The terms 'contract', 'contractual right' and 'contractual
obligation' are fundamental to the definition of financial
instrument, financial asset and financial liability.
The reference to a 'contract' is to an agreement between two
or more parties that has clear economic consequences and which the
parties have little, if any, discretion to avoid, usually because
the agreement is enforceable at law. Contracts, and thus financial
instruments, may take a variety of forms and need not be in
writing. Contractual rights and contractual obligations are rights
and obligations that arise out of a contract. Assets and
liabilities that are not contractual in nature are not financial
assets or financial liabilities.
Most contracts give rise to a variety of rights and
obligations, and the rights and obligations arising from a contract
will often change or be added to as the contract is performed. Some
of these rights and obligations may fall within the definition of a
financial instrument and some may not. For example, an unperformed
contract for the purchase or sale of a tangible asset usually gives
rise to rights and obligations to exchange a physical asset for a
financial asset (although it is possible that, if the contract is
breached, the exchange will involve the payment of compensation).
These rights and obligations do not represent a financial
instrument. Under the same contract, once the physical asset has
been delivered, a debtor or creditor will usually arise and this
will be a financial instrument.
'Contractual rights' and 'contractual obligations' encompass
both rights and obligations that are contingent on the occurrence
of a future event and those that are not. Examples of contingent
rights and obligations are those arising under a financial
guarantee. Such a guarantee meets the definition of a financial
instrument since it gives rise to both a liability for the
guarantor (the contractual obligation to pay the lender if the
borrower defaults) and an asset for the lender (the contractual
right to receive cash from the guarantor if the borrower
defaults).
