Financial assets and financial liabilities are recognised when the company becomes party to the contractual provisions of the instrument. Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the company after deducting all of its liabilities.
Basic financial assets, including trade and other debtors, and cash and bank balances, are initially recognised at transaction price, unless the arrangement constitutes a financing transaction, where the transaction is measured at the present value of the future receipts discounted at a market rate of interest for a similar debt instrument. Such assets are subsequently carried at amortised cost using the effective interest method, less any impairment.
Basic financial liabilities, including trade and other creditors, bank loans and loans from fellow group companies, are initially recognised at transaction price, unless the arrangement constitutes a financing transaction, where the debt instrument is measured at the present value of the future payments discounted at a market rate of interest for a similar debt instrument. Debt instruments are subsequently carried at amortised cost, using the effective interest method.
Financial assets measured at cost and amortised cost are assessed at the end of each reporting period for evidence of impairment. If evidence of impairment is found, an impairment loss is recognised in the profit and loss account.
Financial assets are derecognised when (i) the contractual rights to the cashflows from the asset expire or are settled, or (ii) substantially all the risks and rewards of the ownership of the asset are transferred to another party or (iii) despite having retained some significant risks and rewards of ownership, control of the asset has been transferred to another party. Financial liabilities are derecognised when the liability is extinguished, that is when the contractual obligation is discharged, cancelled or expires.
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously.