The Accounting Standards Council (ASC) approved the adoption of the following amendments to International Accounting Standard (IAS) 39, Financial Instruments: Recognition and Measurement, as part of Philippine Accounting Standard (PAS) 39, Financial Instruments: Recognition and Measurement. The ASC issued Invitations to Comment on these proposed amendments in August 2004 and May 2004.

Amendments to IAS 39 – Cash Flow Hedge Accounting of Forecast Intragroup Transactions

These amendments were developed by the International Accounting Standards Board (IASB) after concerns were raised that it was common risk management practice for entities to designate the foreign currency risk of a forecast intragroup transaction as the hedged item and that IAS 39 (as revised in 2003) did not permit hedge accounting for this. Furthermore, IAS 39 (as revised in 2003) created a difference from US accounting requirements on this point.

Following publication of an exposure draft, the IASB has decided to allow the foreign currency risk of a highly probable forecast intragroup transaction to qualify as a hedged item in consolidated financial statements. This is consistent with the provisions of IAS 21, The Effects of Changes in Foreign Exchange Rates. The amendments allow entities to use hedge accounting for foreign
currency risk in a way that matches current risk management practice.

The amendments are effective for annual periods beginning on or after January 1, 2006, although earlier application encouraged.

Amendments to IAS 39 – The Fair Value Option

These amendments were developed by the IASB after commentators, particularly prudential supervisors of banks, securities companies and insurers, raised concerns that the fair value option contained in the 2003 revisions of IAS 39 might be used inappropriately. The option allowed entities to designate irrevocably on initial recognition any financial instruments as ones to be measured at fair value with gains and losses recognized in profit or loss. The purpose of the option was to simplify the application of the standard.

Following publication of an exposure draft, the IASB has decided to revise the fair value option by limiting its use to those financial instruments that meet certain conditions. The conditions that are required to be met under the amendments are: where such designation eliminates or significantly reduces an accounting mismatch, when a group of financial assets, financial liabilities or both are managed and their performance is evaluated on a fair value basis in accordance with a documented risk management or investment strategy, and when an instrument contains an embedded derivative that meets particular conditions.

The amendments contain detailed transition rules and are effective annual periods beginning on or after January 1, 2006, although earlier application is encouraged.

The amendments have been forwarded to the Board of Accountancy and Professional Regulation Commission for approval.