What Is a Nonfinancial Asset?
Let me tell you directly: a nonfinancial asset is something that gets its value from its physical characteristics. Think of examples like real estate or vehicles. It also covers all intellectual property, such as patents and trademarks. You need to understand that classifying items as nonfinancial assets matters a lot for businesses, since these show up on the company's balance sheet and affect things like market value and debt structure.
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, you'll see nonfinancial assets standing in contrast to financial assets. Financial assets rely on a contractual claim rather than physical worth. These include stocks, bonds, and bank deposits, and they're generally easier to sell than nonfinancial assets.
The value of a financial asset can tie back to an underlying nonfinancial asset. For instance, a futures contract's value comes from the commodities it controls. Commodities are tangible things with inherent value, like coffee or soybeans, while the futures contracts themselves lack physical value and count as financial assets.
Nonfinancial Assets vs. Financial Assets
Nonfinancial and financial assets differ in how you buy and sell them. Many financial assets, like stocks and bonds, trade on exchanges and can be bought or sold any business day the exchange operates. You can easily find the current market price for these. As long as the market stays liquid, there's always a buyer for every seller and the other way around.
In contrast, a nonfinancial asset, such as equipment or a vehicle, can be tough to sell because there's no active market of buyers and sellers. The pricing might not be clear since there's no standard market value. Instead, you often sell nonfinancial assets by finding a potential buyer and negotiating a price. The time to find that buyer, close the deal, and transfer the asset makes nonfinancial assets illiquid.
Nonfinancial Assets as Collateral
You can use both financial and nonfinancial assets as collateral for secured debt, unlike unsecured debt that's just backed by the borrower's promise to pay. What makes collateral appealing to lenders is how quickly they can sell it if the borrower defaults on payments. A financial asset trading on an exchange, like a stock or bond, sells easily, so it's more attractive as collateral.
Consider this example: suppose XYZ manufacturing needs a $100,000 line of credit and offers $60,000 in investment securities plus a $40,000 piece of equipment as collateral. If XYZ defaults, the lender can quickly sell the $60,000 in financial assets to cover the loss. But finding a buyer for the equipment might take longer, making the nonfinancial asset less desirable as collateral.
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