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Contents
12.1 Deciding what instruments come within the scope of section 12.
12.2 Accounting policy choice.
12.2.1 Extract from FRS 102-Sections 12.2–12.2A.
12.2.2.1 What is the accounting policy choice?
12.2.2.2 What accounting policy to choose for an entity.
12.3.1 Extract from FRS 102-Section 12.3–12.5.
12.3.2.1 Items excluded from Section 12 of FRS 102:
12.3.2.2 Items coming within the scope of Section 12 of FRS 102.
12.3.2.2.1.1 Unguaranteed Capital and variation in return linked to a fund.
12.3.2.2.1.2 Collective investment funds.
12.3.2.2.1.3 Loan extension option where rate on the extension is determined at inception.
12.3.2.2.1.5 Variation in return which is dependent on future contingencies.
12.2.2.2.1.7 Investments with profit bonds.
12.3.2.2.1.8 Loans which are linked to value of net assets.
12.3.2.2.1.9 Loan repayments linked to repayments on another loan or tranche of a loan.
12.3.2.2.1.12 Leases with non-standard contractual terms.
12.3.2.2.1.13 Contingent consideration for the seller.
12.3.2.2.1.14.1 The own use exemption.
12.3.2.2.1.16 Warrants that can be settled in cash or in exchange for another financial instrument;
12.3.2.2.1.19 Repurchase agreements;
12.3.2.2.1.20 Compound financial instruments.
12.3.2.2.1.21 A firm commitment which is contractually binding.
12.3.2.2.1.22 Where the variable rate on a loan is leveraged.
12.3.2.2.1.23 Where a bond has a negative yield.
12.4 Initial recognition and subsequent measurement of financial assets and liabilities.
12.4.1 Extract from FRS 102-Section 12.6-12.9.
12.4.2.2 Subsequent recognition.
12.4.2.2.1 Subsequent recognition – General.
12.4.2.2.1.1.1 Financial instruments not permitted to be fair valued under Company Law.
12.4.2.2.1.1.1.1 The accounting treatment where this exception applies.
12.4.2.2.1.1.2.1 The accounting treatment where this exception applies.
12.4.2.2.1.1.3 Where hedge accounting is applied.
12.4.2.2.2 Financial instruments not permitted to be fair valued under Company Law.
12.4.2.2.2.1.1 Financial instruments permitted to be fair valued under Company Law.
12.4.2.2.2.1.1.2.2 Derivative financial instrument.
12.4.2.2.2.1.1.2.2.1 Derivative – defined.
12.4.2.2.2.1.1.2.2.1.1 Examples of Derivatives.
12.4.2.2.2.1.1.2.3 Eliminate an accounting mismatch.
12.4.2.2.2.1.1.2.4 Instrument contains an embedded derivative that is not closely related.
12.4.2.2.2.1.1.2.4.0 Overview.
12.4.2.2.2.1.1.2.4.2 Embedded derivative defined.
12.4.2.2.2.1.1.2.4.3 Identify whether the embedded derivative is or is not closely related.
12.4.2.2.2.1.1.2.4.3.1 Examples where the embedded derivative is not closely related.
12.4.2.2.2.1.1.2.4.3.2 Examples where the embedded derivative is closely related.
12.5.1 Extract from FRS 102 section 12.10 – 12.12.
12.5.2.1 The fair value model to utilise.
12.5.2.2 The fair value of a financial instrument due on demand.
12.5.2.3 Transaction costs and fair value.
12.5.2.4 Examples of fair valuation techniques for complex instruments.
12.5.2.5 Deferred tax and the fair value adjustments.
12.5.2.5.1 Deferred tax and fair value adjustments where they relate to trade assets/liabilities.
12.5.2.5.3 Deferred tax where hedge accounting is applied.
12.5.2.6 Examples of fair valuing financial instruments where market rates are not available.
12.5.2.7 Foreign currency forward contracts.
12.5.2.7.2 Accounting for forward foreign currency contracts – non hedging – Examples.
12.5.2.7.3 Accounting for interest rate swaps – non hedging – Examples.
12.6 Impairment of financial instruments measured at cost or amortised cost.
12.6.1 Extracts from FRS 102 – section 12.3.
12.7 Derecognition of a financial asset or financial liability.
12.7.1 Extract from FRS 102 – section 12.14.
12.7.2.1 Non-hedged instruments.
12.8.1 Extract from FRS102 section 12.15 – 12.17C.
12.8.2.2 Hedged item – defined.
12.8.2.3 Hedging instrument – defined.
