Financial asset, also referred as financial instruments are the different liquid assets which derive their value from any contractual claim and examples of which includes cash in hand, certificate of deposit, loan receivables, marketable securities, bonds, stocks, mutual funds, etc.
Examples of Financial Asset
A Financial Asset, also has known as financial instruments or securities, is not a physical asset but is part of the intangible asset of an entityIntangible Asset Of An EntityIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. . They derive their value from the contractual claim. It can be readily and easily converted to cash. Some are bank balance, shares, short-term investments, treasury billsTreasury BillsTreasury Bills or a T-Bill controls temporary liquidity fluctuations. The Central Bank is responsible for issuing the same on behalf of the government. It is given at its redemption price and a discounted rate and is repaid when it reaches maturity., etc.
It is usually represented as a certificate, receipts, or another legal document. Financial assets are often created by or related to the lending of money. They are widely used to finance real estate and the ownership of tangible assetsTangible AssetsAny physical assets owned by a firm that can be quantified with reasonable ease and are used to carry out its business activities are defined as tangible assets. For example, a company's land, as well as any structures erected on it, furniture, machinery, and equipment..
List of Financial Assets Examples
source: Microsoft SEC Filings
Below is the list of Financial Asset Types and examples –
- Cash or cash equivalentCash Or Cash EquivalentCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation. Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. like a bank balance,
- Equity instruments of another entity. It is the shareholder/investors’ claim for the ownership of the company.
- Bond:Bond:A bond is financial instrument that denotes the debt owed by the issuer to the bondholder. Issuer is liable to pay the coupon (an interest) on the same. These are also negotiable and the interest can be paid monthly, quarterly, half-yearly or even annually whichever is agreed mutually. this is a claim upon interest payments and principal in the future. It could be a financial asset for companies like a bank, or else it is a liability for companies.
- Loan: In the above example, we have taken a bond as a financial asset. Likewise, loans are treated as a financial asset for companies like banks where the sale of such loans brings assets.
- Insurance: the worth of financial assets pays out if the terms of the contract are met. Like if a company pays a premium for its car and car break downs, then the financial asset will pay off.
- Legal & contractual right so that the entity can receive cash from other entity
- A financial asset like securities for a loan from other entity
- Under favorable conditions, the entity has the right to exchange financial assets or liabilities with other entities. Such rights are financial assets for the entity.
- Any contract that may be settled with equity instruments of the entity,
- Any non-derivative instrument for which the entity is obliged to receive some equity instruments of its entity;
- Any derivative that may be settled for cash or any other financial asset that may be settled for the entity’s equity instrument
Classification of Financial Assets on the Balance Sheet
Based on the major classification of a financial asset, we can have the following examples of financial asset:
- Financial Asset at Fair Value through Profit or Loss: These include financial assets that an entity holds for trading purposes or are recognized at fair value through profit or loss.
- Held to Maturity Securities: Investments in debt instruments held till maturity date irrespective of changes in market prices or the entity’s financial position or performance falls under this category.
- Loans and Receivables: These include financial assets with fixed or determinable payments. They are not quoted in an active trading market.
- Available for sale: Entity can keep any financial asset in this category, which does not fall in any of the above three categories. For example, an entity could classify some of its investments in debt and equity instruments as available-for-sale financial assetsAvailable-for-sale Financial AssetsAvailable for sale Securities are the company's debt or equity securities investments that are expected to be sold in the short run and will are not be held to maturity. These are reported on the balance sheet at fair value, and any unrealized gains or losses on these securities are reported in other comprehensive income as a part of shareholders' equity rather than in the income statement..
Accounts receivableAccounts ReceivableAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet. should be classified as loans and receivables if it is not held for trading. Further, the entity can classify it as at fair value through profit and loss or available for sale if they decide to do so. An investment in shares with a certain price and if it is not held for trading should be classified as an available-for-sale financial asset.
Debt security should be classified as loans and receivables if it is not quoted in an active market and is not held for trading.
Financial Assets Examples as per US GAAP
Generally, Accepted Accounting Principles format is followed in most US-based companies. Their pattern of representation, valuation, and impairment is different from other methods of reporting.
source: Amazon.com SEC Filing
Following are some examples of financial assets under GAAP:
- Compound Financial Instruments: Compound financial instruments like convertible bonds are not split into debt and equity components.
- Equity Investments: Under GAAP, equity investments are measured at FV-NI (changes in fair value are recognized in Net Income). However, a measurement alternative is available for equity investments that neither have readily determinable fair values and nor qualify for the net asset value (NAV)
- Loans and Other Receivables: Under US GAAPGAAPGenerally accepted accounting principles (GAAP) are the minimum standards and uniform guidelines for the accounting and reporting. These standards prohibit firms from engaging in unethical business activities and enable for a more accurate comparison of financial reports to investors., the impairment model for loans and other receivables is an incurred loss. These loans and receivables are presented in the balance sheet.
- Derivative: Under GAAP, a derivative instrument must
- Have one or more underlying assetUnderlying AssetUnderlying assets are the actual financial assets on which the financial derivatives rely. Thus, any change in the value of a derivative reflects the price fluctuation of its underlying asset. Such assets comprise stocks, commodities, market indices, bonds, currencies and interest rates., and, one or more notional amounts or payment provisions,
- Not require any initial net investmentNet InvestmentNet investment is calculated as capital expenditure minus non-cash depreciation and amortization for the period, and it indicates how much the company is investing to maintain the life of its assets and achieve future business growth., and
- Be able to be settled net.
- Hedging Instrument: A hedging instrument’s time value can be excluded from the effectiveness assessment.
- Public Business Entities: It shall use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
Financial Assets Examples as per IFRS
International Financial Reporting Standards format is majorly followed in most UK based companies. Their pattern of representation, valuation, and impairment is different from other methods of reporting.
source: Vodafone Annual Report
Based on the major classification of a financial asset, Following are some examples of financial assets under IFRS:
- Compound Financial Instruments: Compound financial instruments are required to be split into a debt and equity component.
- Equity investments: Equity investments are measured at FV-NI (changes in fair value are recognized in Net Income);
However, an irrevocable FV-OCI election is available for non-derivative equity investmentsEquity InvestmentsEquity investment is the amount pooled in by the investors in the shares of the companies listed on the stock exchange for trading. The shareholders make gain from such holdings in the form of returns or increase in stock value. that are not held for trading. FV-OCI means changes in fair value are recognized in Other Comprehensive IncomeOther Comprehensive IncomeOther comprehensive income refers to income, expenses, revenue, or loss not being realized while preparing the company's financial statements during an accounting period. Thus, it is excluded and shown after the net income..
- Under IFRS, there is a single impairment model for debt instrumentsDebt InstrumentsDebt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time. Long-term instruments include debentures, bonds, GDRs from foreign investors. Short-term instruments include working capital loans, short-term loans. recorded at amortized cost or FV-OCI, including loans and debt securities.
- Derivative: Derivative are measured at fair value, whereas value changes are recognized in profit or loss unless it has elected for hedging.
- Hedging Instruments: A hedging instrument’s time value and foreign currency basis spread can be excluded from the effectiveness assessment.
This article has been a guide to Financial Assets Examples. Here we discuss the classification of Financial Assets along with US GAAP & UK IFRS examples. You can learn more about financing from the following articles –