redefining assets: a proposal for the conceptual framework richard gore associate professor fort...
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Redefining Assets: A Proposal
for the Conceptual Framework
Richard GoreAssociate ProfessorFort Lewis College
&
Richard SamuelsonEmeritus Professor
San Diego State University
Why is the Definition Important?
Principal-based Accounting Standards
What is an Asset?
Three Asset Definitions
The Existing Asset Definition (FASB Concept Statement No. 6)
The Proposed Asset Definition (FASB/IASB, 2007)
The Alternative Definition (Samuelson/Gore, 2008)
Criteria
Fisher’s Criteria of a good definition: The definition should be useful for
scientific analysis The definition should harmonize with
common usage
Classical Measurement Theory
Size
Weight
Cost
Fair Value
Asset
Existing Asset Definition
“Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transaction.”
(FASB Concept Statement No. 6.)
Economic
Proprietary
Problems
What goes in here?
Walter Schuetze, 1993
More Problems
Future Economic Benefit(Flow)
ProprietaryMeasurement
Asset(Stock)
(Samuelson, 1996)
Proposed Asset Definition
“An asset of an entity is a present economic resource to which, through an enforceable right or by other means, the entity has access or can limit access by others.”
Intent is to focus the question of whether an asset exists on the present, not the past or the future.
Economic Resource
“Economic Resource is defined as something that is scarce and capable or producing cash inflows, directly or indirectly, alone or together with other economic resources.”
Per FASB/IASB, resources are scarce and must be capable of producing cash flows.
Examples
Accounts Receivable & Prepaid Expenses Is it an economic resource or a right to a
resource?
Leasehold Interests & Plant and Equipment What is the nature of the right to the resource
(future cash flows or technical services)?
Another Example
Goodwill
FASB view is that goodwill is an asset even
though it cannot be separately identified.
Goodwill may arise for many reasons including
future growth opportunities, cost savings, and
financial flexibility.
These items are attributes of some other resource.
“What-You-May-Call-Its”
Goodwill Continued
Master Valuation Account
Debit Credit
Identifiable Net Assets Fair Value
Goodwill Plug
Consideration Given Fair Value
Summary of Proposed Definition
Weaknesses:
Defines economic resources in terms of future
benefits (i.e. cash flows). This confuses asset definition with asset measurement.
Emphasizes the economic component over the
proprietary component. It isn’t very useful in classifying objects.
Alternative Definition
“An Asset is the present right to the services (or uses) of an existing economic resource.”
Rights are limited to enforceable rights
Resources are defined in terms of their
technical services or uses, not cash flow.
Illustration
Robinson Crusoe: Economic resources are everything that is
useful to him (e.g., forest, meadows, and
streams)
There is no exchange value. QuickTime™ and a
TIFF (Uncompressed) decompressorare needed to see this picture.
Barter Exchange
The economic resources are the same, but now they must be divided among the inhabitants.
Assets are the “rights” to use the economic resources. Resources now have “exchange value.” For example, Robinson Crusoe could exchange two
fish for 10 bananas.
Money Economy
Most assets now have exchange value
Classical Measurement Theory
separates the thing being measured
from the attribute used to measure it.
Diagram of Universe
Everything
Economic Resources
Rights
Assets
Alternative Definition
Emphasizes the right to use a resource by placing it first in the definition. Can be used to classify objects
Defines economic resources in terms of utility or technical services, not cash flows. Disentangles definition from measurement
Distinguishes between rights and economic resources
Conclusion
Alternative Definition satisfies Fisher’s two criteria for a good definition. It is useful for scientific analysis
It harmonizes with common usage
Alternative definition will: Promote representational faithfulness of financial
statements elements.
Promote the development of Principle-based Financial Reporting Standards
Thank You.