[et_pb_section bb_built=”1″ admin_label=”Header – All Pages” transparent_background=”off” background_color=”#1e73be” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” custom_padding=”0px||0px|” next_background_color=”#000000″ custom_padding_tablet=”50px|0|50px|0″ custom_padding_last_edited=”on|desktop” global_module=”1221″][et_pb_row admin_label=”row” global_parent=”1221″ make_fullwidth=”off” use_custom_width=”off” width_unit=”on” use_custom_gutter=”off” custom_padding=”||5px|” allow_player_pause=”off” parallax=”off” parallax_method=”on” make_equal=”off” parallax_1=”off” parallax_method_1=”off” background_position=”top_left” background_repeat=”repeat” background_size=”initial”][et_pb_column type=”4_4″][et_pb_post_title global_parent=”1221″ title=”on” meta=”off” author=”on” date=”on” categories=”on” comments=”on” featured_image=”off” featured_placement=”below” parallax_effect=”on” parallax_method=”on” text_orientation=”left” text_color=”light” text_background=”off” text_bg_color=”rgba(255,255,255,0.9)” module_bg_color=”rgba(255,255,255,0)” use_border_color=”off” border_color=”#ffffff” border_style=”solid” custom_padding=”10px|||” parallax=”on” background_color=”rgba(255,255,255,0)” /][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section bb_built=”1″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” custom_padding=”30px||0px|” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” background_color=”#1e73be” prev_background_color=”#000000″ next_background_color=”#ffffff” custom_padding_tablet=”0px||0px|” global_module=”1228″][et_pb_row global_parent=”1228″ make_fullwidth=”off” use_custom_width=”off” width_unit=”on” use_custom_gutter=”off” custom_padding=”30px||0px|” allow_player_pause=”off” parallax=”off” parallax_method=”off” make_equal=”off” parallax_1=”off” parallax_method_1=”off” column_padding_mobile=”on” background_position=”top_left” background_repeat=”repeat” background_size=”initial”][et_pb_column type=”4_4″][et_pb_text global_parent=”1228″ background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid” background_position=”top_left” background_repeat=”repeat” background_size=”initial”]
[breadcrumb]
[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section bb_built=”1″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″ custom_padding_tablet=”0px||0px|” custom_padding_last_edited=”on|desktop” prev_background_color=”#1e73be” next_background_color=”#000000″][et_pb_row][et_pb_column type=”4_4″][et_pb_toggle admin_label=”Index” _builder_version=”3.0.106″ open=”off” title=”Index”]
Section 11: Basic Financial Instruments.
11.2 Accounting policy choice.
11.2.1 Extract from FRS 102 Section 11.2-11.2A.
11.2.2 OmniPro comment – Accounting Policy Choice.
11.3 Scope of the Section 11 and Section 12.
11.3.1 Extract from FRS 102 Section 11.3, 11.5, 11.7 and Glossary to FRS 102.
11.3.2 OmniPro comment – Scope of Section 11.
11.3.2.1 Financial assets and liabilities not within the remit of Section 11 and 12.
11.4 Classification of financial instruments.
11.4.1 Extract from FRS 102 Section 11.6 and 11.8.
11.4.2 OmniPro comment – classification of financial instruments and scope (within Section 11 or 12)
11.4.2.2 – Investment in Shares.
11.5 Conditions for debt instruments to meet the definition of a basic financial instrument
11.5.1 Extract from FRS 102 Section 11.9.
11.5.2 OmniPro comment – basic financial instruments.
11.6 Initial and subsequent measurement of debt instruments.
11.6.1 Extract from FRS 102 Section 11.12-11.20.
11.6.1.2 Subsequent measurement
11.6.1.3 Amortised cost and effective interest method.
11.6.2.2 Short-term receivables/payable within one year
11.6.2.3 Transaction costs – definition/treatment
11.6.2.4 Effective interest rate calculation and amortised cost
11.6.2.4.1 Effective interest rate
11.6.2.4.3 Put or call options when calculating effective interest rate
11.6.2.4.4 Diagram 1 Rules for Accounting for basic financial instruments
11.6.2.4.5 – Financing Arrangement
11.6.2.4.6 Steps in determining the effective interest rate
11.6.2.4.7 Changes in cash flow estimates (amortised cost model)
11.6.2.4.8 Non market loans- inter-company loan / director’s loans
11.6.2.4.8.1 Determining the market rate of interest
11.6.2.4.8.2: Analysis of debt and credits on initial recognition of loans – financing arrangements.
