Financial assets and liabilities are initially measured at transaction price (including transaction costs), except for those financial assets classified at fair value through profit or loss, which are initially measured at fair value (normally the transaction price excluding transaction costs), unless the arrangement constitutes a financing transaction. Where this is the case, the financial asset or liability is measured at the present value of future payments discounted at a market rate of interest for a similar instrument.
Basic debt instruments are subsequently measured at amortised cost using the effective interest rate method. Debt instruments not meeting the conditions to be classified as basic are measured at fair value through profit or loss. Where fair value cannot be measured reliably, they are measured at cost less impairment.
Financial assets measured at cost or amortised cost are reviewed at each reporting date for objective evidence of impairment. Where impairment is identified, the loss is recognised in the Statement of Income and Retained Earnings.
For assets measured at amortised cost, the impairment loss is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the asset’s original effective interest rate. For assets with variable interest rates, the current contractual rate is used.
For assets measured at cost less impairment, the impairment loss is the difference between the carrying amount and the best estimate of the recoverable amount. This is based on the amount the company would expect to receive if the asset were sold at the reporting date.
Financial assets and liabilities are only offset when the company has a legally enforceable right to offset and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.