Types of Financial Assets
Financial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash. 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 EquivalentsCash And Cash EquivalentsCash 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.
- 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. / Notes Receivables
- Fixed Deposits
- Equity Shares
- Debentures/ Bonds
- Preference Shares
- Mutual FundsMutual FundsA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks.
- Interests in subsidiaries, associates and joint ventures
- Insurance contracts
- Rights and Obligations under leases
- Share-Based Payments
- 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 securitiesInvestment SecuritiesInvestment securities are purchased by investors, with or without the assistance of a middleman or agent, solely for the purpose of investment and long-term holding. These are recorded in the financial statements as non-current investments and comprise fixed income and variable income bearing securities., which are short term and easily convertible into cash with higher credit quality. Cash equivalents are highly liquid assetsLiquid AssetsLiquid Assets are the business assets that can be converted into cash within a short period, such as cash, marketable securities, and money market instruments. They are recorded on the asset side of the company's balance sheet. while generating income during their short term. US Treasury bills, high-grade commercial paper, marketable securitiesMarketable SecuritiesMarketable securities are liquid assets that can be converted into cash quickly and are classified as current assets on a company's balance sheet. Commercial Paper, Treasury notes, and other money market instruments are included in it., money market fundsMoney Market FundsMoney Market Account is the account which receives all the interests from the instruments in the money market according to the agreed-upon terms. This account is separate from that of securities account, it only accounts for the proceeds., 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 debtsBad DebtsBad Debts can be described as unforeseen loss incurred by a business organization on account of non-fulfillment of agreed terms and conditions on account of sale of goods or services or repayment of any loan or other obligation.. 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 shareholderEquity ShareholderA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. 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 liquidationEvent Of LiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order., equity shareholders have the last claim on assets and may/ may not receive anything.
#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 marketsFinancial MarketsThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces., 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 appreciationCapital AppreciationCapital appreciation refers to an increase in the market value of assets relative to their purchase price over a specified time period. Stocks, land, buildings, fixed assets, and other types of owned property are examples of assets. 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 companyParent CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary's directions and policies.) 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 statementsConsolidated Financial StatementsConsolidated Financial Statements are the financial statements of the overall group, which include all three key financial statements – income statement, cash flow statement, and balance sheet – and represent the sum total of its parents and all of its subsidiaries.. 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 assetsNet AssetsThe net asset on the balance sheet is the amount by which your total assets exceed your total liabilities and is calculated by simply adding what you own (assets) and subtract it from whatever you owe (liabilities). It is commonly known as net worth (NW). 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 ventureJoint VentureA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the 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 leaseLeaseLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.” 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 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., no principal amount or investment income accrues from such a contract. Common derivatives include futures contracts, options, and swapsContracts, Options, And SwapsSwaps in finance involve a contract between two or more parties that involves exchanging cash flows based on a predetermined notional principal amount, including interest rate swaps, the exchange of floating rate interest with a fixed rate of interest..
#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 incomeComprehensive 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..
This has been a guide to Financial Assets Types. Here we discuss the list of Top 13 types of financial assets, including cash and cash equivalents, accounts receivable, etc. You may learn more about financing from the following articles –