Chapter 1

A1.5 A definition for fiscal policy, general government sector, and public sector is introduced in paragraph 1.2.

A1.6 A section to describe the evolution of international statistical guidelines on government finance statistics, starting in the early 1970s, is presented in paragraphs 1.6–1.9. This section also broadly outlines the reasons for the update of the GFSM 2001.

A1.7 The section on the structure and features of the GFS framework introduces two supplementary statements—namely, the Statement of Total Changes in Net Worth and the Summary Statement of Explicit Contingent Liabilities and Net Implicit Obligations for Future Social Security Benefits (see paragraphs 1.18–1.19). These supplementary statements are added to the GFS framework due to their analytical usefulness for users of fiscal data.

A1.8 The valuation principle described in paragraph 1.29 indicates that current market prices are used to value economic flows and stock positions. This principle is clarified by indicating that market-value equivalents are used for assets and liabilities that are not traded in markets, or are traded infrequently.

A1.9 The important linkages between GFS and other macroeconomic datasets are introduced in paragraph 1.35, also recognizing the close relationship with accounting standards. Paragraph 1.39 highlights the importance of good dissemination practices as spelled out in the General Data Dissemination System, Special Data Dissemination Standard, and the Special Data Dissemination Standard Plus.

Chapter 2

A1.10 The delineation of general government and public sector institutional units is clarified. The chapter is reorganized to first delineate the domestic economy, and then it describes institutional units and the types of units that exist in macroeconomic statistics, before defining institutional sectors. These principles are then applied to delineate the general government and public sectors, and the practical application of the sector classification principles to selected cases is described.

A1.11 The concept of residence is elaborated on to align with guidance of 2008 SNA and BPM6 (see paragraph 2.6). The additional guidance includes defining and describing the treatment of notional resident units (see paragraph 2.13) and nonresident special purpose entities (see paragraph 2.15). Additional guidance on identifying international and regional organizations is presented in paragraphs 2.16–2.19. The treatment of multiterritory regional enterprises (see paragraph 2.20) and currency union central banks (see paragraph 2.21) is explained.

A1.12 The rationale for working with the institutional unit in macroeconomic statistics is explained in paragraph 2.23. In addition, the concepts establishment and enterprise are defined and explained in paragraphs 2.24 and 2.25, respectively.

A1.13 The description of the types of institutional units is organized to make a distinction between persons or groups of persons in the form of households and legal or social entities (see paragraph 2.27). Households are defined and described in paragraphs 2.28–2.29, while legal or social entities are defined, and the types of legal or social entities described in more detail (see paragraphs 2.30–2.38).

A1.14 The section on applying the definition of institutional unit to government introduces a discussion on artificial subsidiaries and ancillary activities, and applies these concepts to resident SPEs and a government central borrowing authority (see paragraphs 2.42–2.45).

A1.15 The definition and identification of nonfinancial and financial corporations sectors are presented in detail (see paragraphs 2.52–2.57). The additional guidance is provided to clarify the distinction between these corporations and government units. This includes the introduction of three broad classes of financial corporations—namely, financial intermediaries, financial auxiliaries, and other financial corporations—and specifically explains financial intermediation.

A1.16 The delineation of general government and public corporations is clarified using the concept of market and nonmarket producers. The application of the concept economically significant prices to determine whether a unit is a market or nonmarket producer is elaborated on (see paragraphs 2.65–2.75).

A1.17 Guidance is provided on how to determine whether a nonprofit institution is under control of government. Indicators of control and how to apply these to establish control of government are provided in Box 2.1.

A1.18 An extensive discussion on the public corporations subsector is introduced in paragraph 2.104. The rationale for the extension of GFS to include data for public corporations is described in paragraph 2.105, and the types of public corporations are presented in paragraphs 2.113–2.121. Guidance is provided on how to determine whether a corporation is under control of government (see paragraphs 2.107–2.112). Indicators of control and how to apply them to establish control of government over corporations are provided in Box 2.2.

A1.19 Using the concepts of residence, institutional units, control, and market versus nonmarket producers, a decision tree for sector classification of the public sector is introduced in paragraph 2.124 and Figure 2.4.

A1.20 A separate section describes the practical application of the sector classification principles to selected cases—these cases are the topics of frequently asked questions. Included are: the identification of quasi-corporations (see paragraph 2.125); distinguishing head offices and holding companies (see paragraph 2.128); restructuring agencies (see paragraph 2.129); financial protection schemes (see paragraph 2.132); special purpose entities (see paragraph 2.136); joint ventures (see paragraph 2.140); sinking funds (see paragraph 2.144); pension schemes (see paragraph 2.147); provident funds (see paragraph 2.148); sovereign wealth funds (see paragraph 2.152); market regulatory agencies (see paragraph 2.156); and development funds and/or infrastructure companies or entities (see paragraph 2.160).

A1.21 The annex to Chapter 2 of the GFSM 2001, describing social protection, is subsumed in Appendix 2 of the GFSM 2014. This appendix presents guidance on the identification and sectorization of entities involved in social protection, as well as guidance on the recording of the flows and stock positions related to their economic activities.

Chapter 3

A1.22 A distinction between monetary and nonmonetary transactions is introduced in paragraphs 3.8 and 3.19, respectively. This distinction also forms the basis for the distinction between transfers (capital and current transfers), exchanges, in-kind transactions, and internal transactions.

A1.23 A definition of stock positions is provided in paragraph 3.36. The concepts economic benefits and ownership are used to define economic assets, before a distinction is drawn between legal and economic ownership in paragraphs 3.38–3.39. These concepts are used to determine the asset boundary and define assets and liabilities (see paragraphs 3.42–3.50).

A1.24 The GFSM 2014 reinstates a more balanced approach between having both accrual and cash information in an integrated statistical framework. Therefore, starting in paragraph 3.61, alternative recording bases are discussed with a reference to using the accrual basis of recording in the Statement of Operations (see paragraph 3.69) and using the cash basis of recording in the Statement of Sources and Uses of Cash (see paragraphs 3.67 and 3.103).

