Accounting Issues

Intermediate Financial Accounting II

Contemporary Accounting Issues

October 18th, 2005

1) The primary change proposed in CICA Section 3855-Financial Instruments-Recognition and Measurement is to introduce new requirements for the recognition and measurement of financial instruments and comprehensive income that are harmonized with standards issued by both the US Financial Accounting Standards Board and the International Accounting Standards Board.

As the market for financial instruments has expanded in terms of growth as well as sophistication, the traditional recognition, measurement and disclosure principles have since proven inadequate to handle the financial instruments readily available to most firms.

Section 3855 dictates when a financial instrument is to be recognized on the Balance Sheet as well as how financial instrument gains and losses are to be reported and presented on a firm's financial statements.

2) The new standards must be applied no later then the first day of a firm's fiscal year beginning on or after October 1st, 2005. Companies can choose to apply the standards earlier, but they must choose to do so as of the first day of their fiscal year. Although companies will not be required to restate comparative figures from previous years, the CICA suggests, "significant implementation planning may be necessary if you use financial instruments extensively."

3) Examples of the most common financial instruments that are excluded from the new standards set forth in CICA Section 3855 include:

- Interest in subsidiaries, joint ventures and significant influence investees

- Employee benefits

- Insurance contracts

- Leases

- Stock-based payments

4) The four major classifications under Section 3855 are as follows. It should be noted that the characteristics of the instrument and a firm's use of them determine whether you have a choice of category and that classification in turn determines how each financial instrument is measured and where gains and losses are recognized.

Financial Assets and Liabilities Held for TradingÐoCompanies may choose to designate any financial instrument into this category when it is first recognized. Most derivatives are classified in this section along with any other financial instrument that firms actively buy and sell in order to make profits.

Held to Maturity InvestmentsÐoRepresents fixed maturity financial assets (debt instruments only) that the company has the "positive intention and ability to hold to maturity." It should be noted that it might become necessary to reclassify these financial assets to the "Available for Sale" category if there are significant sales prior to maturity.

Loans and ReceivablesÐoThis category includes all loans and receivables except debt securities or assets traded in an active market.

Available-for-Sale Financial AssetsÐoincludes all financial assets that are not classified as Held for Trading, Held to Maturity or Loans and Receivables. This category may include the debt instruments that firm's did not wish to classify as