Download Reading Materials Second Intermediate-Level e-Learning

Statistical Institute for Asia and the Pacific
Economic and Social Commission of Asia and the Pacific
United Nations
An Introduction to System of National Accounts
– Integrated Transaction Accounts
Lesson VII
Capital and Financial Accounts - Main entries & data needs
Reading Materials
Second Intermediate-Level e-Learning Course on
the System of National Accounts (2008 SNA)
October - December 2013
Lesson VII
Capital and Financial Accounts
Lesson VII
Capital and Financial Accounts - Main entries & data needs
Capital and Financial Accounts – An Introduction
–
Main features
–
KTA and Transaction Accounts
Asset boundary
–
–
Main extensions in 2008 SNA
–
Research and Development
–
Weapons system
Borderline issues
Asset classification [as in 1993 & 2008 SNA]
Valuation of Assets
–
Net worth
Capital account
–
Capital formation
–
Gross fixed capital formation
–
Changes in inventories
–
Valuables
–
Consumption of fixed capital
–
Acquisition less disposal of non-produced non-financial assets
–
Capital transfers
–
Changes in net worth
Financial accounts
–
Financial assets
–
Financial transactions
–
Valuation
–
Time of recording
Data Needs
_______________________________________
Capital and Financial Accounts – An Introduction
Capital account and financial account are the last two among the transaction accounts. We
have discussed all the other current transaction accounts in the earlier Lessons IV and VI. In this
lesson, we will attempt the following:
Second e-Learning Course 2013
Intermediate-Level
2
Reading material
Lesson VII
•
Capital and Financial Accounts
Explain how the capital and financial accounts are related to each other as well as their links
with the other transaction accounts in the SNA. Their places in the system of accounts are
indicated in Box 3.4 of Reading Material for Lesson III. We have seen that these accounts the
same balancing item – net lending / net borrowing. We will see why.
•
Have a closer look at the asset boundary and discuss the changes in assets classification made
in the 2008 SNA.
•
Discuss in detail the main entries of these two accounts and the purposes they usually serve in
understanding the functioning of an economy.
•
Most of the main entries in these accounts have already been introduced in earlier lessons.
Here we will focus on boundary problems between various categories of transactions
recorded in these two accounts.
Main Features
As discussed in the basic level course as well as reviewed in Lesson I, the balance sheets and
accumulation accounts are the main expression of the stock-flow consistency in the SNA. These links
between the balance sheets and the accumulation accounts reflect the widely varying economic
processes and net worth (stock of assets less liabilities) of the economy and its sectors, which help in
understanding their economic behaviour. What is more important for a compiler of national accounts
is that these links are the main tools for checking the validity of estimates, which are usually based on
very diverse source material.
The Capital and Financial Accounts are the accumulation accounts of the system and
record transactions in balance sheet items, i.e., in both financial and non-financial assets and
liabilities. The other economic flows that bring about changes in the balance sheet items are captured
in Other changes in assets account and Revaluation account. The present course does not cover these
accounts. Here, we will focus on only the accumulation transaction accounts, i.e. capital account and
financial account.
Opening
Balance
Sheet
+
Accumulation
Accounts
=
Opening
Balance
Sheet
What is important to note is that accumulation accounts and balance sheets are concerned
with ownership. While the balance sheets specify the ownership of assets and liabilities to other units
at given points in time, the accumulation accounts show the changes in assets and liabilities during an
accounting period.
Second e-Learning Course 2013
Intermediate-Level
3
Reading material
Lesson VII
Capital and Financial Accounts
Thus, the two sides of the capital and financial accounts are labelled ‘changes in assets’, and
‘changes in liabilities and net worth’, instead of ‘uses’ and ‘resources’ as in the production account
and distribution and use of income accounts.
Summraised versions of the capital and financial accounts are shown in Table 7.1 below.
This table is an expanded form of these two accounts contained in Table 3.5 (Lesson III), with
additional columns for external transactions and two additional items on the right-hand side of the
Capital accounts. The additional items are:
–
Current external balance: this is the balancing item corresponding to savings for the
RoW. [refer Box 3.1 of Reading Material of Lesson III]
–
Changes in net worth due to savings & capital transfers: this is the total of the right-hand
side of the capital account, and NOT a balancing item.
These are discussed in some more detail later in this lesson.
Table 7.1: Basic Structure of Capital Account and Financial Account
[An expanded form of those contained in Table 3.5, Reading Material of Lesson III]
Changes in assets
Total
economy
RoW
Transaction / balancing
item
Changes in liability &
net worth
Transaction / balancing item /
Total
total
economy
RoW
Capital Account
33
B.8 Net savings
B.12 current external balance
19
Capital transfers receivable
x
- 19
23
Gross Capital
formation
- 10
CFC
19
B.9 Net lending
borrowing
1
0
Capital transfers payable
-2
0
Changes in net worth due to
savings & capital transfers
32
19
B.9 Net lending / borrowing
19
- 19
Net incurrence of liabilities
184
51
/
Financial Account
32
203
Net acquisition
financial assets
of
Note that since there is nothing called non-financial liabilities, the net incurrence of liabilities
appear only in the financial account. Also note that the balance of (or difference between) net
acquisition of financial assets and net incurrence of liabilities in the financial account is equal to net
lending / borrowing. This, as we can see from the table, is true for RoW as well as total economy.
This holds good for an individual institutional unit or an institutional sector as well.
Second e-Learning Course 2013
Intermediate-Level
4
Reading material
Lesson VII
Capital and Financial Accounts
The balancing item savings is the net result of all current transactions and represents the
accumulation of wealth of an institutional unit / sector / economy. For the RoW account, the
corresponding balancing item is called the current external balance. Capital account starts with these
on the right-hand side, i.e. ‘changes in liabilities & net worth’. All transactions of goods and services
of non-financial assets and capital transfers are recorded in this account.
The financial account records all transactions of financial assets. In the SNA framework, the
balance of transactions in financial assets is by definition equal to the balancing item of the capital
account , i.e. net lending / borrowing. Let us see why?
