Financial Assets vs Real Assets

Follow us on LinkedIn

Companies or businesses use assets to generate value from their operations. These assets may have several forms or types. Among those, companies may have financial and real assets. It is necessary to look at both of them individually to understand the differences between them.

What are Financial Assets?

A financial asset is usually an intangible asset that gets its value from a contractual claim. Financial assets are liquid assets that companies use in their daily operations. These may consist of cash, stocks, bonds, mutual funds, etc. Financial assets are different from real assets, such as land, property, or other intangible assets. Similarly, financial assets usually involve a counterparty in the deal.

Add your business to our business directory https://harbourfronts.com/directory/ Add your business. Also check out other businesses in the directory

For most companies, deriving the value of financial assets may be an issue. These assets don’t have a single measurement technique that can apply to each item within it. For some small financial assets, the current market price can be a reliable measure. However, for companies with bigger financial assets, it may not be a reliable measure.

Therefore, companies may use several techniques to value their financial assets. These may include the equity method of account or amortized cost method. Some financial assets also require companies to use the fair value method of accounting through either profit or loss or other comprehensive income.

Lastly, most financial assets are short-term. It is because most of these represent liquid assets. Therefore, companies classify them under the portion of the current assets of their Balance Sheet. However, some companies may hold specific financial assets for long-term purposes. In that case, the classification may shift to non-current assets.

What are Real Assets?

As the name implies, real assets are physical assets. They have an intrinsic value due to their substance and properties. These may include assets, such as land, property, equipment, natural resources, real estate, etc. Similarly, companies use these assets as a tool to generate income. These are different from financial assets or intangible assets in their characteristics.

Real assets are more stable compared to financial assets. However, due to their stability, they may be less liquid. Similarly, these assets don’t suffer due to changes in inflation, currency exchange rates, or other macro-economic factors in the same manner. Usually, they have a strong negative correlation with financial markets.

Apart from companies, real assets may also be a viable option for investors. Investors usually prefer to invest in financial assets. However, real assets present an opportunity for them to diversify their portfolio outside of the asset class. Investing in these assets is a strategy that investors utilize in asset allocation to create a diversified investment portfolio.

For companies, real assets represent long-term assets. Therefore, they classify these assets as non-current in the Balance Sheet. However, for short-term real assets, the classification may change to current. There are also some other costs associated with these assets, which companies may charge through the Income Statement. Most of these assets come with the depreciable value and may accumulate depreciation over time.

Conclusion

Financial assets are highly liquid assets, which means they are either cash or readily convertible. These assets usually involve a counterparty and may be short-term. On the other hand, real assets are the opposite. These don’t usually involve a counterparty and represent value-driven physical assets. Similarly, they are often long-term.

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSLophos Holdings Inc. Celebrates Successful Conclusion of Inaugural Annual General Meeting, Confirms Board Members and Stock Options Plan
Lophos Holdings Inc. Celebrates Successful Conclusion of Inaugural Annual General Meeting, Confirms Board Members and Stock Options Plan

VANCOUVER, British Columbia, March 28, 2024 (GLOBE NEWSWIRE) — Lophos Holdings Inc. (CSE: MESC) (“Lophos” or the “Company“) is pleased to announce all matters presented for approval at the annual general meeting of the shareholders of the Company held earlier today March 28, 2024 (the…

Stay up-to-date with the latest news - click here
LATEST NEWSSome cancer patients can find it hard to tell family and friends about their diagnosis: ‘You’re dealing with this all alone’
Some cancer patients can find it hard to tell family and friends about their diagnosis: ‘You’re dealing with this all alone’

Not everyone is eager to share upsetting medical news, even with loved ones

Stay up-to-date with the latest news - click here
LATEST NEWSBattle for Disney board seats heats up as votes come in, Blackwells sues
Battle for Disney board seats heats up as votes come in, Blackwells sues
Stay up-to-date with the latest news - click here
LATEST NEWSExcellon Closes Debenture Restructuring
Excellon Closes Debenture Restructuring
Stay up-to-date with the latest news - click here
LATEST NEWSLiberty Gold Reports Year-End 2023 Financial and Operating Results
Liberty Gold Reports Year-End 2023 Financial and Operating Results

VANCOUVER, British Columbia, March 28, 2024 (GLOBE NEWSWIRE) — Liberty Gold Corp. (TSX:LGD; OTCQX:LGDTF) (“Liberty Gold” or the “Company”), is pleased to announce its financial and operating results for the fiscal year ended December 31, 2023. All amounts are presented in United States dollars unless…

Stay up-to-date with the latest news - click here

Leave a Reply