Finance

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Hong Kong Financial Reporting Standards:

HKAS 39 “Financial Instruments: Recognition and Measurement”

(Relevant to PBE Paper I – Financial Reporting) Lindy W W Yau, ACA, FCCA, FAIA, FCPA and Morris Y M Kwok, MPA, ACMA, CPA

HKAS 39 provides the principles for recognition and measurement for financial instruments. In other words, it addresses the classification and accounting for financial assets and financial liabilities. In addition, HKAS 39 also provides some criteria for impairment and derecognition of financial instruments. Definition A financial instrument is defined in HKAS 32 as any

contract that gives rise to a financial asset in one entity and a financial liability or equity instrument in another entity. 1. Financial assets include any assets that give rise to a contractual right to receive cash or other financial assets, e.g. cash, trade receivables, investment in shares, loans receivable. 2. Financial liabilities include any contractual liability to pay cash or other financial assets, e.g. bank overdrafts, trade payables, loans payable.

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Classification of financial instruments According to HKAS 39, financial instruments are classified into the following categories:

Financial Instruments

Financial Assets

Financial Liabilities

Financial liabilities at fair value through profit or loss

Other financial liabilities

Financial assets at fair value through profit or loss

Held-to-maturity investments

Loan and receivables

Available-for-sale financial assets

The following table summarizes HKAS 39’s classification requirements and provides some examples of financial instruments in different categories:

Category Financial assets at fair value through profit or loss Held-to-maturity investments Loans and receivables Available-for-sale financial assets Financial liabilities at fair value through profit or loss Other financial liabilities Characteristics Financial assets that are either held for trading (i.e. to sell in...