A1.25 Additional guidance on the application of the accrual basis of recording principles is described from paragraph 3.76 onward. Guidance on the time of recording and measurement of taxes and other compulsory transfers is presented in paragraph 3.77.

A1.26 The time of recording dividends when using an accrual basis of recording is defined as when the equity or shares go ex-dividend (see paragraphs 3.87 and 5.112).

A1.27 When using an accrual basis of recording, the time of recording transactions in goods and services, nonfinancial assets, and many financial assets and liabilities is defined as the moment when economic ownership changes. Recognition is given to cases where change of ownership is not obvious and additional guidance for those cases is provided (see paragraphs 3.88–3.97).

A1.28 Guidance on the time of recording other economic flows is described in paragraphs 3.98–3.102.

A1.29 Guidance on using the cash basis of recording in the Statement of Sources and Uses of Cash is elaborated in paragraphs 3.103–3.106.

A1.30 Guidance on valuation is elaborated on and the section is structured to present descriptions of the general valuation rule (see paragraph 3.107), valuation of transactions (see paragraphs 3.108–3.112), valuation of stock positions including alternatives valuation methods (see paragraphs 3.113–3.117), valuation adjustments in special cases (see paragraphs 3.118–3.125), and valuation of other economic flows (see paragraphs 3.126–3.129).

A1.31 The GFSM 2014 introduces a discussion on currency, starting with a discussion on the unit of account for the compilation of GFS in paragraph 3.130. Guidance is provided on currency conversions for transactions and stock positions (see paragraphs 3.132–3.133) and the distinction between domestic and foreign currency (see paragraphs 3.134–3.136) and currency of denomination and currency of settlement (see paragraphs 3.137–3.139).

A1.32 Starting in paragraph 3.152, the GFSM 2014 presents a detailed discussion of consolidation. The concept is defined (see paragraphs 3.153–3.154), a distinction is made between intrasectoral and inter-sectoral consolidation (see paragraphs 3.155–3.157), and reasons for consolidation are discussed (see paragraphs 3.158–3.160), before conceptual guidelines for the process of consolidation are presented (see paragraphs 3.161–3.164). Paragraphs 3.165–3.166 present practical guidelines on implementing consolidation, while paragraphs 3.167–3.168 describe consolidation principles used in other datasets.

Chapter 4

A1.33 The analytic objectives of the GFS framework were expanded to include the ability to assess management and policy decisions, as well as sustainability and liquidity decisions (see paragraphs 4.3–4.5).

A1.34 Paragraph 4.7 elaborates on the coverage of GFS, emphasizing that data should cover the nonmarket activities of the general government sector, as well as the market activities of the public sector.

A1.35 Two additional statements are included in the GFS framework, to further enhance the analytical usefulness of GFS (see paragraphs 4.13–4.15 and 4.46–4.49):

• Statement of Total Changes in Net Worth

• Summary Statement of Explicit Contingent Liabilities and Net Implicit Obligations for Future Social Security Benefits.

A1.36 The concept expenditure is reinstated as an aggregate in both the Statement of Operations and in the Statement of Sources and Uses of Cash (see paragraph 4.21, Table 4.1, and Table 4.2).

A1.37 The definition and identification of policy lending are elaborated on in Box 4.1.

A1.38 The composition of the item net change in the stock of cash, as presented in the Statement of Sources and Uses of Cash, is clarified—the item refers to the financial asset currency and deposits (3202), and should not include other financial instruments or overdrafts (see paragraph 4.33).

A1.39 The description of the Balance Sheet is expanded with a discussion on the use of the net worth concept in the case of public corporations (see paragraph 4.40).

A1.40 Box 4.1 in the GFSM 2001 is replaced with an annex to Chapter 4 of the GFSM 2014, Using GFS for Fiscal Analysis. The annex offers an overview of how analysts can use the data in GFS to build well-defined and internationally comparable fiscal indicators. Some of the indicators can be observed or derived directly from the GFS framework, while others can be derived using GFS together with additional data.

Chapter 5

A1.41 The rationale for defining revenue as an increase in net worth resulting from a transaction is added in paragraph 5.1.

A1.42 The definition of grants (13) is revised to no longer refer to grants as noncompulsory transfers. The change accommodates cases where compulsory revenue sharing occurs between government units. The definition is also expanded to indicate that grants are transfers that do not meet the definition of a tax, subsidy, or social contribution (see paragraphs 5.5 and 5.101).

A1.43 Definitions of the respective categories of other revenue (14) are replaced by a definition of the main category other revenue (14), with only references to the subcategories it comprises (see paragraph 5.6).

A1.44 The section on defining revenue is enhanced with the inclusion of a discussion on the treatment of refunds and corrections, and with an explanation of the delineation between revenue and transactions in assets and liabilities (see paragraphs 5.7–5.8).

A1.45 The section on the time of recording and measurement of revenue is expanded to clearly indicate the time of recording when using the accrual basis of recording, as well as the cash basis of recording (see paragraphs 5.10–5.11). Further clarification is provided on applying an accrual basis of recording to revenue transactions (see paragraphs 5.12–5.17), as well as on the treatment of amounts assessed, but discovered to be uncollectable (see paragraph 5.20).

A1.46 The basis on which the classification of revenue should be made is presented in paragraph 5.21, while paragraph 5.22 describes the rationale for standardized summary classifications and the usefulness of adding subitems according to analytical use and need.

A1.47 Paragraphs 5.27–5.32 describe the treatment of tax refunds and tax relief. In this regard, the GFSM 2014 adopted the gross recording of payable tax credits, while nonpayable tax credits continue to be treated on a net basis.

