What is a Capital Asset?
A capital asset refers to property used for investment or production that is long-term and can be tangible or intangible. This includes real estate, equipment, land, patents, and more. Capital assets appear on the balance sheet as long-term or fixed assets and play a crucial role in business operations. They provide productivity and competitiveness, and long-term ownership of these assets can deliver stable income and value growth to a business.
Types of Capital Assets
Based on different characteristics and risk-return profiles, capital assets are typically categorized into the following types.
- Real Estate Assets: Properties used for investment or rental that generate rental income or appreciation, including land, houses, commercial real estate, etc.
- Production Equipment and Machinery: Equipment or machinery used for producing and manufacturing goods or providing services, such as production lines, machine tools, etc., that enhance production efficiency and capacity.
- Transportation Vehicles: Vehicles used for transporting goods and people, such as trucks, airplanes, ships, etc.
- Technical Equipment: Devices used for information processing and transmission, such as computers, servers, communication equipment, etc.
- Intellectual Property: Intangible assets such as patents, trademarks, and copyrights owned by the business.
- Equity Investments: Assets like stocks in other companies, from which dividends or capital gains are obtained through ownership.
- Investment Fund Shares: Assets like stock or bond funds that earn returns through capital appreciation and dividends.
- Sustainable Development Assets: Assets that promote sustainable development and environmental goals, such as renewable energy facilities (wind power, solar power, etc.) and green infrastructure.
- Technology and Innovation Assets: Assets like research and development results and technology patents that improve the competitiveness and market position of a business.
- Corporate Brand Value: The value formed by a company's reputation and recognition.
- Cultural and Artistic Assets: Assets like artworks and antiquities that can yield appreciation in the art market.
Characteristics of Capital Assets
As a form of long-term investment for businesses or individuals, capital assets have the following characteristics.
- Long-term Investment: Typically, assets that businesses or individuals hold and use for a long time to achieve long-term production and operational goals.
- Value Stability: Generally affected by factors such as supply and demand, production capacity, and changes in demand, making their value relatively stable.
- Long-term Income Generation: Brings long-term and stable income to businesses or individuals, such as rental income from real estate and increased production efficiency from production equipment and machinery.
- Low Liquidity: Due to the complex processes or procedures involving ownership transfer, valuation, and contracts, capital assets are less liquid than current assets.
- Require Maintenance: Regular maintenance and upkeep are necessary to keep them running smoothly and maintain their productive capabilities. For instance, real estate needs periodic repairs, production equipment needs maintenance, and technical equipment requires upgrades.
- Capital Investment: Although capital assets can provide long-term, stable income, purchasing them usually requires substantial capital investment.
Recording and Taxation of Capital Assets
In terms of recording and tax processing for capital assets, businesses must follow specific rules and guidelines.
- Cost of Capital Assets: The cost includes not just the purchase price but also additional expenses directly related to the purchase, such as transportation, installation, and insurance fees.
- Capitalization: Most capital expenditures cannot be deducted immediately in the year of purchase, meaning that the cost of the asset will be spread over several years to match the income generated by the asset in those years.
- Depreciation: Depreciation represents the annual expense associated with the wear and tear, obsolescence, or decrease in value of an asset.
- Depreciation Methods: There are different methods for calculating depreciation, and the chosen method should depend on the asset's expected useful life, residual value, and expected usage pattern.
- Tax Processing: While the cost of capital assets cannot be fully deducted in the year of purchase, businesses are typically allowed to claim depreciation deductions based on the asset’s useful life as stipulated by tax regulations.
- Tax Depreciation Methods: Tax authorities in different countries or regions have varied rules and methods for calculating tax depreciation.
- Capital Gains: When a capital asset is sold or disposed of, the difference between the selling price and the asset’s actual cost (original cost minus accumulated depreciation) is considered a capital gain or loss. Capital gains are usually taxed at rates different from ordinary income tax.
Capital Asset Pricing Models
There are various models for pricing capital assets, with the most classic and widely used being the Capital Asset Pricing Model (CAPM), proposed by American scholars William Sharpe, John Lintner, and Jan Mossin in the 1960s, to estimate the expected return on a capital asset.
The CAPM formula is E(Ri)=Rf+βi×(E(Rm)−Rf). Here, E(Ri)=Rf+βi×(E(Rm)−Rf) represents the expected return of asset i; Rf symbolizes the risk-free rate, usually represented by treasury yields or other low-risk investment returns; βi stands for the beta coefficient of asset i relative to the market portfolio, reflecting asset i's sensitivity to market fluctuations; and E(Rm) denotes the expected return of the market portfolio.
The basic premise of CAPM is that the market portfolio is a weighted combination of all assets, and investors are rational and seek to maximize utility. Based on these assumptions, CAPM posits that an investor's required expected return on an asset should be related to its risk and should be higher than the risk-free rate. The risk of capital assets is mainly measured by the beta coefficient: the higher the beta, the greater the volatility of the asset, and the higher the investor’s required expected return for the asset.
However, CAPM is built on a set of stringent assumptions which may not fully align with actual market conditions. Therefore, caution should be exercised regarding its applicability when using CAPM for asset pricing, and it should be complemented with other models such as Arbitrage Pricing Theory (APT), Fama-French models, and actual market situations for comprehensive analysis.
