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Roh K.A.
Tryhub I.P.
National University of
Food Technologies
FINANCIAL ASSET
First of all it’s necessary to say that assets are
bought to increase the value of a firm or benefit the firm's operations. You
can think of an asset as something that can generate cash flow, regardless of
whether it's a company's manufacturing equipment or an individual's rental
apartment. In the context of
accounting, assets are either current or fixed (non-current). Current means that
the asset will be consumed within one year. Generally, this includes things
like cash, accounts receivable and inventory. Fixed assets are those that are
expected to keep providing benefit for more than one year, such as equipment,
buildings and real estate. Financial
assets, also referred to as financial instruments or securities, are intangible assets.
They are often used to finance the ownership of tangible assets as equipments
and real estate. In general, financial assets serve two main economic functions:
the first is to transfer funds from those who have surplus funds to invest to
those who need a source of financing tangible assets; the second is to
redistribute the risk which was associated
with the investment in tangible assets between different counterparties
according to their preferences and risk aversion. Financial assets represent
legal claims to future cash expected often at a defined maturity. Some examples
of financial assets are: stocks, bonds, bank
deposits, loans. All these instruments can be classified in different
categories according to the features of the cash flow. They can be classified
as debt instruments or equity instruments. Debt instruments as bonds or loans
require a fixed amount payment; equity instruments have an uncertain cash flow,
based on the issuer’s earnings. Financial asset is an intangible representation of the monetary value of
a physical item. It obtains its monetary value from a contractual agreement of
what it represents. While a real asset (such as land) has physical value, a financial asset is a document that
has no fundamental value in of itself until it is converted to cash. Common
types of financial assets include certificates, bonds, stocks, and bank
deposits.
One
of the most common types of financial assets is a certificate
of deposit (CD). A CD is an agreement between an investor and a bank in which the
investor agrees to keep a set amount of money and was deposited in the bank in
exchange for a guaranteed interest rate. The bank may offer a higher amount of
interest payment since money is untouched for a set period of time. If the
investor withdraws the CD before the end of the contract terms, he or she will
lose out on the interest payments and be subject to financial penalties.
Another
type of financial asset is a bond. Bonds are often sold by corporations or governments to investors in
order to help fund short-term projects. They are a type of legal document detailing
the amount of money which investor loaned from a borrower and the length of
time which it needs to be paid. A bond represents how much interest is
guaranteed to be returned to the investor along with the original loan amount.
Stocks are one of the only financial assets that do
not have an agreed upon ending date. Investing in stock means the investor has
part ownership of a company and shares in the company’s profits and losses. He or she can keep the stock for
any length of time or decide to sell it to another investor.
Money that is deposited into a bank account also
counts as a financial asset, rather than a real asset. When cash is put into a
bank account, the proof of the funds is a bank statement that summarizes the
value of the account. Deposited cash is not considered a physical asset because the bank uses the money to fund its
business and agrees to return it when the account holder decides to withdraw
it.
Valuation of financial assets is the process of
determining the amount of cash the assets can be converted to. This process is
often used to find out a person’s personal wealth for legal reasons, such as
his or her ability to pay off a debt. The value of a financial asset can
drastically change depending on the point in time it is valued. For example,
the value of stock can change daily depending on the company’s profits.
In
conclusion should say, that financial asset can be any of these four
items:
1. Cash.
2. Equity of another entity.
3.
A
contractual right to receive cash or similar from another entity or a
potentially favorable exchange of financial assets or liabilities with another entity.
4.
A contract
probably to be settled in the entity's own equity and that is a nonderivative
under which the entity may receive a variable amount of its own equity
instruments, or a derivative that probably will be settled other than through the exchange of cash
or similar for a fixed amount of the entity's equity.
A financial asset is
typically given a maturity date in a contractual claim. If it remains untouched
and unconverted to cash by that date, its value will usually increase. Cashing
out an asset before its maturity date can ultimately cost a person financial
penalties because it violates the terms of the agreement.
References:
1.The Handbook of Financial Instruments Hardcover.- 2002// by Frank J.
Fabozzi (Author), Frank J. Fabozzi CFA
(Editor)
2.Securitization
of Financial Assets, Third Edition//Aspen Publishers Online, 2012
3.Fundamentals of Financial Instruments: An Introduction to Stocks//Bonds,
Foreign Exchange, and Derivatives Hardcover.- 2011
4.Bibliography//Fabozzi F., Modigliani F., Jones F.-2010//Foundation of
Financial Markets and Institutions, Pearson International Edition.