FINANCIAL LIABILITIES

A financial instrument will be a financial liability, as opposed to being an equity instrument, where it contains an obligation to repay. Financial liabilities are then classified and accounted for as either fair value through profit or loss (FVTPL) or at amortised cost.

The default position is, and the majority of financial liabilities are, classified and accounted for at amortised cost.

Financial liabilities that are classified as amortised cost are initially measured at fair value minus any transaction costs.

Accounting for a financial liability at amortised cost means that the liability’s effective rate of interest is charged as a finance cost to the statement of profit or loss (not the interest paid in cash) and changes in market rates of interest are ignored – ie the liability is not revalued at the reporting date. In simple terms this means that each year the liability will increase with the finance cost charged to the statement of profit or loss and decrease by the cash repaid.

Financial liabilities are only classified as FVTPL if they are held for trading or the entity so chooses. This is beyond the scope of this publication.