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A closer look — 'Basic/non basic' classification of debt instruments under FRS102

Published on: 05 Feb 2015

The accounting for financial instruments will be one of the biggest challenges for entities adopting Financial Reporting Standard (FRS) 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ for the first time. Not only are there substantial changes, particularly for those entities transitioning from old UK GAAP excluding FRS 26: Financial instruments: Recognition and measurement, but the requirements of FRS 102 in this area are complex.

In particular the approach to classification and measurement of financial instruments under FRS 102 is very different from that of both old UK GAAP and IFRSs. Under FRS 102, financial instruments are classified as either ‘basic’ or ‘non-basic’ which can determine whether an instrument is measured at cost or fair value. This has also been an area of uncertainty and FRS 102 was amended in July 2014 to address concerns raised about the restrictive nature of the criteria for classifying debt instruments as basic.

The revised criteria continue to place restrictions on the terms a debt instrument may have if it is to be classified as basic. The criteria place limit on the type of returns on an instrument, how those returns change over the life of the debt instrument and the prepayment and extension features that may be present. In addition the criteria prevent derivatives and instruments whose contractual terms may result in loss of principal or accrued interest from being classified as basic.

In this publication we take a detailed look at these criteria and provide examples to illustrate their application. We also provide an overview of the background and the approach to classification. 

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