Financial Assets Types

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Types of Financial Assets

Financial assets can be defined as an investment asset whose value is derived from a contractual claim of what they represent. Below is the list of Financial Assets Types –

  • Cash and Cash Equivalents
  • Accounts Receivable / Notes Receivables
  • Fixed Deposits
  • Equity Shares
  • Debentures/ Bonds
  • Preference Shares
  • Mutual Funds
  • Interests in subsidiaries, associates and joint ventures
  • Insurance contracts
  • Rights and Obligations under leases
  • Share-Based Payments
  • Derivatives
  • Employee benefit plans

A financial asset is a liquid asset that derives its value from any contractual claim. Major types include Certificates of Deposit, bonds, stocks, Cash or the Cash Equivalent, Loans & Receivables, Bank Deposits, derivatives, etc.

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Financial Assets Types

Types of Financial Assets Explained in Detail

This article teaches about different types of financial assets in detail.

#1 - Cash and Cash Equivalents

Cash and cash equivalents are financial assets that include cash, cheques, and money available in bank accounts and investment securities, which are short-term and easily convertible into cash with higher credit quality. Cash equivalents are highly liquid assets while generating income during their short term. US Treasury bills, high-grade commercial paper, marketable securities, money market funds, and short-term commercial bonds are highly liquid assets.

#2 - Accounts Receivable / Notes Receivables

Companies follow the accrual concept and often sell to their customers on credit. The amount to be received from customers is called the Accounts Receivable net of an adjustment for bad debts. It also generates interest if the payment is not made within the credit days.

#3 - Fixed Deposits

A fixed deposit facility is a service given to the depositor to get interested and the principal amount on the maturity date. Example: Depositor makes an FD of $100,000 with a bank @ 8% simple interest for one year. The depositor will receive $100,000 and $8000 Interest on the maturity date.

#4 - Equity Shares

An equity shareholder is a fractional owner who undertakes the maximum risk associated with the invested business venture. Equity shares are financial assets that give the owners the right to vote, the right to receive the dividends, the right to the capital appreciation of the stock being held, etc. However, in event of liquidation, equity shareholders have the last claim on assets and may/ may not receive anything.

#5 - Debentures/ Bonds

Debentures/bonds are a type of financial asset issued by a company giving the holders the right to receive regular interest payments on a fixed date and the principal repayment on maturity. Unlike dividends on equity shares, interest payments on debenture are compulsory even if the company makes a loss. During liquidation, these instrument holders get preference over equity and preference shareholders.

#6 - Preference Shares

Preference shareholders are the holders of preference shares, which give the holders the right to receive dividends; however, they do not carry any voting rights. Like debenture, these holders receive a fixed dividend rate, whether the organization earns a profit or incurs a loss. In liquidation, preference shareholders have their claim on assets earlier than equity shareholders but later to debenture and bondholders.

#7 - Mutual Funds

Mutual funds collect money from small investors and invest such collected money in financial markets, including equity market, commodity, and debt market. The mutual fund holder receives units in exchange for their investment, which is bought and sold in the market based on the market price. The return on investment is simply the sum of its capital appreciation and any income generated on the original amount of the investment. At the same time, the units' fair value may diminish, which is a loss to the unitholder.

#8 - Interests in subsidiaries, associates and joint ventures

A company whose more than 50% stock is controlled by another company (parent company) is a subsidiary. A parent company will consolidate financials from its own operations, and include operations of its subsidiaries, and carry them on its own consolidated financial statements. A subsidiary provides the parent with dividends & share of earnings.

A joint venture is an arrangement whereby the parties that have joint control over the rights to net assets of the arrangement. An associate is an entity over which an investor holds (20%) or more of the voting power (significant influence). As opposed to a subsidiary, the Investor Company does not consolidate the associate company's financials but records its value as an investment on its balance sheet. The share of profits earned by the associate joint venture is shared and recorded in the Investor books.

#9 - Insurance contracts

Based on IFRS 17, contracts under which a party (issuer) accepts significant insurance risk and agrees to compensate the other party (policyholder) if a specified uncertain future event which is also an insured event, adversely affects the policyholder, are insurance contracts. Hence, the value of the contract is derived from the risks that the policy covers.

Life insurance policies pay the insurance holder on maturity and are financial assets at the time of maturity; these policies pay the maturity amount of the policy.

#10 - Rights and Obligations under leases

A lease is a contract under which one party allows another party to use the property for a specified time in return for a periodic payment. Such receivables are financial assets as it generates an asset to the company for the assets being used by another party.

#11 - Share-Based Payments

Share-based payment arrangements are between an entity and another party that entitles the other party to receive cash based on the value of equity instruments of the entity, including shares & share options. Example: an entity acquires particular assets in exchange for equity instruments of that entity

#12 - Derivatives

Derivatives are contracts whose value is derived from the underlying assets used for hedging, speculation, arbitrage opportunities, etc. However, unlike debt instruments, no principal amount or investment income accrues from such a contract. Common derivatives include futures contracts, options, and swaps.

#13 - Employee Benefit Plans

A defined benefit plan is a post-employment benefit plan defined under IAS 19 whereby an entity uses an actuarial technique, i.e., the projected unit credit method, to estimate the total cost to the entity for the benefits that employees have earned in return for their service in the current and prior periods. Further, the method discounts the calculated benefits to their present value, deducts the fair value of plan assets from defined benefit obligation, determines the deficit or surplus, and finally determines the amount to be recognized in profit and loss and other comprehensive income.