A financial instrument is any contract that gives rise toGroup of answer choicesA financial assetA financial liabilityA financial asset of one entity and financial liability of another entityA financial asset of one entity and financial liability or equity instrument of another entity
Question
A financial instrument is any contract that gives rise toGroup of answer choicesA financial assetA financial liabilityA financial asset of one entity and financial liability of another entityA financial asset of one entity and financial liability or equity instrument of another entity
Solution
A financial instrument is any contract that gives rise to a financial asset of one entity and financial liability or equity instrument of another entity.
Here's the step by step explanation:
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A financial instrument is a contract, it's an agreement made between two parties.
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This contract creates a financial asset for one entity. A financial asset is any asset that is cash, a contractual right to receive cash or another financial asset, or an equity instrument of another entity.
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Simultaneously, the contract also creates a financial liability or an equity instrument for another entity. A financial liability is any liability that is a contractual obligation to deliver cash or another financial asset to another entity.
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Therefore, a financial instrument is a contract that simultaneously creates a financial asset for one entity and a financial liability or equity instrument for another entity.
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What is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity?
An issuer of a financial instrument must classify the instrument (or its component parts) on initial recognition as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a ___________________and an equity instrument.
As an exception to the general definition of a _____________, an instrument that meets the definition of a financial liability is nevertheless classified as an equity instrument if it has all the features and meets the conditions in paragraphs 16A and 16B.
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