What is a Financial Instrument?
A financial instrument is a contract that creates a financial obligation or financial asset of one entity and a financial liability or equity instrument of another entity. These instruments can be as commonplace as the stocks and bonds you flirt with on Wall Street, or as exotic as derivatives, which sound like something you’d rather not let your mother know you’re involved with.
Further defined under Sections 11 and 12 of the Financial Reporting Standard Applicable in the UK and Republic of Ireland, financial instruments are split into groups quicker than teenagers at a school dance. The ‘Basic Financial Instruments’ category covers everything you might need for a financial kick-start — think simple loans or straight-up bonds. Then there’s the ‘Other Financial Instruments’, mostly your spicier derivatives and advanced hedging tools, because who doesn’t like a bit of complexity in their portfolio?
Global Standards for Amorous Accountants
To keep everyone playing nice, the International Accounting Standards Board (IASB) offers global soirées — IAS 39 and IFRS 9. IAS 39 is like your wise grandparent who still thinks digital watches are a pretty neat idea, while IFRS 9 is the cool, sophisticated aunt who knows how to work a smartphone better than you.
Related Terms
- Capital Instruments: The rock stars of the financial orchestra; they are instruments used to raise long-term funds.
- Negotiable Instrument: This is the financial world’s version of ‘hot potato’, but instead of throwing around tubers, you are passing around documents representing value.
- Stocks and Bonds: Common types of financial instruments, where stocks are equity stakes and bonds are debt obligations.
Further Reading
Curl up with a good book and continue exploring the financial wilds with these scholarly works:
- “Securities and Investments: Understanding the A-Z of Financial Instruments” by Richard Marks – A must-read for those who want nothing left out of their financial vocabulary.
- “Accounting for Fun and Profit: A Guide to Understanding Accounting Standards” by Lisa Numbers – Makes debits and credits as fun as eating ice cream.
Remember, navigating the complexities of financial instruments can be like performing heart surgery on a running cheetah – exhilarating, risky, and definitely not recommended without proper education or supervision.
