Basic NW and Accounting Question.

[Ronstar]

The difference is that Ronstar's annuity is a period certain annuity, he or his heirs will get the contractual payments no matter what, so it is akin to a bond that has sinking fund payments.

Not like SS where you have to be living to get the payments.

You would recognize a bond with sinking fund payments as an asset, right?

For a period certain annuity like Ronstar, I would just amortize based on the IRR relative to the single premium. Easy peasy.

This matches what I was thinking. I verified by phone today that if I pass away prior to the end payment, my heir gets the choice of continuing the monthly payments until the end of my annuity term or take a lump sum payment.

 

[pb4uski]

I would value it initially at what I paid for it. Over time I would value it at the present value of expected payments.

Again, I am a going concern. I have no reason to assume I will die today and thus value something I just bought for thousands of dollars paradoxically at zero.

And I do not find GAAP to be particularly helpful here. It is seldom employed for personal financial statements anyway.

The last part is correct... GAAP basis personal financial statement are rare.

But even if the FASB did revisit life annuities for personal financial statements I don't think they would come to a different conclusion. ASC 450-30-25-1 indicates that "A contingency that might result in a gain usually should not be reflected in the financial statements because to do so might be to recognize revenue before its realization." A pure life annuity is a series of monthly gain contingencies... if the individual is alive on a particular date then the contingency is realizable and can then be recognized/recorded and that is consistent with not recognizing an asset for life annuity benefits.

For period certain annuities there is no contingency... the benefit payment will be made on specified dates no mater what.. so those benefit payments can be recognized as an asset.

Is the accounting result for the purchaser of a life annuity odd... surely. Is it wrong theoretically... not at all. Now all of that said, most life annuities include some guaranteed payments for a period of time or return ot premium guarantees.... to convince buyers concerns that if they die shortly after buyng a life annuity that their money goes "poof" (a technical term). So in those cases the annuity would be an asset for the present value of the expected certain payments, but not any life contingent benefits.

 

[old medic]

The more discussions I read on net worth, It seems to come down to 2 basic formulas...
1st is what you can prove to the bank.... in which you borrow some and reduce your NW...
2nd is what your Estate is worth at the point of your death...
I don't really want to borrow, nor die either...

 

[CaptTom]

Wow, this is getting pedantic. I love it!

From all of this, I conclude that tools intended to let investors decide if company A is better than company B for investment purposes or loan risk isn't very useful in personal finance.

Very good point. To me this whole discussion is "just for fun."

That said, I did a few calculations in my head before I retired. Things like "having a pension of $XXXX is like having investments of $XXXXX and using a 4% WR." I guess that's sort of like counting an income stream as an asset. But I never put that in writing, or on a spreadsheet.

I do have a "net worth" report I can run which includes cash, investments and real estate assets less liabilities. Again, just for fun.

 

[ShokWaveRider]

To me this whole discussion is "just for fun."

NW in itself is a fun number for most of us. Yes, there is a practical calculation one can do, Tangible Assets - Obligations/Liabilities.

Note: I use "Your" in this text as an example and it is not directed or implied at anyone here.

However, it is a personal Feel-Good very subjective measurement and can be meaningless to others in the real world.

Some folks will include all sorts of things in their assets that should not be there as "they" could never sell them "Tomorrow" or in the "very" near future for what they "Think" they are worth.

So, include your Persian Cat, your overpriced depreciating Truck and Moma's China if you like, if it makes you feel good and that is OK .... for you.

Personally, I do not. Our home is worth 2-3 x what we paid for it, but I only include what we paid for it minus the anticipated closing costs. A lot of things some folks include would only be sold if the SHTF, and in that scenario other folks would be doing the same and that would make your stuff worth even less.

 

[dunkelblau]

NW in itself is a fun number for most of us. Yes, there is a practical calculation one can do, Tangible Assets - Obligations/Liabilities.

A couple of decades ago Florida had an intangibles tax that included stocks, bonds, and mutual funds, but excluded bank deposits and annuities. No idea how this arrangement compares to the various European countries that impose a wealth tax today.

 

[Rianne]

If NW is assets - liabilities and including your home is the question:

If you have a mortgage on your home, that would be a liability. Wouldn't you include that liability in your net worth? So why not include the appreciation or value of the home as an asset included in NW?

 

[ShokWaveRider]

If NW is assets - liabilities and including your home is the question:

If you have a mortgage on your home, that would be a liability. Wouldn't you include that liability in your net worth? So why not include the appreciation or value of the home as an asset included in NW?

Because it is speculative based on a moment in time, unless you are selling tomorrow, it is meaningless. It could change next week to a depreciation.

