To define a financial instrument.
To describe a financial liability and an
equity instrument.
To understand the nature of a
compound financial instrument.
To identify common forms of
compound financial instrument.
To know the accounting for a
compound financial instrument
Financial Instrument
PAS 32, paragraph 11, defines a financial
instrument as any contract that gives rises to
both a financial asset of one entity and a
financial liability or equity instrument of
another entity.
Thus, the term financial instrument
encompasses a financial asset, a financial
liability and an equity instrument
Characteristics of a Financial Instrument
a. There must be a contract.
b. There are at least two parties to the
contract.
c. The contract shall give rise to a financial
asset of one party and financial liability
or equity instrument of another party.
Example of financial instrument:
1. Cash in the form of notes and coins
2. Cash in the form of checks
3. Cash in bank
4. Trade account
5. Notes and loans
1. Debt Securities
2. Equity Securities
FINANCIAL LIABILITY
A Financial Liability is any liability that is
contractual obligation:
a. To deliver cash of other financial asset
to another entity
b. To exchange financial instruments with
another entity under condition that are
potentially unfavorable.
Example Financial Liabilities
a) Trade Accounts payable
b) Notes payable
c) Loans payable
d) Bonds payable
Non Financial liabilities : Deferred revenue,
warranty obligation, income tax payable and
constructive obligation.
Compound Financial Instrument
PAS 32, paragraph 28, defines a compound
financial instrument as “ a financial instrument
that contains both a liability and an equity
element from the perspective of the issuer”
In other words, one component of the financial
instrument meet the definition of a financial
liability and another component of the
financial instrument meet the definition of an
equity instrument.
IA – Compound Financial
