Financial Instruments

  • Any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity
  • For example, a receivable of one entity (financial asset) will represent a payable (financial liability) of another entity
  • An equity instrument (or security) is a financial asset for an investor holding the instrument and is equity of the issuer of the instrument

Financial asset

  •  Cash
  • Equity instrument of another entity
  • A contractual right

– to receive cash or another financial asset from another entity
– to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity
– (example: purchased call or put options)
• A contract that will/may be settled in the entity’s own equity instruments and is
– A non-derivative resulting in receiving a variable number of the entity’s own equity instruments
– A derivative that will/may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of entity’s own equity instruments

Financial liability

  • A contractual obligation

– to deliver cash or another financial asset to another entity
– to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity
– (example: written call or put options)

  • A contract that will/may be settled in the entity’s own equity instruments and is

– A non-derivative resulting in delivering a variable number of the entity’s own equity instruments
– A derivative that will/may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of entity’s own equity instruments

Written options – Financial liability

  • A written call option represents the obligation, if exercised, to sell an item at a specific price
  • A written put option represents the obligation if exercised, to purchase an item at a specified price
  • Contractual basis
  • The rights and obligations of financial assets and financial liabilities are the result of certain contractual provisions underlying these
  • An entity’s tax liability for example does not meet the ‘contractual basis’ test and hence is not a financial instrument
  • Cash, even though is not formed out of a contractual basis is still a financial asset as it is specifically included in the definition

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