KTA and Transaction Accounts
Recall the simplest form of KTA. While discussing the correspondence between the KTA and
current accounts, we restricted the transactions in goods & services to just the products, i.e. those
falling in the category of produced resources. Now, we will extend it to cover transactions in nonproduced economic resources 1 as well.
Box 7.1:
KTA & Transaction Accounts – A relook
Recall that the difference between the uses- and resources-side of the sub-total of non-financial
transactions is the balancing item net lending/borrowing in the capital account. This is because
–
Sub-totals in the KTA are the sum of all non-financial transactions (including sale and
purchases of non-produced assets)
–
Net lending / borrowing is the balance of all non-financial transactions
Capital and Financial Accounts
Kitchen Table Account (simplest form)
Uses
Resources
1.
1. sale of goods & services
Use of goods & services
Changes in assets
Changes in liability &
net worth
Capital Account
2.
Paid income
2. Received income
B.8 Net savings
B.12 net capital transfer
receivable
3.
Paid transfers
3. Received transfers
Capital transfers receivable
Sub-total: non-financial
Gross Capital formation
Sub-total: non-financial
4. Change in financial assets
4. Change in liabilities
Total (= sub-total + item 4)
Total (= sub-total + item 4)
CFC
Capital transfers payable
Changes in net worth due to
savings & capital transfers
B.9 Net lending / borrowing
Financial Account
Also recall that
B.9 Net lending / borrowing
– Totals on the two sides of KTA are equal
Net acquisition of financial assets
Net incurrence of liabilities
– The difference between change in financial assets and that of liabilities is equal to difference of the sub-totals.
Financial account of the SNA corresponds to the financial transactions of the KTA.
Recall (from Lesson III) that the totals of non-balancing-item entries on the two sides of the
non-financial transaction accounts are same as those of all entries (including the balancing items),
1
Unlike produced assets, non-produced resources are those on which ownership rights can be established but
which need not be for productive purposes.
Second e-Learning Course 2013
Intermediate-Level
5
Reading material
Lesson VII
Capital and Financial Accounts
since the balancing items (except the last – net lending / borrowing) on the uses- and resources-sides
cancel out. What remains is the net lending / borrowing – the balancing item of the capital account.
The balancing item net lending / borrowing appears again in the financial account – shown on
the right-hand side of the accounts, i.e. under ‘changes in liabilities & net worth’. The equivalence of
the two sides of the KTA establishes that the balance of all financial transactions has to be net lending
/ borrowing. Thus, the two sides of the financial account is balanced. [Box 7.1]
As a result, the outcome of the real transactions (that is, saving plus net capital transfers
received minus capital formation) must be equal to the balance of the financial accounts (that is, the
net acquisition of financial assets less net incurrence of liabilities).
The accumulation transaction accounts bring the sequence of transaction accounts to
an end, completing the description of transactions taking place between the actors in the
system. These show the consistency between the ‘real economy’ and the ‘financial economy’.
These two accounts reflect four basic types of flow relating to acquisition and
disposal of assets, namely:
–
additions to assets,
–
reductions in assets,
–
additions to liabilities, and
–
reductions in liabilities.
However, only two net categories are shown:
–
net additions to assets on the left-hand side of the account and
–
net additions to liabilities on the right-hand side of the account.
Points to note:
•
Capital and financial accounts can be compiled only for institutional units / sectors and the
entire economy. They cannot be compiled for establishments of multi-establishment enterprises.
•
The Capital and Financial Accounts record transactions in balance sheet items, i.e., in both
financial and non-financial assets and liabilities.
•
Both these accounts are concerned with changes in ownership of assets – financial and nonfinancial.
•
The labels of the two sides of these accounts are ‘changes in assets’, and ‘changes in liabilities
and net worth’
Second e-Learning Course 2013
Intermediate-Level
6
Reading material
Lesson VII
•
Capital and Financial Accounts
In the capital account for the RoW the opening item is Current external balance, which is the
balancing item corresponding to savings for the Row.
•
Changes in net worth due to savings & capital transfers is the total of the right-hand side of the
capital account, and NOT a balancing item.
•
All changes in non-financial assets are recorded in the capital account, while all changes in
financial assets are recorded in the financial account.
•
The balance of transactions in financial assets is by definition equal to the balancing item of the
capital account , i.e. net lending / borrowing.
•
Net lending / borrowing is equal sub-total of uses-side minus sub-total of resources side of the
KTA.
•
The balance of real transactions is equal to net acquisition of financial assets less net incurrence
of liabilities.
Second e-Learning Course 2013
Intermediate-Level
7
Reading material
Lesson VII
Capital and Financial Accounts
Asset Boundary
Recall from Lesson I that the SNA defines an economic asset as an entity functioning as a
store of value
–
over which ownership rights are enforced by institutional units, individually or
collectively; and
–
from which economic benefits may be derived by its owner by holding it, or using it, over
a period of time.
The economic benefits may be derived from use of an asset in the production process, or generation of
property income by letting others use (interest, dividends, rent). Economic benefits are also derived
from assets held as store of value including possible holding gains/losses, that could be realized by
disposing of the asset or terminating it.
The first restriction in this definition serves to limit the concept of assets to items that are
effectively claimed by an economic agent, excluding, for instance, international waters or wild birds;
the second restriction says that only items with an economic value are taken into account.
Main extensions of Assets boundary in 2008 SNA
The asset boundary has undergone a few significant changes in the 2008 SNA. These are
briefly discussed below:
Asset boundary extended to include R&D: The output of the research and development
activities (R&D) is capitalized as intellectual property products (IPP). However, in cases where it is
clear that the activity does not entail any economic benefit to its producer (and hence owner), it is
treated as intermediate consumption. R&D consists of the value of expenditure on creative work
undertaken on a systematic basis in order to increase the stock of “gathered knowledge”, including
knowledge of man, culture and society, and use of this knowledge to devise new applications.
In the 1993 SNA, patented entities were treated as separate asset category. With the inclusion
of output of R&D in the asset boundary, it is no longer identified as a separate asset category. In the
2008 SNA, they form a part of the IPP. Treatment of R&D giving rise to produced assets has
removed the 1993 SNA inconsistency of treating the patented entities as non-produced asset giving
rise to property income.
