What it means
The contrast is with tangible assets such as vehicles, buildings and machinery, which have value because of what they physically do. A delivery van earns money by moving goods, whereas a corporate bond earns money because the issuer has agreed to pay interest and repay the principal.
Intangible assets such as trademarks sit in a third group, valuable but neither physical nor a claim on a counterparty. Financial assets matter in business because they are usually the most liquid part of the balance sheet, meaning they can be turned into cash quickly.
When a lender assesses a company, the mix between financial and physical assets tells them how fast the business could raise money in trouble. A firm holding $800,000 in deposits and receivables is in a very different position from one holding $800,000 of specialised machinery.
They are recorded on the balance sheet at either cost or fair value depending on the category and the accounting standard in use. Investments held for trading are typically marked to market, so gains and losses show up in reported profit even before anything is sold, while trade receivables sit at the amount expected to be collected after allowing for bad debts.
The choice of measurement can move reported earnings significantly. The nuance most people miss is that every financial asset is somebody else's liability.
Your bank deposit is the bank's obligation, your invoice is your customer's payable, and your bond is the issuer's debt. That symmetry is why the credit quality of the other party is inseparable from the value of the asset itself.
In practice
Real-world examples.
Example
A manufacturer holds $1,200,000 of surplus cash in three-month term deposits earning 4.5%. The deposits are financial assets that generate $54,000 of interest a year while remaining available for a planned factory extension.
Example
A consultancy carries $480,000 of trade receivables at any given time. These are financial assets, but the finance director provides $24,000 against them for expected bad debts, so the balance sheet shows $456,000.
Example
A family office allocates $3,000,000 across government bonds and listed equities. Every holding is a financial asset, yet the bonds behave quite differently from the shares when interest rates move, which is exactly why both are held.
Formula
Calculation
Market Value = Quantity held x Current market price
Unrealised Gain or Loss = Market Value - Original Cost
A company bought 20,000 shares in a listed supplier at $15.00 each.
Original cost = 20,000 x $15.00 = $300,000
The shares now trade at $18.50.
Market value = 20,000 x $18.50 = $370,000
Unrealised gain = $370,000 - $300,000 = $70,000
That is a gain of about 23% on cost. If the holding is classified as a trading investment, the $70,000 is recognised in profit for the period even though no shares have been sold, and it would reverse just as quickly if the price fell back to $15.00.Case study
Seen in the real world.
Alderpoint Logistics is a fictional haulage business used here for illustration only. It looked asset rich, with $6,000,000 of trucks and depots on the balance sheet, and the directors assumed the bank would treat that as security enough.
When a customer failed owing $410,000, Alderpoint discovered how little of its balance sheet could be turned into cash quickly. Its financial assets amounted to just $180,000 of cash and $520,000 of receivables, most of them not due for another two months, while the trucks would have taken months to sell at a discount. The company had to negotiate an emergency facility on unattractive terms.
Afterwards the illustrative board set a policy of holding at least $500,000 in short-dated deposits and credit-insuring receivables above $100,000. The lesson was that the composition of assets, not just the total, determines whether a business can survive a shock.
Watch out
Common mistakes.
- Thinking all assets are equally useful in a crisis. Financial assets can usually be converted to cash within days, whereas specialised equipment may take months and sell far below book value.
- Forgetting that receivables are financial assets with credit risk attached. An invoice is only worth its face value if the customer actually pays.
- Confusing physical gold or property with financial assets. Both are valuable, but neither represents a contractual claim on another party, so they behave differently.
Questions
People also ask.
Is cash itself a financial asset?
Yes, and it is the most liquid one, since it needs no conversion at all before it can be spent.
How are financial assets valued in the accounts?
It depends on classification: trading investments are generally carried at fair value, while loans and receivables are carried at amortised cost less any expected credit losses.
Are cryptocurrencies financial assets?
Under most accounting standards they are not treated as financial assets because there is no contractual claim on another party; they are usually classified as intangible assets instead.
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