redefining assets: a proposal for the conceptual framework richard gore associate professor fort...

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.