INTRODUCTION TO FINANCIAL INSTRUMENTS(PAS 32 AND 39)

Definition

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.

Common Examples of Financial Instruments

1. Cash2. Demand and time deposits3. Commercial paper, such as money market instruments and treasury bill.4. Accounts, notes and loans receivable and payable5. Debt and equity securities (including investment in subsidiary, associate

and joint venture)6. Asset backed securities such as collateralized mortgage obligations,

repurchase agreements and securitized packages of receivables.7. Derivatives, including options, rights, warrants, futures contracts, forward

contracts and swaps8. Finance leases9. Rights and obligations with insurance risk under insurance contracts10. Employer’s rights and obligations under pension contracts

Financial Assets

A financial asset is any asset that isa. Cashb. A contractual right to receive cash or another financial asset from another

entity.c. A contractual right to exchange financial instrument with another entity

under conditions that are potentially favorable. An example is an option held by the holder to purchase shares in a specified company at less than market price.

d. An equity instrument of another entity.

The following physical assets are not financial assets because it does not give rise to a present right to receive cash or another financial asset:

a. Prepaid Expensesb. Inventoryc. Property, Plant and Equipmentd. Intangible Assets

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Classification of Financial Assets

For purposes of measuring financial assets subsequent to initial recognition, financial assets under PAS 39 are classified as follows:

a. Trading securitiesb. Available for sale securitiesc. Held to maturity securitiesd. Loans and receivables

Non-derivative financial assets with fixed or determinable paymentsthat are not quoted in an active market.

Financial Liabilities

A financial liability is any liability that is a contractual obligation:a. To deliver cash or other financial asset to another entity

Trade accounts payable Notes payable Loans payable Bonds payable

b. To exchange financial instruments with another entity under conditions that are potentially unfavorable

The following are not financial liabilities because the outflow of economic benefits associated with them is the delivery of goods and services rather than a contractual obligation to pay cash or another financial asset.

a. Deferred revenueb. Warranty obligations

May 2009

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