Treatment of Financial Assets in accordance with US GAAP and IFRS Standards
A liquid asset that’s value acquires from an ownership claim or contractual right is called financial asset. For example:
- Cash
- Stocks
- Bonds
- Mutual Funds
- Bank Deposits
It is not necessary for financial assets to have inherent physical form or even physical worth like other tangible physical assets i.e. land, property, commodities, etc. on the contrary, their values depend upon the factors of supply & demand and also on the degree of risk they carry in the marketplace in which they are traded.
Financial assets may be just pieces of paper or values stated on the computer screen for example dollar bills as they may seem intangible or non-physical. It is a claim of ownership of any entity or interest income from a bond.
Classification of Financial Assets under IFRS
The classification of Financial Assets depends on the purpose for which assets are held or bought. In accordance with IAS 39, they are classified into the following four categories:
- Financial Assets at Fair Value through Profit or Loss
- Held-to-Maturity Investments
- Receivables and Loans
- Financial Assets Available-for-Sale
It is management’s decision at the time of initial recognition to classify and check at the end of the reporting period.
Classification of Financial Assets under GAAP
The classification of Financial Assets according to GAPP defines as cash, evidence of an ownership interest in a company or other entity, a contract that does both as:
- Imposes on an entity a contractual obligation either
- To deliver cash or other financial instrument to another entity
- To exchange other financial instruments on potentially unfavorable terms with another entity.
- Conveys to that other entity a contractual right either
- To receive cash or other financial instrument from the first entity
- To exchange other financial instruments on potentially favorable terms with the first entity