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ABIA STATE UNIVERSITY, UTURU

P.M.B. 2000

DEPARTMENT OF ACCOUNTING

ASSIGNMENT TITLE:
ACCESS THE RELEVANCE OF REAL ASSET AND
FINANCIAL ASSET IN ECONOMIC GROWTH NIGERIA

PRESENTED BY:

NAME: ILLECHUKWU IJEOMA IFUNANYA


MAT. NO: 13/19780/IAS
DEPT.: ACCOUNTING
COURSE TITLE: INVESTMENT AND PROJECT ANALYSIS
COURSE CODE: FIN 446
LEVEL: 400L
PROGRAMME: REGULAR
LECTURER: DR. P.C. URAKPA
DATE: 20/05/2017
INTRODUCTION

Assets are items of the balance sheet that determine the


net worth of a business. These assets are further classified
into financial and real assets. The financial and real assets
serve as value creation and transactional instruments in
production and investment activities. Changes in either of
these types of assets affect the value maximization and risk
management objectives of the business. It is for this reason
that financial and real assets are considered to be important
components of the overall business strategy.

FINANCIAL ASSET RELEVANCE TO THE ECONOMY OF


NIGERIA

The Nigerian financial system comprises various banks that


are operating in the economy as well as many non-bank
financial institutions. In essence, the Nigerian financial
system is made up of various segments which include the
banks, their regulatory and supervisory authorities and
non-bank financial institutions. There are
important segments which include Money Market and its
institutions, the Capital Market and its players, and the
Development Finance.
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Financial assets are cash or transactional instruments that
are readily convertible into cash. Cash reserves, trade
receivables, notes receivable, shares and bonds are some
of the common types of financial assets. These liquid assets
actually represent claims on the underlying value of other
business possessions such as real assets and properties. For
example, an ordinary share represents a claim against the
assets of a company that remain after the full payment of
debts.

According to the International Financial Reporting


Standards (IFRS), a financial asset can be:

Cash or cash equivalent,


Equity instruments of another entity,
Contractual right to receive cash or another financial
asset from another entity or to exchange financial
assets or financial liabilities with another entity under
conditions that are potentially favourable to the entity,
A contract that will or may be settled in the entity's own
equity instruments and is either a non-derivative for
which the entity is or may be obliged to receive a
variable number of the entity's own equity instruments,

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

Treatment of financial assets under IFRS

Under IFRS, financial assets are classified into four broad


categories which determine the way in which they are
measured and reported:

Financial assets "held for trading" i.e., which were


acquired or incurred principally for the purpose of
selling, or are part of a portfolio with evidence of short-
term profit-taking, or are derivatives are measured
at fair value through profit or loss.
Financial assets with fixed or with determinable
payments and fixed maturity which the company has
to be willing and able to hold till maturity are classified
as "held-to-maturity" investments. Held-to-maturity
investments are either measured at fair value through
profit or loss by designation, or determined to be
financial assets available for sale by designation.

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Financial assets with fixed or determinable payments

which are not listed in an active market are considered

to be "loans and receivables". Loans and receivables

are also either measured at fair value through profit or

loss by designation or determined to be financial assets

available for sale by designation.

All other financial assets are categorized as financial

assets "available for sale" and are measured at fair

value through profit or loss by designation.

For financial assets to be measured at fair value through

profit or loss by designation, designation is only possible at

the amount the asset was initially recognized at. Moreover,

designation is not possible for equity instruments which are

not traded in an active market and the fair value of which

cannot be reliably determined. Further (alternative)

requirements for designation are e.g. at least a clear

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diminution of a "mismatch" with other financial assets or

liabilities, an internal valuation and reporting and steering

at fair value, or a combined contract with an embedded

derivative which is not immaterial and which may be

separated. Regarding financial assets available for sale by

designation, designation is only possible at the amount the

asset was initially recognized at as well. However, there are

no further restrictions or requirements.

Financial Sector Development and the Economy


How a developed financial sector impacts on the economy
has been a matter of continuing interest to economists since
Schumpeter raised the issue a century ago. Generally,
growth theorists appear to agree that financial sector
affects the economy through its impact on capital
accumulation and the rate of technological progress. There
is sufficient evidence in the literature to support the
theory of strong linkages between financial sector
deepening and economic growth. However, there are a few
studies that question the direction of causation. Such
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studies attempt to show that financial sector development
does not necessarily lead to economic growth, but that
economic growth leads to financial sector deepening
through increased demand for financial services.
Bagehot (1873) postulated that the financial system played
a critical role in English economic growth by mobilising the
needed capital for development.

