It is any conrtract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity.
What are the characteristics of a financial instrument?
There must be a contract
There are at least two parties to the contract
The contract shall give rise to financial asset of one party and financial liability or equity instrument of another party
Give examples of financial instruments
Cash in the form of notes and coins
Cash in the the form of checks
Cash in bank
Trade accountss
Notes and loan
Debt securities
Equity securities
What is a financial liability?
It is any liability that is a contractual obligation:
To deliver cash or other financial asset to another entity
To exchange financial instruments with another entity under conditions that are potebtially unfavorable
Give examples of financial liabilities
Trade accounts payable
Notes payable
Loans payable
Bonds payable
Why are items such as deferred revenue and warranty obligations not a financial liabilty?
Because the outflow of economic benefits associated with them is the dfelivery of goods and services rather than the contractual obligation to pay cash or another financial asset.
Why are contractual obligations not financial liabilities?
Because the obligations do not arise from contracts
What is an equity instrument?
It is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.