What is a Financial Instrument?
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, requires entities to disclose the fair value of all financial instruments, including derivative financial instruments, as defined. A financial instrument is defined as: • Cash; • Evidence of an ownership interest in an entity; or • A contract that both: • Imposes on one entity a contractual obligation (a) to deliver cash or another financial instrument to a second entity, or (b) to exchange other financial instruments on potentially unfavorable terms with the second entity; and • Conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. A contractual obligation and a contractual right include both those conditioned on the occurrence of a specified event, and those that are not. A contractual obligation or a contractual right may be recognized
Financial instruments are legal documents that embody monetary value. There are a number of different types of documents that are properly identified as a financial instrument. Under the broad heading of a financial instrument, some would be classified as cash instruments or derivative instruments. When most people think in terms of a financial instrument, they tend to identify what is commonly known as a cash instrument. This type of financial instrument is simply those documents that are recognized as cash that can be utilized for various transactions. Currency is the most easily identified of all cash instruments, although such documents as checks or funds transfers from bank accounts would also be understood to be a financial instrument of this type. Derivative instruments are another example of the financial instrument. This classification would include such instruments as futures, options, and swaps. Some analysts also prefer to include stocks, bonds, and currency futures within