A1.48 The tax category unallocable (1113), in the GFSM 2001, is renamed other taxes on income, profits, and capital gains (1113) in the GFSM 2014, and a breakdown of the category is introduced to separately identify these taxes receivable from general government units (11131) and unallocable taxes on income, profits, and capital gains (11132) (see paragraph 5.42 and Tables 5.1 and 5.2). This change allows the identification of those taxes receivable from other general government units that are subject to consolidation.

A1.49 The tax attribution rules are described in paragraphs 5.33–5.38. The tax attribution rules applicable to cases where the activities of the religious organizations are funded from earmarked taxes collected by general government are clarified in paragraph 5.39.

A1.50 The GFSM 2001 tax category for taxes on financial and capital transactions (1134) is moved from property taxes (113) to general taxes on goods and services (1141). In the GFSM 2014, this tax category retains its name, but with a different classification code—namely, taxes on financial and capital transactions (11414) (see paragraphs 5.52 and 5.61). This change aligns the GFSM 2014 with the 2008 SNA, which regards this tax as a tax on the sale rather than on the property itself. To maintain consistency with codes used in the GFSM 2001, the codes in taxes on property do not follow directly.

A1.51 A new definition for excises is introduced in paragraph 5.62.

A1.52 The concept profits on fiscal monopolies (1143) is clarified, and its application to public enterprises, lotteries, and other gambling activities is elaborated on (see paragraphs 5.63–5.68).

A1.53 The coverage of taxes on specific services is extended to include the implicit taxes that result from the central bank imposing a rate of interest other than the market rates (see paragraphs 5.70 and 6.89, Box 6.2).

A1.54 The coverage of taxes on use of goods and on permission to use goods or perform activities (1145) is clarified (see paragraph 5.72). Boundaries of this tax with administrative fees (paragraph 5.73), taxes on business activities (see paragraph 5.76), other tax categories (see paragraph 5.77), and the acquisition or use of an asset (see paragraph 5.78) are explained.

A1.55 Taxes on use of goods and on permission to use goods or perform activities (1145) are subdivided into motor vehicle taxes (11451) and other taxes on the use of goods and on the permission to use goods or perform activities (11452). For the latter, the GFSM 2014 introduces several subcategories of taxes to clarify their classification (see paragraph 5.81 and Table 5.4). Furthermore, the accrual recording of business licenses and taxes on pollution (such as emission trading schemes) is elaborated on (see paragraph 5.81).

A1.56 The implicit taxes or subsidies created by multiple exchange rate regimes are introduced in paragraph 5.89. Furthermore, it is clarified that lumpsum payments receivable by government from monetary authorities should be disaggregated according to the economic nature of the components of the payment (see paragraph 5.90).

A1.57 The concept social contributions (12) is clarified (see paragraph 5.94), specifically making a distinction between voluntary and compulsory contributions, describing the flexibility arrangement for the recording of social contributions used in the 2008 SNA (see paragraph 5.95), and presenting the boundary between social contributions and other categories of taxes (see paragraph 5.96).

A1.58 The treatment of grants is elaborated on, specifically describing the distinction between current and capital grants, grants in kind, and the time of recording in an accrual and cash basis of recording (see paragraph 5.103–5.105).

A1.59 The time of recording dividends when using an accrual basis of recording is clarified to be when the equity or shares go ex-dividend (see paragraphs 3.87, 5.112, and 6.109). In addition, it is clarified that legally constituted corporations, reclassified to be a general government unit, could also distribute dividends (see paragraph 5.113). The treatment of disproportionately large dividends is clarified (see paragraphs 5.115–5.116).

A1.60 The coverage of property income from investment income disbursements (1414) is expanded to include distributions to holders of investment fund shares or units (see paragraph 5.120).

A1.61 The concept rent (1415) is elaborated on to explain the distinction between a resource lease, the creation of an asset, contracts, leases, and licenses (31441), or the sale of the resource. Two types of resource rent, for land and subsoil assets, are described in detail and the boundary with the rental of produced assets is explained (see paragraphs 5.124–5.133).

A1.62 The GFSM 2014 assumes the 2008 SNA and BPM6 treatment of reinvested earnings on foreign direct investment (1416) (see paragraphs 5.134–5.135 and 6.121).

A1.63 The classification of administrative fees (1422) is clarified to include fees payable for voluntary participation in deposit insurance or other guarantee schemes that do not qualify to be a standardized guarantee scheme. For it to be administrative fees, the amount payable should be in proportion to the cost of producing the service (see paragraph 5.138).

A1.64 The treatment of fines and penalties imposed for evasion of taxes and bails set by courts is clarified in fines, penalties, and forfeits (143) (see paragraph 5.143).

A1.65 The GFSM 2001 revenue categories for voluntary transfers other than grants (144) and miscellaneous and unidentified revenue (145) are subsumed in two new categories—namely, transfers not elsewhere classified (144) and premiums, fees, and claims receivable related to nonlife insurance and standardized guarantee schemes (145) (see paragraphs 5.145 and 5.149). Revenue from subsidies (14411) receivable is introduced as a separate category of transfer not elsewhere classified (see paragraph 5.146), while the other transfers are distinguished as other current transfers not elsewhere classified (14412) (see paragraph 5.147) and capital transfers not elsewhere classified (1442) (see paragraph 5.148).

A1.66 The revenue category premiums, fees, and claims related to nonlife insurance and standardized guarantee schemes (145) (see paragraph 5.149) is introduced to allow for the appropriate recording of the revenue related to nonlife insurance and standardized guarantees. Subcategories provide for the identification of premiums receivable (14511), fees for standardized guarantees receivable (14512), current claims receivable (14513), and capital claims receivable (1452) (see paragraphs 5.150–5.151).

Chapter 6

A1.67 The rationale for defining expense as a decrease in net worth resulting from a transaction is added in paragraph 6.1.

A1.68 The distinction between economic classification of expense and functional classification of expense is clarified in paragraphs 6.2 and 6.3, respectively.

