Introduction

‘Financial instruments’ is a broad term, encompassing a wide range of financial assets and financial liabilities. These terms are defined below. A subset is ‘capital instruments’, that is all instruments issued by an entity as a means of raising finance, comprising the entity's equity instruments, together with debt instruments such as loans and debentures.

The term ‘capital instruments’ is not generally used in IFRS and US GAAP, but has been used in UK literature and accounting standards in the context of the company that issues the instruments. By contrast, the broader term ‘financial instruments’ is internationally recognised and is used in the context of the investor as well as the issuer of the instrument; for example, it includes ordinary shares in the accounts of the investing company as well as the issuing company, and encompasses a number of additional contracts that are not regarded as capital instruments, for example, trade debtors and creditors, and derivatives.

Historically, in UK GAAP, there have been accounting standards dealing with capital instruments (FRS 4) and disclosures about financial instruments (FRS 13). These have now largely been superseded by FRS 25 ‘Financial instruments: disclosure and presentation’ and FRS 26 ‘Financial instruments: measurement’, which are based very closely on IASs 32 and 39. FRSs 25 and 26 replace FRS 13 and most of FRS 4 as well as amending a number of other standards.