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entity under conditions that are potentially favorable to the entity
4. A contract that may or will be settled in the entity’s own equity instrument and is not classified as an equity instrument of the entity (discussed ahead)
Example
Examples of assets that meet the definition of a financial asset are
• Cash (see 1. in the preceding list)
• Investment in shares or other equity instrument issued by other entities, (see 2. in the preceding list)
• Receivables (see 3. in the preceding list)
• Loans to other entities (see 3. in the preceding list)
• Investments in bonds and other debt instruments issued by other entities (see 3. in the preceding list)
• Derivative financial assets (see 3. in the preceding list)
• Some derivatives on own equity (see 4. in the preceding list)
Financial liability. Any liability that is
1. A contractual obligation 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 unfavorable to the entity
2. A contract that will or may be settled in the entity’s own equity instruments and is not classified as an equity instrument of the entity (discussed ahead)
Example
Examples of liabilities that meet the definition of financial liabilities are
• Payables (e.g., trade payables) (see 1. previous paragraph)
• Loans from other entities (see 1. previous paragraph)
• Issued bonds and other debt instruments issued by the entity (see 1. previous paragraph)
• Derivative financial liabilities (see 1. previous paragraph)
• Obligations to deliver own shares worth a fixed amount of cash (see 2. previous paragraph)
• Some derivatives on own equity (see 2. previous paragraph)
It follows from the definitions that these assets and liabilities are not financial instruments:
• Physical assets (e.g., inventories, property, plant, and equipment). Control of physical assets creates an opportunity to generate a cash inflow but does not give
rise to a present right to receive cash or another financial asset.
• Leased assets. Control of leased assets creates an opportunity to generate a cash inflow but does not give rise to a present right to receive cash or another
financial asset.
• Intangible assets (e.g., patents and trademarks). Control of intangible assets creates an opportunity to generate a cash inflow but does not give rise to a present
right to receive cash or another financial asset.
• Prepaid expenses. Such assets are associated with the receipt of goods or services. They do not give rise to a present right to receive cash or another financial
asset.
• Deferred revenue. Such liabilities are associated with the future delivery of goods or services. They do not give rise to a contractual obligation to pay cash or
another financial asset.
• Warranty obligations. Such liabilities are associated with the future delivery of goods or services. They do not give rise to a contractual obligation to pay cash or
another financial asset.
• Income tax liabilities (or assets). Such liabilities (or assets) are not contractual but are imposed by statutory requirements.
• Constructive obligations. Such obligations do not arise from contracts. (A constructive obligation is defined by IAS 37 as an obligation that derives from an
entity’s actions where: (1) by an established pattern of past practice, published policies, or a sufficiently specific current statement, the entity has indicated to
other parties that it will accept certain responsibilities; and (2) as a result, the entity has created a valid expectation on the part of those other parties that it will
discharge those responsibilities.)
Apart from items that meet the definition of financial instruments, IAS 32, IFRS 9, IAS 39, and IFRS 7 also apply to some contracts that do not meet the definition
of a financial instrument but have characteristics similar to derivative financial instruments. This expands the scope of IAS 32, IFRS 9, IAS 39, and IFRS 7 to
contracts to purchase or sell nonfinancial items (e.g., gold, electricity, or gas) at a future date when, and only when, a contract has both of these two characteristics:
(1) it can be settled net in cash or some other financial instrument, and (2) it is not for receipt or delivery of the nonfinancial item in accordance with the entity’s
expected purchase, sale, or usage requirements. The chapter on IAS 39 provides a more detailed discussion.
IAS 32 has scope exceptions for some items that meet the definition of a financial instrument, because they are accounted for under other IFRS. Such scope
exceptions are listed in the table.
Scope Exception Applicable Standard
Interests in subsidiaries IAS 27, Consolidated and Separate Financial Statements
Interests in associates IAS 28, Investments in Associates
Interests in joint ventures IAS 31, Interests in Joint Ventures
Employee benefit plans IAS 19, Employee Benefits
Share-based payment transactions IFRS 2, Share-Based Payment