FRS 102 Financial instruments – definitions and examples

FRS 102 Financial instruments – definitions and examples

In this blog we will look at FRS 102 Financial instruments – definitions and examples. This article will look at some common types of assets and liabilities and discuss whether they are counted as financial instruments.

This blog is for general information only and no liability will be accepted should action be taken as a result of the guide. Professional advice specific to your individual case should always be sought. The information presented in this blog is believed to be correct at the date of posting, and whilst every effort is taken to keep the information up to date, this is not always possible.

The first place to start is by looking at what the definition of a financial instrument is. According to FRS 102: section 11.3:

“A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.”

Note the importance of the word “contract.” For there to be a financial instrument there must be a contract. If there is no contract there is no financial instrument. A tax liability is therefore NOT a financial instrument since it is a statutory, not contractual liability.

It is also important to understand what a financial asset and financial liability are:

Financial Asset

According to Appendix 1 of FRS 102 a financial asset is:

Any asset that is:
(a) cash;
(b) an equity instrument of another entity;
(c) a contractual right:
(i) to receive cash or another financial asset from another
entity, or
(ii) to exchange financial assets or financial liabilities with
another entity under conditions that are potentially
favourable to the entity; or
(d) a contract that will or may be settled in the entity’s own equity
instruments and:
(i) under which the entity is or may be obliged to receive a
variable number of the entity’s own equity instruments; or
(ii) that will or may be settled other than by the exchange of a
fixed amount of cash or another financial asset for a fixed
number of the entity’s own equity instruments. For this
purpose the entity’s own equity instruments do not include
instruments that are themselves contracts for the future
receipt or delivery of the entity’s own equity instruments.

Financial Liability

According to Appendix 1 of FRS 102 a financial liability is:

Any liability that is:
(a) a contractual obligation:
(i) to deliver cash or another financial asset to another entity;
or
(ii) to exchange financial assets or financial liabilities with
another entity under conditions that are potentially
unfavourable to the entity, or
(b) a contract that will or may be settled in the entity’s own equity
instruments and:
(i) under which the entity is or may be obliged to deliver a
variable number of the entity’s own equity instruments; or
(ii) will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number
of the entity’s own equity instruments. For this purpose the
entity’s own equity instruments do not include instruments
that are themselves contracts for the future receipt or
delivery of the entity’s own equity instruments.

FRS 102 Financial instruments – definitions and examples

Now we have defined financial instruments, we can look at some specific types of assets and liabilities and work out whether they are financial instruments:

Type of asset / liability  Financial instrument?   Reason why is or is not a financial instrument
Accruals  Yes  This is a contractual right to pay cash so is a financial instrument
Bank loans  Yes  This is a financial asset of the bank and a financial liability of the company. There is a contractual obligation to repay the cash.
Bank overdraft  Yes  This is a financial asset of the bank and a financial liability of the company. There is a contractual obligation to repay the cash.
Cash at bank  Yes  This is a financial asset of the company and a financial liability of the bank. There is a contractual obligation to repay the cash.
Commercial paper  Yes  This is a contract that gives rise to a financial asset of one entity and a financial liability of another entity.
Corporation tax  No  These are statutory, not contractual liabilities so are not financial instruments
Deferred income  No This is associated with the future delivery of goods or services. It does not give a contractual right to receive cash or another financial asset so is not a financial instrument
Derivative financial instruments  Yes
Directors current account  Yes  This is a financial asset / liability of the company and a financial asset / liability of the director. There is a contractual obligation to repay the debt.
Finance leases  Yes  This is a contract that gives rise to a financial asset of one entity and a financial liability of another entity.
Fixed assets  No This gives an opportunity to generate a cash inflow, but does not give a contractual right to receive cash or another financial asset so is not a financial instrument
Foreign exchange forward contract  Yes
Group company creditor  Yes  This is a financial liability of the company and a financial asset of the other group company. There is a contractual obligation to repay the debt.
Group company debtor  Yes  This is a financial asset of the company and a financial liability of the other group company. There is a contractual obligation to repay the debt.
Hire purchase  Yes  This is a contract that gives rise to a financial asset of one entity and a financial liability of another entity.
Intangible assets  No This gives an opportunity to generate a cash inflow, but does not give a contractual right to receive cash or another financial asset so is not a financial instrument
Interest rate swap  Yes
Loan  Yes  This is a contract that gives rise to a financial asset of one entity and a financial liability of another entity.
Loan stock  Yes
Operating lease  No This gives an opportunity to generate a cash inflow, but does not give a contractual right to receive cash or another financial asset so is not a financial instrument
Ordinary shares  Yes
Other creditors  Yes  This is a contract that gives rise to a financial asset of one entity and a financial liability of another entity.
Other debtors  Yes  This is a contract that gives rise to a financial asset of one entity and a financial liability of another entity.
Other taxation & social security  No  These are statutory, not contractual liabilities so are not financial instruments
PAYE / National insurance  No  These are statutory, not contractual liabilities so are not financial instruments
Preference shares  Yes
Prepayments  No This is associated with the delivery of goods or services. It does not give a contractual right to receive cash or another financial asset so is not a financial instrument
Share based payment  Yes
Short term deposits  Yes  This is a financial asset of the company and a financial liability of the bank. There is a contractual obligation to repay the cash.
Stock  No This gives an opportunity to generate a cash inflow, but does not give a contractual right to receive cash or another financial asset so is not a financial instrument
Tax liability  No  These are statutory, not contractual liabilities so are not financial instruments
Trade creditors  Yes  This is a contractual right to receive cash so is a financial instrument
Trade debtors  Yes  This is a contractual right to receive cash so is a financial instrument
VAT  No  These are statutory, not contractual liabilities so are not financial instruments
Warranty obligations  No This is associated with the future delivery of goods or services. It does not give a contractual right to receive cash or another financial asset so is not a financial instrument

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