Non-Financial Asset

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Last Updated:January 7, 2024

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What is a Non-Financial Asset?

Non-financial assets are those whose value is primarily derived from physical assets rather than contractual commitments or financial markets. Tangible assets (plant, machinery, equipment) and intangible assets (patents and trademarks) fall under this classification.

Businesses consider this classification because these assets are included on a company's balance sheet, and their designation as non-financial influences elements like market value and debt profile.

Unlike financial assets, non-financial assets are not actively traded on financial markets. The price of these assets does not adhere to market standards, and there is no established market for buyers or sellers.

A non-financial asset is sold once a potential buyer is found and a reasonable purchase price is agreed upon. In contrast, financial assets like stocks and bonds can be traded through established markets anytime during market hours.

An asset refers to a valuable resource or object that a firm possesses. Cash, stocks, equipment, natural land, and intellectual property are all examples of assets. Every company will have distinctive assets; creating, running, managing, and profitably selling them is critical.

Non-financial assets are significant to businesses and can be used as collateral to secure borrowing from financial institutions. Financial analysts consider non-financial assets when assessing the company's long-term viability.

Key Takeaways

Non-financial assets’ value is derived from physical assets rather than financial markets or contractual commitments.
Non-financial assets include both tangible and intangible assets. Tangible assets include plant and equipment (Physical form), whereas intangible assets include patents and trademarks (nonphysical form).
These assets are not actively traded on financial markets; buyers and sellers negotiate the price of these goods.
Financial analysts consider non-financial assets when determining a company's long-term survival because they are listed on the balance sheet and affect things like market value and debt profile.

Financial Asset Vs. Non-Financial Asset

The following are the key differences between financial and non-financial assets.

**Financial Asset Vs. Non-Financial Asset**
Properties	Financial Asset	Non-Financial Asset
Assets	Include economic assets like Stocks, Bonds, and Securities.	Includes both Tangible and Intangible assets.
Liquidity	Highly liquid	Less likely to quickly convert into cash
Valuation	Valuation is based on the investor’s demand and supply.	Book value is used for accounting purposes, which is the asset’s original cost. Market value is when the asset is sold off or disposed off before the completion of the useful life.
Trading time	Financial assets can be traded anytime when the market is open	Challenging to trade anytime as it can be traded only in active markets.
Market Value	Change in value through volatility as well as external factors that affect the stock price.	Tangible assets are depreciable, whereas intangible assets are revalued based on the firm's current condition.

Types of Non-Financial Assets

The following are the types of non-financial assets. They are classified based on the nature of the purchase.

1. Produced Asset

These are assets that are created through a production process or human effort. They involve using resources and labor to produce a tangible or intangible asset.

Examples of produced assets include

A. Buildings and structures: Constructed houses, offices, factories, and infrastructure.

B. Machinery and equipment: Manufactured tools, machinery, vehicles, and other productive assets.

C. Inventories: Goods produced or purchased for sale or use in production.

D. Leasehold improvements: Enhancements made to leased property by the lessee.

Produced assets result from the production or construction activity and don't have to be capitalized until the end of the useful. Some assets are capitalized in one year or less.

2. Non-Produced Asset

These are sources of wealth that are produced naturally or without the aid of human work. They are typically purchased or found, not manufactured.

Examples of non-produced assets are

A. Land: Natural land that sustains resources, including forests, bodies of water, and mineral deposits.

B. Minerals and fossil fuels: Coal and oil are examples of natural resources. Examples of biodiversity include ecosystems, natural habitats, and the range of species.

C. Ecosystems: Ecosystems provide various services like clean air, water purification, and pollination, which are not produced by humans but have economic value.

Collateral form of Non-Financial Asset

A non-financial asset that holds its value based on the original purchase cost and is not readily convertible to cash can be used as collateral. The collateral form of non-financial assets includes tangible and intangible assets.

Non-financial assets may be accepted as collateral depending on several variables, including the asset's kind, value, marketability, and lending institution rules.

The following is an example of a non-financial asset used as collateral:

Vehicles: Valuable vehicles such as boats, cars, trucks, and SUVs may occasionally be used as collateral.
Equipment: Loans for company finance may employ machinery, heavy equipment, or specialized tools as collateral.
Inventory: Companies with large amounts of inventory can utilize that inventory as security for funding.
Intangible assets: Assets, including patents, trademarks, and copyrights, may be pledged as security for loans.
Collectibles and artwork: Expensive antiques, collectibles, or artwork may be used as collateral for specialized loans.

Note

Lenders might differ significantly in their acceptance and valuations for non-financial items used as collateral.

The terms and circumstances related to utilizing non-financial assets as collateral may also vary based on the jurisdiction and the regulations of the particular lender.

Sale of Non-Financial Assets

The sale of a non-financial asset occurs when its ownership is transferred. Non-financial assets hold value in ways other than direct monetary translation. The following actions are routinely taken when selling a non-financial asset:

Valuation: Establish the asset's value using expert judgments, market analysis, or professional evaluations. Setting a fair asking price for the asset requires completing this step.
Marketing: Create a marketing plan to draw in potential customers. Depending on the kind of asset, this may entail using a variety of mediums to advertise, including print and internet listings, as well as hiring a real estate agent or auction house.
Negotiation: Interact with prospective purchasers, reply to their questions, and discuss the conditions of the transaction. This involves talking about the cost, the conditions of payment, any stipulations, and the ownership transfer.
Due Diligence: The purchaser may conduct due diligence to ascertain the asset's state, legal standing, ownership background, and potential risks or obligations. They could ask for supporting materials, inspections, or other details on the asset.
Purchase Agreement: A purchase agreement is created after the buyer and seller agree on the transaction terms. The purchase price, payment terms, closing date, and any other pertinent clauses are typically included in this agreement.
Closing: The ownership transfer and associated papers are completed at the closing. This might entail exchanging money, registration, title transfers, and legal paperwork.