Providing an asset to secure a loan lowers the interest rate the lender charges because it acts as a form of collateral in the event the borrower defaults. These assets are called pledged assets, and are different from typical collateral because the lender takes possession of them until the obligations are satisfied. Despite this, pledged assets generally don't appear any differently on a balance sheet than other assets, and pledging an asset does not reduce your total assets' value.
Pledged assets are treated no differently on the borrower's balance sheet than any other assets. They are listed on the asset side of the balance sheet, just as any asset is. All the loans a company takes out are listed on the liabilities side, including the loans to which assets are pledged. There are no notes attached on the balance sheet. All of the pledged asset information is listed in the footnotes below.
A publicly traded company files quarterly and annual reports with the Securities and Exchange Commission (SEC) disclosing information about the company. Footnotes make up the bottom portion of the filings, and investors often overlook the footnotes. They provide information about the loan agreements and other items. The loan agreement describes the pledged assets and other restrictions for the company while it owes money on the loan. The other restrictions may include a minimum amount of cash the company must have available and the maximum aggregate debt it can have at any given time.
Types of Pledged Assets
Lenders typically prefer pledged assets that are hard assets, which are tangible or physical items of value. Real estate or accounts receivable or anything with a store of value are acceptable forms of pledged assets. Lenders are less likely to accept technology assets as pledged assets, because prices for technology fall quickly. Investments can be pledged as assets, but if their market value falls below the outstanding amount secured, you will be required to replenish them or risk foreclosure.
SEC Form 10-K
Public companies disclose all these details annually in the reports they file annually with the SEC, which provide information useful to investors. In addition to details about pledged assets, the company also discloses information in the footnotes that may make the company more or less attractive to investors. For example, in a 10-K, the company discloses its real estate properties. Real estate is frequently misrepresented on the balance sheet because it is listed at historical cost, not the current market value. Despite the fact that the value of real estate generally rises, it's listed at its original cost on a company's balance sheet, even if purchased decades or more earlier.
Alex Shadunsky has a bachelor's degree in finance and is pursuing a Master of Business Administration from Indiana University. He has worked at Briefing.com as a junior equity analyst specializing in health-care stocks.