I still find it confusing in the cfa curiculum and in some exercises.
Net wealth extends net worth to future assets that can be used for future consumption like human capital, PV of pension benefit,… but isn’t that the net worth of the economic balance sheet?
I found somewhere traditional balance sheet: net worth economic balance sheet: net wealth
But then in the curriculum I found also net worth in the economic balance sheet.
net wealth = net worth + PV of future pensions + Human capital - PV of future consumption goals - PV of future liabilities. Net wealth is often used as a plug figure (if total assets exceed total liabilities, then net wealth will act as a plug figure that makes total assets equal to total liabilitiies).
My understanding is
traditional balance sheet: net worth economic balance sheet: net wealth
It was also mine (I remember it was stated like this in a solution of a CFA mock), until I checked curriculum again and found net wort in the economic balance sheet
I got this wrong as I thought they were asking for traditional bs as normally they specify that they want econ bs. So net worth is econ and net wealth is traditional?
^
Not according to eoc in chapter 12.
Economic bs gives you net wealth
Traditional bs gives you net worth.
I haven’t done the mock yet
Reading 16, Page 191 Example 3
You have Economic balance sheet with net worth
It’s ridiculous how they test small details and then they are not precise in the learning material…
Exactly, I noted this down in the margin of my notebook since I got this EoC wrong.
yes, I remember I found this as well:
Traditional BS = asset - liabilities = net worth
Economic BS = tot. asset (incl. financial and human capital) - tot liab. = net wealth
but this is wrong compared to what’s written in the CFA curriculum!
In the CFA curriculum I found in a few examples the net worth in the economic BS
so what the answer?
I agree it is quite confusing and took me a little while to get my head around which is which, particularly as the words ‘Wealth’ and ‘Worth’ don’t always mean it’s one over the other.
The rule I now follow is:
Net Wealth = economic balance sheet
Net Worth = traditional balance sheet
The exception to the rule:
If ‘Net Worth’ is preceded by the word ‘economic’ (as seen in Reading 16) e.g., ‘economic net worth’, then they are asking for what is otherwise known as net wealth.
Hope this helps
Net worth = A - L
Net wealth = A + HC - L (liabilities include PV future liabilities)
Economic net worth = Net wealth
I think the CFAI 2018 mock has one question on this as well… And they consider net wealth to be economic balance sheet.
Thank you guys.