Government GCF to include expenditure on weapon systems: Military weapon systems are
seen to be used continuously in the production of defence services, even if their peacetime use is
simply to provide ongoing services of deterrence against aggressors. The 2008 SNA, therefore,
recommends that military weapon systems should be classified as fixed assets.
Single-use items, such as ammunition, missiles, rockets, bombs, etc., delivered by weapons or
weapons systems are treated as military inventories. The 1993 SNA treated as gross fixed capital
Second e-Learning Course 2013
Intermediate-Level
8
Reading material
Lesson VII
Capital and Financial Accounts
formation all expenditures by the military on fixed assets of a kind that could be used for civilian
purposes of production.
Box 7.2:
Intellectual property products – a few examples
In the 1993 SNA, these were called intangible produced assets. These represent establishment of
property rights over “knowledge” in one form or another. The institutional unit creating
“knowledge” may chose to retain the right to use or sell the right to use to others or give users’ right
to others for a specified period against a payment (service charges).
These are classified i the 2008 SNA as follows:
•
Research and development, such as development of engineering designs for use in
production process – whether for own use or sale or operating lease (i.e. letting others use
the design under developer’s patent).
•
Mineral exploration and evaluation - Expenditure incurred on mineral exploration is treated
as expenditures on the acquisition of an intellectual property product and included in the
enterprise’s gross fixed capital formation.
•
Computer software and databases
•
Computer software, such as development of software – whether for own use or for sale of its
copies.
•
Databases
•
Entertainment, literary or artistic originals, such as original films, sound recordings,
manuscripts, tapes, models, etc., radio and television programming, musical performances,
sporting events, literary and artistic output, etc., are recorded or embodied
•
Other intellectual property products.
Borderline issues
There are a few borderline issues. Particularly, there is no clear boundary line between
Intermediate Consumption (IC) and Gross Fixed Capital Formation (GFCF). The guiding principles
for determination are based on practical considerations of using information coming from various
sources. In concept, IC measures the value of goods and services that are transformed or entirely used
up in production, the GFCF measures the acquisition of fixed assets for use repeatedly in the
production process. Some examples of borderline issues are as under.
Small tools: Small tools are to be treated as intermediate consumption when expenditures are made
regularly and are small when compared to machinery and equipment.
Second e-Learning Course 2013
Intermediate-Level
9
Reading material
Lesson VII
Capital and Financial Accounts
Maintenance and repairs: Regular maintenance and repair to keep the fixed assets in good working
order constitutes the intermediate consumption. However, major overhaul and renovation that
enhances the efficiency or capacity, or prolongs the expected working life of assets is GFCF.
Mineral exploration: All expenditures on mineral exploration, whether successful or not, are shown as
GFCF.
Military equipment: As per 1993 SNA, the military weapons and delivery equipment, such as ships
and aircraft are treated as IC. Only those military equipments (assets) that could have a civilian use,
such as buildings, roads, airfields, trucks are to be treated as Gross fixed capital formation.
As per 2008 SNA, however most single use weapons such as ammunition, missiles, rockets,
bombs, etc are treated as military inventories but certain types of ballistic missile with a highly
destructive capability, may provide an on going service of deterrence against aggressors and therefore
meet the general criterion for classification as fixed assets.
Weapons acquired by police are also considered as fixed assets.
Points to note:
•
The output of the own-account research and development activities (R&D) is capitalized as
intellectual property products (IPP).
•
Acquisition of IPP, such as computer software, databases, Entertainment, literary or artistic
originals is treated as fixed capital formation.
•
Expenditure on mineral exploration is treated as expenditures on the acquisition of an
intellectual property product.
•
Military weapon systems are classified as fixed assets. However, the one-time use ammunitions
are treated as military inventories.
•
Small tools are to be treated as intermediate consumption.
Second e-Learning Course 2013
Intermediate-Level
10
Reading material
Lesson VII
Capital and Financial Accounts
Asset classification [as in 1993 & 2008 SNA]
In the 2008 SNA, the assets classification have undergone quite a few changes. The broad
groups of classification have also been changed. The broad groups of assets classification in the 2008
SNA is as follows:
–
–
Produced non-financial assets
•
Fixed assets
•
Inventories
•
Valuables
Non-produced non-financial assets
•
Natural resources
•
Contracts, leases and licenses
•
Goodwill & marketing assets
The main changes are in the fixed assets category. Only one sub-category “Military inventories” is
introduced under “Inventories” in the 20008 SNA.
In the 1993 SNA, the groups ‘fixed assets’ and ‘non-produced non-financial assets’ were
further divided into tangible and intangible. What is ‘natural assets’ in the 2008 SNA was called
‘tangible non-produced assets’ in the 1993 SNA. The group ‘intangible non-produced assets’ in the
1993 SNA is now divided into two groups: ‘contracts, leases & licenses’ and ‘goodwill & marketing
assets’.
In the 2008 SNA, fixed assets are classified as follows:
•
Dwellings
•
Other buildings and structures [land improvements is included in this category]
•
Machinery and equipment [ICT equipment introduced in 2008 SNA]
•
Weapons systems
•
Cultivated biological resources [ this is called ‘cultivated assets in 1993 SNA]
•
[new category in 2008 SNA]
–
Animal resources yielding repeat products
–
Tree, crop and plant resources yielding repeat products
Intellectual property products [new category introduced in 2008 SNA]
The acquisition less disposal of these is included in gross fixed capital formation (GFCF)
Costs of ownership transfer on non-produced assets [new category introduced in 2008 SNA] is also
included in GFCF.
Second e-Learning Course 2013
Intermediate-Level
11
Reading material
Lesson VII
Capital and Financial Accounts
Valuation of Assets
As elsewhere in the System, items in the accumulation accounts are recorded at current
market values. In the case of produced assets used as fixed capital, this implies that allowance should
be made for consumption of fixed capital. Exceptionally, consumption of fixed capital may also apply
to non-produced assets, namely in so far the value of these assets incorporate produced goods and
services (for instance, improvements made to land).
The liability associated with shares in corporations is valued at the market value of the
shares, even if there is no formal obligation of the corporation to make any payments. In
enterprise accounting, shares are recorded at nominal value or issue value instead of current
market value.
