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

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) 8

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) 9

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 10

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 11

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 12

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: –OECD Handbook on Deriving Capital Measures of Intellectual Property Products: 13

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) 15

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) 16

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 18

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 20

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) 22

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) 23

Thank you for your attention! 24