FINANCIAL INSTRUMENTS

FINANCIAL
INSTRUMENTS
PAS 32, paragraph 11, defines a financial
instrument as any contract that gives rise to both a
financial asset of one entity and a financial liability
or equity instrument of another entity.
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.

FINANCIAL
INSTRUMENTS
The following would qualify as financial
instruments:
Cash in the form of notes and coins
Cash in the form of checks
Cash in bank
Trade accounts
Notes and Loans
Debt Securities
Equity Securities

FINANCIAL ASSET
A financial Asset is any asset that is:
a) Cash
b) A contractual right to receive cash or another
financial asset from another entity
c) A contractual right to exchange financial
instruments with another entity under conditions
that are potentially favorable.
d) An equity instrument of another entity

FINANCIAL ASSET
Examples of financial assets:
Cash or currency
Deposit of cash with a bank or similar financial
institutions
Other common examples:
Trade accounts receivable
Notes Receivable
Loans Receivable
Bonds Receivable
A gold bullion deposited in a bank is not a financial
asset

FINANCIAL ASSET
In case of exchanges of financial instruments
with another entity:

Conditions are potentially favorable when

such exchanges will result to gain or
additional cash inflow to the entity
Conditions are unfavorable when such
exchanges will result to loss or additional
cash outflow to the entity.

Investment in shares or other equity instruments

can be classified as Financial Assets

FINANCIAL ASSET
The following are not considered as financial
assets:
a)
b)
c)
d)

Physical Assets
Intangible Assets
Prepaid expenses
Leased Assets

FINANCIAL LIABILITY
A financial liability is any liability that is a
contractual obligation:
a) To deliver cash or other financial asset to
another entity
b) To exchange financial instruments with
another entity under conditions that are
potentially unfavorable.

FINANCIAL LIABILITY
Examples of financial liabilities representing a
contractual obligation to deliver cash in the
future are:
a)
b)
c)
d)

Trade Accounts Payable

Notes Payable
Loans Payable
Bonds Payable

FINANCIAL LIABILITY
Items not considered as financial liabilities:
a)
b)
c)
d)

Deferred Revenue
Warranty Obligations
Income Taxes Payable
Constructive Obligations

EQUITY INSTRUMENT
An equity instrument is any contract that evidences a
residual interest in the assets of an entity after
deducting all of its liabilities.
It includes:
a) Ordinary Share Capital
b) Preference Share Capital
c) Warrants or written call options that allow the holder
to subscribe for or purchase a fixed number of
ordinary shares of the issuing entity in exchange for
a fixed amount of cash or another financial asset

EQUITY INSTRUMENT
Exception:
Redeemable preference share
Financial Liability
Dividends of Redeemable Preference Shares
shall be accounted as interest expense
Current or noncurrent
Depends on redemption date

CLASSIFICATIONS OF
FINANCIAL ASSETS
Financial Assets at Fair Value
Include both equity securities and debt
securities
Financial Assets at Amortized Cost
Include only debt securities

CLASSIFICATIONS OF
FINANCIAL ASSETS
Equity Securities
Encompasses any instrument representing
ownership shares and right, warrants or
options to acquire or dispose of ownership
shares at a fixed or determinable price.
Debt Securities
Is any security that represent a creditor
relationship with an entity.
Usually have maturity date and maturity value

CLASSIFICATIONS OF
FINANCIAL ASSETS
FINANCIAL ASSETS AT FV

The following financial assets shall be measured

at fair value through profit or loss:
Financial Assets held for trading or trading
securities
Financial Assets that are designated initially as
at fair value through profit or loss.
All other investments in quoted equity
instruments.

CLASSIFICATIONS OF
FINANCIAL ASSETS
FINANCIAL ASSETS AT FV

Financial Asset held for trading

a) It is acquired principally for the purpose of
selling or repurchasing it in the near term.
b) On initial recognition, it is part of a portfolio of
identified financial assets that are managed
together and for which there is evidence of a
recent actual pattern of short-term profit taking.
c) It is a derivative, except for a derivative that is
a financial guarantee contract or a designated
and an effective hedging instrument

CLASSIFICATIONS OF
FINANCIAL ASSETS
FINANCIAL ASSETS AT FV

Initial measurement of financial assets

An entity shall measure a financial asset at FV plus,
in case if financial asset not at FV through profit
or loss, transaction costs that are directly
attributable to the acquisition of the financial asset.
Transaction price
Transaction costs directly attributable to the
asset are capitalized

If the financial asset is held for trading or if the

financial asset is measured at fair value through
profit or loss, transaction costs are expensed
outright.

CLASSIFICATIONS OF
FINANCIAL ASSETS
FINANCIAL ASSETS AT FV

Subsequent measurement
After initial recognition, an entity shall measure
a financial asset either at fair value or
amortized cost.
Depends on the business model
a) To hold investments in order to realize
fair value changes
b) To hold investments in order to collect
contractual cash flows

CLASSIFICATIONS OF
FINANCIAL ASSETS
FINANCIAL ASSETS AT FV

Financial Assets shall be measured at

amortized cost if both of the following
conditions are met:
The business model is to hold the financial asset in
order to collect contractual cash flows on specified
dates
The contractual cash flows are solely payments of
principal and interest

CLASSIFICATIONS OF
FINANCIAL ASSETS
FINANCIAL ASSETS AT FV

Financial Assets that do not meet the conditions for

amortized cost measurement shall be measured at
Fair Value.
An entity may designate a financial asset measured at
fair value through profit or loss even if the financial asset
satisfies the measurement at amortized cost.
Fair value amount for which an asset could be
exchanged, or a liability settled, between knowledgeable
and willing parties in an arms length transaction.
Market Value or Quoted Price
Bid Price and Asking Price

CLASSIFICATIONS OF
FINANCIAL ASSETS
FINANCIAL ASSETS AT FV

Unrealized gains and losses on Trading Securities

Financial Assets at FV (not hedged)
Presented in Profit or Loss
FV>CA=Unrealized Gain
FV<CA=Unrealized Loss
FA Sold=Realized Gains and Losses
Financial Assets at Amortized Cost (not hedged)
Not presented in Profit or Loss
Derecognized, sold, impaired or reclassified, and
through amortization process = Realized Gains and
Losses

COMPUTATIONS
DISCUSSION