FINANCIAL ASSETS AND FINANCIAL LIABILITIES

 Financial Asset

A financial asset is defined as one of the following type of asset as per the Accounting Standards:

 Cash

 Equity instrument of another entity

 A contractual right

 To receive cash or another financial asset from another entity

 To exchange financial assets or financial liabilities with another entity under conditions that are
potentially favorable to the entity

 A contract that will/may be settled in the entity’s own equity instruments and is

 A non-derivative resulting in receiving a variable number of the entity’s own equity instruments

 A derivative that will/may be settled other than by the exchange of a fixed amount of cash or
another financial asset for a fixed number of entity’s own equity instruments

 Financial Liability

A financial liability is defined as one of the following type of liabilities as per the Accounting Standards:

 A contractual obligation

 To deliver cash or another financial asset to another entity

 To exchange financial assets or financial liabilities with another entity under conditions that are
potentially unfavourable to the entity

 A contract that will/may be settled in the entity’s own equity instruments and is

 A non-derivative resulting in delivering a variable number of the entity’s own equity instruments

 A derivative that will/may be settled other than by the exchange of a fixed amount of cash or
another financial asset for a fixed number of entity’s own equity instruments
 ROLE OF FINANCIAL INSTITUTIONS IN FINANCIAL MARKETS
1. Role of depository institutions:
• Depository institutions accept deposits from surplus units and provide credit to deficit
units
• Depository institutions are popular because:
a. Deposits are liquid
b. They customize loans
c. They accept the risk of loans
d. They have expertise in evaluating creditworthiness
e. They diversify their loans

2. Commercial Banks:
a. Are the most dominant depository institution
b. Offer a wide variety of deposit accounts
c. Transfer deposited funds by providing direct loans or purchasing debt securities
d. Serve both the public and the private sector

3. Savings Institutions:
a. Include savings and loan associations (S&Ls) and savings banks
b. Are mostly owned by depositors (mutual)
c. Concentrate on residential mortgage loans

4. Credit Unions:
a. Are nonprofit organizations
b. Restrict their business to credit union members
c. Tend to be much smaller than other depository institutions

5. Role of Non-depository Financial Institutions:

a. Non-depository institutions generate funds from sources other than deposits
b. Finance companies
i. Obtain funds by issuing securities
ii. Lend funds to individuals and small businesses
6. Mutual Funds:

a. Sell shares to surplus units

b. Use funds to purchase a portfolio of securities

i. Some focus on capital market securities (e.g., stocks or bonds)

ii. Money market mutual funds concentrate on money market securities

7. Securities firms:

a. Broker function

i. Execute securities transactions between two parties

ii. Charge a fee in the form of a bid-ask spread

b. Investment banking function

i. Underwrite newly issued securities

c. Dealer function

i. Securities firms make a market in specific securities by adjusting their

inventory

8. Insurance Companies:

a. Provide insurance policies to individuals and firms for death, illness, and damage to
property

b. Charge premiums

c. Invest in stocks or bonds issued by corporations

9. Pension Funds:

a. Offered by most corporations and government agencies

b. Manage funds until they are withdrawn from the retirement account

c. Invest in stocks or bonds issued by corporations or in bonds issued by the

government