Types of Financial Assets
Financial assets can be defined as an investment asset whose value is derived from a contractual claim of what they represent. Below is the list of Financial Assets Types –
- Cash and Cash Equivalents
- Accounts Receivable / Notes Receivables
- Fixed Deposits
- Equity Shares
- Debentures/ Bonds
- Preference Shares
- Mutual Funds
- Interests in subsidiaries, associates and joint ventures
- Insurance contracts
- Rights and Obligations under leases
- Share-Based Payments
- Derivatives
- Employee benefit plans
A financial asset is basically liquid assets that derive their value from any contractual claim and major types of which include Certificate of Deposit, bonds, stocks, Cash or the Cash Equivalent, Loans & Receivables, Bank Deposits, and derivatives, etc.
Types of Financial Assets Explained in Detail
In this article, we learn about different types of financial assets in detail.
#1 – Cash and Cash Equivalents
Cash and cash equivalents are a type of financial asset that includes cash money, cheques, and money available in bank accounts and investment securities, which are short term and easily convertible into cash with higher credit quality. Cash equivalents are highly liquid assets while generating income during their short term. US Treasury bills, high-grade commercial paper, marketable securities, money market funds, and short term commercial bonds are highly liquid assets.
#2 – Accounts Receivable / Notes Receivables
Companies follow the accrual concept and often sell to their customers on credit. The amount that is to be received from customers is called Accounts Receivable net of an adjustment for bad debts. It also generates interest if the payment is not made within the credit days.
#3 – Fixed Deposits
A fixed deposit facility is a service given to the depositor to get interested along with the principal amount on the maturity date. Example: Depositor makes an FD of $100,000 with a bank @ 8% simple interest for 1 year. On the maturity date, the depositor will receive $100,000 and $8000 Interest.
#4 – Equity Shares
An equity shareholder is a fractional owner who undertakes the maximum risk associated with the business venture invested in. Equity shares are a type of financial assets that give the owners the right to vote, the right to receive the dividends, the right to the capital appreciation of the stock being held, etc. However, in the event of liquidation, equity shareholders have the last claim on assets and may/ may not receive anything.
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#5 – Debentures/ Bonds
Debentures/bonds are a type of financial asset issued by a company giving the holders the right to receive regular interest payments on a fixed date along with the principal repayment on maturity. Unlike, dividend on equity share, interest payments on debenture is compulsory even if the company makes a loss. During liquidation, these instrument holders get preference over equity and preference shareholders.
#6 – Preference Shares
Preference shareholders are the holders of preference shares, which give the holders the right to receive dividends; however, they do not carry any voting rights. Similar to debenture, these holders receive a fixed rate of dividend, whether the organization earns a profit nor incurs a loss. In the event of liquidation, preference shareholders have their claim on assets earlier than equity shareholders but later to debenture and bondholders.
#7 – Mutual Funds
Mutual funds collect money from small investors and invest such collected money in financial markets, including equity market, commodity, and debt market. The mutual fund holder receives units in exchange for their investment, which is bought and sold in the market based on the market price. The return on investment is simply the sum of its capital appreciation and any income generated on the original amount of the investment. At the same time, the fair value of the units may diminish, which is a loss to the unit holder.
#8 – Interests in subsidiaries, associates and joint ventures
A company whose more than 50% stock is controlled by another company (parent company) is a subsidiary. A parent company will consolidate financials from its own operations, and include operations of its subsidiaries, and carry them on its own consolidated financial statements. A subsidiary provides the parent with dividends & share of earnings.
A joint venture is an arrangement whereby the parties that have joint control over the rights to net assets of the arrangement. An associate is an entity over which an investor holds (20%) or more of the voting power (significant influence). As opposed to a subsidiary, the Investor Company does not consolidate the associate company’s financials but records the associate company’s value as an investment on its balance sheet. The share of profits earned by the associate/joint venture is shared and recorded in the Investor books.
#9 – Insurance contracts
Based on IFRS 17, contracts under which a party (issuer) accepts significant insurance risk and agrees to compensate the other party (policyholder) if a specified uncertain future event which is also insured event, adversely affects the policyholder, are insurance contracts. Hence, the value of the contract is derived from the risks that the policy is covering.
Life insurance policies pay the insurance holder on maturity and are financial assets as at the time of maturity; these policies pay the maturity amount of the policy.
#10 – Rights and Obligations under leases
A lease is a contract under which one party allows another party to use the property for a specified time in return for a periodic payment. Such receivables are financial assets as it generates an asset to the company for the assets being used by another party.
#11 – Share-Based Payments
Share-based payment arrangements are between an entity and another party that entitles the other party to receive cash based on the value of equity instruments of the entity, including shares & share options. Example: an entity acquires particular assets in exchange for equity instruments of that entity
#12 – Derivatives
Derivatives are contracts whose value is derived from the underlying assets used for hedging, speculation, arbitrage opportunities, etc. However, unlike debt instruments, no principal amount or investment income accrues from such a contract. Common derivatives include futures contracts, options, and swaps.
#13 – Employee Benefit Plans
A defined benefit plan is a post-employment benefit plan defined under IAS 19 whereby an entity uses an actuarial technique, i.e., the projected unit credit method to estimate the total cost to the entity for the benefits that employees have earned in return for their service in the current and prior periods. Further, the method discounts the calculated benefits to their present value, deducts the fair value of plan assets from that of defined benefit obligation, determines the deficit or surplus, and finally determines the amount to be recognized in profit and loss and other comprehensive income.
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