Definition of economic assets Anne Harrison What is

Definition of economic assets Anne Harrison

What is the system about? • How labour, capital and natural resources including land are used to produce goods and services • Goods and services are used for production, consumption and accumulation

What makes it work? • Benefits are the means of acquiring goods and services for production, consumption or accumulation in the current period or future periods

Elaboration • Immediate benefit - own account production • Wages and salaries • Consumption may be financed from current or past benefits • Production and accumulation involve postponing benefits to future periods • Financial asset converts benefit in one period into benefit in another period • Current benefits may be acquired by committing future benefits in the form of financial liabilities

Ownership • Legal owner of entities such as goods and services, natural resources, financial assets and liabilities is the unit entitled in law and sustainable under the law to claim the benefits associated with the entities

Elaboration • Entities in the system must have owners • Production risk - operating surplus, income from employment embody risk • Transferring benefits across periods involves risk and different degrees of risk

Economic owner • Of an entity such as goods and services, natural resources, financial assets or liabilities is the institutional unit which is entitled to claim the benefits associated with the use of the entity in the course of economic activity by virtue of accepting the associated risks

Elaboration • Every entity has a legal and an economic owner, often the same • Legal owner may hand over risk to economic owner for another package of risks and benefits • Government may act on behalf of community at large

Definition of an asset • An asset is an entity from which the economic owner can derive a benefit or series of benefits in future accounting periods by holding or using the entity over a period of time, or from which the economic owner has derived a benefit in past periods and is still receiving a benefit in the current period. Because it represents a stock of future benefits, an asset can be regarded as a store of value.

Elaboration • Changes the wording but not the substance of the present definition • Only economic assets recognised in the system

Financial liability • Is established when one unit (the debtor) is obliged, under specific circumstances, to provide a payment or series of payments to another unit (the creditor). The most common circumstance is a legally binding contract which specifies the terms and conditions of the payment(s) to be made and payment according to the contract is unconditional

Cont. • In addition, a financial liability may be established not by contract but by long and well-recognised custom which is not easily refuted. In these cases, the creditor has a valid expectation of payment, despite the lack of a legally binding contract. Such liabilities are called constructive liabilities

Financial claim • Whenever either of these types of liabilities exist, there is a financial claim which the creditor has against the debtor. Like the liabilities, the claims are unconditional. In addition, a financial claim may exist which entitles the creditor to demand payment from the debtor but whereas the payment by the debtor is unconditional if demanded, the demand itself is discretionary on the part of the creditor.

Financial assets • All financial claims plus monetary gold, SDRs of the IMF and shares in corporations. • May change for unallocated gold accounts and SDRs

Asset boundary • All entities which meet the definition of an asset. All appear on the balance sheet of the economy. • All assets can be represented by a monetary value • Value represents the market’s view of the total of the benefits embodied in the asset.

Classification • Non-financial assets – Produced – Non-produced • Financial assets

Produced assets • Enter via production or imports – Historical monuments – Valuables • Leave via being exhausted, sold to residents for use other than as asset, sold to non-residents

Non-produced assets • Natural resources – More as now • Contracts, leases and licences – More when agreement reached • Financial assets and liabilities – When commitments made or cease

Exclusions • • • Consumer durables Human capital Environmental assets Contingent financial liabilities Assets owned by non-residents

Questions • Do you agree with the need to define ownership and benefits? • Thrust of proposed definitions? • Revised definition of an asset? • Exclusions from the balance sheet? • Inclusion of constructive liabilities?

Last comment • Please send me any detailed comments on the wording in the paper

Cont. ? • Depending on the discussion on standardised guarantees, there may be some contingent liabilities