CFM23040 - New UK GAAP: FRS 102: measurement of basic financial instruments

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

Initial recognition

On initial recognition a basic financial asset or financial liability is measured at the transaction price (which includes transaction costs) unless the arrangement represented a financing transaction. In the case of a financing transaction the financial asset or liability is initially measured at the present value of the future payments discounted at a market rate of interest for a similar debt instrument.

For example a loan made between two parties would be recognised at the present value of the cash payable or receivable.

Subsequent measurement

Debt instruments that have been classified as ‘basic’ are subsequently measured on an amortised cost basis (CFM21170) using the effective interest method. CFM21180 provides a worked example of the effective interest rate.

Debt instruments that have been classified as ‘basic’ may, upon their initial recognition, be designated at fair value through profit or loss where doing so:

• eliminates or significantly reduces a measurement or recognition inconsistency (an accounting mismatch) that would otherwise arise from measuring assets or debt instruments or recognising the gains and losses on them on different bases; or
• a group of debt instruments or financial assets and debt instruments is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity’s key management personnel.