What is an encumbrance?

Before we get to asset encumbrance, we must first understand the definition of an “encumbrance.” Encumbrance is a promise to spend money in the future for a specific purpose.

What is asset encumbrance?

The definition of asset encumbrance means different things to different job functions.

What does encumbrance mean in finance?

In finance, encumbrance refers to the controls accounting systems use to prevent overspending. Encumbrances determine the purpose of funds before organizations have spent any money or made a purchase.

What does encumbrance mean in accounting?

In accounting, asset encumbrance refers to restricted funds that are reserved for a specific liability.

What does encumbrance mean in banking?

Asset encumbrance is the process banks go through to secure or collateralize a claim. Banks must specify assets that creditors can take possession of if the bank fails to meet its commitments. If a borrower defaults, the lender can liquidate the asset to recover their cash. Asset encumbrance is also known as pledging or earmarking.

Where does asset encumbrance occur?

Asset encumbrance occurs in transactions that are asset-backed. Some examples of this are market funding, insurance claims, repurchase agreements, securitizations, covered bonds, or derivatives.
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