 

[Rianne]

Because it is speculative based on a moment in time, unless you are selling tomorrow, it is meaningless. It could change next week to a depreciation.

And the stock market could lose 5%, 10%, 15% of its value just the same. Do you include the value of your portfolio every day and reevaluate your net worth on a daily basis? What is the starting value when you figure NW and calculate how long your retirement can last?

 

[ShokWaveRider]

And the stock market could lose 5%, 10%, 15% of its value just the same. Do you include the value of your portfolio every day and reevaluate your net worth on a daily basis? What is the starting value when you figure NW and calculate how long your retirement can last?

If you have money in the Stock Market, yes, we do not. Again, do what you like, it is a FEEL-GOOD number that means absolutely nothing to others. Only you.

 

[Rianne]

If you have money in the Stock Market, yes, we do not. Again, do what you like, it is a FEEL-GOOD number that means absolutely nothing to others. Only you.

Absolutely true. I could own a Van Gogh painting. The value of that could not be guestimated until it sells. Really, there is no way of knowing the value of anything until you sell it, maybe other than individual bonds/CDs.

 

[CRLLS]

I would include a period certain annuity as an asset since it is a noncontingent stream of cash flows. I would probably record it at the pres value of furure payments due using a discount rate commensurate with the IRR at purchase... IOW the interest rate that discounts the eriod certain cash flow to the single premium paid at the purchase date.

That seems to be a reasonable solution for a period certain annuity. Another might be to get a quote for a lump sum from companies like JG Wentworth. This would be the actual value at any given point of time IMO. Granted, one would have to get fresh quotes when updating their NW. Maybe do it just once to compare your formula to real world cash money and adjust as necessary to converge?

That said, based on my observation of people wanting to see a bigger feel-good number than what a traditional NW value is, most would not be willing to use a depleting value as part of their NW calculations. It would seem to be a bit counterintuitive to their purpose.

 

[CaptTom]

...Some folks will include all sorts of things in their assets that should not be there as "they" could never sell them "Tomorrow" or in the "very" near future for what they "Think" they are worth...

That tendency to over-value what your "stuff" is worth to others is very common. You see it all the time at yard sales and on-line marketplaces.

Because it is speculative based on a moment in time, unless you are selling tomorrow, it is meaningless. It could change next week to a depreciation.

The same could be said for cash, or bars of gold buried in the back yard.

It's possible to argue that there is no standard for "worth." You can only compare one asset to some other asset. And they can all change at any time.

I don't think it's unreasonable to value your assets at what they're worth today, in your local currency. Of course all that could change, but what else can you do?

Another way to look at it is that my house provides me shelter, something I'm going to need one way or another for as long as I'm alive. You might say it's about the only real tangible asset which is a store of value. Assuming a major financial crisis, its value will go down. But so will all the other options for shelter. So I count it as an asset, valued in today's dollars.

In a SHTF scenario, if the social order crumbles, that's a totally different calculation. In that world, you can only own what you can defend. I think about it sometimes, but I'm not ready to go "full prepper" mode to eliminate that risk.

 

[CRLLS]

Some people seem to be confusing Net Worth with "projected net worth". They are very different things. One is today's worth, which does not make assumptions. The other might be considered a projection and adds a bunch of "ifs". If the market grows "x" amount, if I live to be "x years old, if I receive an inheritance from grandma, ....... A projected NW is fine. Net Worth is a point in time and that point is today, not last year and not next year.

 

[Montecfo]

The last part is correct... GAAP basis personal financial statement are rare.

But even if the FASB did revisit life annuities for personal financial statements I don't think they would come to a different conclusion. ASC 450-30-25-1 indicates that "A contingency that might result in a gain usually should not be reflected in the financial statements because to do so might be to recognize revenue before its realization." A pure life annuity is a series of monthly gain contingencies... if the individual is alive on a particular date then the contingency is realizable and can then be recognized/recorded and that is consistent with not recognizing an asset for life annuity benefits.

For period certain annuities there is no contingency... the benefit payment will be made on specified dates no mater what.. so those benefit payments can be recognized as an asset.

Is the accounting result for the purchaser of a life annuity odd... surely. Is it wrong theoretically... not at all.

I did not notice anyone arguing for new authoritative accounting pronouncements.

But this does remind me of the balloonist who lost his way in a storm after which his balloon landed and came to rest in a newly plowed field.

He asked the only person within earshot, "hey can you tell me where I am?"

And the observer said, " yes, you are in the middle of a newly plowed field".

The balloonist then asked, "Are you by any chance an accountant?"

