Reasons Why Fixed Deposit is not Treated as a Financial Asset

Fixed deposits are considered to be one of the safest options for investment. However, if you have an FD with a bank experiencing default or insolvency proceedings, your money will no longer be safe. Fixed deposits are usually non-financial because they are not readily convertible into cash and do not earn any interest. If you need money, there is no way that you can withdraw money from your fixed deposit account without getting penalized by banks.

Fixed Deposit Offers a Fixed Rate of Interest Until the Maturity of a Deposit

A fixed deposit (FD) is a financial instrument banks and financial institutions offer. The fixed deposit provides a guaranteed interest rate until a deposit’s maturity. Banks offer FDs to customers who wish to park their money with them for a specific period, usually from three to five years.
A person who invests in FD would be eligible for an assured rate of return during his tenure as per the prevailing interest rates applicable for that particular fixed deposit scheme. However, some restrictions on withdrawing money before maturity vary from bank to bank but mostly range between six months and two years, depending on the investment an investor makes into FDs.

Reasons Why Fixed Deposit is not Treated as a Financial Asset

The Interest Rates on FDS Are Fixed and Depend on the Tenure of the Deposit

The interest rates on fixed deposits are fixed and depend on the tenure of the deposit. For example, if you have deposited Rs 2 lakh in a bank for 20 years and get an interest rate of 7% per annum, your total amount at maturity would be Rs 3,80,000 (Rs 2 lakh x 7% x 20). The interest rate is called the nominal rate as it does not consider inflation and other factors like taxes.

Fixed Deposits Are Short-term Investments That Fetch Higher Returns Than Savings Accounts

FDs are considered short-term investments and are not treated as financial assets. This is because the maturity period of a fixed deposit is less than five years. A bank account with a maturity period of fewer than five years is treated as a short-term investment that fetches higher returns than savings accounts.

However, It is a Safer Investment Option Than Stocks and Mutual Funds

FDs are less volatile in the short run than stocks and mutual funds. This is because of their fixed maturity. Even if the central bank cuts an interest rate, your deposit amount remains unchanged. Hence, it becomes easier to predict your return over a while than in stock investing, where you have no idea how much money you will make or lose.

The safety aspect is another reason many investors prefer fixed deposits over other financial assets like stocks and mutual funds. It is difficult for an individual investor to invest vast sums of money in a single company so that he can benefit from its growth potential (for example: buying 1000 shares at $10 each). On the other hand, they can open multiple FD accounts with different banks for different purposes, like short-term liquidity requirements, without putting too much pressure on their budget.

Reasons Why Fixed Deposit is not Treated as a Financial Asset

The Interest Income From an FD is Taxable, but There is No Tax Deduction at Source (TDS)

While TDS is deducted at source for interest income from savings bank accounts, the same rule does not apply to fixed deposit accounts.

For example, if your interest income in a fiscal year exceeds Rs 40,000, you will have to pay TDS. You can also claim this income while filing your returns and get a refund if charged with excess TDS. This also makes your FD safe from bankruptcy or insolvency proceedings of the bank since banks or financial institutions cannot seize your FD in case they default on repayment.

When you deposit your money in a fixed deposit account, it is not treated as a financial asset. This means that the bank will not report your fixed deposit balance to any agencies such as credit bureaus or credit reporting agencies when they apply for loans.

It is essential to understand that FD returns’ tax rules may change depending on whether individuals or institutions hold them.

Taxation rules for FD returns may also vary depending on the type of income earned, as well as on the tenure of the deposit. FDs are a great way to invest your money. They offer you a fixed interest rate and are not subject to inflation or changes in the stock market. But, there are some taxes that you need to pay before withdrawing your money.

How Do You Calculate Capital?

Capital is a term with many meanings in economics, accounting and finance. One definition of capital is “any resource that can be used to generate future income.” Another definition of capital is “wealth”.
It will help provide a better understanding of cost (capital), which are assets used to produce future net income. For example, it includes the depreciation rate on machinery and equipment, plant and machinery structures, buildings, land improvements made prior to the start of operations. Here is how to calculate capital.

1. Obtain Your Company’s Financial Statements

The first step is to find out the assets and liabilities of your company.

How Do You Calculate Capital?

2. Calculate Your Cost of Capital

This calculation is based on the historical cost, which was calculated using the net present value (NPV) or discounted cash flow method. This is a calculation method that looks at the cash flows, both positive and negative, that will be generated to reflect today’s value. Depreciation expenses treated as operating expenses are not included in this calculation.

There are two ways to calculate your cost of capital.

Method 1: use net book value (NBV) as capital

Convert historical costs to replacement costs, and take the ratio of net book value capital needs for replacement costs for each type of asset. Then calculate the ratio of the remaining assets to total assets, which gives you a ratio showing how much current market value is below the historical cost (NBV) (a negative ratio means the market value is below historical cost). In this way, you get an idea of how much capital is needed to replace these assets.

Method 2: NBV minus depreciation in current operation

In this method, the cost of capital equals net book value plus depreciation.

3. Calculate the Rate of Return on Capital

You can calculate the rate of return on capital with the following equation: Rate of Return Capital = Net Income divided by Capital. Divide the net income by the capital.

The return on capital will give a better idea of how your capital can be used to increase your return in the future. If you have a small initial investment but a large increase in net income, you have possibilities of increasing the return on capital. This is also called leverage. You can also use this method to calculate the return on investment.

Another way of calculating the cost of capital is using the simple cost of capital formula (Cost = RATE” CAPITAL*(1+D/t). It is a method that says that the return on capital equals the historical cost of funds, which will give you an idea if the cost of capital will be greater than your expected income.

How Do You Calculate Capital?

