FINANCIAL REPORTING
FRS 102 Financial Instruments - Factsheet 4 by Robert Kirk
FRS 102 Financial Instruments
Factsheet 4
by Robert Kirk
Robert Kirk reviews Factsheet 4 on how to account for financial instruments.
In December 2013, the Financial
Reporting Council (FRC) published 16
Staff Education Notes (SENs) to aid
users implement FRS 102. The SENs
were not part of FRS 102. They were
simply aimed at helping preparers
apply certain requirements of FRS 102
but they were not to be relied upon
as definitive statements on how to
apply the standard.
In December 2018, the FRC decided
to publish further guidance in the
form of Factsheets which should be
treated in the same vein as the SENs.
One of these (Number 4) is on the
topic of how to account for financial
instruments which is much broader in
scope than two of the SENs i.e. SEN
16 Financing Transactions and SEN 2
Debt instruments – amortised cost.
This short article will look at some of
the issues raised in the guidance.
Classification of financial
instruments
The factsheet lists cash and
investments in most ordinary and
some preference shares as ‘basic’
as well as debt instruments as
long as the criteria in paragraph
11.9 of FRS 102 are met. However,
there have been issues with this
restrictive definition and, as a result,
a number of instruments have been
classified as ‘other’ although their
substance was ‘basic’. To solve this
an additional paragraph, 11.9A, has
been introduced into FRS 102 which
the Factsheet emphasizes introduces
an additional principles-based
description which should be applied
if an instrument fails the detailed
11.9 criteria to identify if it could be
classified as ‘basic’.
Directors’ loans can meet the
paragraph 11.9 (a) criteria as the
contractual return to the holder
is a fixed amount of €nil i.e. the
interest free element is irrelevant to
its classification. However, the other
criteria in paragraph 11.9 may be
failed and thus there must still be
reasonable compensation for the
time value of money, credit risk and
other basic lending risks which is
unlikely to be the case for an interest
free loan.
Measurement of basic
financial instruments
Normally basic instruments are
recorded initially at transaction price
as adjusted for transaction costs.
There is one exception – financing
transactions - as follows:
Financing transactions
Where goods or services are sold
on credit there are two components
to the transaction – a sale and a
financing arrangement. These must
be accounted for separately as
follows:
The Factsheet also gives an example
of how the customer should apply
the transaction under Section 17
Property, plant and equipment by
recording the motor vehicle initially
at €13,500 with a subsequent interest
expense being recorded using the
same amortised cost methodology
as the seller. That provides symmetry
of accounting treatment between the
two parties to the transaction.
However, there are two exceptions
to that general rule:
1. Directors loans – small entities
only under Section 1A FRS 102
Loans to the entity not at market
rate from a person who is a
member of a director’s group
of close family and the group
includes at least one shareholder
in the entity – can measure at
transaction price.
2. Public benefit entity concessionary
loans – can measure at the
amount paid or received.
Facts: ABC Ltd sells a motor vehicle to a customer for €15,000 on 1st
January 2019, payment due in two years’ time. Normally if sold for
immediate cash the sale would be €13,500
Solution
Dr Trade receivables €13,500 1.1.19
Cr Sales €13,500
Dr Trade receivables €1,500 Use amortised
cost method to
spread income
over 2 years
Cr Interest income €1,500
09
Accountancy Plus March Issue 2019
