The company has elected to apply the provisions of Section 11 Basic Financial Instruments of FRS 102 to account for its financial instruments.
Financial instruments are recognised when the company enters into the contractual provisions of the instrument.
Financial assets and liabilities are offset and the net amount reported in the balance sheet, when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously.
Basic financial assets
Basic financial assets, including trade and other receivables, cash and bank balances, and intercompany receivables, are initially measured at fair value, net of transaction costs, and subsequently measured at amortised cost, using the effective interest method, less any impairment losses, unless the arrangement constitutes a financing transaction. Where the transaction is measured at the present value of future receipts discounted at a market rate of interest.
Discounting of financial assets is omitted where the effect of discounting is immaterial. The company’s cash and cash equivalents, trade and other receivables fall into this category of financial instrument.
Impairment of financial assets
Financial assets are assessed for indicators of impairment at each reporting date.
Financial assets are impaired when events, subsequent to their initial recognition, indicate the estimated future cash flows derived from those assets have been adversely impacted. The impairment loss will be the difference between the current carrying amount and the present value of the future cash flows at the assets' original effective interest rates.
If there is a favourable change in the circumstances that gave rise to the impairment loss then the impairment may be reviewed for possible reversal. The reversal will not cause the current carrying amount to exceed the original carrying amount had the impairment not been recognised. The impairment reversal is recognised in the profit or loss.
Financial liabilities
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 the deduction of all its liabilities.
Basic financial liabilities
Basic financial liabilities, which include trade and other payables, bank loans and other loans are initially measured at their transaction price after transaction costs. When this constitutes a financing transaction, the debt instrument is measured at the present value of the future net payments discounted at a market rate of interest. Discounting is omitted where the effect of discounting is immaterial.
Debt instruments are subsequently carried at their amortised cost using the effective interest rate method.
Trade payables are obligations to pay for goods and services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if the payment is due within one year. If not, they represent non-current liabilities. Trade payables are initially recognised at their transaction price and subsequently are measured at amortised cost using the effective interest method. Discounting is omitted where the effect of discounting is immaterial.
Derecognition of financial assets
Financial assets are derecognised when their contractual right to future cash flows expire, or are settled, or when the company transfers the asset and substantially all the risks and rewards of ownership to another party. If significant risks and rewards of ownership are retained after the transfer to another party, the company will continue to recognise the value of the portion of the risks and rewards retained.
Derecognition of financial liabilities
Financial liabilities are derecognised when the company's contractual obligations expire or are discharged or cancelled.