Learning Module for Business Finance How transactions between suppliers and users of funds take place? How would they prove that there was a transaction so that the demander will be able to repay the supplier on time and at the right amount? You may write your answers on the box. Due to the increased need for security for the performance of obligations arising from these transactions, the transfers of funds from one party to another are made through Financial Instruments. Financial Instruments When a financial instrument is issued, it gives rise to a financial asset on one hand and a financial liability or equity instrument on the other. Recall from your ABM class the following definitions: Financial Asset is any asset that is: Cash An equity instrument of another entity A contractual right to receive cash or another financial asset from another entity. A contractual right to exchange instruments with another entity under conditions that are potentially favorable. (IAS 32.11) Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment in Bonds A Financial Liability is any liability that is a contractual obligation: . To deliver cash or other financial instrument to another entity. To exchange financial instruments with another entity under conditions that are potentially unfavorable. (IAS 32) Examples: Notes Payable, Loans Payable, Bonds Payable An Equity Instrument is any contract that evidences a residual interest in the assets of an entity after deducting all liabilities. (IAS 32) Examples: Ordinary Share Capital, Preference Share Capital. Who are the holders of Financial Assets? Suppliers of Funds are the holders of financial assets. 8