Non-financial asset – What it is, definition and concept

A non-financial asset is one whose value comes from its characteristics (physical or intangible) and not from a contractual claim.

That is, a non-financial asset has a value by itself, by its properties or features. It does not depend on the requirement of compliance with an agreement.

Some examples of non-financial assets are real estate and machinery, but also patents and user licenses.

Properties of a non-financial asset

Some properties of this type of assets are the following:

  • It cannot be traded on the financial markets.
  • They are not very liquid assets. This refers to the ease of converting to cash, which is less in the case of the non-financial asset because it is not as easy to exchange. This, compared to financial assets, which can find buyers and sellers quickly, for example, on the stock market. On the other hand, to sell, let’s say, a home, many months or even years may pass.
  • A non-financial asset can serve as the underlying asset for a financial asset. For example, gold, which is a non-financial asset, can be the underlying asset of a future to buy or sell gold, which is a financial asset. In this case, the purchase of gold could be agreed upon at a certain price, let’s imagine $ 1,800 an ounce, within six months. What is traded is the future contract, but the value of this derivative is a material good, gold.
  • These types of assets can serve as collateral to back a debt. For example, mortgages are normally backed by the property that is the object of the transaction. Therefore, if the debtor fails to return the financing, the creditor could demand compliance with the obligation through the execution (sale) of the property.
See also  Horizontal audit - What is it, definition and concept

Non-financial asset types

We can distinguish two main types:

  • Tangibles: They are those assets that are material, so they can be perceived through senses such as touch. It can be a gold bar, a vehicle, a building, etc.
  • Intangibles: They are those intangible assets that cannot be perceived by the senses. We refer, for example, to a patent on an invention, or to intellectual property rights on a trademark.

Another way to classify non-financial assets is between those that come from a manufacturing process, such as machinery and other fixed assets, and those that do not go through a production process, and that rather can be used to manufacture other goods. or services. In the latter case, we refer, for example, to natural resources such as minerals.

Leave a Comment