Disclosure of Financial Instruments with Off-Balance-Sheet Credit and Market Risk

What is a Financial Instrument?

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Question

Disclosure of information about the extent, nature, and terms of financial instruments with off-balance- sheet credit or market risk and about concentrations of credit risk is required for all financial instruments. Which of the following is defined as a financial instrument?

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Explanations

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A. B. C. D. E.

B

A financial instrument is cash, evidence of an ownership interest in an entity, or a contract that both:

1. imposes on one entity a contractual obligation to deliver cash or another financial instrument to a second entity or to exchange financial instruments on potentially unfavorable terms with the second entity, and

2. 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. Therefore, a note payable in U.S. Treasury bonds gives the holder the contractual right to receive and imposes on the issuer the contractual obligation to deliver bonds that are themselves financial instruments.

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