12.8.2.4 Purpose of hedge accounting.
12.8.2.5 What can be hedged under hedge accounting?
12.8.2.6.1 Firm commitment – Defined.
12.8.2.6.2 Classification of Firm commitments as a hedge – fair value or cash flow hedge?
12.8.2.6.3 The exception for fair valuing firm commitments – Own use exception to fair value.
12.8.2.6.4 Determining the fair value of a commitment.
12.8.2.7 Forecast transaction.
12.8.2.7.1 Forecast transaction – Defined.
12.8.2.7.2 Forecast transaction – Indicators that such a transaction exists.
12.8.2.8 Intra-group hedging & when hedge accounting can be applied.
12.8.2.8.1 Intra-group hedging – Example.
12.9 Grouping of items as hedged items.
12.9.1 Extract from FRS102-Section 12.16B.
12.10 Hedging a component of an item.
12.10.1 Extract from FRS102-Section 12.16C.
12.10.2.2 Examples illustrating hedging a component of an item.
12.10.2.2.1 Hedging with a forward contract where contract is less than the probable sale amount.
12.10.2.2.2 Hedging part payments.
12.10.2.2.3 Hedging part payments.
12.11.1 Extract from FRS102-Section 12.17-12.17C.
12.11.2.1 What instruments can be classified as a hedging instrument?
12.11.2.2 Portion of a hedging instruments.
12.11.2.3 Instrument used to hedge a foreign currency risk.
12.11.2.4.1 What is an option and what is a written option?
12.11.2.4.2 Determining the fair value of an option and using it as a hedging instrument.
12.12 Conditions for hedge accounting.
12.12.1 Extract from FRS102-Section 12.18-12.18A.
12.12.2.1 When can hedge accounting be applied from and conditions must be met?
12.12.2.2 What is an economic relationship?
12.12.2.3 Designation and documentation.
12.12.2.4 Causes of hedge ineffectiveness.
12.12.2.4.2 Example of hedge ineffectiveness documented for an interest rate swap.
12.13 Accounting for qualifying hedging relationships.
12.13.1 Extract from FRS102-Section 12.19-12.19A.
12.13.2.1 The three types of hedge relationships for hedge accounting.
12.14.1 Extract from FRS102 – Section 12.19B-12.22.
12.14.2.1 What is a fair value hedge and what does it do?
12.14.2.2 The accounting for a fair value hedge.
12.14.2.2.1 Examples of fair value hedges and the accounting for same.
12.14.2.2.1.1 Fixed interest rate on a debt instrument (financial instrument).
12.14.2.2.1.1.1 Amortised cost on cessation of hedging where financial instrument exists.
12.14.2.2.1.2 Firm commitment not recognised on balance sheet.
12.14.2.2.1.3 Hedge of a foreign currency risk of an unrecognised firm commitment.
12.15.1 Extract From FRS 102 – Section 12.22(b) and 12.23.
12.15.2.1 Cash flow hedge defined.
12.15.2.2 Accounting for cash flow hedges – hedge accounting.
12.15.2.3 Examples of cash flow hedge accounting.
12.15.2.3.1 Forward contract for a probable forecasted sale.
12.15.2.3.1.1 Forward contract for a probable forecasted sale.
12.15.2.3.1.2 Forward contract for a probable forecasted purchase.
12.15.2.3.2 Hedge of variability in cash flows in a floating rate loan due to interest rate risk.
12.15.2.3.2.1.1 Fair valuing an interest rate swap.
12.15.2.3.2.3 Hedge of variability in cash flows in a floating rate loan due to interest rate risk.
12.16 Hedges of a net investment in a foreign operation.
12.16.1 Extract from FRS 102 Section 12.24.
12.16.2.1 Net investment in a foreign operation defined.
12.16.2.2 When can a net investment in a foreign operation be hedged?
12.16.2.3 What is the hedged item and instrument in a net investment in a foreign operation?
12.17 Discontinuing hedge accounting.
12.17.1 Extract from FRS102 Section 12.25 to 12.25A.
12.17.2.2 When can/must hedge accounting be discontinued and is it applied retrospectively.
12.17.2.2.1 Fair value hedge and discontinuance rules.
12.17.2.2.2 Cash flow hedge and discontinuance rules.
12.17.2.2.3 Net investment in a foreign operation hedge and discontinuance rules.
12.17.2.2.4 Examples of discontinuance.
