The financial liability, seen from the issuer's side

Learning objectives

• Explain that a financial liability includes, in particular, a contractual obligation to deliver cash or another financial asset.L1
• Determine, from the terms of an issued contract, whether it creates a contractual obligation that meets the definition of a financial liability.L2

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

• A contractual obligation to deliver cash to another entity is an element that characterises a financial liability, assessed from the issuer's point of view.L1
• Zéphyr SA, whose functional currency is the euro, enters into a forward contract with a bank under which it will have to exchange USD 2,000,000 for euros at a rate fixed today (case facts). At the reporting date, the market rate may be more or less favourable to Zéphyr. Which element of the contract fits the definition of a financial liability?L2
• An internal manual summarises the notion of financial liability. Which of these sentences is wrong?L1