Financial instrument

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A financial instrument is a tradeable asset of any kind; either cash, evidence of an ownership interest in an entity, or a contractual right to receive or deliver cash or another financial instrument.

According to IAS 32 and 39, it is defined as "any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity".

Categorization

Financial instruments can be categorized by form depending on whether they are cash instruments or derivative instruments:

• Cash instruments are financial instruments whose value is determined directly by the markets. They can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer.
• Derivative instruments are financial instruments which derive their value from the value and characteristics of one or more underlying entities such as an asset, index, or interest rate. They can be divided into exchange-traded derivatives and over-the-counter (OTC) derivatives.

Alternatively, financial instruments can be categorized by "asset class" depending on whether they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan the investor has made to the issuing entity). If it is debt, it can be further categorised into short term (less than one year) or long term.

Foreign Exchange instruments and transactions are neither debt nor equity based and belong in their own category.

A table

Combining the above methods for categorization, the main instruments can be organized into a table as follows:

Asset class	Instrument type
	Securities	Other cash	Exchange-traded derivatives	OTC derivatives
Debt (long term) > 1 year	Bonds	Loans	Bond futures Options on bond futures	Interest rate swaps Interest rate caps and floors Interest rate options Exotic instruments
Debt (short term) ≤ 1 year	Bills, e.g. T-bills Commercial paper	Deposits Certificates of deposit	Short term interest rate futures	Forward rate agreements
Equity	Stock	N/A	Stock options Equity futures	Stock options Exotic instruments
Foreign exchange	N/A	Spot foreign exchange	Currency futures	Foreign exchange options Outright forwards Foreign exchange swaps Currency swaps

Some instruments defy categorization into the above matrix, for example repurchase agreements.

Measuring financial instruments' gain or loss

The table below shows how to measure a financial instrument's gain or loss:

Instrument Type
	Categories	Measurement	Gains and losses
Assets	Loans and receivables	Amortized costs	Net income when asset is derecognized or impaired (foreign exchange and impairment recognized in net income immediately)
Assets	Available for sale financial assets	Deposit account – fair value	Other comprehensive income (impairment recognized in net income immediately)

See also

• Off-balance-sheet issues

External links

• IFRS List – The online community about IFRS/IAS and Auditing