CFM24030 - Accounting for corporate finance: derivative contracts: what is a financial instrument?
What is a financial instrument?
The definitions below, and that of derivative financial instruments at CFM24040, are essentially the same as those used in the standards issued by both the ASB and the IASB.
A financial instrument is 'any contract that gives rise to both a financial asset and a financial liability or equity instrument of another entity', where:
- a financial asset is 'any asset that is:
- cash, or
- a contractual right to receive cash or another financial asset from another entity, or
- a contractual right to exchange financial instruments with another entity under conditions that are potentially favourable, or
- an equity instrument of another entity, or
- a contract that will or may be settled in the entity’s own equity instruments and is:
- a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or
- a derivative that will or may be settled other than by the exchange of a fixed amount of cash or other financial asset for a fixed number of the entity’s own equity instruments. For this purpose, the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments’.
- a financial liability is 'any liability that is:
- a contractual obligation to deliver cash or another financial asset to another entity, or
- a contractual obligation to exchange financial instruments with another entity under conditions that are potentially unfavourable to the entity, or
- a contract that will or may be settled in the entity’s own equity instruments and is:
- a non-derivative for which the entity is or may not be obliged to deliver a variable number of the entity’s own equity instruments; or
- a derivative that will or may be settled other than by the exchange of a fixed amount of cash or other financial asset for a fixed number of the entity’s own equity instruments. For this purpose, the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments’.
- an equity instrument is 'any contract that evidences an ownership interest in an entity, i.e. a residual interest in the assets of the entity after deducting all of its liabilities.'
A financial instrument must be a contractual asset or liability
A financial instrument must be an asset or liability that is contractual. For example, tax liabilities, because these stem from a statutory provision and not from a contract, are not financial liabilities.
Contractual rights and contractual obligations include those that are contingent on the occurrence of future events (e.g. those arising under a financial guarantee).
Note that, for an accountant, the term 'contract' has a precise meaning. Although an agreement to purchase an item of plant or machinery is legally a contract, this is initially an unperformed, or executory, contract, which gives rights and obligations to exchange a physical asset for a financial asset. It is only once the item is delivered that a debtor/creditor relationship is brought into existence. These are then the financial assets and liabilities thus created.
