Financial Instruments


After studying this chapter, you should have a grasp of the following concepts:

  • Accounting standards for financial instruments.
  • Definition of financial instruments.
  • Financial assets and financial liabilities.
  • Categories of financial instruments.
  • Fair value measurement concepts.
  • Recognition and derecognition of financial instruments.
  • Types of investments.
  • Difference between investment and speculation.
  • Two major accounting standards: U.S. GAAP and IFRS.
  • Hierarchy of U.S. GAAP and IFRS.


The topic of accounting standards for financial instruments covers the following aspects:

  • Definition of financial instrument, financial asset, financial liability, and equity instrument.
  • Definition of a derivative instrument.
  • Different types of contracts that are covered within the scope of the accounting standards for financial instruments.
  • Four categories of financial instruments.
  • Fair value and fair value determination.
  • Accounting treatment of different categories of financial instruments.
  • Recognition and derecognition of financial instruments.
  • Initial measurement and subsequent measurement of financial instruments.
  • Effect of changes in fair value.
  • Reclassification and its impact.
  • Impairment and its treatment for different categories.
  • Hedge accounting concepts.

The synopsis of the accounting standards under the International Financial Reporting Standards (IFRS), IAS 39, is given in Appendix B. ...

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