Broadly speaking, it is the risk that losses may be incurred due to difficulty converting assets into money. More specifically, in accounting, it denotes the risk that arises from inability to meet, or difficulty in meeting, obligations associated with financial liabilities that need to be settled/ transferred by delivering cash or a type of financial asset. At times, an entity may have limited cash flow, affecting its ability to meet financial obligations on a timely basis, which gives rise to this type of risk.
Liquidity risk may take other forms including impossibility to sell an asset at its fair value (fair market value), but rather for less than that value.
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