Asset Valence

Two dynamics affect the quality of any transition. The transition must involve sufficient structural order to remain stable against disordering influences, and it must involve sufficient change to produce a yield. Effective transitions intelligently harmonize stability and change; they modulate order while magnifying yield. At the level of firms, astutely managing the interplay of structural order and growth accounts for most strong movement in the business environment over time.  

Measuring this interplay is the logic behind standard financial ratios. The usefulness of financial ratios as tools for evaluating performance and assessing credit risk depends in the first instance on conceptualizations of the underlying financial statement elements - assets, liabilities, equity, revenue, and so on. One of the revelations of complex environments is that conventional notions on this score are confused and need to be refined. Evidence of this is the struggle of the Financial Accounting Services Board - the primary US standards body for financial accounting - regarding the nature of 'assets'.

For a number of years the FASB has defined ‘asset’ as ‘a resource controlled by the entity as a result of past events from which future economic benefits are expected to flow to the entity.’  This definition generated confusion, so the FASB recently proposed this revision: ‘An asset of an entity is a present economic resource to which the entity has a right or other access that others do not have’. In the amplifying text to the proposal, the Board explains that ‘present economic resource’ means ‘the economic resource exists and the entity has the right or other access that others do not have’. The Board explains further that ‘an economic resource is something that is scarce and capable of producing cash inflows or reducing cash outflows’.

Unfortunately, however, this revision only perpetuates confusion. The phrase ‘right or other access’ is imprecise. The phrase 'capable of producing' is too expansive. The referent of ‘future cash flows’ to amplify the meaning of ‘economic resource’ is too narrow. It is unclear whether 'economic resource' is instantiated by a property 'right' or the related property item - and so on.    

The lexical quality of 'asset' and other financial statement elements is fundamental when bodies such as the FASB issue their principles-based accounting standards - yet, the Board's semantic struggle is not altogether its fault. It is working within the constraints of a conceptual framework that is not adequate in today's commercial environments. For that reason, the clarity the Board is striving to attain is beyond reach. 

In our Pragmatica ontology, assets, liabilities, and other commercial elements are conceptualized as subsets of patterns of deontic relations.  A feature of deontic relations is their ‘valence’ – the degree of their capacity to interact with other patterns. Use of the concept of valence avoids the semantic entanglements described above.