Chapter CFM21080

Published date16 April 2016
Record NumberCFM21080
Contracts and contractual rights

The terms ‘contract’, ‘contractual right’ and ‘contractual obligation’ are fundamental to the definition of financial instrument, financial asset and financial liability.

The reference to a ‘contract’ is to an agreement between two or more parties that has clear economic consequences and which the parties have little, if any, discretion to avoid, usually because the agreement is enforceable in law. Contracts, and thus financial instruments, may take a variety of forms and need not be in writing. Contractual rights and contractual obligations are rights and obligations that arise out of a contract. Assets and liabilities that are not contractual in nature are not financial assets or financial liabilities.

Most contracts give rise to a variety of rights and obligations, and the rights and obligations arising from a contract will often change or be added to as the contract is performed. Some of these rights and obligations may fall within the definition of a financial instrument and some may not. For example, an unperformed contract for the purchase or sale of a tangible asset usually gives rise to rights and obligations to exchange a physical asset for a financial asset (although it is possible...

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