Rating Assets

Is a musical work a rateable asset? Or is just a metal like gold a rateable asset? RATING EVIDENCE and RATING©REPAIR relate to the evidence and to the repair of ratings for specific assets or counterparties. In the following the focus will be on the definition of assets. Since the word “asset” plays an important role in the differentiation of rating types such as “credit rating”, “fund rating”, “real estate rating”, “start-up rating”, “commodity rating”, here are some ideas on how to identify things which are accessible to a rating methodology. Since the first bond ratings were devised as forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates more than a century ago, rating systems have evolved in response to the increasing depth and breadth of the global capital markets. Much of the innovation in rating systems has been in response to market needs for increased clarity around the components of investment risk, for inclusion of new assets classes or for finer distinctions in rating classifications.

An “asset” is in its broadest sense a useful or valuable thing or person. More specifically an asset is an item of property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.

While a “tangible asset” is an asset that has a physical presence, is touchable and measurable in meters, square meters, kilograms, e.g. property, equipment, “intangible” is an asset that has no physical presence, such as patents, copyrights, goodwill and trademarks. Intangible assets are no less “real” than tangible assets, but the latter are also called “real assets”.

In financial accounting, an asset is any resource owned by a business or an economic entity. The monetary value of anything that can be owned or controlled to produce positive economic value can be recorded in a balance sheet. Long-lived assets such as buildings, equipment and furniture that cannot be easily converted into cash are called “fixed assets”, while cash and assets that are expected to be consumed or expended or converted into cash within the current operating period are called “current assets”. To develop a single set of high-quality, understandable, enforceable and globally accepted accounting standards, an asset has been defined as a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

Since so called “wasting assets” irreversibly decline in value over time, this may be accounted for by applying depreciation under accounting regimes. Vehicles and machinery, mines and quarries in use are tangible wasting assets, while expiring options and insurance policies are intangible wasting assets.

An asset that has a value based on a contract such as deposits, stocks, bonds and derivatives is called a “financial asset“. Financial assets are opposed to non-financial assets. These are property rights which include both tangible property such as land, real estate or commodities and intangible assets such as intellectual property. Whether a financial asset is “held for trading” (acquired or incurred principally for the purpose of selling, or is part of a portfolio with evidence of short-term profit-taking) or “held-to-maturity” (the owner is willing and able to hold it till maturity) are subject-related aspects and are not included in an object-related rating approach. Profiling mirrors subject-related issues, while rating mirrors object-related issues.

The law selectively “codes” certain assets, endowing them with the capacity to protect and produce wealth. With the right legal coding, almost any object, claim, or idea can be turned into an asset. To pick and choose among different legal systems and legal devices is a key competence for creating an asset, which is in turn accessible to an evidence-based rating methodology. Since codability is given for almost anything, ratings can help under many more circumstances than just decisions about bond investments.

An evidence-based rating method for assessing an asset can be developed mainly under the following conditions:

  • The investor can choose from various alternatives in the relevant asset class. He can acquire one or the other asset within the asset class. It is not critical whether the asset can be sold again: a pension or life insurance policy, for example, can be inalienably linked to a specific person. At the time of purchase, however, there might be various alternatives to consider. If there is no choice, for example in the case of a coercive system of compulsory levies, no ratings are required to decide, since there is nothing left but to follow the applicable rule. The freedom to choose is an inalienable prerequisite for any meaningful rating.
  • The economic benefit of the asset can be measured by a counting unit – numéraire – such as euros, dollars or grams of gold. The numéraire is a basic standard by which value is computed. While usually the legal tender, the numéraire can be any tradable economic entity in terms of whose price the relative prices of all other tradables can be expressed. There are considerable problems with the choice of this computing unit, especially when viewed over the long term. Currencies can be reformed and gold can be banned.
  • There has to be a legal framework for an asset, a set of promulgated rules or procedural steps, in common law established through precedent or in a code jurisdiction made explicit in statutory or regulatory law through which judgments can be determined in a legal case. An asset-relevant doctrine comes about when a judge makes a ruling where a process is outlined and applied, and allows for it to be equally applied to like cases. When a credit risk is rated, the risk that an entity may not meet its contractual financial obligations as they come due and any estimated financial loss in the event of default or impairment is evaluated. The contractual financial obligations addressed by a credit rating are those that call for, without regard to enforceability, the payment of an ascertainable amount, which may vary based upon standard sources of variation (e.g., floating interest rates), by an ascertainable date.
  • It is not enough to know about rules. It is equally important to form an opinion on how likely it is that there is a willingness to play by the rules. A credit rating addresses not only the issuer’s ability to obtain cash sufficient to service the obligation, but also its willingness to pay.

An “asset” is a resource with economic value that an individual, organization, or country owns or controls with the expectation that it will provide a future benefit. A “rating” classifies the probability that expectations will be met. Consequently, “rating evidence” is about the evidence, reliability and validity of the classification of this probability. In addition to assets, contractual partners can also be the subject of a rating. If counterparties are rated, a rating classifies the probability that they will meet the expectations placed on them.

While rating assets involves a specific interest of a decision maker to choose among investments and to allocate ressources, a social credit rating calls for the establishment of a unified record system for individuals, businesses and the government to be tracked and evaluated for trustworthiness.