Question

Define a financial instrument and identify transactions that give rise to financial instruments and those that do not.

Answer 1

As per IAS 32, "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".

Transactions that give rise to financial instruments:

1) Investments in equity. (Financial Asset)

2) Investments in bonds or deposits. (Financial Asset)

3) Loans and borrowings. (Financial Liability)

4) Trade receivables and Trade Payables.(Financial asset and Financial Liability)

5) Equity instruments issued (Equity instrument)

In all the above examples, there is an involvement of either financial assets (or) financial liabilties/equity.

Transactions that do not give rise to financial instruments:

1) Depreciation of assets

2) Writing down inventory to NRV or cost whichever is lower.