Financial assets

What it means

Financial assets are money and claims to money: cash, bank accounts, securities, shares in other companies and loans granted. A company holds them not to run its operations but for a return or for influence.

They split by holding period: long-term financial assets are kept for more than a year, short-term ones are a liquid reserve. Unlike long-term assets they are not depreciated, and their carrying amount is corrected by impairment or by remeasurement.

Receivables from selling goods and services are not financial assets, even though an invoice to a customer is also a claim to money. It is a trade receivable. The line is drawn by how the claim arose: a financial asset comes from investing or lending money, a receivable from selling something.

How it works in practice

Classification is decided on acquisition by intent: a share in a subsidiary and a bond held to maturity are long-term financial assets, while paper bought for trading is short-term. The decision is made once, not to suit the balance sheet later.

At the balance sheet date they are remeasured: trading securities to fair value through profit or loss, foreign currency accounts at the ECB reference rate, which is where the exchange difference comes from. Shares are tested for impairment instead.

A common case is an s. r. o. lending spare cash to a sister company or to a shareholder. The loan is a financial asset of the lender, and the interest on it should match what independent parties would agree. Otherwise the tax office adjusts the tax base under the transfer pricing rules, so we keep the agreement and the interest calculation with the books.

What to watch out for

The cash box cannot go negative. A negative balance means more payments were booked than there was cash, and at a tax audit the gap is read either as unreported revenue or as an undocumented injection by the owner, with tax assessed on top of it.

A loan to a related company that has stopped paying often stays in the balance sheet at full value until someone reviews it. Profit and equity are then overstated, and an impairment allowance against the principal of such a loan does not normally reduce the tax base, so the loss is recognised in the books but gives no tax relief.