Classification of Financial Assets

Equities, fixed income securities, and derivatives are some

of the common classifications of financial assets. Equities

are shareholding rights to a business, and they are issued

either as common shares or preferred stock. Unlike

preferred stock, common shares carry voting rights. Fixed

income securities are instruments of borrowing that earn

fixed rates of interest over specified durations. Some are

issued by public institutions while others are issued by

private entities. Examples include treasury, municipal and

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corporate bonds. Derivatives are securities, such as futures

and options, whose valuations are attached to other assets.

Futures bind a business to buy or sell assets at specified

prices within a specific time frame. Options, on the other

hand, grant holders the rights to purchase or sell assets at

stated prices prior to specified dates.

REAL ASSERT RELEVANCE TO THE ECONOMY OF


NIGERIA

Real assets are physical assets that have value due to their
substance and properties. Real assets include precious
metals, commodities, real estate, agricultural land,
machinery and oil. They are appropriate for inclusion in
most diversified portfolios because of their relatively low
correlation with financial assets such as stocks and bonds.

Breaking it down Real Asset

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Investing in real assets is particularly well-suited for
inflationary times because of their tendency to outperform
financial assets during such periods.

Most businesses own a range of assets, and they typically


fall into the real, financial or intangible category. For
example, imagine XYZ Company owns a fleet of cars, a
factory and a great deal of equipment. These are real
assets. However, the company also owns several
trademarks and copyrights. These are intangible assets.
Finally, the company has a few stocks in a sister company,
which are financial assets.

Difference Between Real Assets and Financial Assets

Real assets are a separate and distinct asset class from


financial assets. Unlike real assets, which have intrinsic
value, financial assets derive their value from a contractual
claim on an underlying asset which may be real or
intangible. For example, commodities and property are real
assets, but commodity futures, exchange-traded funds
(ETFs) and real estate investment trusts (REITs) constitute
financial assets whose value depends on the underlying real
assets.
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Advantages and Disadvantages of Real Assets

Real assets tend to be more stable than financial assets.


Inflation, shifts in currency values and other
macroeconomic factors affect real assets less than financial
assets. However, real assets also have lower liquidity than
financial assets, as they take longer to sell and have higher
transaction fees in general. Finally, real assets have higher
carrying and storage costs than financial assets.

Characteristic Similarities

Financial and real assets share a number of similarities. For


instance, the valuations of financial and real assets are
based on their potential to generate cash flows. Both asset
classes also exhibit significant degrees of uncertainties
when establishing and predicting cash flow trends.

Functional Differences

Most financial assets are more liquid than real assets,


because they are easily convertible into cash. For example,
whereas it would take just a matter of hours to sell stocks,

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the same cannot be said of real estate properties, which
commonly take months to dispose of. Moreover, cash flows
generated by financial assets experience perpetual growth.
This is unlike real assets, with the exception of land, that
perpetually generate diminishing cash flows. The valuations
of buildings, for example, dip over time due to depreciation.

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Conclusion and Recommendations

The challenges highlighted in this work includes: poor


property right protection; poor corporate governance
system; lack of competitiveness of the real sector; lack of
competition in the economy; poor entrepreneurship
development and lack of development of rating agencies in
Nigeria. It observed that for a successful real sector
financing in Nigeria, a culture of accountability and
transparency in the conduct of our national affairs must be
taken seriously. The quality of governance must also be
improved, to ensure that the legal framework for economic
activities is well strengthened, such that the protection of
creditors rights may not be jeopardized.

The government as well as the private sector have financing


roles to play in Nigerias on-going perspective plan known
as the NV20:2020. The aim is to make the country to be
among the top 20 largest economies of the world by the
year 2020. There are underlying assumptions, which are
fundamental to the actualisation of the Vision. The core of
them is associated with good governance while funding is
also critical. Meanwhile, through the Transformation

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Agenda, the present Administration has drafted strategies
to combat some of the envisaged emerging challenges in
the course of implementing the 1st NIP and ultimately the
NV20:2020. Also, the reforms required to creating enabling
environment for mobilising the needed resources for
NV20:2020 are clearly mapped out.

What more? It is now time for the Administration and


all other stakeholders to commit themselves to the
transformation of the Nigerian economy. It is also time for
the relevant stakeholders to be allowed to take ownership
of the strategy for the sake of synergy and appropriate
linkages of the various sectors of the economy.

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