My lecturer at university always said to focus on the definitions in accounting. As long as you understand the basics of the definitions, accounting becomes relatively straightforward. The summary does indeed tend to explain the definitions of financial instruments (IAS 32 and IFRS 9) in a way that...
As per definitions in IAS 32 a financial asset is:
a) Cash i.e a bank account, petty cash
b) an equity instrument of another entity e.g. shares
c) i)a contractual right to receive cash (in future e.g. debtors) or another financial
asset
(convertible debt: the conversion into shares is a right as there is embedded call
option in the financial instrument to exercise if favourable.
ii) to exchange financial assets (cash for shares) or financial liabilities with another
entity under conditions that are potentially favourable to the entity e.g. a call option
that expires in the money
d) a contract that will or may be settled in the entity’s own equity instruments
and is:
i) a non-derivative for which the entity is or may be obliged to receive a variable
number of own equity instruments
ii) a derivative that will or may be settled other than by exchange of a fixed amount
of cash or another financial asset for a fixed number of the entity’s own equity
instruments eg entity X purchases a call option form entity Y to the value of $1000
on entity X’s own shares. Because the equity instruments(shares) are the
company’s own and the number of shares to be received is variable (depends on
the market value per share at expiry to be delivered by entity Y i.e $1000 divided by
MV per share at expiry.)
A financial liability is a contractual obligation
a) to deliver cash (trade payables) or another financial asset to another entity
or
b) to exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavourable to the entity eg the company
writes a call option and it expires in the money so entity has to deliver shares
i) a contract that will or may be settled in the entity’s own equity instruments
i.e instead of paying cash for goods purchased you pay with your own
shares) and is
and is:
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