Financial assets are traded on financial market and have characteristic of contractual arrangement having no physical value. These are intangible by nature and derive monetary value from its contractual agreement. Examples of financial assets are cash convertible investments and savings like
- Certificate of deposits
Unlike land or machinery, these assets do not have physical/tangible value. A financial asset is a documentary proof as only mean of its existence and its monetary value will be realized when this is converted to cash. All terms and conditions related to how much and when this amount will be available in cash form will be written in that document.
By definition, financial assets are cash convertibles, equity instruments. This is also recognized as contractual right to receive cash on maturity of financial asset or it may be return in the form of another financial assets beneficial for the company`s interest.
For recording and reporting purposes, as per International Financial Reporting Standard, these financial assets have different forms. Financial assets which are bought for resale are call financial assets held for sale. These are short-term financial assets like derivatives and shown at fair value in financial statements.
Financial assets having long term maturity will be converted to cash or another financial asset on a fixed future date. These financial assets will be shown at fair value and will be classified as Assets held to maturity. Financial assets held to maturity would have a fixed value at maturity.
Loan and receivables are also type of financial assets shown at fair value.
Ordinary types of financial assets like Bonds. These are legal documents issued by company to generate fund for its short term investments. Investor who buys this legal document,bond is offered a handsome amount of interest as well as the original amount (principal). Pre-determined Length of time after which this purchased bond will be returned to company and the cash benefit along with interest as additional earning will be paid to investor.
Stocks, are type of share issue in which investors becomes part of company`s ownership. No maturity date is mentioned as term of a stock. Investor is free to sell this legal document to another investor or may wait for longer period.
Certificate of deposit is a promissory contract between an investor and Bank. Investor putt a high amount of money in bank account and do not withdraw it for a considerable long time. Bank in return will pay a percentage of interest to the investors as income on savings.
Similarly, ordinary way of keeping you cash in bank account and then withdrawing it after intervals at the same time adding the cash in bank account, This type of cash investments is also categorized as Financial asset.
Valuing a financial asset is a matter that is subject to variation since the cash was invested and then the legal document was converted to cash again. Financial assets having a maturity period has a genuine condition to wait for that maturity date for cashing the benefit. As a rule if financial asset is left untouched even after its maturity period, its financial return will be increased. On the other hand, if it is converted to cash before its maturity some cost have to be incurred by investor as a penalty for breaking the term.