What it means
A factory uses machines and stock to make products. Those resources can generate future value through use or sale, but they are not promises that another party will pay the factory a fixed amount, whereas the customer's receivable is different: it is a contractual claim to cash.
IAS 32 describes financial assets as including cash, an equity instrument of another entity and certain contractual rights to receive cash or exchange financial instruments, and non-financial assets fall outside that definition while still meeting the applicable asset-recognition rules. The accounting treatment depends on the kind of non-financial asset, as property, plant and equipment under IAS 16 generally follows a cost or revaluation model with depreciation as applicable.
Impairment needs care: IAS 36 sets tests for many non-financial assets, but inventories are dealt with under IAS 2 and some other assets have their own standards, and a machine may lose value because of damage or reduced future use. Financial assets have different questions, such as whether a customer will pay a receivable or what a security is worth.
Liquidity also differs. A building may be valuable yet slow or costly to sell, while cash is readily available and some receivables may be delayed.
A balance-sheet ratio can show how asset-heavy a business is, by dividing recognised non-financial assets by total recognised assets. Changes in the ratio require more than a headline.
Buying equipment with cash swaps one asset for another and may leave total assets unchanged before other effects, while borrowing to fund an asset can raise both assets and liabilities. Compare the asset mix with cash needs, debt and return on investment, since a profitable warehouse expansion can be sensible even if it makes the company less liquid, and a large unsold stock balance can signal risk.
Evaluate useful life, maintenance, obsolescence and working-capital effects rather than praising a higher non-financial share. For managers, identify the asset type and the rule that applies to it.
Keep ownership, valuation and useful-life evidence, and reconcile the supporting register with the accounts. Use the classification to ask how value will be realised, not as a substitute for a full investment case.
In practice
Real-world examples.
Example
A manufacturer owns a press and raw materials, both non-financial assets. Its customer receivables and bank balance are financial assets.
Example
A company licenses software for use in operations. A recognised software right may be non-financial even though no physical item exists; recognition depends on the contract and accounting rules.
Example
An investor compares two companies using recognised asset values and asks whether plant, stock and cash are generating a suitable return rather than looking only at their relative shares.
Formula
Calculation
Non-financial asset share = Recognised non-financial assets / Total recognised assets x 100
Worked example. A fictional manufacturer has $14 million in plant and stock plus $6 million in cash and receivables. Its non-financial share is 14 / 20 = 70%.
It buys equipment for $4 million, paying $2 million cash and borrowing $2 million. Plant and stock become $18 million ($14 million + $4 million); cash and receivables become $4 million ($6 million - $2 million); total assets become $22 million, with liabilities up $2 million. The new share is 18 / 22, or about 81.8%, before depreciation and other effects.
Notice that total assets rose by $2 million, not $4 million: the $2 million of cash spent left the asset base, and only the $2 million of borrowing added to it.Case study
Seen in the real world.
This illustrative and entirely fictional case follows Desert Forge, an invented parts maker. It has $20 million of assets: $14 million in plant and inventory, $3.5 million cash and $2.5 million receivables. Management considers a new production line costing $4 million and plans to pay half from cash and half from a loan. The initial presentation added the entire purchase to total assets and reported $24 million, forgetting the $2 million cash used. Finance corrected the model: plant and stock become $18 million, cash falls to $1.5 million and receivables remain $2.5 million.
Total assets are $22 million, and debt increases by $2 million before other transaction effects. The non-financial asset share rises from 70% to about 81.8%, but that does not make the project profitable. The board reviews expected sales, maintenance, depreciation, debt service and downside capacity. It approves no purchase solely on the changed asset mix.
Watch out
Common mistakes.
- Calling every intangible asset a financial asset. A software right can be non-financial.
- Ignoring cash used to buy a machine when calculating total assets after the purchase.
- Applying one measurement or impairment rule to inventory, equipment and every other non-financial asset.
Questions
People also ask.
Is investment property a financial asset?
No. The property itself is non-financial, though an invoiced rent receivable is a financial asset.
Is cash a non-financial asset because a business uses it?
No. Cash is a financial asset under the relevant financial-instrument definition.
Does a higher non-financial share mean stronger finances?
Not necessarily. Check how assets earn, how liquid they are, their condition and the debt used to fund them.
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