Working Paper 70 - International Accounting Standards - IAS 39 Accounting for Financial Instruments: Implementation Issues and Bank’s Decision - Making Dilemma

The IAS 39 brings visibility in the use of derivative instruments for investors andother financial statements users. However, its implementation requires firms toincur additional investment in technical capacity building including acquisition ofasset and liability management systems, systems of evaluation adapted to the typesof financial instruments in use and proper training of staff to acquire the necessaryskills to handle these systems. It also requires more informative disclosure in thefinancial statements. Furthermore the implementation of IAS 39 requires alertingtop management to decide upon the financial information most relevant for decisionmaking.Despite added constraints and costs to firms, the implementation of IAS39 brings in the financial statements (balance sheet and income statement) thedisclosure of market and credit risks resulting from the use of derivative instruments,which previously were either not disclosed or were inappropriately disclosed asoff balance sheet items. Therefore the implementation of IAS 39 not only protectsfirms from unwanted surprises such as the Barings Bank case, but also gives abetter protection to investors by periodically disclosing these derivatives positionto them. This standard is mandatory starting from January 2001 for all firms usingInternational Accounting Standards. The corresponding standard in the USA forthose firms using GAAP is FASB 133.