Anyone with a 31st March financial year end may be trying to savour the last bit of quiet before the year end storm hits in April, or perhaps is already getting busy preparing for it. Financial instruments can be complicated. For those that follow International Financial Reporting Standards the main standards are IFRS 9 (Financial Instruments), IFRS 16 (Leases), IFRS 7 (Financial Instrument Disclosures), IFRS 13 (Fair Value Measurement) and IAS 32 (Financial Instruments Presentation).
Financial instruments have to be categorised into amortised cost, fair value through profit and loss or (for financial assets) fair value through other comprehensive income. For financial assets the main test to categorise assets appropriately is whether payments are solely principal and interest, followed by the business model used when holding the investment – are they held for the long term to collect cash flows, or to buy and sell on a regular basis?
All financial instruments will need a fair value, even if this is only for a disclosure note. Fair values should be calculated according to the fair value hierarchy which should be disclosed. Level 1 in the hierarchy means an active market with quoted prices; level 2 means there is no active market but there are observable inputs that can be used; level 3 should only be used when level 1 or 2 cannot be, and means that you have to use unobservable inputs to estimate fair value.
Any financial assets where you have a contractual right to receive cash (so loans or deposits made, but not shares owned) will require an ECL or ‘Expected Credit Loss’ to account upfront for the risk of not receiving your investment back in full and on time. Loan commitments and guarantees also need an ECL calculation.
Some particularly tricky bits in our experience includes anything a bit ‘weird’, which is typically where payments are not ‘solely payment of principal and interest’ and can include hybrid instruments which are part debt and part equity. These do not always fit into neat categories or straightforward methodologies and require a bit more thought. Anything where the effective interest rate is not the same as the cash interest rate also have to be carefully worked through – this is common for bonds owned, or for any loans where the rate of interest is ‘stepped’ (starting low and getting higher over time). Soft loans made or received at below a market rate of interest, commonly made between subsidiaries, are also an area that can cause a headache. The rules around loans that have been modified or restructured can be complicated to apply.
At Arlingclose we have over two decades of assisting clients in accounting for their financial instruments in published financial accounts. If you would like any assistance please contact us at info@arlingclose.com or on 08448 808 200.
18/03/2026
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