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Hi and welcome to part six
Financial Instruments and Leases
in this HSTalks lecture series
on Analyzing Financial Statements.
My name is David Bond.
Given it's a big topic,
I'm going to jump right in.
We'll start with financial instruments
before moving on to leases.
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Financial instruments range
from the relatively simple
to the incredibly complex.
Not surprisingly,
the accounting for financial instruments
can be a little convoluted at times.
It is also controversial.
The use of fair values,
or sometimes termed
mark-to-market accounting,
was argued to be an exacerbating factor
during the GFC.
Given that this is an introduction
to financial instruments,
I'm going to first look at
what financial instruments are
and then provide an overview
of the main ways
in which they get accounted for
so you can get a feel
as to what is going on.
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So what are financial instruments?
According to the standards,
a financial instrument is any contract
that gives rise to a financial asset
of one entity
and a financial liability
or equity instrument of another entity.
Looking at that definition,
a couple of things are important.
First, a financial instrument
is a contractual relationship
between two parties.
Second, one party will end up
with a financial asset
whilst the other will end up
with either a financial liability
or an equity instrument.
Before we move into an example
to explain this,
let's define financial asset,
financial liability,
and equity instrument.
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The following definitions
are somewhat simplified
from the standards,
but they'll suit our purposes.
A financial asset
is any asset that is cash
and equity instrument of another entity
or the contractual right to receive cash
or another financial asset
from another entity.
A financial liability is any liability
that is a contractual obligation
to deliver cash
or another financial asset
to another entity
and an equity instrument is any contract
that evidences a residual interest
in the assets of an entity
after deducting all of its liabilities.
Now that we've defined them,
let's use an example
to see them in action.