12.18 Taxation of fair valuing derivatives – current and deferred tax.
12.19.1 Extract from FRS102-Section 12.25B.
12.20.1 Extracts from FRS 102 section 12.26 – 12.29.
12.20.2.2 Sample Disclosure requirements.
12.20.2.2.1 Extract from accounting policy notes.
12.20.2.2.2 Extract of notes to the financial statements – Financial instruments note disclosures.
12.20.2.2.3 Extract of notes to the financial statements – interest disclosures.
12.20.2.2.3.1 Note: Interest receivable and similar income.
12.20.2.2.3.2 Note: Interest payable and similar expenses.
12.20.2.2.4 – Debtors Disclosures.
12.20.2.2.5 – Creditors disclosures.
12.20.2.2.7 Statement of Comprehensive Income.
12.20.2.2.8 – Statement of Change in Equity.
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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.
12.3 Scope of Section 12
12.3.1 Extract from FRS 102-Section 12.3–12.5
12.3 Section 12 applies to all financial instruments except the following:
(a) Those covered by Section 11.
(b) Investments in subsidiaries (see Section 9 Consolidated and Separate Financial Statements), associates (see Section 14 Investments in Associates) and joint ventures (see Section 15 Investments in Joint Ventures).
(c) Employers’ rights and obligations under employee benefit plans (see Section 28 Employee Benefits).
(d) Insurance contracts (including reinsurance contracts) that the entity issues and reinsurance contracts that the entity holds (see FRS 103 Insurance Contracts).
(e) 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 (see Section 22 Liabilities and Equity).
(f) Leases (see Section 20 Leases) unless the lease could, as a result of non-typical contractual terms, result in a loss to the lessor or the lessee.
(g) Contracts for contingent consideration in a business combination (see Section 19 Business Combinations and Goodwill). This exemption applies only to the acquirer.
(h) Any forward contract between an acquirer and a selling shareholder to buy or sell an acquiree that will result in a business combination at a future acquisition date. The term of the forward contract should not exceed a reasonable period normally necessary to obtain any required approvals and to complete the transaction.
(i) Financial instruments, contracts and obligations to which Section 26 Share-based Payment applies, except for contracts within the scope of paragraph 12.5.
(j) Financial instruments issued by an entity with a discretionary participation feature (see FRS 103).
(k) Reimbursement assets accounted for in accordance with Section 21 Provisions and Contingencies.
(l) Financial guarantee contracts (see Section 21).
A reporting entity that issues the financial instruments set out in (d) or (j) or holds the financial instruments set out in (d) is required by paragraph 1.6 to apply FRS 103 to those financial instruments.
12.4 Most contracts to buy or sell a non-financial item such as a commodity, inventory, or property, plant and equipment are excluded from this section because they are not financial instruments. However, this section applies to all contracts that impose risks on the buyer or seller that are not typical of contracts to buy or sell non-financial items. For example, this section applies to contracts that, as a result of its contractual terms, could result in a loss to the buyer or seller that is unrelated to changes in the price of the non-financial item, changes in foreign exchange rates, or a default by one of the counterparties.
12.5 In addition to the contracts described in paragraph 12.4, this section applies to contracts to buy or sell non-financial items if the contract can be settled net in cash or another financial instrument, or by exchanging financial instruments as if the contracts were financial instruments, with the following exception: contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements are not financial instruments for the purposes of this section.
