What Is a Nonfinancial Asset?
A nonfinancial asset is an asset that derives its value from its physical traits. Examples include real estate and vehicles. It also includes all intellectual property, such as patents and trademarks. The classification of possessions as nonfinancial assets is important to businesses as these items appear on a company's balance sheet and determine a multitude of factors, such as a company's market value and debt profile.
Key Takeaways
- A nonfinancial asset is determined by the value of its physical traits and includes items such as real estate and factory equipment.
- Intellectual property, such as patents, are also considered nonfinancial assets.
- Nonfinancial assets play an important role in determining a company's market value and ability to borrow.
- Financial assets, such as stocks, are the opposite of nonfinancial assets. They are easier to value and more liquid.
Understanding a Nonfinancial Asset
On a company's balance sheet, nonfinancial assets stand in contrast to financial assets. Financial assets are based on a contractual claim rather than a physical net worth. Financial assets include stocks, bonds, and bank deposits and are generally easier to sell than nonfinancial assets.
The value of a financial asset can be based on the value of an underlying nonfinancial asset. For example, the value of a futures contract is based on the value of the commodities controlled by that contract. Commodities are tangible objects with inherent value, such as coffee or soybeans, while futures contracts, which do not have an inherent physical value, are an example of a financial asset.
Nonfinancial Assets vs. Financial Assets
Nonfinancial and financial assets differ based on how the assets are bought and sold. Many financial assets, such as stocks and bonds, will trade on exchanges and can be bought and sold on any business day that the exchange is open. It is easy to get the current market price to buy or sell these assets. As long as the market is liquid, there will be a buyer for every seller and vice versa.
On the other hand, a nonfinancial asset, such as a piece of equipment or a vehicle, can be challenging to sell because there is not an active market of buyers and sellers. The pricing of the nonfinancial item may be foggy as there is no market standard. Instead, many nonfinancial assets are sold when the seller finds a potential buyer and negotiates a sale price. The time it takes to find a buyer, make the sale, and distribute the physical asset, make nonfinancial assets illiquid.
Nonfinancial Assets as Collateral
Both financial and nonfinancial assets may be used as collateral to back secured debt, standingin contrast to unsecured debt, which is only backedby the borrower's ability to pay. One factor that makes a form of collateral more attractive to the lender is the ability to quickly sell the asset if the borrower fails to make principal or interest payments. A financial asset that trades on an exchange, like a stock or bond, is easier to sell than a nonfinancial asset, so a financial asset is more attractive to a lender as collateral.
Assume, for example, that XYZ manufacturing needs a $100,000 line of credit to operate the business, and they put up $60,000 in investment securities and a $40,000 piece of equipment as collateral for the loan. If XYZ does not make principal and interest payments on the loan and defaults, the lender can sell the $60,000 in financial assets quickly to cover the loss. Finding a buyer for the equipment, however, may take longer, so the nonfinancial asset is less attractive as collateral.
FAQs
Examples of non-financial assets include tangible assets, such as land, buildings, motor vehicles, and equipment, as well as intangible assets, such as patents, goodwill, and intellectual property.
What is a non-financial asset? ›
non-financial assets. Definition English: An asset with a physical value such as real estate, equipment, machinery, gold or oil. For example, gold is considered a nonfinancial asset because it has inherent value based on its use in jewelry, electronics, dentistry, ornamentation and historically as currency.
What is the fair value of a non-financial asset? ›
27 A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
What is the best answer to define an asset? ›
An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company's balance sheet. They are bought or created to increase a firm's value or benefit the firm's operations.
What is the difference between a financial asset and a non-financial asset? ›
A financial asset is a liquid asset whose value comes from a contractual claim, whereas a non-financial asset's value is determined by its physical net worth. Non-financial assets cannot be traded, yet financial assets frequently are. The former, over time, will depreciate in value, whereas the latter does not.
What is an example of a non produced non-financial asset? ›
Non-financial non-produced assets consist of natural resources (e.g. land, mineral and energy reserves, non-cultivated biological resources such as virgin forest, water resources, radio spectra and others), contracts, leases and licences as well as goodwill and marketing assets.
Is cash a non-financial asset? ›
Cash, stocks, bonds, mutual funds, and bank deposits are all are examples of financial assets. Unlike land, property, commodities, or other tangible physical assets, financial assets do not necessarily have inherent physical worth or even a physical form.
What are the types of non assets? ›
Here are some examples of non-current assets:
- Land.
- Office buildings.
- Manufacturing plants.
- Vehicles.
- Natural resources.
- Investments, like bonds.
- Patents and trademarks.
- Equipment.
A non-financial asset can either be tangible and physical assets such as inventories and property, plant and equipment or intangible assets like computer software, patents, and copyrights.
How do you calculate fair value of an asset? ›
To determine the fair value of a product or financial investment, an individual or business may look at actual market transactions for similar assets, estimate the expected earnings of the asset, and determine the cost to replace the asset.
“Available-for-sale financial assets” are recorded at their fair value including related purchase costs. They are classified as non-current assets, unless management intends to dispose of them within 12 months from the end of the reporting period.
What assets are valued at fair value? ›
Fair value refers to the actual value of an asset – a product, stock, or security – that is agreed upon by both the seller and the buyer. Fair value is applicable to a product that is sold or traded in the market where it belongs or under normal conditions – and not to one that is being liquidated.
What are the three types of assets? ›
Three of the main types of asset classes are equities, fixed income, and cash and equivalents. For individual investors, these are more commonly referred to as stocks, bonds and cash. An investor's asset allocation, or mix of asset types, is the foundation of portfolio construction.
Why is a house not an asset? ›
An Asset Provides Income
These assets either pay dividends/interest or spin off cash from operations that end up in your pocket. Your home, however, does just the opposite. Rather than generating income, it costs you money through mortgage payments, property taxes, maintenance, utilities, and other expenses.
What is an example of assets with definition? ›
An asset is generally any useful thing or something that holds value. Most people have personal assets, like cash, savings accounts, bonds, life insurance policies, jewelry and collectibles. A person's skills and abilities can also be an asset.
What is an example of a non-financial liability? ›
Non-financial liabilities may also denote liabilities that do not arise from financial transactions. Examples of such liabilities include liabilities to employees, tax liabilities, social security payables, employers' liability insurance premiums, etc.
What are non-financial companies examples? ›
The non-financial corporations' sector includes, for example, incorporated energy and resource firms, agriculture, forestry and fishing businesses, manufacturers, companies engaged in distribution of products (wholesalers and retailers), entities engaged in construction and real estate, transportation services, and ...
