The financial instrument: one contract, two positions

Learning objectives

• Explain that a financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.L1
• Identify, from the facts of a case, whether an item is a financial instrument as defined in the Standard.L1

Normative references

• IAS 32 §11A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. A financial asset includes cash, an equity instrument of another entity, a contractual right to receive cash or another financial asset or to exchange financial assets or liabilities under potentially favourable conditions, and certain contracts settled in own equity instruments. A financial liability includes a contractual obligation to deliver cash or another financial asset or to exchange financial assets or liabilities under potentially unfavourable conditions, and certain contracts settled in own equity instruments (a variable number of instruments, or a derivative other than a fixed-for-fixed exchange); rights, options or warrants to acquire a fixed number of own equity instruments for a fixed amount of any currency are equity if they are offered pro rata to all existing owners of the same class of non-derivative equity instruments. An equity instrument is a contract that evidences a residual interest in the assets after deducting all liabilities. The paragraph also defines a puttable instrument.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• Alpha Bank subscribes to an issue of bonds by Beta SA. The issue contract is a financial asset for Alpha and a financial liability for Beta: each party reads it from its own side.L1
• Which sentence correctly defines a financial instrument under IAS 32?L1
• A trainee summarises the definition of a financial instrument for a loan granted by Sora SA to Terra SA. Which of the trainee's sentences is wrong?L1