A1.69 The section on defining expense is enhanced with the inclusion of a discussion on the treatment of refunds and corrections and the delineation between expense and transactions in assets and liabilities (see paragraphs 6.4–6.5).

A1.70 The section on the time of recording expense is expanded to clearly indicate the time of recording when using the accrual basis of recording, as well as the cash basis of recording. Furthermore, the time of recording of the acquisition and use of goods and services (22) is clarified (see paragraphs 6.6–6.7).

A1.71 The definition of compensation of employees is clarified to emphasize the individual employer-employee relationship, and the exchange of manual and intellectual labor services (see paragraph 6.9). Furthermore, the nature of wages and salaries in cash (see paragraph 6.13) and in kind (see paragraph 6.17) is elaborated on.

A1.72 Guidance on estimating imputed employers’ social contributions (2122) is elaborated on. A clear distinction between nonpension and employment-related pension benefits is introduced (see paragraphs 6.23–6.26).

A1.73 The section on the use of goods and services (22) is reorganized to: define the concept (see paragraph 6.27); make a distinction between the time of recording use of goods and services when using an accrual and cash basis of recording (see paragraphs 6.28–6.31); describe the boundary between use of goods and services and compensation of employees (see paragraph 6.33); describe the boundary between use of goods and services and transfers (see paragraph 6.37); describe the boundary between use of goods and services and transactions in the acquisition of nonfinancial assets (see paragraph 6.43); and describe other boundaries related to use of goods and services (see paragraph 6.50).

A1.74 Conceptually, the coverage of use of goods and services (22) in the GFSM 2001 is changed to exclude weapons and weapons systems in the GFSM 2014 (see paragraphs 6.49). These are recognized as the acquisition of a specific category of nonfinancial assets in the GFSM 2014 (see paragraph 8.43).

A1.75 The relationship between inventory (612) and use of goods and services (22) is clarified in Table 6.3.

A1.76 The treatment in GFS of the implicit fees for financial services is explained (see paragraphs 6.52 and 6.81). These implicit fees include items such as financial intermediation services indirectly measured (FISIM), service fees implied by nonlife insurance premiums, and the implicit fees payable by governments to central banks for nonmarket services.

A1.77 The concept consumption of fixed capital (23) is elaborated on. The relation between consumption of fixed capital as recorded in the 2008 SNA and in GFS is explained (see paragraph 6.53). The relation between consumption of fixed capital and depreciation as used in government financial records is also explained (see paragraph 6.54). The calculation of consumption of fixed capital is described in Box 6.1. Furthermore, the treatment of costs of ownership transfer as a component of consumption of fixed capital is explained in paragraphs 6.60 and 8.42.

A1.78 The description of interest (24) is clarified to show the relationship between interest as recorded in the 2008 SNA and interest as recorded in the GFSM 2014. It is suggested to identify the counterpart for interest transactions to allow for consolidation (see paragraph 6.62). A discussion on recording interest, when using a cash basis of recording, is introduced in paragraph 6.65. Recording interest in the case of grace periods and step-up interest arrangements is explained in paragraphs 6.69–6.70. The recording of interest related to index-linked securities is explained in paragraphs 6.75–6.78. Furthermore, clarification is provided on the treatment of interest on debt securities with embedded derivatives, nonperforming loans, and arrears (see paragraphs 6.79–6.82).

A1.79 Recording subsidies (25) is clarified. The treatment of subsidies in cases when an institutional unit acts on behalf of another unit to redistribute the subsidies is explained in paragraph 6.84. It is also clarified that subsidies are receivable by all resident and nonresident producers, and that units such as general government units, nonprofits institutions serving households, and households can receive subsidies in their capacity as producers (see paragraph 6.86). The coverage of subsidies is extended to include the implicit subsidy that results from the central bank imposing a rate of interest other than the market rates (see paragraphs 5.70 and 6.89, Box 6.2). The discussion on subsidies also introduced the distinction between subsidies on products and subsidies on production to better align with this distinction in the 2008 SNA (see paragraphs 6.89–6.90).

A1.80 To further delineate subsidies, a list of items that do not constitute subsidies is included (see paragraph 6.91), and Box 6.3 elaborates on transactions with public corporations with specific reference to the classification of “capital injections” into public corporations.

A1.81 The definition of grants (26) is revised to no longer refer to grants as noncompulsory transfers. This change accommodates cases where compulsory revenue sharing occurs between government units. The definition is also expanded to indicate that grants are transfers that do not meet the definition of a tax, subsidy, or social contribution (see paragraph 6.92).

A1.82 The treatment of grants in kind is elaborated on, specifically describing the distinction between current and capital grants, and the time of recording in, respectively, an accrual and cash basis of recording (see paragraph 6.93–6.95).

A1.83 The circumstances under which social assistance benefits (272) become payable are clarified to include contributions payable to social insurance schemes on behalf of households who cannot otherwise afford to participate in the scheme (see paragraph 6.102).

A1.84 The distinction between imputations for employment-related nonpension social benefits and employment-related pensions and other retirement benefits is clarified in paragraph 6.105.

A1.85 The time of recording dividends (2811) when using an accrual basis of recording is clarified to be when the equity or shares go ex-dividend (see paragraphs 3.87, 5.112, and 6.109). The treatment of disproportionately large dividends is clarified (see paragraphs 5.116 and 6.110).

A1.86 The coverage of property expense for investment income disbursements (2813) is expanded to include distributions to holders of investment fund shares or units (see paragraph 6.113).

A1.87 It is clarified that rent (2814) includes amounts payable under resource leases on land, subsoil resources, and on other natural resources. The measurement of such amounts payable is clarified in the context of the corresponding revenue item (see paragraph 6.120).

A1.88 The GFSM 2014 assumes the 2008 SNA and BPM6 treatment of reinvested earnings on foreign direct investment (2815) (see paragraph 6.121).

