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An Executive Guide to IFRS: Content, Costs and Benefits to Business by Peter Walton

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Financial instruments

This highly controversial area is mostly irrelevant for the majority of commercial and industrial groups, while it is primordial for banks, insurance companies and other financial institutions. For the non-financial sector, the issue is that if they enter into any derivatives contracts (e.g. forward contracts on currencies or commodities), or they want to apply hedge accounting, or both, this standard concerns them. Receivables and payables generated by companies are not affected. However, it is also an area that is changing rapidly, as a result of pressures brought about by the financial crisis. Just to make life more complicated, it is an area where, famously, the IFRS as endorsed for use in the European Union do not correspond in all details with IFRS as issued by the IASB1

The need for a standard on financial instruments became apparent in the late 1980s when companies started to make a more widespread use of derivative contracts. Some of these turned into major losses that occurred without shareholders having any idea that the company was exposed to risk. The point with such contracts is that their historical cost is either nil or negligible and gives no inkling of the scale of risk. The solution found was to value them at market value at reporting date (in the same way as foreign currency balances). On the good side, this drew attention to their existence; on the bad side, companies complained that this was importing market volatility into their financial ...

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