What are Financial Assets?
This type of financial asset is the cash or equivalent reserved with the organization. For banks, loans are such assets as they sell them to other parties as their business.
These are basically contracts. All the above assets are liquid assets as they can be converted into their respective values as per the contractual claims of what they represent. They do not necessarily have inherent physical worth like land, property, commodities, etc.
Financial Assets Classification There is no single measurement classification technique that is suitable for all these assets.
Cash and cash equivalents come under this category. On the other hand, one may have to wait for the stock to get money as they have to be sold in exchange financial investments to which assets belong, followed by settlement. For investors, it gives them more security when they have more capital parked in liquid assets. It serves as a major economic quickly find or make money of financing tangible assets.
It becomes possible with the transfer of funds from those who have a surplus of it to where it is needed for such financing. It represents legal claims to future cash expected generally at a defined maturity and defined rate.
The counter-parties involved in the agreement are the company that will pay the future cash issuer and the investors. Disadvantages and Limitations Financial assets liquid assets like deposits in savings accounts and checking accounts with banks are greatly limited when it comes to its return on investmentas there are no restrictions for their withdrawal.
Furthermore, these assets like CDs and money market accounts may prevent withdrawal for months or years as per the agreement, or they are callable. It majorly comes with a maturity date in the contract, attempting to cash out assets before maturity calls for penalties and lower returns.
- Financial asset - Wikipedia
- A financial asset is a liquid asset that gets its value from a contractual right or ownership claim.
- Asset - Wikipedia
- What Are Financial Assets? - Nationwide
Important Points The value of this asset is determined by the demand and supply of such assets in the market. These assets are valued as per the cash required to convert them, which again is decided based on certain parameters.
According to the International Financial Reporting Standards IFRSa financial asset can be: Cash or cash equivalent, Equity instruments of another entity, Contractual right to receive cash or another financial asset from another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity, A contract that will or may be settled in the entity's own equity instruments and is either a non-derivative for which the entity is or may be obliged to receive a variable number of the entity's own equity instruments, or a derivative that financial investments to which assets belong or may be settled other than by exchange of a fixed amount of cash or another financial asset for a fixed number of the entity's own equity instruments. Financial assets with fixed or with determinable payments and fixed maturity which the company has to be willing and able to hold till maturity are classified as "held-to-maturity" investments. Held-to-maturity investments are either measured at fair value through profit or loss by designation, or determined to be financial assets available for sale by designation. Financial assets with fixed or determinable payments which are not listed in an active market are considered to be " loans and receivables ". Loans and receivables are also either measured at fair value through profit or loss by designation or determined to be financial assets available for sale by designation.
The measurement of financial assets cannot be done using a single measurement method. Suppose we measure stocks when investments are small in quantum, the market price can be financial investments to which assets belong to measure the value of the stock at that time.
However, if a company owns a large number of shares of other companies, the market price of the share is not relevant because the investor holding majority shares may not sell them.
Include any money you have in the bank as well as the value of your investments. Include your property value and the worth of your car if you were to sell it, along with any monthly payments you might receive from a pension or retirement plan. Then subtract your liabilities, which are debts you owe. That includes the remaining mortgage on your house and the balances on credit cards or student and car loans.
Every financial asset has different risks and returns for its purchaser. For instance, a car company usually has no idea of the sale of its cars, so the value of stocks of the company may increase or decrease.
Understanding financial assets
A bond can default as issuers may fail to pay back the par value of a bond. Even cash and savings accounts have risks associated, as inflation may have an impact on purchasing power. Conclusion These are a crucial part of any organization. It always needs to have a good record of its financial assets so that is can be put to use whenever needed, like in financial emergencies.
It is helpful to keep a check on the availability of such assets. Each and every financial asset has a different but particular goal for the holder, each has a different amount of risk associated with it, and thus, returns are also different based on risk for the purchaser of such asset.
It helps in the proper functioning of the organization without any dearth of assets. Recommended Articles This article has been a guide to what are Financial Assets and its definition. You may also learn more about the following articles —.