A1.89 The GFSM 2001 expense categories for miscellaneous other expense (282) are subsumed in two new categories in the GFSM 2014—namely, transfers not elsewhere classified (282) and premiums, fees, and claims payable related to nonlife insurance and standardized guarantee schemes (283) (see paragraphs 6.122 and 6.125, respectively). The transfers are distinguished as current transfers not elsewhere classified (2821) (see paragraph 6.123) and capital transfers not elsewhere classified (2822) (see paragraph 6.124).

A1.90 The expense category premiums, fees, and claims related to nonlife insurance and standardized guarantee schemes (283) is introduced to allow for the appropriate recording of the expense related to nonlife insurance and standardized guarantee schemes. Subcategories provide for the identification of premiums payable (28311), fees for standardized guarantees (28312), current claims payable (28313), and capital claims payable (2832) (see paragraph 6.125).

A1.91 The discussion on the Classification of Functions of Government (COFOG) in Chapter 6 of GFSM 2001 is moved to the annex to Chapter 6 in GFSM 2014.

A1.92 COFOG in GFS is limited to the expenditure of government, which differs from its application to all outlays of government as used in the OECD/UN classification (see paragraph 6.127 in the annex).

A1.93 The annex is reorganized to separately present: the structure of COFOG classifications (see paragraph 6.128); uses of COFOG (see paragraph 6.130); distinction between individual and collective goods and services (see paragraph 6.133); units of classification (see paragraph 6.140); problems in identifying functions of government (see paragraph 6.143); and the cross-classification of expenditure (see paragraph 6.148). No changes occurred in the functions themselves.

Chapter 7

A1.94 The usefulness of a set of balance sheets integrated with economic flows is elaborated on in paragraph 7.2.

A1.95 A distinction is drawn between legal and economic ownership in paragraphs 3.38–3.41 and 7.5–7.13. These concepts are used to determine the asset boundary and to provide an overview of assets and liabilities (see paragraphs 7.14–7.19).

A1.96 The asset boundary is clarified to not include contingent assets and liabilities (see paragraph 7.13), and financial claims are clarified to include: debt instruments; financial derivatives and employee stock options; equity and investment fund shares; and monetary gold in the form of unallocated gold accounts (see paragraph 7.15).

A1.97 The GFSM 2001 treatment of monetary gold and SDRs (6201/6301) as financial assets without a corresponding financial claim is revised. In the GFSM 2014, only monetary gold in the form of gold bullion is regarded as a financial asset without a corresponding financial claim. Also, recognizing that transactions in SDR holdings may be entered into by two domestic units, the exclusion of SDRs from domestic financial asset flows is eliminated (see paragraphs 7.15 and 7.125–7.134, respectively).

A1.98 The concept of produced versus nonproduced nonfinancial assets is introduced in paragraph 7.17–7.19.

A1.99 The valuation of assets and liabilities is elaborated on in paragraphs 7.20–7.25. The usefulness of nominal value of financial instruments is presented in paragraph 7.21, while the treatment of cost of ownership transfer is described in paragraph 7.22. Possible methods of estimating current market prices are described in paragraphs 7.25–7.33.

A1.100 Determining the time of change in ownership of fixed assets that are produced over two or more accounting periods, and those built under a public-private partnership, is elaborated on (see paragraphs 7.37 and 7.39, respectively).

A1.101 The creation of notional units to own fixed assets in territories where they are not residents is explained in paragraphs 2.13 and 7.91.

A1.102 Identifying public monuments and guidance on their recording are clarified in paragraph 7.42.

A1.103 The definition and identification of dwellings (61111) are clarified and guidance on the valuation of dwellings is provided in paragraphs 7.44–7.45.

A1.104 Within buildings and structures, a category of fixed assets for land improvements (61114) is added. The cost of ownership transfer on all land is included with land improvements (see paragraphs 7.49–7.51).

A1.105 Subcategories are introduced for machinery and equipment other than transport equipment (61122) to separately identify information, computer, and telecommunications (ICT) equipment (see paragraphs 7.56–7.57) and machinery and equipment not elsewhere classified (see paragraph 7.57).

A1.106 The definition and identification of cultivated biological resources (61131) are clarified, and the time of recording when the production of these fixed assets takes a long time to complete is elaborated on. Subcategories are introduced to further clarify the composition of this item (see paragraphs 7.59–7.63 and Table 7.5).

A1.107 The definition and identification of intellectual property products (61132) are elaborated on. Subcategories separately identify research and development (611321), mineral exploration and evaluation (611322), computer software and databases (611323), entertainment, literary, and artistic originals (611324), and other intellectual property products (611325). The coverage of this item is expanded to include research and development products so that patented resources no longer appear as nonproduced assets. Furthermore, the coverage of computer software is expanded to include databases (see paragraphs 7.64–7.73).

A1.108 Weapons systems are introduced as a separate fixed asset category (see paragraph 7.74).

A1.109 In the GFSM 2014, categories of inventory (612) are aligned with the categories used in 2008 SNA. The category strategic stocks (6121) is eliminated as a separate category of inventory and is subsumed in goods for resale (61224), and a category for military inventories is added (see paragraphs 7.75–7.86).

A1.110 The definition of land (6141) is clarified and guidance is provided on the valuation of land (see paragraphs 7.92–7.96).

A1.111 The GFSM 2001 category subsoil assets is replaced by mineral and energy resources (6142). The ownership and recording of this category of asset are elaborated on in paragraphs 7.97–7.99.

A1.112 The classification of other naturally occurring assets (6143) is elaborated on. Subcategories for specific classes of other naturally occurring assets are introduced, and their definitions are clarified (see paragraphs 7.100–7.103 and Table 7.7).

A1.113 The category intangible nonproduced assets (6144) is clarified, and subcategories are introduced for contracts, leases, and licenses (61441) and goodwill and marketing assets (61442) (see paragraphs 7.104–7.117).

