Route 102 – One man’s year-long journey……Day 26

  • By Jeremy Williams
  • 23 February 2015 00:00

To mark this momentous year for UK GAAP, I'm embarking on a mission to work my way through FRS 102, reading a portion on each working day of 2015 and writing a short blog entry on my thoughts and musings (be they few or many). After an absence for a week's holiday, we're back with a bump in section 11...

DAY 26 (23 Feb)

Having trawled endlessly through the classification criteria, we move to initial recognition and measurement. Para 12 insists that the entity must have entered into a contract before it can recognise financial assets and liabilities.

Basic financial instruments are measured at the transaction price, including transaction costs (fair value instruments are not, but these will be covered later). However arrangements that are 'in effect, a financing transaction' are dealt with differently - these are measured at the present value of future payments discounted using a market rate of interest for a similar debt instrument. Sounds like the small print on an insurance ad, doesn't it?

So what does the standard mean by 'a financing transaction'? Broadly the standard includes:

- Loans made and received that are not simply short-term; and

- Trading transactions that are at non-market rates (e.g. interest-free credit or deferred payment terms)

So technically, all (non-short) loans should be recorded at the present value of cash flows, rather than the transaction price (ie the amount of capital raised, net of transaction costs). However if a market rate of interest is being charged, then there is no difference between these two terms. The complications arise when a non-market rate of interest (or none at all) is charged. This means that there will be a difference between the transaction price and the amount measured in the accounts. Tomorrow we'll explore how to deal with this...

P.S. If you missed the last instalment please click here

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