Rights and obligations approach to the recognition of financial instruments. IAS 39 applies to contracts equally proportionately unperformed (where both parties to the contract have equal unperformed rights and obligations) unless they are specifically scoped out.
In recognition of financial instruments, traditionally, contracts equally proportionately unperformed have not been accounted for. Common examples of such contracts are normal purchase and sale agreements such as the purchase of a machine.
A purchaser does not usually account for the right to receive a machine and the corresponding obligation to pay for it at the date of making a purchase order. Similarly, the supplier does not usually account for the right to receive payment for the machine and a corresponding obligation to deliver it, at the date of receiving the purchase order. Both parties commence recognition of financial instruments at the date of delivery, which is the date at which the equally unperformed rights and obligations are performed.
Recognition of financial instruments :
IAS 39 requires accounting on a rights and obligations basis unless the contracts giving rise to those rights and obligations are scoped out of the standard. Hence the scoping out of normal purchases and sales of non-financial items. However, as soon as the contract becomes something other than normal, with terms that embody financial assets and liabilities, a rights and obligations approach is required.
IAS 39, paragraph 14, states that “an entity shall recognize a financial asset or a financial liability on its statement of financial position when, and only when, the entity becomes a party to the contractual provisions of the instrument”.
AG 35 provides other examples of applying the recognition criteria, as follows:
- “Unconditional receivables and parables are recognized as assets or liabilities when the entity becomes a party to the contract and, as a consequence, has a legal right to receive or a legal obligation to pay cash”. Normal trade accounts receivable and trade accounts payable would fall into this category.
- “Assets to be acquired and liabilities to be incurred under a firm commitment to purchase or sell goods or services are generally not recognized until at least one of the parties has performed under the agreement”. However, this is subject to the rules set out in the scope paragraph of IAS 39. Thus, if a firm commitment to buy or sell non-financial items is within the scope of IAS 39 its net fair value is recognized as an asset or liability on the commitment date.
- “A forward contract within the scope of the standard is also recognized as an asset or liability on the commitment date”.
Read more on Recognition of financial instruments in IFRS and Rights and obligations to the recognition of financial instruments