A1.114 Negotiability is introduced as a distinguishable feature of securities (see paragraph 7.119).

A1.115 Market value for valuing debt instruments is elaborated on by providing practical guidance on valuation (see paragraph 7.122).

A1.116 Monetary gold and Special Drawing Rights (6201, 6221, 6301, 6321) as financial instruments are elaborated on (see paragraphs 7.125–7.134).

A1.117 The coverage of currency and deposits (6202/6302) is clarified and the valuation of this instrument explained (see paragraphs 7.135–7.142).

A1.118 A description of various types of debt securities (6203/6303) and their recording is introduced in paragraphs 7.143–7.156.

A1.119 The description of loans (6204/6304) is expanded to clarify financial leases (see paragraph 7.158), gold swaps (see paragraph 7.161), and off-market swaps (see paragraph 7.162). The treatment of securities repurchase agreements is clarified as a collateralized loan (see paragraph 7.159). The valuation of loans and treatment of nonperforming loans are presented in paragraph 7.163.

A1.120 The category equity and investment fund shares (6205/6305) is elaborated on to distinguish various types of financial instruments (see paragraphs 7.164–7.177). Investment fund shares (62052/63053) have a specialized role in financial intermediation and are introduced as a separate category (see paragraphs 7.174–7.177).

A1.121 The category for the reserves of insurance, pension and standardized guarantee schemes (6206/6306) is clarified by introducing subcategories for: nonlife insurance technical reserves (see paragraphs 7.183–7.186); life insurance and annuities entitlements (see paragraphs 7.187–7.188); pension entitlements (see paragraphs 7.189–7.198); claims of pension funds on pension managers (see paragraphs 7.199–7.200); and provisions for calls under standardized guarantee schemes (see paragraphs 7.201–7.202).

A1.122 The coverage of insurance, pension, and standardized guarantee schemes (6206/6306) is expanded following recognition of standardized guarantees in a way similar to nonlife insurance and the recognition of claims of pension funds on pension managers (see paragraphs 7.201–7.202 and 7.1997.200, respectively).

A1.123 The category financial derivatives and employee stock options (6207/6307) is clarified by defining the two concepts (see paragraphs 7.204 and 7.221, respectively), describing the types of financial derivatives (see paragraphs 7.209–7.218), and explaining the use of margins (see paragraphs 7.219–7.220).

A1.124 The main balancing item on the balance sheet, net worth (6), is clarified and the relationship with equity for public corporations explained (see paragraphs 7.228–7.233).

A1.125 The items recorded as memorandum items to the balance sheet are expanded to include: net financial worth (see paragraph 7.235), various valuations of gross and net debt (see paragraphs 7.236–7.245), concessional loans and the implicit transfers resulting from loans at concessional interest rates (see paragraph 7.246), arrears (see paragraphs 7.247–7.250), explicit contingent liabilities (see paragraphs 7.251–7.260), net implicit obligations for future social security benefits (see paragraph 7.261), and nonperforming loans (see paragraph 7.262).

A1.126 The classification of the counterparty of financial assets and liabilities by institutional sector is introduced in paragraphs 7.264–7.265 and Table 7.11.

A1.127 The classification of debt liabilities and their corresponding financial assets by maturity is introduced in paragraphs 7.266–7.271 and Table 7.12.

Chapter 8

A1.128 The concept of net investment in nonfinancial assets is introduced in paragraph 8.4, and a distinction drawn with gross investment in nonfinancial assets (i.e., consumption of fixed capital is not taken into account).

A1.129 The treatment of costs of ownership transfer associated with acquiring and disposing of nonfinancial assets (other than inventory) is clarified (see paragraphs 8.6–8.8).

A1.130 The valuation of transactions in nonfinancial assets is elaborated to make a clear distinction between valuation of acquisitions and disposals of: fixed assets (see paragraph 8.9); inventories (see paragraph 8.10); land (see paragraph 8.11); and nonproduced assets other than land (see paragraph 8.11).

A1.131 Time of recording transactions in nonfinancial assets is clarified to be when economic ownership changes. Guidelines for alternatives to use when change of ownership is not obvious are provided (see paragraphs 8.13–8.17).

A1.132 The classification of transactions in nonfinancial assets is identical to the classifications of the same stock positions introduced in Chapter 7 (see paragraph 8.22 and Table 8.1).

A1.33 The treatment of public monuments as buildings and structures (3111) is clarified in paragraph 8.30.

A1.134 Transactions related to land improvements (31114) are introduced as a separate category of transactions in paragraph 8.31.

A1.135 Transactions related to cultivated biological resources (31131) are clarified to include net investment in livestock that are cultivated for the products they yield, and net investment in plantations, orchards, etc. Guidance is provided on the valuation of these transactions (see paragraphs 8.34–8.36).

A1.136 Guidance on the transactions in intellectual property products (31132) is expanded to clarify the valuation of transactions related to research and development (311321) (see paragraph 8.38), mineral exploration and evaluation (311322) (see paragraph 8.39), computer software and databases (311323) (see paragraph 8.40), and entertainment, literary, and artistic originals (311324) (see paragraph 8.41).

A1.137 The treatment of costs of ownership transfer on nonproduced assets other than land (31133) is introduced in paragraph 8.42. Figure 8.1 is included to illustrate the treatment of these costs in the GFS framework.

A1.138 The recording of transactions related to the acquisition and disposals of weapons systems (3114) is introduced in paragraph 8.43.

A1.139 Transactions related to the additions and withdrawals of inventory (312) are elaborated on. A distinction is made between the owner of inventory acting as a producer of goods and services and acting as an owner of assets (see paragraphs 8.44–8.47).

A1.140 The nature and treatment of transactions in all the categories of nonproduced assets are elaborated on (see paragraphs 8.49–8.58).