Current market value is at the prices at which a particular asset or liability should be
valued as if it were being acquired on the date to which the balance sheet relates plus any
associated costs of ownership transfer (for non-financial assets). Major methods for valuation
of assets are
•
observable prices; such as for dwellings, land, equipment, livestock, marketable
securities, inventories;
•
current value of cumulative capital formation, such as for major construction,
cultivated assets, mineral exploration;
•
present value of future income, such as for intangible assets, subsoil assets; and
•
insurance value, such as for valuables.
Net worth
Net worth is defined to be equal to the value of a unit’s assets less the value of its liabilities.
For quasi corporations, net worth must be zero because their equity liability is derived as a residual.
For other units, the net worth can be either positive or negative depending on the relative size of their
assets and liabilities. This is because the current market value of their equity liability is used in the
calculation of total liabilities, and need not be the same as shareholders funds.
Second e-Learning Course 2013
Intermediate-Level
12
Reading material
Lesson VII
Capital and Financial Accounts
Capital account
The purpose of the Capital account is to record the values of the non-financial assets that are
acquired or disposed of by institutional units by engaging in transactions, and to show the change in
net worth due to saving and capital transfers. The latter is a measure of the funds available for capital
formation with institutional units. Further, it makes it possible to determine the extent to which
acquisitions less disposals of non-financial assets have been financed out of saving and by capital
transfers. Finally, it shows a net lending corresponding to the amount available to a unit or a sector or
the economy for financing, or a net borrowing corresponding to the amount which a unit or a sector or
the economy is obliged to borrow from other units or sectors.
This is founded on the identity:
Net lending/ borrowing ≡
Gross Savings + (net) Capital transfer receivable
minus (GFCF + CII + acquisition less disposal of valuables)
- acquisition less disposal of non-produced non-financial assets
The two sides of the capital account show
–
changes in net worth due to saving and capital transfers and
–
acquisition of non-financial assets account.
[The figures presented here are those for the total economy. These are taken from 2008 SNA, pages 570
- 572]
Changes in assets
Changes in liabilities & net worth
Capital Account
376
359
17
28
10
-222
0
10
Gross fixed capital formation
Acquisition less disposal of
fixed assets
Costs of ownership transfers
on non-produced assets
Changes in Inventories
Acquisition less disposal of
valuables
CFC
Acquisition less disposal of nonproduced assets
B.8g Savings (net)
Capital transfers receivable
205
62
Capital transfers payable
-65
Changes in net worth due to savings
& capital transfers
202
B.9 net lending/borrowing
Second e-Learning Course 2013
Intermediate-Level
13
Reading material
Lesson VII
Capital and Financial Accounts
It opens with net saving (for the total economy) and the current external balance (for the RoW
account). The capital transfers (such as capital taxes, investment grants and the like) are recorded on the
change in liabilities side. The sum of these items gives the total change in liabilities regarding change in
net worth due to saving and capital transfers. Note that change in net worth is only relevant for the
national economy, so, for the ROW the resulting balancing item on this account has no specific
analytical value.
On the change in assets side, the details of actual investments are recorded. These consist of
fixed capital formation, change in inventories, “acquisitions less disposals of valuables” and
“acquisitions less disposals of non-produced non-financial assets”. The last two items are recorded on a
net basis. A negative value represents, on balance, a net export of the involved commodities.
Capital formation
Five categories of changes in non-financial assets are distinguished in the Capital Account: (i)
Gross fixed capital formation, (ii) Consumption of fixed capital, (iii) Changes in inventories, (iv)
Acquisition less disposals of valuables, and (v) Acquisition less disposals of non-produced nonfinancial assets.
Gross fixed capital formation: Gross Fixed Capital Formation (GFCF) is measured by the
value of resident producers’ acquisitions, less disposals, of fixed assets during a given period plus
certain additions to the value of non-produced assets realized by the productive activity of producer or
institutional units. Fixed assets are tangible or intangible assets produced as outputs from processes of
production that are themselves used repeatedly, or continuously, in processes of production for more
than one year. GFCF can be positive or negative depending upon the value of acquisition and
disposition of assets by the resident producer.
Broadly there are three types of GFCF
a.
Acquisitions, less disposals, of (tangible) fixed assets: Examples: dwellings, other buildings
and structures, machinery and equipment, cultivated assets, e.g. trees and livestock. In the
2008 SNA,
i.
a sub-category for land improvements has been added within ‘building & structures’.
This replaces the 1993 SNA term "major improvements to non-produced nonfinancial assets". The costs of ownership transfer on all land are included with land
improvements;
ii.
the information, computer and telecommunications (ICT) equipment has been
included as a new category under machinery and equipment;
iii.
weapon systems are recognized as produced assts and classified separately
Second e-Learning Course 2013
Intermediate-Level
14
Reading material
Lesson VII
Capital and Financial Accounts
Box 7.3:
Fixed Capital Formation – Main changes in 2008 SNA
Costs of ownership transfer: As in the 1993 SNA, the 2008 SNA continues to treat the costs
of ownership transfer (COT) as fixed capital formation. The COT on acquisition of an asset should
be written off over the period the asset is expected to be held by the purchaser. The 1993 SNA
recommended to write off COT over the whole life of the asset. The COT on disposal of an asset
should also be written off over the period the asset is held but recorded when they are actually
incurred. Recognising the difficulty in implementation of this recommendation for lack of adequate
data, the 2008 SNA recommends that these costs should still be recorded as gross fixed capital
formation but written off as CFC in the year of acquisition.
Mineral exploration and evaluation: A Further specification of capital formation in the 2008
SNA relates to mineral exploration and evaluation. The 2008 SNA maintains the distinction between
the act of exploring for mineral resources (treated as a produced asset) and the mineral resources
themselves (treated as non-produced assets). The term “mineral exploration” has been renamed as
“mineral exploration and evaluation” to match the term used in the International Accounting
Standards. The 2008 SNA gives guidance that mineral exploration and evaluation should be valued
at market prices if purchased or at the sum of costs plus an appropriate mark-up if undertaken on
own account.
