Subject 3. Financial Instruments: Financial Assets and Financial Liabilities

Financial instruments are contracts that give rise to both a financial asset of one company and a financial liability of another company. Financial instruments come in a variety of forms which include derivatives, hedges, and marketable securities.

Measured at fair market value:

Financial assets:

  • Financial assets held for trading.
  • Available-for-sale financial assets.
  • Derivatives (whether stand-alone or embedded in non-derivative instruments).
  • Non-derivative instruments with fair value exposures hedged by derivatives.

Financial liabilities:

  • Derivatives.
  • Financial liabilities held for trading.
  • Non-derivative instruments with fair value exposures hedged by derivatives.

Measured at cost or amortized cost:

Financial assets:

  • Unlisted instruments (there is no reliable valuation measure).
  • Held-to-maturity investments (bonds).
  • Loans and receivables.

Financial liabilities:

  • All other liabilities (such as bonds payable or notes payable).

Accounting for Gains and Losses on Marketable Securities

  • Held-to-maturity securities. Debt securities that management intends to hold to their maturity dates. At year-end, they are reported at cost adjusted for the effect of interest (debit the securities account and credit the interest income account) and unrealized holding gains and losses are not recognized.

  • Trading securities. Debt and equity securities bought and held mainly for sale in the short term to generate income on price changes. At year-end, they are reported at their fair market value. Any unrealized holding gains or losses are recognized on the company's income statement as part of net income. When they are sold, the realized gains or losses will also appear on the income statement. Realized gains and losses are not affected by any unrealized gains or losses recognized before.

  • Available-for-sale securities. Debt and equity securities not classified as held-to-maturity or trading securities. Unrealized gains and losses are reported as part of other comprehensive income (in contrast, the unrealized gains or losses of trading securities are reported in the income statement as part of net income). Other than that, they are accounted for in the same way as trading securities.
  • User Contributed Comments 4

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    pappoo: Very tricky.
    Oksanata: think of all this fin.instruments as ones that are actively dealing with markets and ones that are not so active dealing with markets. So, you get following idea: if active - measure it at fair market value and recognize UNREALIZED gains/losses (assets:held for trading, available for sale etc, liabilities: held for trading, derivatives etc). if not active - measure it at cost or amortized cost and DO NOT recognize UNREALIZED gains/losses (held to maturity securities etc, other liabilities, see above classifications for fin.assets and liab.)
    Oksanata: watch out though for net income/comprehensive income thing for UNREALIZED gains/losses recognition for trading and available for sale securities..if trading sec - put it to net income, if available-for-sale - put it to other comprehensive income
    johntan1979: Reported under net income if under IFRS