11.6.2.4.9 Sales and purchases made under unusual credit terms – Debtors/creditors
11.6.2.4.11 Loans repayable on demand
11.6.2.4.12 Loan repayable on demand but with notice of 1 year and 1 day
11.6.2.4.15 Variable interest rate over the life of the loan
11.6.2.4.16 Issues surrounding directors or intra-group loans
11.6.2.4.16.1 Factors that indicate a related party loan is not at market rates.
11.7.1 Extract from FRS 102 Section 11.27-11.32.
11.7.2.1.2 Fair value hierarchy
11.8 Impairments of financial assets held at cost or amortised cost
11.8.1 Extract from FRS 102 Section 11.21-11.26.
11.8.2.1 Indicators of Impairment
11.8.2.2 Individual and group impairments.
11.8.2.3 Impairment debt instruments.
11.8.2.4 Reversal of Impairments.
11.8.2.5 Impairment of financial assets carried at cost
11.9 Derecognition of a Financial Asset
11.9.1 Extract from FRS 102 Section 11.33-11.35.
11.9.2 OmniPro comment – Decrecognition of Financial Assets.
11.10 Derecognition of financial liabilities.
11.10.1 Extract from FRS 102 Section 11.36-11.38.
11.6.2.4.5 Derecognition rules – overview
11.10.2.2 Derecognition of Financial Liability.
11.11.1 Extract from FRS 102 Section 11.38A.
11.11.2 OmniPro comment – Presentation – set off
11.12.1 Extract from FRS 102 Section 11.39-11.48A.
11.12.2.1 Disclosure requirements.
11.12.2.2 Sample Disclosure requirements.
11.12.2.2.1 Extract from accounting policy notes
11.12.2.2.2 Extract of notes to the financial statements – Financial instruments note disclosures
11.12.2.2.3 Extract of notes to the financial statements – interest disclosures.
11.12.2.2.3.1 Note: Interest receivable and similar income.
11.12.2.2.3.2 Note: Interest payable and similar expenses.
11.12.2.2.4 – Debtors Disclosures
11.12.2.2.5 – Creditors disclosures
11.12.2.2.7 Statement of Comprehensive Income
11.12.2.2.8 – Statement of Change in Equity
[/et_pb_toggle][/et_pb_column][/et_pb_row][et_pb_row][et_pb_column type=”3_4″][et_pb_text admin_label=”Main Body Text” text_orientation=”justified” use_border_color=”off” border_color_all=”off” module_alignment=”left” _builder_version=”3.17.6″]
The below extracts and guidance is applicable for periods beginning before 1 January 2019 and are based on the September 2015 version of FRS 102. For periods beginning on or after 1 January 2019, the March 2018 version of FRS 102 applies which incorporates the changes made by the Triennial review of FRS 102. Note the March 2018 version of FRS 102 can be voluntarily applies for periods beginning before 1 January 2019. For the extracts from the March 2018 version of FRS 102 and the related guidance please click on the following link. For details of a summary of the main changes as a result of the triennial review please see the following link.
11.3 Scope of the Section 11 and Section 12
11.3.1 Extract from FRS 102 Section 11.3, 11.5, 11.7 and Glossary to FRS 102
11.7 Section 11 applies to all financial instruments meeting the conditions of paragraph 11.8 of FRS 102 except for the following as detailed in section 11.7 which also meet the conditions but are dealt with under separate standards:
(a) Investments in subsidiaries, associates and joint ventures;
(b) Financial instruments that meet the definition of an entity’s own equity and the equity component of compound financial instruments issued by the reporting entity that contain both a liability and an equity component.
(c) Leases, to which Section 20 Leases applies. However, the derecognition and impairment rules in Section 11 applies
(d) Employers’ rights and obligations under employee benefit plans, to which Section 28 Em-ployee Benefits applies;
(e) Financial instruments, contracts and obligations to which Section 26 Share-based
payment applies, and contracts within the scope of paragraph 12.5
(f) Insurance contracts (including reinsurance contracts) that the entity issues and reinsur-ance contracts that the entity holds (see FRS 103 Insurance Contracts).
(g) Financial instruments issued by an entity with a discretionary participation feature (see FRS 103 Insurance Contracts).
(h) Reimbursement assets accounted for in accordance with Section 21 Provisions
and Contingencies.
(i) Financial guarantee contracts (see Section 21).
11.3 A financial instrument is a contract that gives rise to a financial asset of one entity and a finan-cial liability or equity instrument of another entity.
Glossary to FRS 102 – A financial asset is any asset that is:
- Cash
- An equity instrument of another equity
- A contractual right:
- To receive cash or another financial asset from another entity; or
- To exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity
- A contract that will or may be settled in the entity’s own equity instruments and:
- Under which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or
- That will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose, the entity’s own equity instruments do not include instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments.
A financial liability is any liability that is:
- A contractual liability to deliver cash or another financial asset from another entity; or
- To exchange financial assets or liabilities with another entity under conditions that are po tentially unfavourable to the entity;
- A contract that will or may be settled in the entities own equity instruments and:
- Under which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or
- That will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose, the entity’s own equity instruments do not include instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments.
