Non-Financial Asset (2024)

A type of asset whose value is determined by its tangible characteristics and physical net worth

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What is a Non-Financial Asset?

A non-financial asset refers to an asset that is not traded on the financial markets, and its value is derived from its physical characteristics rather than from contractual claims. 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.

Non-Financial Asset (1)

Non-financial assets are important for companies, and they can be used as collateral when securing credit from financial institutions. They are included on the balance sheet, and financial analysts consider non-financial assets when evaluating the long-term viability of the company.

Summary

  • A non-financial asset is a type of asset whose value is determined by tangible characteristics and physical net worth.
  • Non-financial assets are recorded on the balance sheet, and they are considered when determining the value of a company.
  • They can be tangible assets such as machinery, real estate, and motor vehicles, or intangible assets such as patents, purchased goodwill, and intellectual property.

Understanding Non-Financial Assets

Unlike financial assets, there is no active market for buyers and sellers of non-financial assets. Also, there are no market standards for determining the pricing of non-financial assets, such as equipment or motor vehicles, and the value of an asset is determined based on its physical characteristics.

The seller of the non-financial asset only initiates a sale when they find a potential buyer and negotiates an agreeable purchase price for the asset. The sale process is considered complete when the buyer pays the full purchase price to the seller, and the seller transfers the asset to the new owner.

The sale of non-financial assets is more complicated than the sale of financial assets, which can be traded through an established active market. Financial assets, such as bonds and stocks, can be bought and sold at any time when the financial markets are open. The value of a financial asset is determined by the amount of risk associated with the specific asset, and its demand and supply in the market where they trade.

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Other financial assets derive their value from another underlying asset. For example, futures contracts are based on the value of commodities, which are tangible assets with inherent value.

Types of Non-Financial Assets

Non-financial assets are classified into two types – produced assets and non-produced assets – based on how they came into existence.

1. Produced assets

Produced assets come into existence through the production or manufacturing process. The assets come with a residual value, which is realized when they are no longer needed and are available for sale.

Produced assets are not necessarily fixed assets in that fixed assets take on a useful life of more than one year, and they are capitalized in the balance sheet. On the other hand, other produced assets can be written off in the year of purchase or manufacturing.

2. Non-produced assets

Non-produced assets are the assets that come into existence through means other than the process of production but may be used in the production of goods and services. Examples of non-financial non-produced assets include natural resources (minerals, water resources, virgin forests, etc.) leases and licenses.

Non-produced assets may be classified into tangible assets and intangible assets. Tangible non-produced assets are natural assets that are capable of bringing economic benefits to their owners, and that are subject to effective ownership. Natural resources whose ownership rights cannot be established are excluded from non-produced assets.

Intangible non-produced assets include assets such as patents, purchased goodwill, and transferrable contracts.

Using Non-Financial Assets as Security for a Loan

When taking out a loan from financial institutions, borrowers may be required to provide non-financial assets, such as collateral, for secured debt. Borrowers are required to submit ownership documents for the assets before the credit can be approved.

For example, when a borrower provides a motor vehicle as collateral, they are required to submit the motor vehicle’s logbook to the lender. The lender retains the asset ownership documents until the borrower completes the monthly principal and interest payments for the loan.

In the event that the borrower defaults on the monthly payments, the lender is at liberty to sell the asset pledged as collateral to recover the loan payments that are in default.

Non-Financial vs. Financial Assets

Non-financial and financial assets represent ownership of value, and they represent an economic resource that owners/holders can easily convert into value. Both types of assets are recorded on the balance sheet and are considered when evaluating the actual value of a company.

However, the assets differ based on their characteristics and features. One of the distinguishing characteristics between the two types of assets is how their value is calculated. Non-financial assets, such as motor vehicles, equipment, and machinery, are valued by looking at their physical and tangible characteristics. On the other hand, financial assets are valued based on their contractual claim, and their value can be easily determined in the financial markets.

Another difference between non-financial assets and financial assets is that the former depreciate in value, whereas the latter does not lose value through depreciation.Tangible non-financial assets lose value through depreciation, where the value of the asset is spread over its useful life.

Some non-financial assets, such as land, appreciate in value. In contrast, financial assets are not affected by depreciation but may lose value through changes in market interest rates and fluctuations in stock market prices.

Related Readings

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Non-Financial Asset (2024)

FAQs

What is an example of a non-financial asset? ›

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? ›

The fair value of a non-financial asset is determined based on its 'highest and best use'. This refers to the most advantageous use of the asset that would maximise its value. The perspective of market participants guides this determination, even if the entity has a different intended use or no use for the asset.

What is the best answer to define an asset? ›

An asset is something containing economic value and/or future benefit. An asset can often generate cash flows in the future, such as a piece of machinery, a financial security, or a patent. Personal assets may include a house, car, investments, artwork, or home goods.

What are non money financial assets? ›

Non-monetary assets are not readily converted into a fixed amount of money in the short term. They include property, plant, and equipment (PP&E), goodwill, patents, and copyrights.

What is financial and non-financial with examples? ›

The financial account is the account of Financial Assets (such as loans, shares, or pension funds). The non-financial account deals with all the transactions that are not in financial assets, such as Output, Tax, Consumer Spending and Investment in Fixed Assets.

What are the types of non assets? ›

Non-current assets may be tangible (like physical property) or intangible (like intellectual property). Key categories of non-current assets include property, plant & equipment (PP&E); investments; goodwill; and “other” intangible assets.

What assets are reported at fair value? ›

Fair value estimates are used to report such assets as derivatives, nonpublic entity securities, certain long-lived assets, and acquired goodwill and other intangibles. These estimates specifically exclude entity-specific considerations, such as transaction costs and buyer-specific synergies.

What is an example of a fair value asset? ›

For example, let's say a company purchased land for $500,000 five years ago, and a land appraiser says it's worth $600,000 now. A historical cost balance sheet will value the land at $500,000 until it's sold. The fair value method of accounting would adjust the land's value to $600,000.

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 3 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.

Is a house considered an asset? ›

An asset is anything you own that adds financial value, as opposed to a liability, which is money you owe. Examples of personal assets include: Your home. Other property, such as a rental house or commercial property.

How do you answer what is your strongest asset? ›

Sample Answer

My greatest strength is my ability to excel in highly pressurized situations. I have found creative ways to keep calm when working under pressure, for example, organizing my work more efficiently and getting the MOST important work done during the times I am MOST productive.

What is non-financial? ›

/ˌnɑːn.faɪˈnæn.ʃəl/ /ˌnɑːn.fɪˈnæn.ʃəl/ Add to word list Add to word list. not relating to money or how money is managed: Non-financial incentives have proven much less effective than financial ones. Couples also consider non-financial factors when deciding on when to retire.

What are non-financial assets and liabilities? ›

Non-financial assets are tangible or intangible properties upon which ownership rights may be exercised. Financial assets are economic assets such as means of payment or financial claims. Financial liabilities are debts.

Is inventory a non-financial assets? ›

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.

What are non-financial assets and non-financial liabilities? ›

Non-financial assets are tangible or intangible properties upon which ownership rights may be exercised. Financial assets are economic assets such as means of payment or financial claims. Financial liabilities are debts.

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.

What are examples of non-financial liabilities? ›

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.

References

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