12.3.2 OmniPro comment
12.3.2.1 Items excluded from Section 12 of FRS 102:
To summarise Section 12.3 of FRS 102, the following items are excluded from Section 12:
- Any basic financial instruments accounted for under Section 11 of FRS 102;
- Investment in subsidiaries, associates and joint ventures;
- Insurance contracts issued by entities;
- Own equity instruments such as share based payments (accounted for under Section 26 of FRS 102) and items classified as equity under Section 22 of FRS 102;
- Leases with no non-typical terms – see Section 20 of FRS 102
- Contingent consideration from the point of view of the purchaser; (See Section 19 and 21 of FRS 102);
- Forward contract between an acquirer and selling shareholder to buy or sell a business that will result in a business combination;
- Share based payments;
- Employee benefits (Section 28 of FRS 102);
- Contingent assets (Section 21 of FRS 102);
- Financial guarantee contracts (Section 21 of FRS 102); and
- Non-financial items i.e. commodities, inventory or PPE where risks are not imposed by contractual terms that could result in loss to either party that is unrelated to the change in price in the non-financial asset or the contract can be settled net in cash or another financial instrument with the exception of contracts entered into for the purpose of delivery of non-financial items in accordance with the entity’s purchase, sale or usage requirements. In effect the own use exception applies (see 12.3.2.2.1.14 for further details) – Section 12.4 of FRS 102 refers.
12.3.2.2 Items coming within the scope of Section 12 of FRS 102
12.3.2.2.0 Overview
As stated at 12.1 in order to confirm any of the below comes within the definition of a complex instrument then one should ensure that it does not meet the definition of a complex financial instrument. Listed below are examples of items that would come within the remit of Section 12 of FRS 102 – note this is not an exhaustive list. See 11.5.2 of Section 11 for the definition of a basic financial instrument and some worked examples showing what instruments are basic or not.
12.3.2.2.1 Debt instrument/investment where capital is not guaranteed and/or the return is linked to a particular fund
Where there is a risk to the holder of an investment in that the capital is not guaranteed or the return is linked to a particular fund which is variable, then this must be accounted for under Section 12 of FRS 102 as it is not a basic financial instrument. This applies if this relates to any class of debt instrument (see definition of a debt instrument at 11.4.2.1) e.g. for bonds, investment in funds etc. Once they come within the remit of Section 12 then they must be fair valued. The definition of basic financial instruments in Section 11.9 of FRS 102 is very narrow and there is very specific rules in how the return should be structured in order for an instrument to come within the definition of a basic instrument. See 11.5.2 of Section 11 for a further discussion and to assess whether the instrument is a basic instrument.
12.3.2.2.1.1 Unguaranteed Capital and variation in return linked to a fund
Example 1: Unguaranteed Capital and variation in return linked to a fund
Company A invested CU100,000 with a Bank. The return on this investment is linked to a particular fund performance on the stock exchange and the Capital is not guaranteed. As this investment is not capital guaranteed and as the return is variable and linked to the stock exchange it does not meet the definition of a basic financial instrument and therefore must be fair valued under the rules of Section 12.
12.3.2.2.1.2 Collective investment funds
Example 2: Collective investment funds
Company A invested CU100,000 in a collective investment fund where the return depends on the performance of the fund and is capped at 20%.
As the return is not pre-determined and as the return is linked to the stock exchange it does not meet the definition in Section 11.9 of FRS 102 and therefore is considered a complex instrument and must be fair valued under Section 12 of FRS 102.
12.3.2.2.1.3 Loan extension option where rate on the extension is determined at inception
Example 3: Loan extension option (Section 11.9 (AB) of FRS 102)
A loan is issued for 10 years at a rate of 3% which provides an option to the borrower to extend the loan for a further 3 years and at that point pay interest at a rate of LIBOR plus 1% at that time.
