Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide

DEFINITION OF FINANCIAL INSTRUMENTS

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Investments in equity shares are a form of financial asset.

Financial asset

A financial asset is defined as one of the following types of assets as per the accounting standards:

• 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;
• 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 the entity’s own equity instruments.

Financial liability

A financial liability is defined as one of the following types of liabilities as per the accounting standards:

• 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;
• 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 ...