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HMRC internal manual

Corporate Finance Manual

Accounting for corporate finance: International Financial Reporting Standards: IAS 39: overview

Accounting approach

Prior to 2005, UK GAAP generally applied the historic cost model to accounting for financial instruments. The key divergence to this was the financial sector, where trading assets and liabilities were marked-to-market, with gains and losses taken through the profit and loss account.

Note that references and guidance in relation to IAS 39 will also apply to those that apply FRS 26 under Old UK GAAP, to those that apply IAS 39 through FRS 101 and to those that apply IAS 39 through the accounting policy choice in FRS 102.

IAS 39

IAS 39 applies fair value accounting more widely to financial instruments, but adopts a ‘mixed-measurement’ or hybrid model of accounting.

IAS 39 requires all financial assets and financial liabilities, including derivatives, to be recognised on the balance sheet. They are initially measured at fair value. This may differ from Old UK GAAP (excluding FRS 26), where initial recognition was normally at cost, which is not always the same as fair value.

Subsequent to initial recognition, however, all financial assets are re-measured in various ways according to the category they fall in. Details of these categories are in CFM21520. In many cases the changes resulting from re-measurement are reflected in the income statement, rather than equity.

Income statement

In this context ‘income statement’ is equivalent to ‘Profit and Loss account’. It refers to the primary statement giving information about the company’s performance.


Equity is the residual interest in the assets of the entity after deducting all liabilities. It is equivalent to ‘shareholders’ funds’, though under IFRS it also includes ‘minority interest’ (renamed as ‘non-controlling interest’ by amendments to IAS 27 in 2008). IAS 1, the standard dealing with the presentation of financial statements, requires entities to present a statement of changes in equity (SOCIE) between two balance sheet dates. (For periods beginning prior to 1 January 2009, this may alternatively be presented as a Statement of Recognised Income and Expense (SORIE)). Where IAS 39 talks about amounts being taken to equity, they will be recognised in the SOCIE or SORIE. It is equivalent to their being reflected in the STRGL (Statement of Total Recognised Gains and Losses), or taken to reserves.