Given that the variation in return is contingent on the borrower extending the loan and given that the market rate of the loan cannot be known at that time, this does not meet the condition in Section 11.9(aB) of FRS 102 as a basic financial instrument. In order for this condition to be met the loan agreement would have to specify that the interest rate charged on the loan after 10 years would be determined at that time. As a result, the loan is classed as complex and within the remit of Section 12. In this case under Section 12, the fair value of the option with the LIBOR plus 1% would have to be determined based on the facts at each reporting period and the movement posted to the profit and loss account assuming it is permitted to be fair valued under Company Law. The fair value would likely be determined by assessing what the likely rate would be at the end of the 10 years on such a loan and this rate would be used to present value the future cash flows
12.3.2.2.1.4 Loan issued which is linked to an inflation index which is not general and instead is specific to the market
Example 4: Loan issued which is not linked to a general inflation index (Section 11.9 aA) of FRS 102
Such a loan is a basic financial instrument. However, if it is linked to an inflation index which is not general and instead is specific to the market, it does not meet the definition of a basic instrument.
12.3.2.2.1.5 Variation in return which is dependent on future contingencies
Example 5: Variation in return (Section 11.9 (aB) of FRS 102)
A loan stating that interest is payable at fixed rate of 2% for the first 2 years and 4% for the remaining 3 years. Such a loan is a basic instrument as it meets the requirement in 11.9 (aB) of FRS 102 i.e. the variation is not contingent on future events as it is explicitly stated from the start.
If in the above example the interest was fixed for the 5 years and then reverts to variable LIBOR rate, this is also determined to be basic financial instrument as it is in the contract, is determinable and not dependent on future contingencies.
12.3.2.2.1.6 Prepayment options which are not included purely to protect the issuer from early termination or to credit deterioration
Example 6: Prepayment options (Section 11.9 (c) of FRS 102
A loan is issued which states that if repayment is made early, then penalties will be payable to the issuer to compensate them for a fall in interest rates since inception.
Such a clause would meet the basic financial instrument definition as the clause was included to protect the issuer for early termination which is allowed as per Section 11.9(c) of FRS 102.If this was not the case then it would be a complex financial instrument.
12.3.2.2.1.7 Investments with profit bonds
Where an entity holds with profit bonds these are complex financial instruments and cannot be basic as the return is variable in nature.
12.3.2.2.1.8 Loans which are linked to value of net assets
Where loans are arranged whereby the return to the lender is linked to the value of the net assets of the entity, then this is a complex financial instrument and must be fair valued under the rules in Section 12 of FRS 102. This can apply where a loan was restructured.
12.3.2.2.1.9 Loan repayments linked to repayments on another loan or tranche of a loan
Where loan repayments and ultimately the amount of capital to be repaid is linked to how other loans perform, then this type of loan must be accounted for under Section 12 of FRS 102 as the lender is at risk of loss of capital due to non-standard terms in the loan. Whether such a loan liability can be fair valued will depend on whether it is permitted under Company Law. See further details in relation to same at .
12.3.2.2.1.10 Certain preference shares classified as a liability where a coupon rate is fixed but the coupon rate reduces if certain conditions of the investment are met
For preference shares which meet the definition of a liability (as they are redeemable at a set date in the future and there is a fixed coupon rate) and therefore is considered a financial instrument (See Section 22 of FRS 102 for the rules with regard to classification of such shares as liabilities) where there is a coupon rate of let’s say 8% which reduces to 3% in the money advanced is used for the purposes it was intended, then in this case, these are classified as complex as the rules in Section 11.9 of FRS 102 which deals with basic financial instruments does not permit a return to move downwards from inception. Whether such a loan liability can be fair valued will depend on whether it is permitted under Company Law (see further details at 12.4.2.2.2). If it is not permitted to be fair valued under Company Law then, it must be carried at amortised cost as stated in Section 12.8(c) of FRS 102. See further details in relation to accounting for this as amortised cost at 11.6.2.4.
12.3.2.2.1.11 Shares classified as a liability or a loan issued with rights stating that where profits are made at certain amounts, then a dividend of certain percent of the profit should be payable.
