Question

Hi, can you answer this question in more detail?

Subject: Hong Kong Personal Financial Planning Practice

Q1. B

In personal balance sheet, there are three types of assets, namely, Financial assets, Personal use assets and Luxury assets. Discuss the characteristics of these assets with examples.

(Words: 700 - Don't direct copy)

Answer 1

With reference to a personal balance sheet financial assets are those non-physical assets that generally arise due to contractual agreements on future cash flows. While most of the financial assets are intangible there can also be tangible financial assets as well. Examples of tangible financial assets are cash. Intangible financial assets in a personal balance sheet are shares, bonds, mutual funds etc. These are not held physically but usually in a digital form or dematerialized (demat) form. Financial assets are also known as liquid assets as these assets can easily be converted to cash. For example suppose that you hold shares of a public listed company called ABC. You can easily sell these shares in the stock exchange and get cash in return immediately. It is a different question whether you will be making gains or incurring losses on your sale but you will certainly be able to liquidate your shares in the secondary market and get cash in return. As mentioned earlier value of financial assets is derived from a contractual claim of what they represent. Thus owning bonds will give you contractual claims on interest payments/coupon payments, owing stocks will give you contractual claims on dividend payments by the company and also on its profits (not mandatory though), owing certificate of deposits will give you contractual claims on interest payments, owing receivables will give you contractual claim in principal amount owed and interest (if applicable).

The next category of asset is called personal use asset. The personal use assets can be defined as those assets that a person or an individual has purchased and owns mainly for the purpose of personal use and enjoyment. Personal assets are never used for any business purposes or for any investment purposes. Examples of personal use assets are cars, personal residence, furniture, clothing, household appliances, kitchen wares, TV, stereos and DVDs. It should be noted that personal use assets are mostly physical in nature and hence are not intangibles like most of the financial assets mentioned in the above paragraph. Also unlike financial assets the personal use assets do not have any contractual agreements on future cash flows. Personal use assets can also be liquidated in the markets though not as easily and as readily and immediately as tin case of financial assets. Items like cars and personal residence are not sold immediately and are held for a certain time period. On the other hand items like clothing, furniture, household appliances, kitchen wares etc. are replaced from time to time depending on when they become worn out or when they can no longer be used in a useful manner. Thus we can say that personal use assets are usually held by a natural person and are mainly used for purposes other than the purpose of carrying on a trade or the purpose of making a financial gain from the sale and purchase of these assets.

Luxury assets are high value assets that a person holds and owns. Examples of luxury assets are jewelry, vacation property and valuable collections. These assets are mainly tangible in nature and are held by a person to satisfy a personal desire. These assets are mostly held by HNIs i.e. (high net worth individuals) and the value and cost of these assets are very high. For instance a collection of paintings of famous artists, collection of designer handbags, collection of vintage wines and whiskies, collection of designer pens, collection of bespoke items that you get handmade. Luxury assets are not generally held for trading purposes though many individuals do sometimes tend to sell some of their luxury assets to take advantage of the rapid increase in their values. For example it is rare to see people selling their exquisite collections of rare paintings and bespoke items in their possession but still there are instances when people do sell the luxury assets owned by them. These instances are, however, quite rare. As values of luxury assets are quite high their proportionate value of overall assets held by a person tends to be highest, especially when it comes to HNIs i.e. high net worth individuals. Owning luxury assets not only requires deep pockets but also requires a sense of aesthetics.