Capital asset

The term capital asset has three unrelated technical definitions, and is also used in a variety of non-technical ways. In financial economics, it refers to any asset used to make money, as opposed to assets used for personal enjoyment or consumption. This is an important distinction because two people can disagree sharply about the value of personal assets, one person might think a sports car is more valuable than a pickup truck, another person might have the opposite taste. But if an asset is held for the purpose of making money, taste has nothing to do with it, only differences of opinion about how much money the asset will produce. With the further assumption that people agree on the probability distribution of future cash flows, it is possible to have an objective Capital asset pricing model. Even without the assumption of agreement, it is possible to set rational limits on capital asset value.1 In governmental accounting, it is defined as any asset used in operations with an initial useful life extending beyond one reporting period.2 Generally, government managers have a "stewardship" duty to maintain capital assets under their control. See International Public Sector Accounting Standards for details. In some income tax systems, gains and losses from capital assets are treated differently than other income. Sale of non-capital assets, such as inventory or stock of goods held for sale, generally is taxed in the same manner as other income. Capital assets generally include those assets outside the daily scope of business operations, such as investment or personal assets. The United States system defines a capital asset by exclusion.3 Capital assets include all assets except inventory of supplies or property held for sale (including subdivided real estate), depreciable property used in a business, accounts or notes receivable, certain commodities derivatives and hedging items, and certain copyrights and similar property held by the creator of the property. The United Kingdom has an even broader definition.4 Non-technical and ambiguous usage A well-known financial accounting textbook5 advises that the term be avoided except in tax accounting because it is used in so many different senses, not all of them well-defined. For example it is often used as a synonym for fixed assets6 or for investments in securities.5 A common non-technical usage occurs when people ask that employees or the environment or something else be treated as a capital asset. In this context it means something managers have a responsibility to maintain, and to report changes in value as gains or losses.7 Capital assets should not be confused with the capital a financial institution is required to hold. This capital is computed from the right-hand side of the balance sheet while assets are found on the left-hand side.5 References ^ Eugene F. Fama and Merton H. Miller, The Theory of Finance, Holt Rinehart and Winston (1974). ^ Governmental Accounting Standards Board Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, paragraph 19. ^ 26 USC 1221. Also see the discussion of capital gains and losses in IRS Publication 550. ^ See HMRC discussion of assets liable to capital gains tax. ^ a b c Clyde P. Stickney and Roman L. Weil, Financial Accounting, p. 622. ^ John Owen Edward Clark, Dictionary of International Accounting Terms, p. 98 ^ David F. Robinson, "Human asset accounting", Long Range Planning, v. 7, i. 1, February 1974, Pp. 58-60. See also Current asset