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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
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11.9 Derecognition of a Financial Asset
11.9.1 Extract from FRS 102 Section 11.33-11.35
11.33 An entity shall derecognise a financial asset only when:
(a) the contractual rights to the cash flows from the financial asset expire or are settled; or
(b) the entity transfers to another party substantially all of the risks and rewards of ownership of the financial asset; or
(c) the entity, despite having retained some, but not substantially all, risks and rewards of ownership, has transferred control of the asset to another party and the other party has the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without needing to impose additional restrictions on the transfer. In this case, the entity shall:
(i) derecognise the asset; and
(ii) recognise separately any rights and obligations retained or created in the transfer.
The carrying amount of the transferred asset shall be allocated between the rights or obligations retained and those transferred on the basis of their relative fair values at the transfer date. Newly created rights and obligations shall be measured at their fair values at that date. Any difference between the consideration received and the amounts recognised and derecognised in accordance with this paragraph shall be recognised in profit or loss in the period of the transfer.
11.34 If a transfer does not result in derecognition because the entity has retained significant risks and rewards of ownership of the transferred asset, the entity shall continue to recognise the transferred asset in its entirety and shall recognise a financial liability for the consideration received. The asset and liability shall not be offset. In subsequent periods, the entity shall recognise any income on the transferred asset and any expense incurred on the financial liability.
11.35 If a transferor provides non-cash collateral (such as debt or equity instruments) to the transferee, the accounting for the collateral by the transferor and the transferee depends on whether the transferee has the right to sell or repledge the collateral and on whether the transferor has defaulted. The transferor and transferee shall account for the collateral as follows:
(a) If the transferee has the right by contract or custom to sell or repledge the collateral, the transferor shall reclassify that asset in its statement of financial position (e.g. as a loaned asset, pledged equity instruments or repurchase receivable) separately from other assets.
(b) If the transferee sells collateral pledged to it, it shall recognise the proceeds from the sale and a liability measured at fair value for its obligation to return the collateral.
(c) If the transferor defaults under the terms of the contract and is no longer entitled to redeem the collateral, it shall derecognise the collateral, and the transferee shall recognise the collateral as its asset initially measured at fair value or, if it has already sold the collateral, derecognise its obligation to return the collateral.
(d) Except as provided in (c), the transferor shall continue to carry the collateral as its asset, and the transferee shall not recognise the collateral as an asset.
11.9.2 OmniPro comment – Decrecognition of Financial Assets
In Section 11.33 (a) of FRS 102, a financial asset can be derecognised if the asset is settled or expires. See diagram at 11.9.2.1 for derecognition rules for financial assets
Example 21: Asset recognised due to settlement
Company A loans CU100,000 to another entity which attracted a market interest rate and was repayable in year 5.
The asset can be derecognised at the end of year 5 i.e. when the loan is fully repaid. If the loan is repaid earlier then it is derecognised on the date it is repaid or the date the loan is formally forgiven in writing
In Section 11.33 (b), of FRS 102, a financial asset can be derecognised when the entity transfers to another party substantially all of the risks and rewards of ownership of the financial asset.
Example 22: Sale of debtors with recourse
Company A arranges invoice discounting with a bank. They sell their book of debtors which is stated at CU200,000 for CU180,000. However the company retains the credit risk. The company manages the debtors book and pays over any receipts to the bank. Given that substantially all the risk and rewards of ownership have not been transferred, as Company A will incur any bad debt risk, the debtor balance cannot be derecognised. As a result the way in which this CU180,000 is recognised is to:
| CU | CU | |
| Debit bank account | 180,000 | |
| Credit invoice discounting liability | 180,000 |
NOTE: the interest charged by the bank is charged to the P&L as incurred and any transaction costs are released over the life of the arrangement such that the liability is held at amortised cost.
Example 23: Sale of debtors without recourse
Company A arranges invoice discounting with a bank. They sell their book of debtors which is stated at CU200,000 for CU180,000. The bank also takes on the credit risk. The company manages the debtors book and pays over any receipts to the bank. Given that substantially all the risk and re-wards of ownership have been transferred, the company can derecognise the trade debtor balance. The journal to derecognise this is to:
| CU | CU | |
| Dr Bank Account | 180,000 | |
| Dr Profit and Loss – Bank Charges | 20,000 | |
| Cr Trade Debtors | 200,000 |
In Section 11.33 (c) of FRS 102, a financial asset can be derecognised when the entity, despite having retained some significant risks and rewards of ownership, has transferred control of the asset to another party and the other party has the practical ability to sell the asset in its entirety. These are the key requirements.
Example 24: Transfer of assets at fair value subject to a call option
Company A owned publically quoted shares with a fair value of CU50,000. The company decided to sell these shares for CU45,000 to a bank with an option to purchase these in 6 months for CU55,000.
It is noted that the risk and rewards of ownership have not been substantially transferred as Company A has an option to purchase the shares back if the value of the shares is above CU55,000. However, given that the bank can sell the shares themselves in an active market and then repurchase them at a later date if the option is called in, it therefore means that the bank has control as it meets the definition in Section 11.33 (c) of FRS 102. On this basis as control has passed, the asset can be derecognised. The journals to be posted are as follows:
| CU | CU | |
| Dr Bank Account | 45,000 | |
| Cr Investments | 50,000 | |
| Dr fair value of Call option (to be accounted for under Section 12) | 5,000 |
Note there has to be an ability for the other party to dispose of the asset to another party. This would not be the case for a debtor’s book balance where credit risk was maintained by Company A.
As detailed in Section 11.35 of FRS 102, where non cash collateral is provided (e.g. in the form of shares or debt) it needs to be separated and disclosed in the financial statements, however it is not derecognised until the entity defaults on any loan.
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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
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