Financial Instruments

Financial instruments are all around us and are certainly not only limited to large financial institutions.

We have valued a variety of financial instruments over the years, and are able to assist you with your specific challenges.

Financial instruments are all around us – foreign exchange contracts, interest-rate swaps, equity investments, put options, long-term loans and so on.

In fact, whenever we enter into a contract in which we are exposed to some sort of future cash flows, a financial instrument has most likely appeared. We may be either the person receiving these cash flows, or the person responsible for settling them – it really makes no difference.

The accounting for financial instruments is highly complicated and the relevant authorities have been at pains over the past decade to “make things simpler” while also making sure that no more major businesses collapse. If we look at the recent (March 2023) collapse of Silicon Valley Bank, however, there is still a lot more work that needs to be done.

Without unnecessarily getting into the accounting detail of “IFRS 9: Financial Instruments”, the valuation of financial instruments is divided into two broad categories – “Amortised Cost” and “Fair Value”. As the accounting world moves closer to “Fair Value”, however, the bastion of “Amortised Cost” is very much under siege.

And so, focusing on “Fair Value”, the valuation of Financial Instruments is based on two main principles:

  1. Estimation of the Future Cash Flows, and
  2. Assessment of the Risks underpinning those Future Cash Flows.

In estimating the Future Cash Flows, we should look at Various Scenarios and the Probability of them occurring. This may be either a very simple weighting exercise or involve complicated statistical measures.

There are many types of Risks that we should consider, and some of these are illustrated in the diagram above.

There is obviously a strong interdependency between the Future Cash Flows and the Risks that underpin them, and we must be careful to balance these.

Please Contact us for more information on how we can assist you with any Financial Instruments queries that you may have.