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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.