Chapter 9

A1.141 An explanation of the relationship between transactions and the impact of these on financial assets/liabilities is introduced in paragraph 9.3. Similarly, the impact of net lending/net borrowing on the economy is explained in paragraph 9.5.

A1.142 Concessional loans and their treatment in macroeconomic statistics are clarified in paragraph 9.12.

A1.143 Arrears are defined in paragraph 9.20, and the recording of transactions related to arrears is described in paragraphs 9.21–9.23.

A1.144 The classification of transactions in financial assets and liabilities by instrument and residence of the counterparty is described in paragraphs 9.24–9.27. The classification by instrument that follows is the same as those described in the balance sheet (Chapter 7).

A1.145 Transactions related to monetary gold and special drawing rights (3201/3301) are clarified in paragraphs 9.28–9.32.

A1.146 For debt securities (3203/3303), transactions related to interest and amortization are elaborated on (see paragraphs 9.36 – 9.43).

A1.147 The impact of recording transactions between the owners of enterprises and the enterprise is clarified. Transactions such as dividends, transfers, membership dues and subscription fees payable to international organizations, and other operations, such as privatization and nationalization, are clarified in the description of transactions in equity (32051/33051) (see paragraphs 9.47–9.55).

A1.148 The recording of the change in value of investment fund shares or units, other than from holding gains and losses, is described in paragraph 9.56.

A1.149 For insurance, pension, and standardized guarantee schemes (3206/3306), the transactions influencing these reserves are elaborated on for each sub-category of the reserves (see paragraphs 9.57–9.69).

A1.150 The coverage of financial derivatives and employee stock options (3207/3307) is expanded to separately identify employee stock options. Transactions related to financial derivatives (32071/33071) are clarified. A distinction is introduced between transactions at inception, on secondary markets, with ongoing servicing, and at settlement (see paragraphs 9.71–9.76). Transactions related to employee stock options (32072/33072) are introduced in paragraph 9.77.

A1.151 The classification of transactions in financial assets and liabilities by sector and residence is introduced in paragraphs 9.85–9.87 and Table 9.2.

A1.152 The classification of transactions in debt liabilities and their corresponding financial assets by maturity is introduced in paragraph 9.88. If analytically useful, the same classification structure could be applied for transactions as what is depicted for stock positions in Table 7.12.

Chapter 10

A1.153 Other economic flows are described and the two components of other economic flows—namely, holding gains and losses and other changes in the volume of assets—are defined in paragraph 10.1.

A1.154 The section on holding gains for particular types of nonfinancial assets is elaborated on. Specific guidance is added on: the difference between unrealized and realized holding gains (see paragraph 10.6); neutral and real holding gains (see paragraph 10.11); estimating the holding gains on fixed assets (see paragraphs 10.13–10.15) and inventories (see paragraphs 10.16–10.17); valuables (see paragraph 10.18); and nonfinancial assets disposed of during the reporting period (see paragraphs 10.19–10.20).

A1.155 The impact of various events on the valuation of financial instruments is elaborated on. Specific guidance is added on: monetary gold and SDRs (see paragraphs 10.21–10.22); financial assets and liabilities with fixed monetary values (see paragraph 10.23); debt securities (paragraphs 10.24–10.29); equity and investment fund shares (see paragraphs 10.30–10.34); insurance, pension, and standardized guarantee schemes (see paragraphs 10.35–10.41); and financial derivatives and employee stock options (see paragraphs 10.42–10.43).

A1.156 Paragraph 10.44 introduces holding gains and losses related to financial instruments denominated in foreign currencies, and debt instruments that do not accrue interest over an unusually long time are discussed in paragraph 10.45.

A1.157 Paragraph 10.46 introduces three events that result in other changes in the volume of assets—namely, the appearance or disappearance of existing resources as economic assets, the effects of external events, and changes in classifications.

A1.158 The appearance or disappearance of financial assets and liabilities from the balance sheet is elaborated on with specific reference to the appearance of public monuments and valuables (see paragraph 10.50). Circumstances under which natural assets, such as subsoil assets, noncultivated biological resources, other natural resources, or land, appear on the balance sheet are explained in paragraph 10.52.

A1.159 The effects of external events on the value of assets and liabilities are described in paragraph 10.59. Details on the recording of these events are provided and include catastrophic losses (see paragraph 10.60), uncompensated seizures (see paragraph 10.62), and other volume changes not elsewhere classified (see paragraph 10.63).

A1.160 Paragraph 10.83 introduces the reclassification of costs of ownership transfer on nonproduced assets other than land, and the consumption of fixed capital relating to these costs. The reclassification is necessary to maintain the integration of stock positions and flows.

A1.161 Paragraph 10.79 elaborates on the reclassifications of negotiable securities necessary due to secondary transactions.

A1.162 The reclassification of monetary gold held in the form of gold bullion when it becomes a reserve asset is introduced as an example of changes in the classification of financial assets and liabilities (see paragraph 10.84).

Cross-Cutting Changes in Terminology

A1.163 The following changes in terminology were made to further clarify the text of the Manual.

• References to GFS system are replaced with GFS framework—this allows a clear distinction with the 2008 SNA.

• In the context of GFS, references to accounting principles and periods are replaced by references to statistical guidelines and reporting periods—this allows a clear distinction with the use of the term accounting in source data compilation in the context of public sector accounting.

• References to flows are replaced by references to economic flows, while it is acknowledged that flows will often be used as a short form for economic flows.

• References to the balances of assets and liabilities as stocks are replaced by references to stock positions—this allows a clear distinction with the use of the word “stocks” referring to a specific type of financial instrument.

• References to net acquisition of nonfinancial assets are replaced with references to net investment in nonfinancial assets—the former term is often misinterpreted as including only the acquisition minus disposals of nonfinancial assets, while consumption of fixed capital should also be included in this concept. Similar to what is customary in the case of operating balances, references to net/ gross investment in nonfinancial assets can now be used to make a distinction for the including/ excluding of consumption of fixed capital.

