as a hedge and the hedge meets certain minimum effectiveness criteria and certain other detailed requirements; and
  • the hedge accounting techniques prescribed by the standard are adopted
FRS 26 implements the measurement and hedging requirements of IAS 39 in their full. However, entities applying FRS 26 will still be subject to the provisions of the Companies Act, which restricts the use of fair value measurement for liabilities. These entities will not, as a result, be able to take full advantage of the fair value option in FRS 26. FRS 26 includes guidance on the extent to which liabilities may be accounted for at fair value.

FRS 26 has the effect of withdrawing the material in FRS 4 'Capital Instruments' on the measurement of debt and gains and losses on the repurchase of debt. The remainder of FRS 4 is withdrawn by FRS 25 'Financial Instruments: Disclosure and Presentation'. FRS 26 also supersedes UITF Abstract 11 'Capital instruments: issuer call options'.

The ASB amended FRS 26 on 25 April 2006. The amendment had the impact of implementing the IAS 39 material dealing with recognition and derecognition into FRS 26. The amendment is effective for accounting periods commencing on or after 1 January 2007, with earlier adoption permitted. Transitional provisions are also set out for initial adoption of the amendments.

In October 2005 the ASB issued an amendment to FRS 26 which has the effect of implementing in full into FRS 26 the following amendments to IAS 39, by the IASB:
  1. transition and initial recognition of financial assets and financial liabilities;
  2. cashflow hedge accounting of forecast intragroup transactions;
  3. the fair value option; and
  4. financial guarantee contracts and credit insurance. Further details are set out in: Financial Instruments - long term project.
Further details are set out in: Financial Instruments - long term project.

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