Financial asset

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A financial asset is an intangible asset that derives value because of a contractual claim. Examples include bank deposits, bonds, and stocks. Financial assets are usually more liquid than tangible assets, such as land or real estate, and are traded on financial markets.[1][2][3][4] According to the International Financial Reporting Standards (IFRS), a financial asset is defined as one of the following:

  • Cash or cash equivalent;
  • Equity instruments of another entity;
  • Contractual right to receive cash or another financial asset from another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity;
  • Contract that will or may be settled in the entity's own equity instruments and is either a non-derivative for which the entity is or may be obliged to receive a variable number of the entity's own equity instruments, or a derivative that will or may be settled other than by exchange of a fixed amount of cash or another financial asset for a fixed number of the entity's own equity instruments.[5]

Treatment of financial assets under IFRS[edit]

Recognition and measurement of financial assets under IFRS[edit]

Under IFRS, financial assets are classified into four broad categories which determine the way in which they are initially measured:

  • Financial assets held for trading, i.e. which were acquired or incurred principally for the purpose of selling, are part of a portfolio with evidence of short-term profit-taking or are derivatives, are measured at fair value through profit or loss.
  • Financial assets with fixed or with determinable payments and fixed maturity which the company has to be willing and able to hold till maturity are classified as "held-to-maturity investments". Held-to-maturity investments are either measured at fair value through profit or loss by designation or determined to be financial assets available for sale by designation.
  • Financial assets with fixed or determinable payments which are not listed in an active market are considered to be loans and receivables. Loans and receivables are also either measured at fair value through profit or loss by designation or determined to be financial assets available for sale by designation.
  • All other financial assets are categorized as financial assets available for sale and are measured at fair value through profit or loss by designation.[6]

For financial assets to be measured at fair value through profit or loss by designation, designation is only possible at the amount the asset was initially recognized at. Moreover, designation is not possible for equity instruments which are not traded in an active market and the fair value of which cannot be reliably determined. Further (alternative) requirements for designation are e.g. at least a clear diminution of a "mismatch" with other financial assets or liabilities,[7] an internal valuation and reporting and steering at fair value,[8] or a combined contract with an embedded derivative which is not immaterial and which may be separated.[9] Regarding financial assets available for sale by designation, designation is only possible at the amount the asset was initially recognized at as well. However, there are no further restrictions or requirements.

References[edit]

  1. ^ www.investopedia.com Financial Asset
  2. ^ Financial Asset
  3. ^ www.investorwords.com Financial Asset
  4. ^ financial-dictionary.thefreedictionary.com Financial Asset
  5. ^ International Accounting Standard (IAS) 32.11
  6. ^ International Accounting Standard (IAS) 32.9
  7. ^ International Accounting Standard (IAS) 32.9b i
  8. ^ International Accounting Standard (IAS) 32.9b ii
  9. ^ International Accounting Standard (IAS) 32.11a