What does “financial instruments” actually mean?

The PSP auditors explain what is meant by “financial instruments”.
Financial instruments are playing an increasingly important role for companies in almost all sectors and sizes. The question often arises as to how and to what extent these are to be shown in the balance sheet or information is required in the notes or management report. Since the legislator has (deliberately) left the term financial instrument vague, the first question that arises is what financial instruments actually are.
A financial instrument is a mutual contract that gives rise to a financial asset for one party and a financial liability or equity instrument for the other party. A distinction is made between primary and derivative financial instruments.
Original financial instruments are mostly securities (particularly shares), which are to be reported accordingly in the balance sheet. Apart from a few special regulations for banks, German commercial law does not have any special regulations for the accounting of financial instruments. They must therefore be accounted for following the general principles of accounting. Disclosures in the notes are only considered insofar as the book value of the original financial instrument is higher than its fair value (fair value) and no unscheduled depreciation was made (Section 285 No. 18 HGB).
Derivative financial instruments (derivatives), on the other hand, are forward transactions designed as fixed or options transactions that are concluded based on a specific underlying. Securities (equities, bonds), financial ratios (interest rates, exchange rates, price indices), or commodities (commodity prices) may be considered as possible base values. By combining an underlying transaction with an opposing transaction initiated to hedge risk, derivative financial instruments are often used for the targeted control of market price risks. Common derivatives are in particular options, futures, forward transactions, and swaps.
The fair value of the financial instrument is regularly determined by the contractual banks and can be queried there. The additional disclosure requirements of Section 285 No. 19 HGB do not apply to derivatives that are the subject of a hedge position and represent a valuation unit under Section 254 HGB.
For derivative financial instruments, it must be checked on the balance sheet date whether losses are to be expected from the contracts concluded, for which a provision for impending losses must then be formed by commercial law. Unrealized profits, on the other hand, are not to be shown following the realization principle. Current payments from the derivative are recognized as income or expense in the income statement.

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