Page 212 - Annual Report 2020

22 Financial risk management continued
22.2 Recognition and measurement
All financial assets and liabilities, other than derivatives and trade Financial assets are subsequently carried at fair value or amortised
receivables, are initially recognised at the fair value of consideration cost based on:
paid or received, net of transaction costs as appropriate. Financial • the Group’s purpose, or business model, for holding the
assets are initially recognised on their trade date. financial asset;
• whether the financial asset’s contractual terms give rise to cash
flows that are solely payments of principal and interest.
The resulting financial statement classifications of financial assets can be summarised as follows:
Contractual cash flows Business model Category
Solely principal and interest Hold in order to collect contractual cash flows Amortised cost
Solely principal and interest Hold in order to collect contractual cash flows Fair value through other comprehensive income
and sell
Solely principal and interest Hold in order to sell Fair value through profit or loss
Other Any of those mentioned above Fair value through profit or loss

Solely principal and interest refers to the Group receiving returns only Fair value measurement
for the time value of money and the credit risk of the counterparty The carrying amount of financial assets and liabilities measured at
for financial assets held. The main exceptions for the Group are fair value is principally calculated based on inputs other than quoted
provisionally priced receivables and derivatives. prices that are observable for these financial assets or liabilities,
The Group has the intention of collecting payment directly from its either directly (i.e. as unquoted prices) or indirectly (i.e. derived
customers in most cases, however the Group also participates in from prices). Where no price information is available from a quoted
receivables financing programs in respect of selected customers. market source, alternative market mechanisms or recent comparable
Receivables in these portfolios are therefore held at fair value through transactions, fair value is estimated based on the Group’s views on
profit or loss prior to sale to the financial institution. relevant future prices, net of valuation allowances to accommodate
With the exception of derivative contracts and provisionally priced liquidity, modelling and other risks implicit in such estimates.
trade payables, the Group’s financial liabilities are classified as The inputs used in fair value calculations are determined by the
subsequently measured at amortised cost. relevant segment or function. The functions support the assets
and operate under a defined set of accountabilities authorised
The Group may in addition elect to designate certain financial assets by the Executive Leadership Team. Movements in the fair value
or liabilities at fair value through profit or loss or to apply hedge of financial assets and liabilities may be recognised through the
accounting where they are not mandatorily held at fair value through income statement or in other comprehensive income.
profit or loss.
Derivatives are initially recognised at fair value on the date the contract
is entered into and are subsequently remeasured at their fair value.

For financial assets and liabilities carried at fair value, the Group uses the following to categorise the method used based on the lowest level
input that is significant to the fair value measurement as a whole:

IFRS 13 Fair value hierarchy Level 1 Level 2 Level 3
Valuation method Based on quoted prices (unadjusted) Based on inputs other than quoted prices Based on inputs not observable
in active markets for identical included within Level 1 that are observable in the market using appropriate
financial assets and liabilities. for the financial asset or liability, either valuation models, including
directly (i.e. as unquoted prices) or discounted cash flow modelling.
indirectly (i.e. derived from prices).

210 BHP Annual Report 2020