Land improvements: As in the 1993 SNA, land improvements continue to be treated as
gross fixed capital formation. The 2008 SNA recommends treating land improvements as a category
of fixed assets distinct from the non-produced land asset as it existed before improvement. In cases
where it is not possible to separate the value of the land before improvement and the value of those
improvements, the land should be allocated to the category that represents the greater part of the
value. The costs of ownership transfer on all land are to be included in the land improvements.
b.
Acquisitions, less disposals, of intellectual property products: Examples: mineral
exploration, entertainment, literary or artistic originals. Note that, in the 2008 SNA
i.
the term "intangible fixed assets" has been renamed as "intellectual property
products". The word "products" is included to make clear that it does not include third
party rights which are non-produced assets in the SNA
ii.
R&D products are included within intellectual property products
iii.
the item "mineral exploration" of 1993 SNA has been renamed as "mineral
exploration and evaluation" to emphasise that the coverage conforms to the
international accounting standards
Second e-Learning Course 2013
Intermediate-Level
15
Reading material
Lesson VII
Capital and Financial Accounts
iv.
“other intangible fixed assets” of 1993 SNA is replaced by the term "other intellectual
property products".
c.
Cost of ownership transfer of non-produced assets.
Changes in inventories: Changes in inventories are measured as the value of the entries into
inventories less the value of withdrawals and the value of any recurrent losses of goods held in
inventories. Types of inventories involved are materials and supplies, work-in-progress, finished
goods, and goods for resale.
The only change made in the 2008 SNA to inventories is to show military inventories
separately.
For valuation of changes in inventories,
–
the output of finished goods is valued as if they were sold at the moment of entering into
inventories at current basic prices;
–
additions to work-in-progress - in proportion to the estimated current basic price of the
finished product;
–
reductions in work-in-progress as withdrawn from inventories when production is
finished - valued at current basic prices of the unfinished product;
–
goods for resale - at actual or estimated purchasers’ prices of the trader; and goods for
resale withdrawn - at the purchasers’ prices at which they can be replaced at the time they
are withdrawn.
Valuables: Valuables are goods that are not used primarily for production or consumption, do
not deteriorate (physically) over time under normal conditions and that are acquired and held
primarily as stores of value. Types of valuables are precious stones and metals such as diamonds, nonmonetary gold, platinum, silver; antiques and other art objects, such as paintings, sculptures, etc.; and
other valuables, such as jewellery fashioned out of precious stones and metals and collectors items.
Valuation of valuables for acquisition is done at the purchasers’ prices paid for them,
including any agents’ fees or commissions and trade margins when bought from dealers; and for
disposals - at the prices received by sellers, after deducting any fees or commissions paid to agents or
other intermediaries.
Consumption of fixed capital (CFC)
CFC is recorded as a change in assets on the left side of the capital account. It represents the
amount of fixed assets used up, during the accounting period, as a result of normal wear and tear and
foreseeable obsolescence, including a provision for losses of fixed assets as a result of accidental
damage. CFC should be distinguished from the depreciation allowed for tax purposes or the
depreciation shown in business accounts and should be estimated on the basis of the stock of fixed
Second e-Learning Course 2013
Intermediate-Level
16
Reading material
Lesson VII
Capital and Financial Accounts
assets and the probable average economic life. The perpetual inventory method (PIM) is
recommended for the calculation of the stock of fixed assets. The stock of fixed assets should be
valued at the purchasers’ prices of the current period.
Acquisition less disposal of non-produced non-financial assets
Non-produced non-financial assets consists of land and other tangible non-produced (subsoil
assets, non-cultivated biological resources and water resources) assets that may be used in the
production of goods and services. Land does not include the following items: buildings or other
structures on the land or through it (roads, tunnels), vineyards, orchards, or other plantations of trees,
subsoil assets, non-cultivated biological resources, and water resources below the ground.
Non-produced non-financial assets (2008 SNA) include the following three types:
•
Natural resources - the "tangible non-produced assets" of the 1993 SNA are renamed as
"natural resources", adding other natural resources such as the radio spectrum.
[The "intangible non-produced assets" of the 1993 SNA has been spilt into two subcategories:
•
–
contracts, leases and licences and
–
goodwill and marketing assets]
Contracts, leases and licences: these are the contracts, leases and licenses which provide
price advantage to the holders and the holder is legally permitted to realize the advantage.
This category of non-produced assets has four sub-categories:
–
marketable operating leases, such as lease of a building that can be sublet at a higher
rental
–
permissions to use natural resources, such as rights to use radio spectra for mobile
phones
–
permissions to undertake specific activities, such as licenses for retail sales of liquor
–
entitlement to future goods and services on an exclusive basis, such as publisher’s
exclusive rights to publish new works or television broadcasting rights to telecast
sporting events.
•
Goodwill and marketing assets: these are the contracts, leases and licenses which provide
price advantage to the holders and the holder is legally permitted to realize the advantage.
–
Goodwill: The premium offered (or might be offered) above the net value of the
assets and liabilities.
–
Marketing assets: Items like brand names, mastheads, trademarks, logos and domain
names
Second e-Learning Course 2013
Intermediate-Level
17
Reading material
Lesson VII
Capital and Financial Accounts
Goodwill and marketing assets are only recognized as assets in the SNA when they are
evidenced by a sale, i.e. only when there is an actual sale and purchase. The value of
goodwill and marketing assets, in case of sale of an ongoing unit, is defined as:
the value paid for an enterprise as a going concern
minus
the sum of its assets
less
the sum of its liabilities of each item separately identified and valued.
Capital transfers
Capital transfers could be in the form of investment grants which are capital transfers in cash
or in kind made by governments or by the RoW to other resident or non-resident institutional units to
finance all or part of the costs of their acquiring fixed assets; or other capital transfers that do not
themselves redistribute income but redistribute wealth among the different sectors or sub-sectors of
the economy or the rest of the world. Capital taxes such as capital levies and taxes on capital transfers
are also capital transfers. In contrast to current transfers the capital transfers do not affect the saving.
The 2008 SNA clarifies that exceptional payments from government to public quasicorporations should be treated as capital transfers.
