In December the ASB issued guidance (available on the ASB's website) on the EU-amended version of IAS 39 adopted by the European Commission (see page 6). The guidance is relevant only to entities in the UK and the Republic of Ireland preparing their financial statements in accordance with EU-adopted IFRSs.

The guidance addresses the parts of IAS 39 that have been affected by the EU's carve outs, taking into account the Commission's explanation that, as a result, certain items in the Companies Act 1985 or equivalent national legislation continue to apply to the relevant entities. The guidance covers four areas.

Hedge accounting

The amended IAS 39 has less onerous restrictions on the use of hedge accounting than the unamended standard. However, if an entity wishes to comply with both the amended standard and the unamended standard, it can do so - by applying the hedge accounting requirements of the unamended standard. The ASB continues to recommend that companies do this.

Fair Valuing of Financial Assets

The Commission's carve outs have no effect on an entity's ability to measure financial assets at fair value through profit or loss.

Fair Valuing of Financial Liabilities

The Commission's carve outs do not affect financial liabilities that are required to be measured at fair value through profit or loss.

The carve outs do, however, affect which financial liabilities are permitted to be fair valued through profit or loss. The unamended standard's permission to measure any financial liability through profit and loss is deleted in the carve out. As a result only those financial liabilities required to be measured at fair value through profit and loss can be so valued under the standard.

This stark situation, however, is complicated by the Commission stating that one effect of the carve out is that certain accounting requirements in national legislation come into play. One major practical effect of this is that an entity that prepared its 2004 accounts in accordance with such national legislation and stated some financial liabilities at fair value through profit or loss can continue, if it wishes, to apply that accounting treatment in following years.

Transitional Arrangements

The Commission has stated that entities applying the carved out version of IAS 39 can regard themselves as first time adopters of IFRSs and thus take advantage of the relief provisions of IFRS 1 'First-time Adoption of International Financial Reporting Standards'. The ASB is unsure of the status of this Commission statement and whether it is in fact correct. It urges entities to avoid this uncertainty by complying from the outset with both the amended and unamended versions of the standard.