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MEASUREMENT OF NON-FINANCIAL ASSETS
Peter van de VenHead of National Accounts, OECD
NBS-OECD Workshop on National AccountsGuangzhou, December 2 – 5, 2014
Introduction
• Assets
– Non-financial assets• Produced assets
– Fixed assets
– Inventories
– Valuables
• Non-produced assets– Tangible assets
» Land
» Mineral and energy resources
» Other natural resources
– Intangible assets
– Financial assets
• Liabilities
• Net worth
Introduction
Valuation issues:
•Starting point: valuation at market prices or market-equivalent prices
•Exception for some financial assets: deposits and loans
•Also exception for other (non-tradable) equity => often valued by looking at the intrinsic value of the underlying company
•Note: In national accounts valuation principles apply to both assets and liabilities for reasons of consistency => may sometimes raise eyebrows, e.g. (government) debt
Introduction
• Stocks at end year t
• Changes due to transactions (purchases, including own-account production, and sales)
– Transactions in non-financial assets => capital account
– Transactions in financial assets => financial accounts
• Changes due to revaluations => revaluation accounts
– Neutral holding gains/losses
– Real holding gains/losses
• Changes due to other changes in the volume of assets
• Stocks at end year t+1
Introduction
User needs for balance sheets
•Assessment of a nation’s wealth, its disposition, and changes over time
•Assessment of risks and vulnerabilities: price bubbles, debt accumulation, interconnectedness, etc.
•Explanation of behaviour – e.g. household saving and consumption, and productivity developments
•However: information on non-financial assets, especially on non-produced assets, usually less available
•Aftermath of economic and financial crisis: increasing user demands
Introduction
Methodologies and practices in measuring non-financial assets
•Produced fixed assets => this presentation
•Inventories => this presentation
•Tangible non-produced non-financial assets– Land (and structures) => Jennifer Ribarsky
– Subsoil assets => Katrina Richardson
•Intangible non-produced non-financial assets => this presentation
Produced Fixed Assets
General observations
• (Produced) fixed assets: acquisitions (less disposals) of produced goods and services that are used in production for more than one year– Dwellings
– Other buildings and structures
– Machinery and equipment
– Weapons systems
– Cultivated biological resources (animals yielding repeat products, tree, crop and plant resources
– Intellectual property products (mineral exploration and evaluation; software and databases; entertainment, literary and artistic originals)
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General observations
• Ordinary maintenance and repairs (intermediate consumption) versus major renovations or enlargements to fixed assets (gross fixed capital formation)
• Maintenance expenditures considered as investments in the following cases:– Deliberate investment decision
– Increase performance/capacity or expected service life of existing fixed assets
• Use of fixed assets is allocated to different time periods = consumption of fixed capital (or depreciation)
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General observations
• Perpetual Inventory Method (PIM) is the usual method applied in National Accounts to compile estimates of capital stock and depreciation
• Very similar to “current replacement cost” method, applied in business accounting
• Gross capital stock is measured by summing up past purchases (less disposals) of capital goods, or investments
• Net capital stock = Gross capital stock adjusted for depreciation = – Market prices in the second hand market (if existent)
– Net Present Value of future benefits derived from the capital good
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A simple case
• Investments in road: 200
• Service life: 50 year
• Scrap value after end service life: 0
• Proportional depreciation over the service life: 2% each year => annual depreciation of 4
• Capital stock after …– 1 year: 196
– 2 years: 192
– …
– 50 years: 0
• Total net capital stock: summing up past investments after depreciation
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However …
• Prices? => “inflate” past investments using price indices of newly constructed investment goods
• Depreciation function? => annual benefits derived from capital good may decrease over time => use of alternative “age-efficiency” or “age-price” profiles
• Retirement patterns? => not all capital goods are discarded exactly at the end of the assumed service life => use of a certain distribution functions
• Lots of mathematics, but that’s not a major issue, it’s about the availability of relevant data
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Data requirements
• Sufficiently long time series of purchases (less disposals)
• Sufficiently long time series of price indices
• A benchmark estimate for certain year in the past
• Service lives by type of assets
• Assumptions on the depreciation function and the retirement pattern
• More information:– OECD Manual on Measuring Capital: http://
www.oecd.org/std/productivity-stats/43734711.pdf
– OECD Handbook on Deriving Capital Measures of Intellectual Property Products: http://www.oecd.org/std/na/44312350.pdf
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Inventories
• Different types of inventories
– Materials and supplies
– Work in progress
– Finished goods
– Military inventories
– Goods for resale
• Changes in inventories to be valued at the prices current at the time the goods (and services) enter or leave the stocks: not easy to distinguish changes in inventories from holding gains/losses, especially for goods with very volatile prices
• Stock of inventories to be valued at the prices current at the time the balance sheets are referring to
• Information base usually relatively weak, especially changes in inventories difficult to measure
Inventories (1)
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• Valuation of different types of inventories
– Materials and supplies: purchasers’ price
– Work in progress: proportion of production costs incurred, applied to basic price
– Finished goods: basic prices
– Military inventories: purchasers’ prices
– Goods for resale: purchasers’ prices
• May be difficult to align changes in inventories (resulting from description of production process), holding gains/losses and other changes in volume to the difference between the stock values at beginning and end of the year
• Often changes in inventories estimated as a residual between supply and use of the relevant goods (and services)
Inventories (2)
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Land (and Structures)
• Direct method: area of each parcel of land is multiplied by an appropriate price
• Indirect method: obtains either the value of the land indirectly or obtains the price of the land indirectly– Residual approach: value of land: e.g. value of dwellings
(including land) minus value of dwellings based on PIM
– Hedonic approach: including land as one of the determining factors for the RPPI or CPPI
– Land-to-structure ratio approach
• Method will also depend on type of land
• More => presentation by Jennifer Ribarsky
Estimation methods
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Mineral and Energy Resources
Valuation of mineral and energy resources
• Usually based on the estimation of the Net Present Value of future resource rents
• Information needs:– Physical stocks including extraction pattern
– Resource rent: Gross Operating Surplus minus User Costs of Produced Assets (depreciation plus return to produced assets)
• Physical stocks highly dependent on definition used
• Resource rent highly dependent on price and related production forecasts
• More => presentation by Katrina Richardson
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Intangible Non-produced Non-financial Assets
• Not the result of a production process => depends on definition of investment expenditures
• Contracts, leases and licenses (only to be recorded when significant)– Marketable operating leases (e.g. rental contract => “key
money”)
– Permits to use natural resources (e.g. fishing quota)
– Permits to undertake specific activities (e.g. taxi licenses)
– Entitlements to future goods and services on an exclusive basis (e.g. contracts of sports players, writers, musicians, etc.)
• Goodwill and marketing assets (brand names, mastheads, trademarks, logos, domain names, etc.)
Intangible Non-produced Assets (1)
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• Value of contracts, leases and licenses: market value
• Value of goodwill and marketing assets =
value paid for an enterprise as a going concern
minus
sum of its assets less the sum of its liabilities, each item of which has been separately identified and valued
• Only recorded when evidenced by a market transaction, usually the purchase of a whole corporation
• Note: If expenditures to build up brand names and organisational capital would be considered as (produced) investments and capital stock, the above difference would become smaller
Intangible Non-produced Assets (2)
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Thank you for your attention!
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