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Redefining Assets: A Proposal for the Conceptual Framework. Richard Gore Associate Professor Fort Lewis College & Richard Samuelson Emeritus Professor San Diego State University. Why is the Definition Important?. Principal-based Accounting Standards. What is an Asset?.

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redefining assets a proposal for the conceptual framework
Redefining Assets:A Proposal for the Conceptual Framework

Richard Gore

Associate Professor

Fort Lewis College

&

Richard Samuelson

Emeritus Professor

San Diego State University

why is the definition important
Why is the Definition Important?

Principal-based Accounting Standards

What is an Asset?

three asset definitions
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
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
Classical Measurement Theory

Size

Weight

Asset

Cost

Fair Value

existing asset definition
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
Problems

What goes in here?

Walter Schuetze, 1993

more problems
More Problems

Future Economic Benefit

(Flow)

Asset

(Stock)

Measurement

Proprietary

(Samuelson, 1996)

proposed asset definition
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

“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
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
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.
goodwill continued
Goodwill Continued

Master Valuation Account

summary of proposed definition
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
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
Illustration
  • Robinson Crusoe:
    • Economic resources are everything that is useful to him (e.g., forest, meadows, and streams)
    • There is no exchange value.
barter exchange
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
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
Diagram of Universe

Assets

Rights

Economic Resources

Everything

alternative definition1
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
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