Similarly, exceptional payments from public corporations should be recorded as withdrawals
from equity. These should be recorded in the financial account accordingly.
Changes in net worth
The total of the resources, on the right side of the account, is explicitly shown and described
as changes in net worth due to saving and net capital transfers. It is not a balancing item. It
represents the positive or negative amount available to the unit or sector for the acquisition of nonfinancial and financial assets.
Change in the net worth due to saving and capital transfers account appearing on the right
hand side of the capital account determines the change in net worth due to saving and capital
transfers, which corresponds to net saving plus capital transfers receivable, minus capital transfers
payable. It is the total of the resources - changes in the net worth due to the saving and net capital
transfers and is not a balancing item. It represents the positive or negative amount available to the unit
or sector for the acquisition of non-financial and financial assets
Second e-Learning Course 2013
Intermediate-Level
18
Reading material
Lesson VII
Capital and Financial Accounts
Net lending or borrowing
Net lending or borrowing, the balancing item of capital account is defined as
net saving
plus
capital transfers receivable
minus capital transfers payable
minus value of acquisitions less disposals of non-financial assets,
less
CFC.
Points to note:
•
The two broad classes of non-financial assets are: produced and non-produced non-financial
assets. In 2008 SNA, there is no classification as intangible produced assets.
•
Net worth is defined to be equal to the value of a unit’s assets less the value of its liabilities.
•
The change in assets consists of capital formation and “acquisitions less disposals of nonproduced non-financial assets”.
•
The gross capital formation consists of fixed capital formation, change in inventories,
acquisitions less disposals of valuables.
•
GFCF is mainly of three types: acquisitions less disposals of fixed assets, acquisitions less
disposals of intellectual property products and costs of ownership transfers on non-produced
assets.
•
Costs of ownership transfer and land improvements are included in GFCF.
•
CII includes change in inventories of raw materials, finished goods, work-in-progress and goods
for resale.
•
There three main types of non-produced non-financial assets (2008 SNA): natural resources,
contracts, leases and licences and Goodwill and marketing assets.
•
Goodwill and marketing assets are only recognized as assets in the SNA when they are
evidenced by a sale.
•
Exceptional payments from government to public quasi-corporations should be treated as
capital transfers.
Second e-Learning Course 2013
Intermediate-Level
19
Reading material
Lesson VII
Capital and Financial Accounts
Financial accounts
Financial transactions describe changes in ownership of financial assets and the creation and
liquidation of financial claims.
Financial Account records by type of financial instrument the changes in the financial assets
and liabilities. The classification of assets and liabilities used in the financial account is identical to
that used in the balance sheets. Left side of the account records acquisitions less disposals of financial
assets, while the right side records incurrence of liabilities less their repayment.
Net incurrence of liabilities less net acquisition of financial assets is equal in value, with the
opposite sign, to net lending/borrowing, the balancing item in the capital account.
[The figures presented here are those for the total economy. These are taken from 2008 SNA, pages
572 - 573]
Changes in assets
Changes in liabilities & net worth
Financial Account
B.9 net lending/borrowing
10
Net acquisition of financial assets
Net acquisition of liabilities
426
-1
F.1 Monetary gold
drawing rights (SDRs)
F.1 Monetary gold and special drawing
rights (SDRs)
89
F.2 Currency and deposits
F.2 Currency and deposits
86
F.3 Debt securities
F.3 Debt securities
74
78
F.4 Loans
F.4 Loans
47
F.5 Equity & investment fund shares
F.5 Equity & investment fund shares
48
F.6 Insurance,
pension
standardised guarantee scheme
and
F.6 Insurance, pension and standardised
guarantee scheme
48
14
F.7 Financial
derivatives
employees’ stock options
and
F.7 Financial
derivatives
employees’ stock options
11
15
F.8 Other accounts receivable/ payable
436
107
and
special
102
105
and
F.8 Other accounts receivable/ payable
39
Financial assets
Most financial assets are financial claims. Financial claims and obligations arise out of
contractual relationship entered into when one institutional unit provides funds to the other.
A financial claim is defined as an asset that entitles its owner, the creditor, to receive a
payment, or series of payments, from the other unit, the debtor, in certain circumstances specified in
the contract between them. The claim is extinguished when the liability is discharged by the debtor
Second e-Learning Course 2013
Intermediate-Level
20
Reading material
Lesson VII
Capital and Financial Accounts
paying a sum agreed in the contract. Such claims include not only claims on financial intermediaries
in the form of cash and deposits but also loans, advances and other credits and securities such as bills
and bonds.
In the 2008 SNA, financial assets are classified under eight major categories:
F.1 Monetary gold and special drawing rights (SDRs)
[The 2008 SNA recommends to treat special drawing rights (SDRs) issued by the IMF
as being a liability of countries receiving the allocations and to record allocation and
cancellation of SDRs as transactions.]
F.2 Currency and deposits
F.3 Debt securities
[This was called “Securities other than shares” in the 1993 SNA.]
F.4 Loans
F.5 Equity & investment fund shares
[called “Shares and other equity” in the 1993 SNA]
F.6 Insurance, pension and standardised guarantee scheme
[called “Insurance technical reserves” in the 1993 SNA].
These are classified as
–
Non-life insurance technical provisions
–
Life insurance and annuity entitlements
–
Pension entitlements
F.7 Financial derivatives and employees’ stock options
[simply “Financial derivatives” in 1993 SNA]
F.8 Other accounts receivable/payable.
Financial transactions
Financial transactions always have counterpart transactions in the system – either other
financial transactions or non-financial transactions. Most transactions involving transfer of ownership
of a good or non-financial asset, or the provision of a service or labour, entail a counterpart entry in
the financial account.
In the SNA, many transactions take place entirely within the financial account. For example,
when one financial asset is exchanged for another, such as purchase of shares of a company using
cash in hand or bank deposit, only the entries of financial account is affected. Again, when a liability
is repaid with a financial asset entries are made only in the financial account. When the counterpart
transaction of a financial transaction is not a financial transaction, net lending/net borrowing changes.
