Page 113 - Accountancy_F5

Definition of financial assets to fulfil obligations outlined in the
According to IAS 32, a financial asset can certificates.
take various forms, such as cash, equity Nature of investment in financial
instruments in other entities, contractual assets
rights to receive cash or other financial
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assets, or contracts settled in the entity’s own The nature of investment in financial assets
equity instruments. Examples of financial is determined by the liquidity of an asset.
assets encompass certificates of deposit in Some investments are short-term in nature,
banks, accounts receivable, acquired shares, while others are long-term in nature. Short
bonds, and treasury bills. Although IAS term investments are more easily converted
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32 offers a broad definition of financial into cash in short period as compared to
assets, in this particular context, the term long term investments. Also, short term
pertains specifically to investments in investments are less risky than long term
ordinary shares and bonds. Unlike tangible investments, for instance bank deposit, loans
assets like land or properties, financial repaid within short period. Consequently,
assets derive their value from contractual short term investments promise less return
agreements rather than physical properties. compared to long term investments. In
They signify claims against the income or contrast, long term financial investments
wealth of other business entities, typically are those which are not expected to be easily
evidenced through certificates, computer converted into cash in a near period of time
records, receipts, or legal documentation. such as shares and bonds. Their acquisition
These claims arise from the transfer of is usually attached to long-term objectives.
funds from investing entities (net savers) to Liquidity preferences can influence
entities with cash shortages (net borrowers). investors’ decisions. An investor who is
expecting to have cash requirement soon
Financial assets function as instruments (within a year) is more likely to invest in
facilitating the transfer of funds between short-term financial assets than in long-
entities with surplus funds (net savers) and term assets. Short-term securities are easily
those facing cash deficits (net borrowers) convertible to cash. For example, a person
within the financial market. Investors who saves to buy bond is expected to
supplying funds obtain certificates, such invest in long term financial assets that
as share or bond certificates, as a proof has different liquidity compared to a person
of their investments, representing either who invests his/her banking savings to
debt obligations issued by governments finance school fees of the family. However,
or companies or ownership stakes in some long-term investments (for example
companies. Conversely, entities receiving publicly traded shares and corporate bonds)
funds (net borrowers or deficit spenders) can be sold in an open market such as in the
issue written certificates, such as share or stock exchange whenever it is necessary.
bond certificates, as contractual assurances

Student’s Book Form Five
100

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