We are going to discuss financial instruments. If you're reading a set of financial statements for any bank, you'll regularly see the term used. So let's explain exactly what it refers to. A financial instrument is a contract that gives rise to a financial asset in one entity and a financial liability or equity instrument in another. So in summary, a financial instrument is a contract, a piece of paper between two parties. Let's think about two parties, an issuer and an investor. An example of a financial instrument is where a company issues bonds. For an investor holding those bonds, it records a financial asset, a debt security on its balance sheet. This is a type of financial instrument. Another example of a financial instrument would be a company issuing shares. For an investor holding those shares, he'd also record a financial asset, an equity security in its balance sheet. This is an another example of a type of financial instrument.

So we've introduced the term financial instruments and we've described an investment in both debt securities and equity securities. Now let's think in some more detail about how these financial instruments might be further classified under US GAAP. There are three distinct classifications which we'll discuss in turn, held to maturity, trading and available for sale.

Held to maturity is relevant for debt securities and redeemable preference shares. It is a restrictive classification under US GAAP. There must definitely be no intention to sell the security for it to sit within this category and this must be justified for each investment. For example, securities that may be sold based on a change in interest rates should not be classified as held to maturity. There must be a positive intent and ability to hold to maturity for a security to be classified in this way. If an entity sells are held for maturity security, it calls into question the entity's intention to hold all of its investments to maturity. Under US GAAP, this is called a tainting event. It's pretty serious. It means that for a period of time, it is forced to reclassify all of its remaining held to maturity investments as available for sale. Debt securities held to maturity are reported at amortised cost, meaning that they're held at their original cost on the balance sheet less any impairment. This is because the investor holds the security to collect contractual cash flows and will not realize any short term fluctuations in fair value. If a security is being acquired with the intention to sell within hours or days, there is no question, US GAAP tells us it must be recognized as trading. Specifically, US GAAP tells us that the entity should make reference to the business purpose of the transaction. If the objective is to make a profit from short-term price differences, then trading is the correct category. Financial instruments in this category are accounted for at fair value. You may be familiar with the term marked to market. Any changes in fair value are recognized in net income. The final category is available for sale. This captures assets that are not able to be categorized as held to maturity because there is insufficient evidence to back that up. For example, because the security may be sold if economic conditions change. Furthermore, the security has not been purchased with the principle business purpose of profiting from short-term price fluctuations and there is no intention to sell it in the near term. So it is not a trading security. Financial instruments in this category are again accounted for at fair value. You may be familiar with the term mark to market. However, any changes in the fair or market value are recognized in other comprehensive income, and so do not impact net income on the P&L. Here we have an example of a real bank's balance sheet. This example happens to be Goldman Sachs's balance sheet. You'll notice that Goldman Sachs is reporting receivables. Principally, these line items will be held at amortised cost. And below we have financial instruments which are recorded at fair value, meaning they're marked to market at each balance sheet date.