CFM21060 - Accounting for corporate finance: key concepts: financial instrument, financial assets and financial liabilities

Meaning of financial instrument, financial asset and financial liability

IAS 32 introduced the concept of a 바카라 사이트˜financial instrument바카라 사이트™. The definitions of IAS 32 are applied whether IAS 39 or IFRS 9 is applied to recognise and measure financial instruments. This concept was mirrored in FRS 25/26 under Old UK GAAP. It is also incorporated in New UK GAAP through FRS 101 and FRS 102. In each case the definition is similar.

A 바카라 사이트˜financial instrument바카라 사이트™ is defined as any 바카라 사이트˜contract바카라 사이트™ that gives rise to both a 바카라 사이트˜financial asset바카라 사이트™ of one entity and a 바카라 사이트˜financial liability바카라 사이트™ or 바카라 사이트˜equity instrument바카라 사이트™ of another entity.

The meaning of a contract in this context is discussed at CFM21080.

In very broad terms, financial assets will, or will likely, lead to a company receiving cash in the future. Financial liabilities will, or will likely, lead to a company paying out cash in the future. But the cash may be received, or paid, via a whole chain of contractual rights or obligations. For example, a company may hold an option to acquire a convertible bond that can be converted into shares that can be sold for cash. So the definitions of financial asset and financial liability in IAS 32 and its equivalent, section 22 of FRS 102, are in general terms.

Common examples of financial assets representing a contractual right to receive cash in the future and corresponding financial liabilities representing a contractual obligation to deliver cash in the future are:

  • trade receivables and payables;
  • accounts, notes and loans receivable and payable;
  • bonds and other debt instruments held or issued.

In each case, one party바카라 사이트™s contractual right to receive (or obligation to pay) cash is matched by the other party바카라 사이트™s corresponding obligation to pay (or right to receive), meaning that each case is an example of a financial instrument.

Further examples of financial assets and financial liabilities are at CFM21070.

The meaning of equity instruments is discussed at CFM21100.

Derivatives

A derivative is a particular type of financial instrument whose value changes in response to changes in the value of some underlying subject matter. At any given time, a derivative may be either a financial asset or a financial liability of a company. There is more about derivatives at CFM24000.

Most derivatives stand alone. But some financial instruments (for example a convertible bond held by a company) are 바카라 사이트˜hybrid instruments바카라 사이트™ that combine a non-derivative 바카라 사이트˜host contract바카라 사이트™ with an 바카라 사이트˜embedded derivative바카라 사이트™. IFRS 9 has changed the accounting requirements for some embedded derivatives from those under IAS 39. There is more about embedded derivatives at CFM25030.