“A tradeable debt security, usually issued by a government or semi-government body to raise money. Holders of the bond have lent money for which they receive a fixed rate of interest over a set period of time. The bond is repaid with interest on the predetermined maturity date.”
“Loan to a company at a fixed rate of interest and for a fixed term, usually one to five years. The debenture is secured by a trust deed over an asset, or assets, of a company.”
Unsecured notes
“Loans made to a company for a fixed period of time at a fixed rate of interest… They offer a higher rate of interest than a debenture of the same maturity, but do not have the same security as a debenture.”
Source: ASX Pty Ltd
1. Understand what financial instruments are
Derivative securities
Futures & forwards contracts
“An agreement to buy or sell an asset or cash equivalent at a date in the future at a price agreed today.” Option
“Contract between two parties giving the taker (buyer) the right, but not the obligation, to buy or sell a preASX Pty Ltd existing underlying asset at a particular priceSource: on or before a particular date.”
2. Identify why accounting for financial instruments is problematic
Divergence in legal form and economic substance The value of securities and derivatives change
Different parties may utilise the same instrument in different ways
i.e. lending money
Some entities will simply collect the cash flows (i.e. hold to maturity)
Others will either sell or be looking to sell those cash flows 3. Regulation – Financial Instruments
3. Regulation – Financial Instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
AASB 132.11
AASB 132.11
3. Regulation – Financial Instruments
A financial asset is any asset that is: cash; an equity instrument of another entity; a contractual right:
a)
b)
c)
to receive cash or another financial asset from another entity; or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or
i. ii. d)
a contract that will or may be settled in the entity’s own equity instruments…
AASB 132.11
3. Regulation – Financial Instruments
A financial liability is any liability that is: a contractual obligation:
a)
to deliver cash or another financial asset to another entity; or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or
i. ii. b)
a contract that will or may be settled in the entity’s own equity instruments…
AASB 132.11
3. Regulation – Financial Instruments
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
