Interpretation and Application of IPSAS

15 Financial Instruments

Public sector entities can enter into complex financial transactions to reduce their exposure to risks. Recent financial crisis has led many governments to intervene in various ways, including by taking an investment in financial institutions that needed a capital injection or by purchasing “toxic” financial assets (Schumesh et al., 2012).

This means that public sector entities invest, directly or indirectly, significant amounts in financial assets. The nature of these complex financial transactions has led to entities adopting different accounting practices, with increased use of fair values and extensive application of hedge accounting techniques (i.e., offsetting).

As financial instruments become more complex and commonplace, clear and full disclosure becomes increasingly important.

Three standards have been published by the IPSASB to cover the accounting and financial reporting of financial instruments:

• IPSAS 28 Financial Instruments Presentation;
• IPSAS 29 Financial Instruments: Recognition and Measurement;
• IPSAS 30 Financial Instruments: Disclosures.

The underlying principle of these standards is to limit off balance sheet items, and therefore to record all financial instruments (including derivatives) on the balance sheet in order to show risks to stakeholders and readers of the financial statements.

What is a Financial Instrument?

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability ...