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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