Second e-Learning Course 2013
Intermediate-Level
21
Reading material
Lesson VII
Capital and Financial Accounts
Conventions adopted in the SNA result in the ownership of some non-financial assets being
construed as the ownership of financial assets. Specific cases include:
(a) Immovable assets, such as land and structures, are construed as being owned by residents of
the economy where they are located, except when those structures are owned by foreign
government entities and are thus located out of the economic territory of the country. When
the owner of such assets is a non-resident, therefore, he is considered to have a financial claim
on a notional resident unit that is construed to be the owner;
(b) An unincorporated enterprise that operates in a different economy from the one in which its
owner resides is considered to be a quasi-corporation. That entity is a resident of the
economy where it operates, rather than a resident of the economy of its owner. The owner of
the enterprise is deemed to own foreign financial assets equal in value to all the assets, nonfinancial as well as financial, belonging to the quasi-corporation.
(c) Reinvestment earnings from FDI: Reinvestment of earnings of FDI enterprises is shown as
reinvested earnings in the resources-side of the distribution of primary income account of the
parent corporation. Because it is not actually withdrawn, it adds to the value of the equity of
the enterprise by a recording as reinvestment of earnings in the financial account of the parent
corporation.
(d) Relating to non-life insurance: Change in Technical Reserves of the insurance corporation
(unearned premiums plus outstanding claims) is recorded in financial account as
i. ‘change in liabilities’ of Insurance corporations and
ii. ‘change in assets’ of domestic & RoW policy holders.
(e) Relating to life insurance: Life insurance and annuities entitlements (net premiums and
benefits) of the insurance corporation is recorded in financial account as
i. ‘change in liabilities’ of Insurance corporations and
ii. ‘change in assets’ of domestic & RoW policy holders.
(f) Change in pension and non-pension entitlements are recorded in financial account as
i. ‘change in liabilities’ of pension / non-pension fund and
ii. ‘change in assets’ of households.
Valuation
Transactions in financial assets are recorded at the prices at which the assets are acquired or
disposed of. These prices should exclude service charges, fees, commissions, and similar payments
for services provided in carrying out the transactions. Such payments should be recorded as payments
for services. When a financial transaction involves a new issue of liabilities, the transaction should be
recorded by both creditor and debtor at the amount of the liability incurred, i.e., exclusive of any fees,
Second e-Learning Course 2013
Intermediate-Level
22
Reading material
Lesson VII
Capital and Financial Accounts
commissions, etc., and also exclusive of any prepaid interest that may be included in the price. When
a security is issued at a discount, the proceeds to the issuer at the time of sale, and not the face value,
are recorded in the financial account. The difference between the issue price and the face value is
treated as interest that is accrued over the life of the instrument
Time of recording
In principle, the two parties to a financial transaction should record the transaction at the same
point in time. When the counterpart to an entry in the financial account is non-financial - for example,
when sales of goods or services give rise to a trade credit, the entries in the financial accounts should
take place when the entries are made in the relevant non-financial account, i.e., when ownership of the
goods is transferred or when the service is provided. When all entries relating to a transaction pertain
only to the financial account, they should be recorded when the ownership of the asset is transferred.
Second e-Learning Course 2013
Intermediate-Level
23
Reading material
Lesson VII
Capital and Financial Accounts
Points to note:
•
Net incurrence of liabilities less net acquisition of financial assets is equal in value, with the
opposite sign, to net lending/borrowing, the balancing item in the capital account.
•
Most financial assets are financial claims.
•
All financial transactions have counterpart transactions - other financial or non-financial
transactions.
•
Many transactions (those NOT involving non-financial transactions) take place entirely within
the financial account.
•
•
Net lending/net borrowing is NOT affected by
–
exchange of one financial asset for another or
–
when a liability is repaid with an asset.
All transactions financial assets are recorded at the actual prices at which the assets are acquired
or disposed of.
•
Payment of interest on loans is NOT considered as financial transaction, since it does not
change the assets and liability position of the units involved.
•
Fees and commissions, whether explicitly charged or implicit are treated as service charges.
Second e-Learning Course 2013
Intermediate-Level
24
Reading material
Lesson VII
Capital and Financial Accounts
Data needs
Recall the correspondence between the KTA and SNA accounts [Lesson III ] that a component
of capital formation –own-account capital formation - represents non-monetary transactions. This
involves production for own use, for which market prices, if available, should be used for valuation;
otherwise are to be valued at cost. The valuation of these goods & services are invariably done at the
stage of compiling production account and are transferred to capital account.
All the entries of financial account represent monetary transactions. In spite of representing
monetary transactions, many entries of financial account are not directly observable. Mostly these
relate to assets and liabilities of ‘Insurance, pension and standardised guarantee scheme’ category. As
we have seen in Lesson VI, the value of such transactions are derived from observed actual
transactions and are often imputed by partitioning, rerouting and reallocation.
Here, we will indicate the data needs separately for the entries (other than the balancing
items) of only the capital account. As the data needs for this account (that are not obtained from the
production account) relate to monetary transactions, national accountants rely on data available from
the administrative records, business accounts and statistical surveys. We will try to identify the data
required for estimating aggregates relating to these in the following table.
Also note that since all these accounts are relevant only for institutional units and sectors, the
records of transactions maintained by businesses at the corporate level are sufficient for compilation
of these accounts. Thus, the main sources of data are the business records, administrative records of
the government and the Central bank and statistical surveys (and censuses). The last source is
important for covering the transactions of the households and unincorporated enterprises. Note that
for compilation of annual accounts from the results of periodic surveys on households and
unincorporated units are usually based on other indices and indicators. The following table indicates
the main data needs (that are not already covered under data needs for production account) under all
the stated circumstances:
Second e-Learning Course 2013
Intermediate-Level
25
Reading material
Lesson VII
Capital and Financial Accounts
Main Data Needs for Capital Account
SNA Aggregate
1. Fixed capital
Segment of
Main Data Needs
economy
• Purchase and sale of dwellings, other buildings and
All sectors
structures, machinery and equipment, cultivated
formation
assets, e.g. trees and livestock.
• Purchase and sale of weapons systems.
• Purchase of intellectual property products.
