CIMA F2 Syllabus B. Financial reporting standards - Financial Instruments - Introduction - Notes ^{1 / 7}

Definition of a Financial Instrument

1. It's a contract

2. It creates a financial asset in one entity and a financial liability or equity instrument in another.

Examples:

• Trade receivable (Its trade payable in the other entity)

• Trade Payables

• Loans

• Derivatives

This is also a Financial Instrument...

A contract to buy, for example, precious metals at a future date if......

1. You don't normally buy this metal (or in fact will ever have it delivered)

2. and at some stage you will just settle this contract in cash, based on the movement in the price of the precious metal

Basically you are gambling on the price of the metal... the value of the instrument is DERIVED from the price of the metal (it's a Derivative)

You can spot these in the exam - when you're told:

The metal “will NOT be delivered” or 
The contract “can be settled net”

Financial Liabilities

1. There must be an OBLIGATION to deliver either cash (or other financial asset)

Equity

Basically Assets - Liabilities

• No obligation to deliver cash (or other financial asset)

Shares....

1. In your own company

   These are NOT financial Instruments

2. In a company you have invested in

   These are financial Instruments