A director/shareholder lends the company a substantial amount interest free for a fixed term of three years.For goods purchased from a supplier on short-term credit, a payable is recognised at the undiscounted amount owed to the supplier, which is normally the invoice price.For a loan received from a bank at a market rate of interest, a payable is recognised initially at the amount of the cash received from the bank less separately incurred transaction costs.If the current cash sale price is not known, it may be estimated as the present value of the cash receivable discounted using the prevailing market rate(s) of interest for a similar receivable. For an item sold to a customer on two years' interest-free credit, a receivable is recognised at the current cash sale price for that item (in financing transactions conducted on an arm’s length basis the cash sales price would normally approximate to the present value).For goods sold to a customer on short-term credit, a receivable is recognised at the undiscounted amount of cash receivable from that entity, which is normally the invoice price.Debt instruments that meet the conditions in paragraph 11.8(b) of FRS 102 shall be measured at amortised cost using the effective interest method (paragraphs 11.15 to 11.20 provide guidance on this).įor a long-term loan at a market rate of interest made to another entity, a receivable is recognised at the amount of the cash advanced to that entity plus transaction costs incurred by the entity.Debt instruments that are payable or receivable within one year shall be measured at the undiscounted amount of the cash or other consideration expected to be paid or received.If the arrangement is a financing transaction, the entity shall measure the debt instrument at the present value of the future payments discounted at a market rate of interest for a similar debt instrument.These paragraphs have the following treatments for loans (or debt instruments): ![]() Paragraphs 11.14 to 11.32 deal with the subsequent measurement. Other financial assets or financial liabilities should initially be measured at the transaction price (including transaction costs).When such assets and liabilities are initially recognised, it is for the entity to decide whether or not to treat them as such designated items to be valued at fair value with changes in value going to profit or loss (paragraphs 11.27 to 11.32). Financial assets and liabilities that are measured at fair value through profit and loss.If the arrangement is a financing transaction, the entity shall measure the financial asset or financial liability at the present value of the future payments discounted at the market rate of interest for a similar debt instrument.This splits the treatment into the following three categories: Paragraph 11.13 deals with the initial measurement. Loans payable by the entity or receivable by the entity with a fixed interest rate or with no interest would normally be treated as basic financial instruments and come within section 11 of FRS 102.įRS 102 explains how these loans should be accounted for both in terms of the initial recognition and how they should be treated in subsequent reporting dates. An introduction to professional insightsįRS 102 deals with accounting for financial instruments in section 11 ‘basic financial instruments’ and section 12 ‘other financial instruments’.Virtual classroom support for learning partners.Becoming an ACCA Approved Learning Partner. ![]()
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