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On the Treatment of Intangible Assets in National Accounting Itsuo Sakuma Senshu University.

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1 On the Treatment of Intangible Assets in National Accounting Itsuo Sakuma Senshu University

2 Popper’s three worlds World 1 the world of physical states or processes World 2 the world of mental states or processes World 3 the world of the products of human minds How to treat “Output” (?) to the World 3 may be the focus.

3 Work of Art and Production Boundary of SNA Items68SNA93SNAResidence in Popper’s three Worlds Sculpture Fixed Capital Formation if purchased by producers ValuablesWorld 1 and World 3 Paintings Fixed Capital Formation if purchased by producers ValuablesWorld 1 and World 3 Literary works Outside of production boundary Originals should be treated as Intangible Fixed Capital Formation World 3 Music composing Outside of production boundary Originals should be treated as Intangible Fixed Capital Formation World 3 Music Performances Services; Intermediate or Final Consumption Master tapes, etc. should be treated as Intangible Fixed Capital Formation World 1 and World 3

4 World 3 World 2 World 1 The location of Production Boundary and the Three Worlds 93SNA’s Production Boundary ?

5 Is the “output” to the World 3 economic production? Knowledge creation is unique, non- reproducible. “Third Party (Person) Criterion” tells us that it is not economic production. Thus, Shakespeare could not have asked someone to write Hamlet for him. Knowledge creation is not something done under the control of some institutional unit. It is because of its autonomy and the Popperian evolutionary processes involved.

6 How about the World 2? In passing, The “output” to the World 2 is also questionable!! Are mental changes really the economic output of certain services? Or, better described as the outcome of the services.

7 Terms Two categories of intangible assets Intangible fixed assets Intangible non-produced assets BAD NAMING Because financial assets as well are intangible and non-produced

8 Intangible Fixed Assets Computer software (copies)is tangible. Because it is a component of the machine. To be “machine-readable,” it needs to be a tangible object!!

9 Intangible Fixed Assets (Work-in- progress Approach) As far as R&D etc. and originals are concerned, it is possible to consider that they are capital items in that they are similar to work-in-progress-type expenditures.(or they are preparatory work to the later stages of production) Naturally, it matters whether the expenditures are part of a continued process if they are to be the work-in- progress to some later stages of production.

10 Intangible Fixed Assets (Failed mineral exploration ) Failed mineral exploration should be regarded as a capital item only if it can be deemed to be part of a continued process. It is not sufficient that the same institutional unit operates the exploration projects. If this rule is not followed, official statistics may lead to misunderstanding about the financial position of the public sector.

11 Access to the World 3(Knowledge access) Instead of treating knowledge itself as capital, which is clearly impossible because creating knowledge is not economic production, knowledge access should be focused. We propose that knowledge access status and knowledge access activities should be analysed in satellite accounts.

12 Knowledge Access Status(Prototype) Area ∖ Level....... Faculty level and equivale nt Graduate level and equivale nt Advance d Most advance d Chemistry**** Physics**** Econometrics**** Organisation- specific ****.......

13 Knowledge Access Activities(Prototype) Area/LevelIndustrySectorGoods and Services including time spent Environmental/m ost advanced AgriculturePublic sector… Environmental/ advanced ……… …EducationPrivate sector… …………

14 Intangible Non-produced Assets Intangible non-produced assets are socially created assets. They are totally different from intangible fixed assets. Confusion between the two may give rise to the loss of confidence in official statistics internationally because people think the SNA is pro-patent as well as serious mis-measurement of economic performances.

15 Goodwill is not a national accounting concept There are two rules concerning acquisitions. The balance sheets of the two businesses are simply combined (using historical cost valuation) and no goodwill is created The acquiring company will put the premium they paid on their balance sheet under the heading "Goodwill.”

16 Business Accounting Treatment of Goodwill Assets 1000 Liabilities 600 Capital 400 Assets 1500 Liabilities 1000 Capital 500 Assets 2500 Liabilities 1600 Capital 900 Assets 3000 Of which Goodwill 500 Liabilities 1600 Capital 1400 Company BCompany T Pooling Method Purchase Method Total market value of Company B is 900 Total market value of Company T is 1100

17 Current- Value Pooling Method Goodwill is not a national accounting concept. Current-value pooling method is the only method that can be used in national accounting. Assets 2500 Liabilities Including shares 3600 Net worth -1100 Negative net worth should be focused instead!

18 Closing Remarks As a reference framework, “Popper’s three worlds” may be useful for national accountants. The distinction between produced assets and non-produced assets should not be obscured in order for the official statistics to be credible with the international society. Publicness involved in the private sector’s activities is not adequately accounted for in the current national accounts statistics.


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