Financial Instruments

Financial instruments are contracts for monetary assets that can be bought, traded, created, modified or settled. In terms of contracts, there is a contractual obligation between the parties involved in a transaction involving financial instruments. When referring to assets, liabilities and equity instruments, the balance sheet immediately comes to mind. Moreover, financial instruments are described in the definition as contracts, so financial assets, financial liabilities and equity instruments are essentially a piece of paper. When we talk about accounting for financial instruments, we are talking about how we account for investments in shares, investments in bonds and receivables (financial assets), how we account for trade payables and long-term loans (financial liabilities) and how we account for share capital (equity instruments). When looking at the rules for accounting for financial instruments, various questions arise about classification, initial measurement and subsequent measurement.

When an invoice is issued for the sale of goods on credit, the entity that sold the goods has a financial asset, the receivable, while the buyer has a financial liability, the payable, to recognize. Suppose an entity raises capital by issuing shares. The entity subscribing to the shares has a financial asset, the investment, while the issuer of the shares who raised the financing has to recognize an equity instrument, the share capital.

There are usually three types of financial instruments: Spot instruments, derivative instruments and foreign exchange instruments.

Cash instruments:

Cash instruments are financial instruments whose value is directly influenced by the market situation. Within cash instruments there are two types: Securities and deposits, and loans.

Securities: A security is a financial instrument that has a monetary value and is traded on the stock exchange. When a security is purchased or traded, it represents ownership of a portion of a publicly traded company on the stock exchange.

Deposits and loans: Both deposits and loans are considered cash instruments because they represent monetary assets that have some form of contractual agreement between the parties.

Derivative instruments:

Derivative instruments are financial instruments whose value is determined by underlying assets such as resources, currencies, bonds, equities and equity indices. The five most common examples of derivative instruments are synthetic agreements, forwards, futures, options and swaps. This is explained in more detail below. Synthetic agreement for foreign exchange (SAFE): A SAFE occurs in the over-the-counter market (OTC) and is an agreement that guarantees a specific exchange rate for an agreed period of time.

Forward contract: A forward is a contract between two parties involving adjustable derivatives where the exchange occurs at the end of the contract at a specified price.
Future: A future is a derivative transaction that involves the exchange of derivatives on a specific future date at a predetermined price.
Options: An option is an agreement between two parties whereby the seller grants the buyer the right to buy or sell a specified number of derivatives at a predetermined price for a specified period of time.
Interest rate swap: An interest rate swap is a derivative agreement between two parties involving the exchange of interest rates in which each party agrees to pay different interest rates on its borrowings in different currencies.

Foreign exchange instruments:

Foreign exchange instruments are financial instruments that are present in the foreign market and consist mainly of currency agreements and derivatives.

As far as currency agreements are concerned, they can be divided into three categories.

Spot: A currency agreement where the actual currency exchange takes place no later than the second business day after the original date of the agreement. It is called "spot" because the currency exchange takes place "on the spot" (limited time frame).
Outright forward: A currency agreement where the actual exchange of the currency takes place "forward" and before the actual date of the agreed need. This is advantageous in the case of fluctuating exchange rates, which change frequently.
Currency swap: A currency swap refers to the simultaneous purchase and sale of currencies with different fixed value dates.

Asset classes of financial instruments:

In addition to the types of financial instruments listed above, financial instruments can also be divided into two asset classes. The two asset classes of financial instruments are debt-based financial instruments and equity-based financial instruments.

Debt- based financial instrumentsDebt-based financial instruments are categorized as mechanisms that an entity can use to increase the amount of capital in an entity. Examples include bonds, notes, mortgages, US Treasuries, credit cards and lines of credit (LOC).

They are an important part of the business environment as they allow companies to increase profitability through capital growth.

Equity-based financial instruments

Equity- based financial instruments are categorized as mechanisms that serve as legal ownership of an entity. Examples include ordinary shares, convertible bonds, preference shares and transferable rights issues. They help companies to increase their capital over a longer period of time, but have the advantage that the owner is not responsible for repaying the debt.
An entity that owns an equity-based financial instrument can either continue to invest in the instrument or sell it whenever it deems it necessary.

FINANCIAL INSTRUMENT

FINANCIAL INSTRUMENT

Cash instruments:

Derivative instruments:

Foreign exchange instruments:

Asset classes of financial instruments:

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FINANCIAL INSTRUMENT

FINANCIAL INSTRUMENT

Cash instruments:

Derivative instruments:

Foreign exchange instruments:

Asset classes of financial instruments:

​Contact

​Services

​Information

Contact

Services

Information