Basic financial instruments
Cash and cash equivalents, and trade and other debtors and creditors, are classified as basic financial instruments.
Basic financial instruments not constituting financing transactions are initially recognised at transaction price. For arrangements constituting financing transactions, different recognition criteria apply:
- Loans to the company from a person who is within a director's group of close family members that contains at least one shareholder are also initially recognised at transaction price.
- All other arrangements constituting financing transactions are initially recognised at the present value of the future payments or receipts discounted at a market rate of interest.
Subsequent to initial recognition:
- Basic financial instruments classified as payable or receivable after more than one year are measured at amortised cost using the effective interest method.
- Basic financial instruments classified as payable or receivable within one year are only amortised if the effect is material.
Cash and cash equivalents
Cash in hand, bank balances, and short-term deposits with an original maturity of three months or less, which are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value, are classified as cash and cash equivalents. These amounts are included in 'Cash at bank and in hand' on the statement of financial position.
Bank overdrafts are generally classified separately as creditors under current liabilities. However, if overdrafts are repayable on demand and the company has a legally enforceable right to set them off against cash and cash equivalents, they may be offset in certain circumstances.