IAS 39 establishes the principles for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. IAS 39 includes provisions about the classification of financial instruments, their ongoing measurement (including when impairment is required), when financial instruments should be recognised and derecognised and hedge accounting requirements. The original version of IAS 39 was published by the Board’s predecessor body, the International Accounting Standards Committee (IASC), and became effective for financial statements covering financial years beginning on or after 1 January 2001. As part of its initial agenda of technical projects, the Board undertook a project to improve a number of standards, including IAS 39.

In March 2006, the IASB and the FASB further clarified their intentions to work together to improve and converge financial reporting standards by issuing a Memorandum of Understanding (MoU), A Roadmap for Convergence between IFRSs and US GAAP - 2006 - 2008. As part of the MoU, the Boards worked jointly on a research project to reduce the complexity of the accounting for financial instruments. This joint effort resulted in the IASB’s issuing of the March 2008 discussion paper, Reducing Complexity in Reporting Financial Instruments, which the FASB also published for comment by its constituents. Focusing on the measurement of financial instruments and hedge accounting, the discussion paper identified several possible approaches for improving and simplifying the accounting for financial instruments.

In a separate project, the FASB issued the June 2008 exposure draft, Accounting for Hedging Activities, an amendment of FASB Statement No. 133. The exposure draft proposed amendments intended to simplify hedge accounting and improve financial reporting. At the October 2008 joint FASB/IASB meeting, the IASB and FASB staffs presented summaries of the comments received on both the discussion paper on reducing complexity and on the exposure draft on hedging.

A majority of respondents to the discussion paper supported a significant change in the current requirements for reporting financial instruments. In addition, many of the user respondents expressed support for the boards’ working together on a project to simplify the accounting for hedging activities, provided that the simplification would reduce the complexity of financial statement interpretation. A majority of respondents to the exposure draft were concerned that many of the proposed amendments would create further divergence between hedge accounting under US GAAP and under IFRS. Many of these respondents urged the boards to work together on a joint project to improve hedge accounting, noting that the FASB’s hedge accounting project could be incorporated into the boards’ research projects on reducing complexity.