CFM23030 - New UK GAAP: FRS 102: classification of financial instruments

For those entities applying FRS 102 with an accounting period beginning on or after 1 January 2015.

FRS 102 classifies financial instruments into two categories - basic and other.

‘Basic’ financial instruments are those considered to have straightforward terms - examples provided in Section 11 of FRS 102 include cash, trade debtors, trade creditors and debt instruments (such as an account, note, or loan receivable or payable) that meets the conditions in paragraph 11.9.

A debt instrument not meeting the conditions in paragraph 11.9 may still be considered to be ‘basic’ if, in accordance with paragraph 11.9A, it gives rise to cash flows on specified dates that constitute repayment of the principal advanced, together with reasonable compensation for the time value of money, credit risk and other basic lending risks and costs.

‘Other’ or ‘non-basic’ financial instruments refer to all other financial instruments. In particular the following are examples of instruments which will now be typically be held at fair value in accordance with Section 12 of FRS 102:

• All derivatives (including interest rate swaps; a forward commitment to purchase a commodity that is capable of being cash-settled; options and forward contracts, etc.);
• Loans that are not plain vanilla debt - where, for example, the amount repayable can vary or where non-standard interest rates are used; and
• Investments in convertible debt where the return to the holder can vary with the price of the issuer’s equity shares rather than just with market interest rates