Valuation of capital stock and consumption of fixed capital

14.28    Capital stock and consumption of fixed capital are presented in the ASNA in current prices and as chain volume measures. The chain volume measures are referenced to the average values in the reference year.

14.29    There are two broad approaches to the measurement of capital stock:

1. direct measurement, as the name implies, involves direct approaches to owners of fixed capital assets to obtain estimates of their capital stock. Such data have not been collected for Australia.
2. the Perpetual Inventory Method (PIM) involves the compilation of a 'rolling' inventory of capital stocks; in any particular period, investment in capital assets is added to stocks, and retired assets are deducted. To apply the PIM, the following are generally required:
   • gross fixed capital formation (GFCF) for the period for which the capital stock estimate is required and for periods prior to that period up to the maximum life of the asset; and

   • price indexes for the entire timespan of GFCF.

   • the mean asset lives; that is, average of the length of time they are used in production;

   • the extent to which assets are retired before, on or after the average asset life for that asset - the retirement distribution. Alternatively, retirements can be expressed as a survival function;

   • the age-efficiency functions of assets (when weighted using the retirement distribution are used to derive productive capital stock estimates);

   • the age-price function of assets (used to derive net capital stock estimates and estimates of consumption of fixed capital);

14.30    Obsolescence occurs when an event causes an otherwise useful asset to become less useful or useless. Examples include immovable assets at a remote mine site when the mine is worked out, a building that fails to meet new health and safety regulations or, very commonly, technical innovation. As time passes technical innovation occurs, leading to the availability of assets that are superior in some way to assets previously available that performed a similar function. An example is a new model of computer that has superior performance to previous models, but is not commensurately more expensive. New, desirable software becomes available which only the new computers can support. Demand for the new, superior computers is strong while the demand for older-style computers declines sharply, and the older-style assets in service are retired before they are worn out.

14.31    Obsolescence is time-dependent, not age-dependent. All vintages of an older style asset suffer obsolescence at the same time. For many types of asset there is a history of regular technical innovation that leads purchasers to expect further innovations in the future. Computer equipment is an asset of this type. Purchasers of computer equipment can expect rapid technical innovation to make an asset bought today obsolete in a few years' time. While computers might be expected to give relatively trouble-free service for many years their economic lives are much shorter. As a consequence, the values of assets such as computer equipment fall rapidly and their rate of COFC is high.

14.32    If obsolescence is foreseen then it is factored in by the owner in determining the asset's expected economic life, and hence its expected value and depreciation in future periods. Therefore, when the event causing the foreseen obsolescence occurs there is not an abrupt fall in the value of the asset. Foreseen obsolescence is included in COFC in the national accounts because it is an expected cost of production. If there is a loss in value of an asset due to obsolescence that is not foreseen, then it should be recorded in the other changes in the volume of assets account and not in COFC. In general, it is assumed in the Australian national accounts that all obsolescence is foreseen.

14.33    If proper account is taken of quality changes in the compilation of price indexes, then they will reflect relative price falls when technical innovation occurs. As a consequence, if such price indexes are used to deflate capital formation of a type of asset that undergoes a technical innovation, the resulting volume estimates of older-style and new-style assets will be comparable because the price indexes used to deflate the current price values of the old- and new-style assets reflect the difference in quality between the two.

14.34    The age-price functions referred to above are in real terms. Therefore, providing they do not change over time (due to the rate of foreseen obsolescence changing or changes in asset reliability, etc.), the same age-price function is applicable to both different vintages of the same asset type at any particular time or to any particular vintage of an asset type over time. For most asset types it is assumed that the age-price function is constant. There are some exceptions for which slowly changing economic lives are prescribed and, as a result, the age-price functions of these asset types change slowly over time. In these cases, it is the same suite of age-price functions that is applicable both to different vintages of the same asset type at any particular time and to any particular vintage of an asset type over time. Thus the same suite of age-price functions can be used to permit the aggregation of different vintages of the same asset type at a particular time to obtain estimates of net capital stock, or they can be used to calculate the change in value of assets over time - COFC - in volume terms.

14.35    It is evident from the foregoing that volume estimation is an essential first step in estimating capital services, net capital stock and COFC.