Accounting for financial instruments

In this lesson

1. 0:00 Accounting for financial liabilities overview
2. 1:06 Amortised cost measurement and calculation
3. 2:02 Loan note worked example
4. 4:45 Fair value through profit or loss for liabilities
5. 5:26 Trading liability fair value calculation
6. 7:30 Initial recognition of financial assets
7. 8:00 Business model test for debt instruments
8. 9:14 Equity instruments and other financial assets
9. 10:21 Reclassifying financial assets between categories

About this lesson

You'll explore the two main measurement approaches: amortised cost (the most common method for liabilities and many debt instruments) and fair value through profit or loss (used for derivatives, traded liabilities, and certain equity investments). Understanding when and how to apply each approach is essential for accurate financial statement preparation and exam success. The lesson covers financial liabilities first, showing how to measure them initially at fair value less transaction costs, then subsequently using amortised cost with finance costs calculated via the effective interest rate method. You'll work through a detailed example of a loan note issued at a discount, calculating the opening and closing liability balances year by year and reconciling total finance costs. This methodology mirrors the approach used in lease accounting and is fundamental to handling borrowings correctly. You'll then learn about fair value through profit or loss for liabilities—a less common but important treatment for trading liabilities and derivatives. The lesson explains how gains and losses split between other comprehensive income (changes in credit risk) and profit or loss (remaining changes), with a worked example showing how a traded financial liability is remeasured at fair value each reporting date. Finally, the lesson addresses financial assets, distinguishing between debt instruments (measured using the business model and cash flow tests to determine amortised cost or fair value through other comprehensive income) and equity instruments (typically fair value through other comprehensive income, with an optional election to use profit or loss). You'll understand the reclassification rules, which apply only when the business model changes and only to debt instruments, ensuring you can classify and measure these assets correctly in your exam answers.

Duration: 11m