Running Head: FINANCIAL INSTRUMENTS

Financial Instruments

[Name of the Writer]

[Name of the Institution]

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Table of ContentsIntroduction.................................................................................................................................................1

Financial Instruments (GAAP Accounting).................................................................................................1

Examples.....................................................................................................................................................1

Accounting for Financial Instruments.........................................................................................................2

IFRS 9 – Financial Instruments...............................................................................................................2

Types of Financial Instruments...................................................................................................................2

Valuation of Financial Instruments.............................................................................................................3

Conclusion...................................................................................................................................................3

References...................................................................................................................................................4

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Introduction

In the paper, definition of financial instruments will be discussed. The examples and

scenarios that are related to the financial instruments will be explained in detail plus the

proposed are defined on broader look as assets which hold significance & can be used as trading

assets. These instruments can be cash or an entity which provides proof of ownership interest or

a right which is contractual to send or receive a particular asset, cash or any instrument in

relation to finance.

Financial Instruments (GAAP Accounting)

To be more specific, GAAP (Generally Accepted Accounting Principles-US Standard)

defines financial instrument as a documented paper that includes checks, bonds, shares,

exchange bills, drafts, forwards or futures (contract) etc. provided the document bears a

monetary value or signifies a legal agreement which is enforceable or binding among the

concerned parties mentioning right to money payments (ACCA, 2014).

Examples

When a bill is issued on the credit sale of assets, the selling entity has a specific financial

asset on called “Receivable” while the buyer entity is accounted for a financial liability termed as

“Payable”, the issuance of the bill is a financial instrument.

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Another example is when a party earns finance by the issuance of equity shares. The

party that is subscribing shares made an “investment” while the issuer entity who earned finance

has accounted for “equity share capital” (equity instrument).

A third example is when a party issues bonds to raise fund, this is called “Debentures”.

Here the entity subscribing bonds is lending the money and this party has financial asset

(investment) while the bond issuer is the borrower responsible for raising funds and the entity is

accounted for financial liability.

Accounting for Financial Instruments

Accounting for financial instruments, in simpler terms means to account for financial

assets like accounting for shares investments, bonds investments & account for receivables, to

account for financial liabilities like accounting for long term loans & payables and finally

account for equity instruments like accounting for share capital (Spaulding, 2014).

IFRS 9 – Financial Instruments

IFRS 9 presents an approach logical for the business approach in which an asset is

apprehended & financial asset classification being driven by characteristics of cash-flows. The

prevailing rule based requirements are replaced by principle-based & single approach, to make it

simpler and easier to apply. The new approach has also resulted to be a only impairment model

which will be applied to all financial instruments and it has removed all the complexities related

with previous accounting model.

Types of Financial Instruments

There are many types of financial instruments. Some of the types are listed below:

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Money Exchange for principal repayment & future interest payments

Money Exchanges for interest & capital gain

Money Exchanges for offset risk &/or capital gain

Money Exchanges for security against risk.

Valuation of Financial Instruments

The valuation of financial instrument is done upon the expected pay & in accordance

with it, payment’s present value is calculated which is determined in relation to the payment

received. Noticeably, the greater expected rate of return of the payment, the greater the present

value. That’s the cause behind the highly valued stocks of high growth companies.

Conclusion

The financial instruments are utilized for the exchange of trading assets. They are useful

for the accounting purposes in finance. Various accounting models have been introduced in order

to sort out the complexities and to make the application of the concepts simpler.

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References

ACCA, A. (2014). What is a financial instrument? | ACCA Qualification | Students | ACCA

Global. [online] Accaglobal.com. Available at:

http://www.accaglobal.com/pk/en/student/acca-qual-student-journey/qual-resource/acca-

qualification/f7/technical-articles/what-financial-instrument.html [Accessed 2 Dec.

2014].

BusinessDictionary.com, (2014). What is financial instrument? definition and meaning. [online]

Available at: http://www.businessdictionary.com/definition/financial-instrument.html

[Accessed 2 Dec. 2014].

Fasb.org, (2014). Accounting for Financial Instruments. [online] Available at:

http://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1351027210037 [Accessed 2 Dec.

2014].

Spaulding, W. (2014). Financial Instruments. [online] Thismatter.com. Available at:

http://thismatter.com/money/banking/financial-instruments.htm [Accessed 2 Dec. 2014].

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