And the observer replied, "why, yes I am, how did you know that?"

And the balloonist replied, "well, the answer you provided was completely accurate, and totally useless!"

And I say that as someone who spent a career as an accountant. If the only tool you have is a hammer, well, you know.

 

[pb4uski]

I did not notice anyone arguing for new authoritative accounting pronouncements. ...

Fair point other than you don't like the current accounting... but in that case just ignore that one sentence.

 

[Taco]

Our home is worth 2-3 x what we paid for it, but I only include what we paid for it minus the anticipated closing costs.

To each their own, and as you said it is just a fun number so what does it really matter anyway - but I gotta say this makes no sense to me.

I can get someone just not wanting to include their home in their NW at all.
I can get someone wanting to include their home in their NW, and using a somewhat conservative number.
I don't get including the home in your NW, and using a number that is completely divorced from reality.

Let's assume you paid $400K for a home and it is now worth ~2.5x what you paid, or ~$1 million. Note the anticipated closing costs will be based on the current value. Let's say those will be ~6%, or ~$60K.

You would include something like $340K, when the number is more likely to be closer to $900K. I can get lowballing the value to be conservative, but not to the extreme that the number is not even in the ballpark.

Not trying to convince you to do anything differently - you do you - it just strikes me as a rather odd approach.

 

[ShokWaveRider]

To each their own, and as you said it is just a fun number so what does it really matter anyway - but I gotta say this makes no sense to me.

Maybe I do it because I am very comfortable where our NW is without taking into account the Capital Gain of the home. If I were not, I would probably add it. I have always erred on the low side when it comes to our money.

 

[Jerry1]

From all of this, I conclude that tools intended to let investors decide if company A is better than company B for investment purposes or loan risk isn't very useful in personal finance.

One of the statements that a company generates is a Statement of Cash Flows. That would let the reader know that the company has cash coming in (and going out) and would capture the reality of a stream of cash - like a pension or annuity. Point being is that it's not ignored.

Also remember that accounting is sensitive to the user of the information. While no accountant would include a pension in Net Worth, that does not mean the accountant would not disclose the existence of the cash flow to a prospective reader.

Look at it in reverse - a bank, for purposes of a loan would focus more on cash flow than net worth. They want to make sure you have an income stream that would allow you to manage the payment. They usually don't consider that you have a few million in the bank - they want to see cash flow. However, if you do have significant assets in your net worth, nothing keeps the accountant/person from pointing that out to the bank so that they will consider it.

 

[mathjak107]

we have banks that do asset based lending . we originally looked in to it .

they have formulas for how much they will allow in loans to asset values .

that is because the liquid assets that are counted can pay the loans.

the terms though are higher than income based loans because most companies that buy loans are only buying income based loans

 

[Montecfo]

Fair point other than you don't like the current accounting... but in that case just ignore that one sentence.

I do not dislike accounting. It can just provide answers that may be accurate but not very useful.

 

[pb4uski]

Then what would be useful?

 

[CRLLS]

I do not dislike accounting. It can just provide answers that may be accurate but not very useful.

Back in the day, I went to a management seminar that was focused for engineers. The presenter had a saying that has stuck with me. With all due respect to others, I will share.

"Accountants count what they can count; they can't count what counts."

Remember, it was an audience of engineers. Now back to the main topic.

 

[TheWizard]

NW in itself is a fun number for most of us. Yes, there is a practical calculation one can do, Tangible Assets - Obligations/Liabilities.

Note: I use "Your" in this text as an example and it is not directed or implied at anyone here.

However, it is a personal Feel-Good very subjective measurement and can be meaningless to others in the real world.

Some folks will include all sorts of things in their assets that should not be there as "they" could never sell them "Tomorrow" or in the "very" near future for what they "Think" they are worth.

So, include your Persian Cat, your overpriced depreciating Truck and Moma's China if you like, if it makes you feel good and that is OK .... for you.

Personally, I do not. Our home is worth 2-3 x what we paid for it, but I only include what we paid for it minus the anticipated closing costs. A lot of things some folks include would only be sold if the SHTF, and in that scenario other folks would be doing the same and that would make your stuff worth even less.

Why do you feel a need to compute your Net Worth, however you chose to do it?
I certainly don't.

But I do total up my Investible Assets each year, to see how I do in that competition...

 

[BeWealthy]

Should the taxable amount on unrealized capital gains in equity investments be considered a liability in NW calculations. It seems optimistic to include the entire unrealized gains as an asset. However, if I was to pass these appreciated assets to heirs the step-up basis would include the gains. The plot thickens...