I remembered once I posted in my
Facebook status "Is the house that
you bought and stayed in considered as your asset?" One of my friends
actually asked me back "Is that a trick question?"
What exactly can be
considered as an Asset?
"In financial accounting, assets are economic resources. Anything
tangible or intangible that is capable of being owned or controlled to produce
value and that is held to have positive economic value is considered an asset.
Simply stated, assets represent value of ownership that can be converted into
cash."
Investopedia defines an
asset as:
"A resource with economic value that an individual, corporation or
country owns or controls with the expectation that it will provide future
benefit.”
My definition of an asset is
something that can generate you income now. As you can see it is slightly
different than the classic definition. It is stricter. I will only consider those that provide
immediate benefit as an asset.
This means the house that
you bought and stayed in is not your asset. Neither is the car that you use to
ferry you around.
An endowment policy that you
make payment to every month in anticipation of a lump sum payment in the future
is not your asset. You can only consider it an asset if you surrender it or
when it is matured.
While you are still paying
for it, it could however arguably be recorded as an asset to your beneficiary.
I'm kidding! Well technically if you die then it is an asset to your
beneficiary.
All the above are actually
your liabilities.
Why do I say that? Because
you still have to pay for it. Even if the car and the house that you use are fully paid, you still need to maintain it and that
will cost you money.
What can be considered as your asset then?
Your job is actually an
asset. So cherish it. Don't hate your boss or bad-mouth your company too much!
Unfortunately you can't include it in your net worth calculation because it is
not your “real” asset. You could be fired tomorrow!
If your net salary is more
than your expense then the excess cash is your asset.
If you invest the excess
cash in unit trusts or shares and they generate dividend income then the
investments are your assets.
Your Employee Provident Fund
is an asset. Now aren't you glad that the authority makes it a compulsory
contribution and also makes it difficult to do pre-retirement withdrawals?
For most people that could
be the only asset that they have.
Unfortunately it is not a
liquid asset. So unless you are above 55 years old, if you want to be strict
and want to know your real net worth you should exclude it in your calculation.
In my case, I include it but
I put it under “non-liquid” asset category. This is to ensure that I will
monitor it but at the same time I know that I can't access it now.
What about property investment?
If you buy a house as an investment (instead of to stay), technically it
is an asset. It could be a performing or
non-performing asset depending on circumstances. A performing asset
if it gives you rental income, non-performing
if it doesn't (still in building stage
or left empty unrented). I know that this is not in sync with my definition of
asset above.
The reason why I include the
non-performing asset in the asset list is due to the fact that you need
to include the housing loan of the non-performing asset at the liability
section of the Net Worth Statement.
If you only list the housing loan, you will overestimate your
liabilities. Even though I am fine with that, your heart may not when you see
the numbers!
For prudence sake, it is recommended to use the purchase price instead of market price as
the value.
How about gold, jewellery, paintings or expensive
watches?
Those are non-performing
assets. They don’t generate any passive income. There are only potential
capital gains if you chose wisely and sell them later at a profit.
If you buy them purposely
for investment, then you may put them in your asset at cost price. If you
buy them for day to day use, you should exclude them from your list.