For more than two millennia, the world has relied on some form of financial resource for commercial activity. The complexity of the nature of financial products, especially in the advanced countries, is a hallmark of humanity’s achievement in that respect. Today, we have financial resources that range from bets through insurance policies to equities. Financial resources are ubiquitous so much so that they are the de facto instruments for the store of economic value. This function has made it such that all other resources have been forced within the financial valuation model as if they all behave alike.
DEFINITION, LOGIC AND EXAMPLES
A financial resource is the quantitatively expressed and implied information of a time-based or context-based commitment from one person (the liable authority) to another person (the holding entity).
Examples of financial resources include: Cash, Stocks, Bonds, Insurance Policies, Bets, Derivatives, Options, Swaps, and Mortgages.
Unlike other pieces of information, financial resources attain their distinction from the contractual agreement and relationship between the holding entity and the liable authority. The Liable Authority issues the financial resource and is responsible for its performance stated in the contract; to the Liable Authority, the financial resource is a liability. The Holding Entity holds the financial resource and has the right to use it in exchange for goods, services or opportunities within the jurisdiction of the financial resource; to the Holding Entity, the financial resource is an asset.
In terms of financial resources, all assets held have corresponding liabilities. Here, we validate the concept of debit and credit. However, these exist in different books. In the record of the Liable Authority, the financial resource is a liability, whereas in the books of the Holding Entity the same financial resource is an asset. For instance, MTN Cameroon issues a bond which has a face value of XAF 10,000 and is bought by Ms Iya; in MTN Cameroon’s books, there is a liability (Credit) of XAF 10,000 to Ms Iya, while in Ms Iya’s, there is a corresponding asset (Debit) of XAF 10,000 with MTN Cameroon.
Also, it is not a must that the value of the asset equals to the value of the liability except for their fiat values.
The Table below outlines examples of financial resources, the holding entities and the respective liable authorities.
No. | Financial Resource | Holding Entity | Liable Authority |
1 | Cash | Citizens | The Government |
2 | Treasury Bill | Bill Investors | The Government |
3 | Corporate Stock | Shareholder | Corporation |
4 | Corporate Bond | Bondholder | Corporation |
5 | Insurance Policy | Insured | Insurance Company |
6 | Bank Account Deposit | Account Holder | Bank |
7 | Bank Credit | Bank | Debtor |
8 | Car Mortgage | Mortgage Lender | Car Owner |
Table 1: Financial Resource, Holding Entity and Liable Authority
BASIS OF VALUE
- Visibility (V): This is the extent to which the performance of the liable authority can be monitored and evaluated by the community of holding entities.
In holding a financial resource, the Holding Entity is at the mercy on the performance of the Liable Authority. As such, in order to reduce the vulnerabilities, it is important that the Holding Entity is well informed of the performance of the Liable Authority with respect to the financial resource. Such performance is particular to the terms established during the creation of the financial resource.
Money for instance, though we are born to take this for granted, is a contract between the state (monetary union) and its citizens. In this contract, the citizens expect that the government will maintain good policies that ensure its continuity, hence the continuity of the money they are backing. For the citizens to know how well the government is fulfilling its part of the bargain, they must be informed of its performance in the areas through which they perceive is critical to the continuity and security of the government.
This concept of visibility is well understood and it drives the thinking behind investments in publicly traded companies. The whole rationale is that investors, who are the holding entities, are informed about the corporation’s relative performance in terms of profitability, sustainability, liquidity and any other measure that is deemed important for it to continue fulfilling its obligations for the financial resource it backs.
The concept of visibility establishes the need for information regarding the performance of the Liable Authority to the public of Holding Entities. Hence the need for business accounting and other business performance measures as well as their associated reporting standards.
- Assurance (A): This is the degree of certainty that the liable authority will maintain responsibility over the financial resource and fulfill the ultimate exchange agreed upon at the initial exchange.
The essence of Visibility is to ascertain the level of confidence the holding entity is willing to attribute to the liable authority. Assurance is the amount of confidence the holding entity has allotted to the liable authority based on the available information on the liable authority’s performance. Assurance is at the core of the performance of the financial resource. In cases where the public of holding entities have very low confidence levels for the liable authority, the inherent value of the financial resource plummets.
When a firm maintains either a cash flow deficit or operating losses for a longtime, it gets investors to worry about it meeting with its pledges.
- Transferability (T): This is the degree of certainty that the community of holding entities will continue accepting the financial resource in exchange from one another.
The relative nature of the performance of financial resources makes it such that their relative value fluctuates over time, place and context; irrespective of the performance of the liable authority. Such flux thus makes it such that it becomes impossible to hold the same financial resource indefinitely.
An implicit assumption on all financial resources is that they will be exchanged at some point in the future when the holding entity has an alternative other than holding the financial resource. Thus transferability is an implicit trait with all financial resources.
- Financial Cover: This is a pledged compensation the liable authority of a less performing financial resource makes during the initial exchange to the liable authority of a more performing financial resource in an exchange between the two financial resources.
Financial Cover arises only in exchanges involving two financial resources of different inherent and relative performances. Traditionally, the compensation is along the line of trade-off between Interest and Influence.
o Interest is the amount of value the LA of the less performing financial resource is willing to part with on a periodic basis in holding and making use of the more performing financial resource.
o Influence on the other hand is the degree of control (governance, oversight, authority) the LA of the less performing financial resource is willing to take from the LA of the more performing in exchange for keeping and using the more performing financial resource.
- Fiat Value (FVo): This is the assumed and legally endorsed numerical value of the financial resource considered at the point of infinity (long term) established during the initial exchange and eventually at the ultimate fulfillment.
Fiat Value is fixed over time, context or holding entity. Generally in contemporary and classical finance, the par value of stocks and bonds are the fiat value, while the Fiat Value of Insurance Policies is the Insurance Cover.
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