Where such a loan is in existence then this must be accounted for under Section 12 and fair valued assuming the liability is permitted to be fair valued under Company Law. If it is not permitted to be fair valued under Company Law then, it must be carried at amortised cost as stated in Section 12.8(c) of FRS 102. See further details in relation to same at . When fair valuing such a loan one would assess what the market rate would be for such a loan based on the conditions at each balance sheet date. This rate would then be used to present value the future cash flows of the loan to get to the fair value amount.
12.3.2.2.1.12 Leases with non-standard contractual terms
Examples of typical non-standard contractual terms in leases that could result in a loss to the lessor or the lessee are;
- terms related to changes in the price of the leased asset;
- changes in interest rates; or
- changes in foreign exchange rates; or
- consequences of a default by one party.
If any of the above exist, then the liability must be fair valued under Section 12 of FRS 102.
12.3.2.2.1.13 Contingent consideration for the seller
Contingent consideration from the perspective of the seller comes within the remit of Section 12 as it does not have a fixed price. In this case, for the seller at each period end date to which the amounts are still receivable, an entity must determine the fair value of this contingent consideration i.e. how much could the entity sell this asset for at each period end (could possibly be fair valued by looking at the expected results in the future and then discounting at a government bond rate which matures at some point in the future).
12.3.2.2.1.14 Non-financial items- contracts for commodities, inventories, PPE not used for own purposes but merely held as an investment. Options to purchase/sell
Where the financial instrument relates to an option taken out for example to purchase/sell commodities/inventory/property, plant and equipment or any other non-financial asset and these items will not be used by the entity for its own trade (i.e. contracts that are not entered into and do not continue to be held for the purposes of the receipt or delivery of non-financial items in accordance with the entity’s expected purchase, sale or usage requirements), then such options would have to be fair valued under Section 12 of FRS 102 as is made clear in Section 12.5 of FRS 102. In effect Section 12 would apply to contracts entered into which could result in a loss to the buyer or seller that is unrelated to the changes of the price of the non-financial item, changes in foreign exchange rates, or a default by one of the counterparties (with the exception of the own use exception – See 12.3.2.2.1.14.1).
Net settlement in Section 12.5 of FRS 102 means that the entity will pay or receive cash (or a financial asset of equivalent amount) to and from the counterparty, equal to the net gain or loss on the contract on exercise or settlement.
12.3.2.2.1.14.1 The own use exemption
If the option to purchase/sell commodities, inventories, property, plant and equipment is for own use (contracts that are entered into and continue to be held for the purposes of the receipt or delivery of non-financial items in accordance with the entity’s expected purchase, sale or usage requirements) then they do not come within the remit of Section 12 as they are not financial instruments (Section 12.5 of FRS 102). There is no ‘get in clause’ i.e. it cannot be accounted for under Section 12.
Note however if a foreign currency contract has been taken out to cover a firm commitment in relation to these items for own use the foreign currency contract would have to be fair valued and hedge accounting could potentially be used (See 12.14.2.2.1.3).
12.3.2.2.1.15 Options to purchase or sell items that can be settled in cash or in exchange for another financial instrument (e.g. option to purchase something in the future);
Note when assessing whether such options are to be fair valued the entity needs to review the terms of the option. If the option states that an item can be purchased at a market rate at a point in time in the future, then the fair value of the option is nil as you are not any worse or better off as a result of having the option other than having the ability to call it in. In contrast, if the option provides a set price that is payable in the future date, then this option has a fair value and will need to be recognized on the balance sheet. In this case the fair value would be what the item to which the option relates could be purchased for at the balance sheet date (if it relates to assets) less the option price it can be purchased at in the future.
Note if there is an option where the entity has the choice to not take up the option, then a fair value liability would not need to be recognized, instead the fair value is nil as the option is worthless. This compares to an option where the entity can be forced to take it up, in which case the fair value liability would need to be recognised.
12.3.2.2.1.16 Warrants that can be settled in cash or in exchange for another financial instrument;
See further details at 12.3.2.2.1.15
12.3.2.2.1.17 Forward contracts that can be settled in cash or in exchange for another financial instrument;
See further details at 12.5.2.7
12.3.2.2.1.18 Interest rate swaps that can be settled in cash or in exchange for another financial instrument;
See further details at 12.5.2.7.3
12.3.2.2.1.19 Repurchase agreements;
Where agreements are entered into to repurchase an asset at a set price in the future such contracts would have to be fair valued (could be fair valued by looking at the market price at the period end less the price in the agreement).
