Financial Instruments

Topics: International Financial Reporting Standards, Financial markets, Balance sheet Pages: 7 (2443 words) Published: July 16, 2012
In today’s world of Globalization, we are witnessing free trade agreements between different countries, international exchanges are multiplying, and commercial barriers are falling. Hence competition is measured on global scale. In this wave of globalization, financial instruments have been growing at an incredible pace. We are currently witnessing a rapid expansion phenomenon of the use of the financial instruments in the international financial market. These fluctuate from the traditional instruments like interests or bonds, to the various forms of derivative instruments, such as futures contracts, forward contracts, options, interest rate swap etc. So the need for converging standards for addressing complexity of financial instrument arises. Because of the increase in the use of financial instruments in the global market there is a need to recognize and disclose them in the financial statements that it can provide the reliable and relevant information so that investors and creditors can rely on those instruments. So I am undertaking research which will focus on disclosure and recognization of financial instruments keeping in mind the CICA Handbook Section 1000. I will start my study with the definition and classification of financial instruments. And then I will discuss the development and further amendments, the need to focus on the development of the financial instrument emerged due to the recent revolution of convergence.

Definition of Financial Instruments
With reference to definition given in the book written by Scott, William R. (2007) “Financial Accounting theory” 5th ed., pp 2355, financial instrument are defined as : “A financial instrument” is a contract that creates a financial asset of one firm and a financial liability or equity instrument of another firm” Financial assets and liabilities are defined quite broadly. Thus financial assets are: •Cash

An equity instrument of another firm
A contractual right
oTo receive cash or another financial asset from another firm oTo exchange financial instruments which another firm under conditions that are potentially favourable In the same way, a financial liability is any liability that is: •A contractual obligation

oTo deliver cash or another financial assets to another firm oTo exchange financial assets or financial liabilities with another firm under conditions that is potentially unfavourable.

Classification of Financial Instruments
As per IAS 39, financial assets can be classified into the following four categories: 1.Available for Sale: These are non-derivative financial assets that firm designate upon acquisition as available for sale. 2.Loans and Receivables: These are non-derivative financial instruments with fixed and determinable future payments. 3.Held to Maturity: These are non derivate financial assets with fixed or determinable payments that the firm intends to hold to maturity. A portfolio of bond investment could be a good an example. 4.Financial assets at fair value through profit and loss: This category includes all derivative not held for hedging and all non derivatives held for trading. Similarly, financial Liabilities can be categorized into following two categories: •Financial Liabilities at fair value through profit and loss: These liabilities are valued under fair value option same as the financial assets. •Other financial liabilities: This category includes bonds outstanding. They are valued at cost or amortized cost.

Valuation of Financial Instruments
Accounting information plays an important role in the efficient functioning of a market economy. Financial statements facilitate the allocation of capital throughout the economy by conveying information that helps investors and creditors assess an entity’s future profitability. So the valuation of financial instruments should be reliable and relevant for the users of financial statements. As per CICA...
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