4. Calculate the Depreciation Rate Used for Calculating Capital

Depreciation rate is calculated as follows:

Depreciation Rate = ((Total Asset – Salvage Value) / Total Asset).

The depreciation rate can be divided into two types: straight line (SL) and declining balance (DB). In this way, you can calculate the capital amounts of each type of asset.

Depreciation rate = Straight-line method / Declining Balance Method

These two methods will be used to calculate depreciation expense and income tax expense. On the other hand, the depreciation method is not only used to calculate capital, but also to estimate future taxes.

SL: Depreciation Rate = Total Asset Initial Value / Total Asset Current Value

DB: Depreciation Rate = N (Initial Value + 1.5) / N+1 (Current Value + 1.5)

5. Calculate Your Total Asset

Calculate your assets by adding together the historical cost and current value of each type of assets. This calculation is based on the historical cost calculated using accounting rules.

6. What is Depreciable Capital?

In general, there are three types of depreciable capital: tangible fixed assets; intangible fixed assets; inventory and raw materials.

7. Calculate the Depreciation Amounts

Depreciation amount = Depreciable Capital Total Asset * Depreciation Rate. The depreciation amount comes from the cost of capital, and is a way to address the initial investment in capital. The higher the depreciation, the greater your income tax savings, but there will be a lower tax deduction in net income. If you have more fixed assets, you need to depreciate more capital, which will give you a higher income tax savings.

How Do You Calculate Capital?

8. Calculate Current Value of Depreciable Assets

Depreciable assets = Depreciable Capital Total Assets * Current Value / Original Value.

*The current value of depreciable capital can be used to replace the historical cost of capital.

9. Calculate Gross Income

Gross Income = Net Income + Depreciation Amount

10. How to Identify Capital Consumption?

There are two different ways to calculate capital consumption: Fixed Asset Depreciation Method and Depletion Method for Oil and Natural Gas Companies.

11. How to Calculate the Depreciation Expense?

Depreciation Expense = Depreciable Capital Depletion Rate * Depletion Amount.

The deprecation amount comes from the depreciation rate, which comes from the cost of capital, and is a way to address the initial investment in capital. The higher the depreciation amount, the greater your income tax savings, but there will be a lower tax deduction.

What Are the Objectives of Dividend Policy?

A dividend policy is a set of goals and objectives that the corporation’s board of directors sets for the corporation. These may include raising shareholder value, earnings per share growth, capital growth, or financial leverage. The main objectives can vary depending on the size and characteristics of a business. Managers generally determine dividend policies to encourage shareholders to keep their shares over time. An investment firm’s dividend policy is a series of determinations and policies that determine how much dividends the firm pays to shareholders, who can receive in cash or as stock. The objectives of dividend policy are to provide the following:

1. Wealth Maximization

Corporate managers hope to have the best market mix of stock price, dividend, and earnings per share. Providing this information to shareholders allows them to make informed decisions about their investment options. The aim is to maximize shareholder value. A corporation can grow its total wealth by increasing its cash value by issuing dividends. This can be done by paying dividends and, at the same time, maintaining constant or increasing cash flow from operations.

2. Income Maximization

A company can pay out its current earnings as dividends to shareholders. This can be done by paying regular dividends throughout the year. It is a good way for investors to plan how much income they need during the year and how much they will receive from a specific amount of investment.

What Are the Objectives of Dividend Policy?

3. Capital Appreciation

By paying a dividend, investors have an opportunity to build wealth because the value of their shares will appreciate if the company does well. This gives them a basic idea about what to expect for investment returns. It is also an excellent way to attract other investors and build credibility in a corporation as it grows in size and reputation. Motives for dividend payments may differ in industries where stock price volatility is a concern, such as in the utility industry, versus industries where volatility is less of a situation, like the service sector or the pharmaceutical industry.

4 . Stable Rate of Dividend

A corporation can choose to pay a stable dividend rate, which provides investors with a certain level of income over time. The dividend rate can be adjusted as the company goes through different growth phases. It is generally changed so that the company’s debt (bonds) remains the same so that both liabilities and assets are kept in balance. A corporation may set up a regular monthly or quarterly dividend that does not change, regardless of current market conditions. This can reassure investors and help them have confidence in the corporation.

5. Tax Considerations

Dividend distributions count as income from a company to an investor, which means that the investor will have to pay taxes as an individual on any dividends received from the corporate investment. This can be a concern for investors depending on their tax situation, which should be considered when choosing an investment. Generally, corporate managers try to structure dividends to minimize the burden on the investor.

6. Investor Relations

Dividends are generally declared by corporations annually and are usually announced as part of annual reports. This allows shareholders to keep track of the dividend payments and provide information about the company’s financial performance.

What Are the Objectives of Dividend Policy?

7. Degree of Control

The main objective of the board of directors is to create a decision-making body that is as independent and informative as possible. The relative independence of the board of directors must be emphasized to provide shareholders with confidence in their decisions and to make good decisions on behalf of shareholders. The objective is, therefore, to give investors a sense of control over their investment by providing information about how their money will be used and at what pace it will be used.

8. Retention Strategy

Dividend payments are usually declared annually, and a payment plan is enunciated. This means that shareholders must give the corporation up to 12 months’ notice before they can sell their investment. They can control the pace of dividend payments by selling their shares, but this may be detrimental to overall shareholder value as dividends may be paid out at a slower rate than planned. Many corporations have a particular retention strategy for their investment portfolio. By distributing tips to investors, the corporation intends to have some control over its stock price. This can be done in different ways, including gifts, approved share buy-backs, or increased shareholder equity.

The two main methods of dividend policy implementation are conservative and progressive. In a traditional approach, the business will maintain an initial steady dividend amount, hence the term ‘conservative.’ This is done to ensure that the corporation is not undervalued in the market because its dividend yield would be lower than its competitors.