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Financial instrument

IFRS 9 Definition: 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.

Financial asset is any asset that is:Financial instrument Financial instrument Financial instrument

  1. Cash;
  2. An equity instrument of another entity;
  3. A contractual right:
    1. to receive cash or another financial asset from another entity; or
    2. to exchange financial assets or financial liability with another entity under conditions that are potentially favourable to the entity; or
  4. a contract that will or may be settled in the entity’s own instruments and is:
    1. 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
    2. a derivative that will or 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.
      For this purpose the entity’s own equity instruments do not include puttable financial instruments classified as equity instruments in accordance with IAS 32 16A – 16B, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments in accordance with IAS 32 16C – 16D, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments.

Examples of financial assets are cash, deposits in other companies, trade receivables, loan to other companies, investment in debt instruments, investment in shares, and other equity instruments.

Financial liability is any liability that is:

  1. a contractual obligation:
    1. to deliver cash or another financial asset to another entity; or
    2. to exchange financial assets or financial liability with another entity under conditions that are potentially unfavourable to the entity; or
  2. a contract that will or may be settled in the entity’s own instruments and is:
    1. a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or
    2. a derivative that will or 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.
      For this purpose, rights, options or warrants to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency are equity instruments if the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments. Also, for these purposes the entity’s own equity instruments do not include puttable financial instruments that are classified as equity instruments in accordance with with IAS 32 16A – 16B,  instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments in accordance with paragraphs 16C and 16D, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments. As an exception, an instrument that meets the definition of a financial liability is classified as an equity instrument if it has all the features and meets the conditions in IAS 32 16A – 16B or IAS 32 16C – 16D.

Examples of financial liability are trade payables, loans from other companies and debt instruments issued by the entity.

Equity instrument: Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

A derivative is a financial instrument:

  • Whose value changes in response to the change in an underlying variable such as
    an interest rate, commodity or security price, or index;
  • That requires no initial investment, or one that is smaller than would be required for a
    contract with similar response to changes in market factors; and
  • That is settled at a future date.

Contract and contractual refer to an agreement between two or more parties that has clear economic consequences that the parties have little, if any, discretion to avoid, usually because the agreement is enforceable by law. Contracts, and thus financial instruments, may take a variety of forms and need not be in writing.

A puttable instrument is a financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset or is automatically put back to the issuer on the occurrence of an uncertain future event or the death or retirement of the instrument holder.

Puttable financial instruments will be presented as equity only if all of the following criteria are met:

  1. the holder is entitled to a pro-rata share of the entity’s net assets on liquidation;
  2. the instrument is in the class of instruments that is the most subordinate and all instruments in that class have identical features;
  3. the instrument has no other characteristics that would meet the definition of a financial liability; and
  4. the total expected cash flows attributable to the instrument over its life are based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and un-recognised net assets of the entity (excluding any effects of the instrument itself). Profit or loss or change in recognised net assets for this purpose is as measured in accordance with relevant IFRSs.

In addition to the criteria set out above, the entity must have no other instrument that has terms equivalent to (iv) above and that has the effect of substantially restricting or fixing the residual return to the holders of the puttable financial instruments.

Financial instrument

Financial instrument

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