12.3.2.2.1.20 Compound financial instruments
A compound financial instrument is considered a complex instrument. The debt element of the financial instrument can be measured under the rules of Section 11 if it is considered basic if not it must be carried at fair value under the rules in Section 12 assuming it is permitted to be carried at fair value under company law. See further details at 12.4.2.2.2. See 22.7.2 for a further discussion on the accounting for compound instruments.
12.3.2.2.1.21 A firm commitment which is contractually binding
In this case the fair value would be the movement on what the asset could be purchased at year end date compared the committed price payable/receivable.
12.3.2.2.1.22 Where the variable rate on a loan is leveraged
Where interest on a loan is referenced to say two times the bank’s standard variable rate, the variable rate is leveraged so the conditions for the basic treatment do not apply and therefore must be measured in line with Section 12 rules. In accordance with the definition of a variable rate, the contractual interest rate payable must be able to be linked to a single observable interest rate. A bank’s standard variable rate is an observable rate and meets the definition of a variable rate, but the rate here of 2 times the bank’s standard variable rate and the link to the observable interest rate is leveraged. Therefore, the rate in this example is not a variable rate as described in paragraph 11.9(a) of FRS 102 and therefore this loan should be fair valued assuming it is permitted under Company Law. See details at. In this case it is likely that this could be fair valued as it would meet the IFRS criteria as the embedded derivative would not be closely related (only closely related if it is less than 2 as per the rules in IAS 39).
12.3.2.2.1.23 Where a bond has a negative yield
Where a bond has a negative yield as this does not meet the condition for basic in Section 11.9 of FRS 102 this bond must be fair valued under the rules of Section 12.
12.3.2.2.1.24 Loans where interest and/or repayments are linked to the profits of the business (profit participation loans)
Profit participation loans where the interest or repayments are linked to the profits of the company are complex financial instruments to be accounted for under Section 12. Where the entity views the profits to be a non-financial variable, then these loans would need to be fair valued. If the entity views the link to profits to be a non-financial variable then such loans would not be carried at fair value as it would not be permitted by company law, instead it would have to be carried at amortised cost as stated in Section 12.18 of FRS 102.
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Examples
Example 1: Unguaranteed Capital and variation in return linked to a fund.
Example 2: Collective investment funds.
Example 3: Loan extension option (Section 11.9 (AB) of FRS 102).
Example 5: Variation in return (Section 11.9 (aB) of FRS 102).
Example 6: Prepayment options (Section 11.9 (c) of FRS 102.
Example 6a: Investments held at fair values – market rates available.
Example 6b: Fair valuing complex financial instruments where no active market available.
Example 6c: Fair valuing complex financial instruments where no active market available.
Example 6d: Fair valuing complex financial instruments where no active market available.
Example 8: Foreign currency forward contract to hedge a sale.
Example 9: Foreign currency forward contract to hedge a future purchase.
Example 10: Interest rate swap – non hedge accounting.
Example 11: Hedging in a group context.
Example 13: Hedging with a forward contract where contract is less than the probable sale amount.
Example 14: Hedging part payments.
Example 15: Hedging part payments.
Example 16: Partial term hedging.
Example 17: Portion of a hedging instruments.
Example 19: Forward contract option.
Example 22: Hedge of a foreign currency risk of an unrecognised firm commitment.
Example 23: Forward contract for a probable forecasted sale.
Example 24: Probable forecasted purchase of equipment.
Example 26: Fair valuing an interest rate swap.
Example 27: Hedge of variability in cash flows in a floating rate loan due to interest rate risk.
Example 28: Net investment in a foreign operation (Extracted from Appendix to Section 12 of FRS 102.
Example 29: Discontinuance of a cash flow hedge – forecasted sale/purchase.
Example 30: Cash flow hedge example.
Example 31: Interest rate swap – cash flow hedge accounting.
Example 32: Sample Disclosure Requirements.
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