• Expenditures on land improvement. [from production
account]
• Expenditure on R&D and other IPP, such as mineral
exploration, film making, music recording etc. [from
production account]
• Costs of ownership transfers.
2. Change in
Inventories
All
sectors
mainly
– • Opening & closing stock of finished goods [also
market
producers
required are corresponding basic price to eliminate
the effects of holding gains / losses – not covered in
this course]
• Additions and reductions to work-in-progress
• Opening & closing stock of goods for resale.
• Opening and closing stocks of raw materials for
intermediate
consumption,
including
military
ammunitions.
3. Valuables
All sectors
• Purchase and sale of precious stones and metals;
antiques and other art objects, and other valuables.
The sale figures are required for those not producing
the valuables.
4. CFC
All sectors
• Opening & closing stocks of all fixed assets by
detailed category and age , in current market value.
• Average life of each category of fixed assets.
Second e-Learning Course 2013
Intermediate-Level
26
Reading material
Lesson VII
Capital and Financial Accounts
Main Data Needs for Capital Account (Contd.)
SNA Aggregate
5. Transactions of
Segment of
economy
All sectors
Main Data Needs
• Purchase and sale of land, subsoil assets, non-
Non-produced
cultivated biological resources and water resources
non-financial
for production purposes.
• Payments for & receipts from marketable operating
assets
(long-term) leases of produced & non-produce assets
• Payments for & receipts from permits for use of
natural resources
• Payments for & receipts from special permits –
government the recipient.
• Payments for & receipts from exclusive rights of
publications and broadcasting.
• Purchase and sale of goodwill & marketing assets
with explicitly stated prices.
• In case of sale of an ongoing enterprise, purchase
value and its net worth.
6. Capital Transfer
All sectors
• Receipts and payment of capital transfers.
• Receivable and payable capital taxes
• Exceptional payments from government to public
quasi-corporations
Second e-Learning Course 2013
Intermediate-Level
27
Reading material
Lesson VII
Capital and Financial Accounts
Lesson VII: Capital and Financial Accounts
Lesson Completion Test
[Please note that this a fixed set of questions. You have to take the test on-line and may attempt as
many times as you like. You will get access to the presentations of the next lesson, only after you
secure 80% score in this test.
All the questions carry equal marks.]
Please mark one of the alternatives ([a], [b], [c] and [d]) to indicate your answer to a question. Note
that for each question there is only one correct answer.
1. Which one of the following is NOT recorded in the Capital account
[a] borrowing from bank
[b] CII
[c] purchase of machinery by a production unit
[d] purchase of land
2. Which one of the following is shown in the Financial account
[a] purchase of fixed assets to their owners
[b] payment of bank interest
[c] repayment of bank loan
[d] government grant
3. Which one of the following is NOT shown in the Financial account
[a] change in pension and non-pension entitlements
[b] reinvestment earnings from FDI
[c] capital transfers
[d] purchase of shares
4. Which one of the following is included in the Capital account
[a] purchase of shares
[b] purchase of vehicle by a household
[c] expenditures on minor repair & maintenance
[d] government grant for building construction
Second e-Learning Course 2013
Intermediate-Level
28
Reading material
Lesson VII
Capital and Financial Accounts
5. Which one of the following is TRUE
[a] all changes in non-financial assets are recorded in the financial account
[b] balance of real transactions is equal to net acquisition of
financial assets less net incurrence of liabilities.
[c] transactions in non-financial non-produced assets
is NOT reflected in capital account of a unit
[d] all financial transactions affect net lending / borrowing
6. Which one of the following is NOT included in fixed capital
[a] expenditure on land improvement
[b] expenditure on own-account R&D activities
[c] payment for permits for long term use of natural resources
[d] purchase of weapons systems by the government
7. Which one of the following is included in fixed capital
[a] small tools having durability of more than one year
[b] payment of commission to an agent for purchase of land
[c] normal repair and maintenance expenditure
[d] purchase of land
8. The value of CII of finished goods is recorded in
[a] resource-side of production account
[b] ‘change in assets’ side of capital account
[c] none of the above
[d] both [a] & [b]
9. The value of purchase of ammunitions for army is recorded in
[a] uses-side of production account
[b] ‘change in assets’ side of capital account
[c] none of the above
[d] both [a] & [b]
Second e-Learning Course 2013
Intermediate-Level
29
Reading material
Lesson VII
Capital and Financial Accounts
10. The value of goodwill of an on-going enterprise is recorded in the ‘change in assets’ side of
the capital account, when
[a] net worth of the enterprise increases
[b] it is sold and the value of sales exceeds net worth
[c] the fixed capital stock of the enterprise increases
[d] a buyer offers a high price for buying it
11. Which one of the following is NOT true
[a] for every monetary transaction at least one entry
is made in the financial account
[b] transactions reflected only in the financial account
affect net lending / borrowing
[c] all transactions are NOT reflected in financial account
[d] transactions involving sale of market output
always have a counterpart entry in financial account
12. Reinvested earnings of a domestic enterprise A from FDI in a unit B resident of a different
country is recorded in which of the following
[a] ‘change in assets’ side of financial account of A
[b] ‘change in liability & net worth’ side of financial account of B
[c] none of the above
[d] both [a] & [b]
13. Change in pension entitlements is recorded in which of the following
[a] ‘change in assets’ side of financial account of households
[b] ‘change in liabilities & net worth’ side of financial account
of the pension fund
[c] none of the above
[d] both [a] & [b]
Second e-Learning Course 2013
Intermediate-Level
30
Reading material
Lesson VII
Capital and Financial Accounts
14. Which one of the following id NOT true
[a] payment of interest on loans is a financial transaction
[b] net borrowing/ lending is not affected by
exchange of one financial asset for another
[c] all financial transactions have counterpart transactions
- either financial or non-financial transactions.
[d] exceptional payments from government to public
quasi-corporations should be treated as capital transfers.
15. The broker’s fee paid by an enterprise for purchase of another company’s share is included in
which one of the following
[a] in the uses-side of production account
[b] in the ‘change in assets’ side of capital account
[c] in the ‘change in assets’ side of financial account
[d] none of the above
___________________________________________
Second e-Learning Course 2013
Intermediate-Level
31
Reading material