Definition of economic assets

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Definition of economic assets

• Anne Harrison

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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

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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

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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

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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

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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

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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

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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

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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.

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Elaboration

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

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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

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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

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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.

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Financial assets

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

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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 markets view of the total
  of the benefits embodied in the asset.

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Classification

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

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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

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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

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Exclusions

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

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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?

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Last comment

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

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Cont.?

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