Chapter 7

FINANCIAL INSTRUMENTS



Sec. 1. Scope. This Chapter provides principles for: a) presenting financial instruments as liabilities or net assets/equity and for offsetting financial assets and financial liabilities; b) recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items; and c) disclosure in the entity's financial statements that enable users to evaluate the significance of financial instruments for the entity's financial position and performance and the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the end of the reporting period, and how the entity manages those risk.

Sec. 2. Definition of Terms. For the purpose of this Manual, the terms stated below shall be construed to mean as follows:


a. Equity instrument - is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

b. Derivative is a financial instrument that derives its value from the movement in commodity price, foreign exchange rate and interest rate of an underlying asset or financial instrument.

c. Financial Instrument - is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. (Par. 9, PPSAS 28)

d. Financial asset - is any asset that is:


1. Cash;
2. An equity instrument of another entity;
3. A contractual right to receive cash or another financial asset from another entity;
4. A contractual right to exchange financial instruments with another entity under conditions that are potentially favorable; or
5. A contract that will or may be settled in the entity's own equity instruments.


e. Financial liability - is any liability that is:

1. A contractual obligation:

i. To deliver cash or another financial asset to another entity; or
ii. 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.

Sec. 3. Financial Instruments. The following are the characteristics of a financial instrument:

a. There must be a contract;
b. There are at least two parties to the contract; and
c. The contract shall give rise to both a financial asset of one party and a financial liability or equity instrument of another party.




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