11.5 Basic financial instruments within the scope of Section 11 are those that satisfy the conditions in paragraph 11.8. Examples of financial instruments that normally satisfy those conditions include:
(a) cash
(b) demand and fixed-term deposits when the entity is the depositor, eg bank accounts;
(c) commercial paper and commercial bills held;
(d) accounts, notes and loans receivable and payable;
(e) bonds and similar debt instruments;
(f) investments in non-convertible preference shares and non-puttable ordinary and preference shares; and
(g) commitments to receive a loan and commitments to make a loan to another entity that meet the conditions of paragraph 11.8(c).
11.3.2 OmniPro comment – Scope of Section 11
The definition of financial assets and liabilities does not differentiate between those that are basic and therefore coming within Section 11 and those that are other than basic, neither does it deal with what types come within the remit of Section 11 and Section 12. Section 11.8 of FRS 102 and 11.5 of FRS 102 provide detailed guidance on what is determined to be a basic financial instrument. This is discussed further at 11.4.2.1. Section 11 and section 12 therefore, applies to investments in equity which is less than 20% of the share capital of the investee as anything above these amounts will be accounted for under other sections within FRS 102 (assuming investments under 20% do not provide the entity with a significant influence or control and therefore within the scope of Section 14-Associates, Section 15-Joint Ventures or Section 9-Consolidated and Separate financial statements).
Example 1: Investment in shares
Company A, hold an investment of 25% in the ordinary share capital of Company Y which gives Company A significant influence. In this particular case, this investment does not come within the remit of Section 11 for Company A as this is considered an associate which is accounted for in accordance with Section 14-Investments in Associates.
Example 2: Investment in shares – 15%
Company A hold an investment of 15% in the ordinary share capital of Company Y (which does not provide Company A with significant influence). This comes within the definition of a financial instrument and is accounted for in accordance with Section 11 as there is no puttable element attaching to the rights of the shares.
It is evident from Section 11.6 of FRS 102 that foreign currency forward contracts, interest rate swaps and hedging do not come within the definition of basic and are therefore accounted for under Section 12.
11.3.2.1 Financial assets and liabilities not within the remit of Section 11 and 12
The principal assets and liabilities on the balance sheet which are not classed as a financial instrument are:
- PPE and investment property;
- Inventories;
- Construction contract work in progress;
- Prepayments for good or services;
- Deferred income and warranty obligations where settled by delivery of goods or services;
- Accrued dividend where the entity does not have to deliver cash; and
- Current and deferred tax.
The other items scoped out in section 11.7 of FRS 102 (as detailed above) are financial instruments however they do not come within the Section 11 and Section 12 as they are dealt with by other standards. Contingent consideration which is not detailed in 11.7 of FRS 102 is also a financial instrument however it is scoped out of Section 11 and 12 as it is accounted for in accordance with Section 19 – Business Combinations and Goodwill. See further details on classification and assessing if an instrument comes within the scope of Section 11 or Section 12 at 11.4.2.1 and 11.4.2.2 and 11.6.2
[/et_pb_text][/et_pb_column][et_pb_column type=”1_4″][et_pb_toggle _builder_version=”3.0.106″ title=”Practical Examples” open=”off”]
Examples
Example 1: Investment in shares.
Example 2: Investment in shares – 15%.
Example 3: variable and fixed interest payments.
Example 5: Fixed and variable interest payments.
Example 6: Fixed rate loan for a set period and then a reversion to the banks variable rate.
Example 8: Loan/bond which is convertible into the borrower’s equity.
Example 9: Loan issued which is linked to a general inflation index.
Example 10: Variation in return.
Example 11: Prepayment options.
Example 12: Loan extension option.
Example 12a: Unguaranteed Capital
Example 12b: Collective investment funds.
Example 13: loan at market rates with transaction costs.
Example 13a: Change in estimate.
Example 14: Intercompany loan from a parent company.
Example 15: Loan provided to the company by a director
Example 16a: Intercompany loan from a related party or a fellow subsidiary.
Example 16b: Loan from subsidiary to the parent company.
Example 16c: Sale with unusual credit terms.
Example 16d: Purchase with unusual credit terms.
Example 17a: Loans repayable on demand..
Example 17b: Loan repayable on demand but with notice of 1 year and 1 day.
Example 18: Bonds – discount/premium.
Example 20: Impairment of debt instruments.
Example 20a: Bonds with an impairment
Example 21: Asset recognised due to settlement
Example 22: Sale of debtors with recourse.
Example 23: Sale of debtors without recourse.
Example 24: Transfer of assets at fair value subject to a call option.
Example 25: Substantial modification of a loan.
Example 26: Sample disclosure requirements
[/et_pb_toggle][/et_pb_column][/et_pb_row][/et_pb_section]