Www.bea.gov BEAs Fixed Assets Accounts : An Overview Dave Wasshausen The First World KLEMS Conference Harvard University August 19-20, 2010.

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www.bea.gov BEAs Fixed Assets Accounts : An Overview Dave Wasshausen The First World KLEMS Conference Harvard University August 19-20, 2010

www.bea.gov 2 Fixed Assets Accounts (FAAs) Net [Wealth] Stock Investment Depreciation Other Changes in Volume of Assets (OCVA) Average Age

www.bea.gov 3 Net [Wealth] Stock vs BLS Productive Stock BEA calculates wealth stocks Depreciation rates generally derived from market prices of used assets Corresponding depreciation reflected in the NIPAs as a charge against income from current production BLS calculates productive stocks Deterioration rates reflect productive capability of the asset Used to calculate multifactor productivity

www.bea.gov 4 Wealth Stock vs Productive Stock Assets depreciate (BEA) quicker than they deteriorate (BLS) For example, an automobile provides similar level of productive service after 1-year of use; however its value has declined significantly

www.bea.gov 5 Wealth Stock vs Productive Stock

www.bea.gov 6 Valuations Historical-cost Book value measure Real-cost Quantity measure Current-cost Replacement-cost measure Current-cost depreciation is the featured NIPA depreciation (aka consumption of fixed capital or CFC)

www.bea.gov 7 Perpetual Inventory Method (PIM) Used for all asset-types except autos to indirectly derive net stock: K jt = K j(t-1) *(1-r j ) + I jt *(1-r j /2) - O jt Where: K jt = net stock for year t for type of asset j r j = depreciation rate for type of asset j I jt = investment for year t for type of asset j O jt = other changes in volume of assets for year t for type of asset j

www.bea.gov 8 Physical Inventory Method Applies independently estimated prices to a direct count of the number of physical units of each type of asset. More direct than PIM but is used only for autos because they are the only type of asset with sufficient source data.

www.bea.gov 9 Estimating Methodologies PIM can be rewritten as follows: K jt = K j(t-1) + I jt - O jt - M jt Where: M jt = depreciation for year t for type of asset j Depreciation is estimated as a residual as follows: M jt = I jt – O jt - (K jt - K j(t-1) )

www.bea.gov 10 Estimating Methodologies Historical- and real-cost net stock and depreciation are calculated using the perpetual (or physical) inventory method. Current-cost net stock and depreciation are calculated by reflating real-cost estimates. Price indexes taken from NIPA fixed investment estimates. Current-cost estimates can be sensitive to price changes (i.e., CFC for housing in recent periods).

www.bea.gov 11 Current-cost vs. Historical-cost

www.bea.gov 12 Investment Investment (nominal and real) by asset-type comes from NIPAs for most assets. Handful of asset-types that differ for the FAAs -- private fixed investment reconciliation tables can be found here (www.bea.gov/national/FA2004/index.asp)www.bea.gov/national/FA2004/index.asp Investment by industry and by legal form of organization (LFO) are derived using Census data on: Capital expenditures by industry Payroll and revenue by legal form of organization.

www.bea.gov 13 Depreciation Depreciation profiles are based on empirical evidence of used asset prices in resale markets wherever possible. Geometric patterns are used for most asset types because they more closely approximate actual profiles of price declines than straight-line patterns. Based on empirical studies, BEA data, or technological factors, some assets (autos, computers, missiles, and nuclear fuel) justify the use of a nongeometric pattern of depreciation by BEA.

www.bea.gov 14 Depreciation Rates are calculated by dividing the declining-balance rate (DBR) by the assets assumed service life. DBRs primarily derived from estimates made by Hulten and Wykoff under the auspices of the U.S. Department of the Treasury.

www.bea.gov 15 Service Lives Service lives for nonresidential fixed assets based primarily on studies conducted by the Department of the Treasury. Service lives for most types of residential structures are taken from a study by Goldsmith and Lipsey.

www.bea.gov 16 Service Lives Ideally, service lives would be calculated by industry and varied over time to account for changes in business conditions and technology; however, data limitations prevent this. Service lives for the following assets vary by industry: Communications equipment, metalworking machinery, special industry machinery, general industry machinery, heavy trucks, aircraft and service industry machinery. Service lives for the following assets vary over time: Computers, office and accounting machinery, light and heavy trucks, autos, aircraft, electric power structures, and mining exploration, shafts, and wells for petroleum and natural gas.

www.bea.gov 17 Published Depreciation Rates

www.bea.gov 18 OCVA War losses (begin with 1940) Estimated from a variety of sources, including newspapers and other media sources. Disaster losses (begin with 1971) Generally defined as catastrophic events with property losses exceeding 0.1 percent of GDP (or about \$15 billion). Also estimated from a variety of sources, including insurance-related trade data, risk management firms, and official government reports.

www.bea.gov 19 Disaster Losses

www.bea.gov 20 Average Age Weighted average of the ages of all depreciated investment in the net stock as of yearend. Net stock expressed as a function of investment only: K jt = I jt *(1-r j /2) + I jt-1 *(1-r j /2)(1-r) 1 + … + I jt-n *(1-r j /2)(1-r) n Net age stock calculated by aging each vintage of investment as follows: = (0.5)*I jt *(1-r j /2) + (1.5)*I jt-1 *(1-r j /2)(1-r) 1 + … + (n+.5)I jt-n *(1-r j /2)(1-r) n Age equals net age stock divided by net stock

www.bea.gov 21 Average Age Example

www.bea.gov 22 Published Estimates Standard FAA tables presented by: Asset-type Industry Legal form of organization Detailed FAA Tables presented by: Detailed asset-type and industry

www.bea.gov 23 BEA Fixed Assets Accounts www.bea.gov/national/FA2004/Index.asp Email questions to: FANIWD@bea.gov Or David.Wasshausen@bea.gov (202) 606-9752

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