THE GOVERNMENT of Jamaica issues debt instruments such as treasury bills and bonds. Bonds are issued locally or internationally (the latter referred to as 'Global bonds').
Prior to the revision of International Accounting Standard (IAS) 39, which became effective for periods beginning on or after January 1, 2005, most of these instruments were classified as 'originated loans and receivables' where they were purchased at the time of primary issue. Where they were purchased on the secondary market, they were classified as either 'held-to-maturity' or 'available-for-sale', as these were not considered to be direct lending. Based on the requirements of the revised IAS 39, debt instruments (whether originated or purchased) can be classified as 'loans and receivables', except those that are quoted in an active market.
FINANCIAL INSTRUMENT
IAS 39.AG 71 states that : "A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. Fair value is defined in terms of a price agreed by a willing buyer and a willing seller in an arm's length transaction."
IAS 39.AG 73 states: "If a rate (rather than a price) is quoted in an active market, the entity uses that market-quoted rate as an input into a valuation technique to determine fair value. "
IAS 39.AG 74 states: "If the market for a financial instrument is not active, an entity establishes fair value by using a valuation technique. Valuation techniques include using recent arm's length market transactions between knowledgeable, willing parties, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models."
In our local situation, these instruments are not traded on an exchange and there is no central agency or pricing service that publishes quoted prices for some of these instruments. Also, there is no over-the-counter market. There is some secondary market trading, but exchange prices are not known to other than the parties to the transactions and the number of transactions is not known. On request, quotes can be obtained from market participants whose quotes vary and are specific to each participant.
ACTIVELY TRADED
A key element to consider in determining the appropriate treatment is whether the financial instrument is actively traded in the specified market, so that any willing buyer or willing seller would know at any time the price at which it could enter the transaction at that date (i.e. non-significant liquidity risk). I believe that it is not necessary for an active market to have a large number of dealers or brokers who provide prices based on recent market transactions. As long as an entity is able to dispose of, or acquire, a reasonable quantity of a particular financial instrument at a price that is not significantly different from the quotes recently received, it may be concluded that such financial instrument is traded in an active market. In some cases, information about pricing and volumes traded may be available from only one independent source, e.g. a broker.
Each financial instrument should be assessed against the criteria in IAS 39 to determine if it is quoted in an active market.
Raphael E. Gordon is the managing partner of KPMG in Jamaica, chairman of KPMG CARICOM and a member of the Public Accountancy Board. The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG.
