Broadly defined, it is a liability that results in an outflow of monetary assets or other financial assets. Specifically, it arises from a contractual obligation to deliver financial assets (cash, securities, etc.) to a counterparty, or from a contractual obligation to exchange financial assets or financial liabilities with a counterparty under conditions that may not be favorable to the entity.

A financial liability may also arise from a contract that potentially involves repayment in the entity’s own equity, or a non-derivative that may result in a delivery of a variable number of its equity instruments, or a derivative that will or may be settled other than by the exchange of a financial asset for a specific number of the entity’s equity instruments. These instruments do not include convertibles and puttable instruments classified as entity, and any other liabilities, with the nature or classification of an equity, that may arise on liquidation.