Welcome to IFRS is easy's flash term for the week
Understanding financial instruments
Have you ever wondered why many fear IFRS 9 as an unnecessarily complex accounting standard? Maybe you also do? But there is no shame in it because everyone has been in that dreadful position before.
Understanding the basics could go a long way in eliminating that fear. And like Emerson said, "if you learn the principles, you can devise your own method."
IFRS 9 whose subject matter is Financial Instruments is one of the three accounting standards that address the accounting treatment of financial instruments. IAS 32 deals with the presentation while IFRS 7 deals with the disclosures.
So what is this financial instrument that we all do talk about?
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.
The above implies that when there is a financial asset, then there must be either a financial liability or an equity instrument on the other end. It is just like the basic accounting principle: assets = liabilities + equity.
Financial instruments can be a financial asset (which is cash or the right to receive cash), a financial liability (which is the obligation to deliver cash), or equity (which is the residual interest in the assets of an entity after deducting all of its liabilities).
Derivatives or Non-derivatives?
Can you identify which is a financial asset, financial liability, equity, or non-financial instrument below?
- Trade receivables
- Trade payables
- Contract liabilities
- Loans and borrowings
- Loans and advances to customers
- Value added tax payable