Measurement of non-financial assets

1. Measurement of non-financial assets Peter van de Ven Head of National Accounts, OECD NBS-OECD Workshop on National Accounts Guangzhou, December 2 – 5, 2014

2. 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

3. 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

4. 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

5. 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

6. 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

7. Produced Fixed Assets

8. 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)

9. 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)

10. 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

11. 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

12. 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

13. 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

14. Inventories

15. Inventories (1) • 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

16. Inventories (2) • 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)

17. Land (and Structures)

18. Estimation methods • 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

19. Mineral and Energy Resources

20. 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

21. Intangible Non-produced Non-financial Assets

22. Intangible Non-produced Assets (1) • 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.)

23. Intangible Non-produced Assets (2) • 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

24. Thank you for your attention!