Financial Instruments: IAS 32, IFRS 7, IFRS 9

Financial Instruments

• A financial instrument is a contract between two entities, resulting in a financial asset for one entity and a financial liability or equity instrument for the other.

Definitions

• A financial asset: any asset that is cash, an equity instrument of another entity, or a contractual right to receive cash or another financial asset from another entity.
• A financial liability: any liability that is a contractual obligation to deliver cash or another financial asset to another entity.
• An equity instrument: any contract that evidences a residual interest in the assets of an entity after deducting all its liabilities.

Examples of Financial Instruments

• Issue of a loan stock
• Selling goods to a customer on credit
• Deposit of money into a bank account
• Bank overdraft
• Ordinary shares (equity instrument)
• Purchase of ordinary shares (financial instrument between issuing and investing company)

Classification of Financial Instruments

• Depends on the substance, not the form
• Classified as an equity instrument if there is no contractual obligation to deliver cash or another financial asset to another entity
• Redeemable preference shares are a liability, with mandatory repayment of share capital and the right to require repayment

Compound Financial Instruments

• Have a liability and equity component
• Determine the fair value of the liability component and equity component

Recognition and Measurement (IFRS 9)

• A financial asset or liability should be recognized when the entity becomes party to the contractual provisions
• A financial asset is derecognized when the entity's contractual rights to receive cash expire
• Measurement is at fair value (normally the amount when acquired or incurred) with transaction costs considered

Learn about financial instruments, assets, and liabilities as defined by IAS 32, IFRS 7, and IFRS 9. Understand the concepts and their applications.