• References to net lending/borrowing are replaced with references to net lending/net borrowing, to enhance the precision in terminology.

• References to the Statement of Government Operations are replaced with references to Statement of Operations—this allows the use of this statement for government units as well as public sector units.

• References to other nonrecurrent taxes on property (1135) in the GFSM 2001 are replaced with references to capital levies (1135)—this allows the terminology in GFS to align with 2008 SNA terminology.

• References to property income attributed to insurance policyholders are replaced with references to property income from investment income disbursements—this allows the terminology in GFS to align with 2008 SNA terminology.

• References to the expense for social contributions (212) are replaced by references to employers’ social contributions (212)—this clarifies the economic nature of this item. Similarly, actual social contributions (2121) and imputed social contributions (2122) are replaced with actual employers’ social contributions (2121) and imputed employers’ social contributions (2122), respectively.

• References to the outlays of government are replaced with references to expenditure—this eliminates confusion with the use of outlays in the OECD/UN classification, which include expense, acquisition of nonfinancial assets, and transactions in financial assets and liabilities.

• References to nonresidential buildings (61112) are replaced with references to buildings other than dwellings (61112)—this allows the terminology in GFS to align with 2008 SNA terminology.

• References to other machinery and equipment (61122) are replaced with references to machinery and equipment other than transport equipment (61122)—this allows the revised GFS category to align with historic data and to subsume the 2008 SNA categories of information, computer, and telecommunications equipment and other machinery and equipment.

• References to cultivated assets (61131) are replaced with references to cultivated biological resources (61131)—this allows the terminology in GFS to align with 2008 SNA terminology.

• References to subsoil assets (6142) are replaced with references to mineral and energy resources (6142)—this allows the terminology in GFS to align with 2008 SNA terminology.

• References to intangible fixed assets (61132) are replaced with references to intellectual property products (61132)—this allows the terminology in GFS to align with 2008 SNA terminology. The word “products” is included to make clear that it does not include third-party rights, which are nonproduced assets.

• References to securities other than shares (6203/6303) are replaced with debt securities (6203/6303)—this allows the terminology in GFS to align with 2008 SNA terminology.

• References to shares and other equity (6205/6305) are replaced with equity and investment fund shares (6205/6305)—this allows the terminology in GFS to align with 2008 SNA terminology.

• References to insurance technical reserves (6206/6306) are replaced with insurance, pension, and standardized guarantee schemes (6206/6306)—this allows the terminology in GFS to align with 2008 SNA terminology.

• References to financial derivatives (6207/6307) are replaced with financial derivatives and employee stock options (6207/6307)—this allows the terminology in GFS to align with 2008 SNA terminology.

• References to entity when meaning a good, service, nonfinancial asset, etc. are replaced with references to resource—this eliminates the confusion with entities referred to in the context of institutional units.

Introduction

A1.164 The integrated GFS framework described in the GFSM 2014 represents a substantial modernization and expansion of the framework described in A Manual on Government Finance Statistics, 1986 (GFSM 1986). Major changes have been made to definitions, classifications, balancing items, the coverage of units and economic events to be recorded in the GFS framework, and the timing at which economic events are to be recorded. The GFS framework is also more harmonized with other macroeconomic statistical frameworks than is the GFSM 1986. There are numerous detailed changes within each major topic, but an exhaustive listing of all such changes is beyond the scope of this appendix.

Coverage of Units

A1.165 The focus of the coverage of units in the GFS framework is the general government sector as defined in the 2008 SNA. Its definition is based on the concept of an institutional unit, which is described in Chapter 2. The general government sector consists of all resident government units and all resident nonprofit institutions that are controlled by government. The coverage of the GFSM 1986 is defined on a functional basis rather than a unit basis. It includes all units carrying out a function of government, but, in principle, only those transactions that are directly related to the functions of government are included. By implication, the transactions that do not represent the fulfillment of a fiscal policy are excluded. In particular, all transactions related to the functions of the monetary authority and other depository financial institutions are excluded.

A1.166 Supranational authorities are international organizations that have been endowed with the authority to raise taxes or other compulsory transfers within the territories of the countries that are members of the authority. Despite the fact that supranational authorities fulfill some of the functions of government within each member country, they are always considered nonresident institutional units. As a result, they are not included in the GFS framework for any country. In the GFSM 1986, transactions resulting from governmental functions carried out within a country by supranational organizations are included in the statistics for that country. It is possible, however, to compile statistics for supranational authorities using the GFS framework as if they constituted a separate country and to classify relevant categories of transactions by country.

Time of Recording Economic Events

A1.167 The time at which transactions and other economic flows are recorded is determined by the principles of accrual accounting in the GFS framework. That is, flows are recorded when economic value is created, transformed, exchanged, transferred, or extinguished. In the GFSM 1986, transactions are recorded when cash is received or paid. In general, flows are recorded at an earlier time under the accrual basis than under the cash basis.

A1.168 Recording flows on the accrual basis will automatically capture past-due obligations, such as arrears of debt principal, interest payments, or payments for goods and services. In the GFSM 1986, use of the cash basis means that arrears and changes in the level of arrears are not recorded.

A1.169 The accrual basis of recording permits the difference between the redemption value of a bond or similar security and its issue price to be recorded as interest as it is earned or incurred rather than when the security matures. In the GFSM 1986, the entire difference between the issue and redemption prices is recorded as interest when the security is redeemed.

Coverage of Events

A1.170 The coverage of events in the GFS framework is broader than in the GFSM 1986 because the revised framework includes all economic events that affect assets, liabilities, revenue, or expense, rather than just those represented by a cash transaction. For example, barter and grants of goods and services are included. The GFSM 1986 incorporates in-kind transactions only selectively and as memorandum items.

A1.171 The GFS framework includes other economic flows, which are all flows other than transactions that affect a unit’s stock position of assets, liabilities, and net worth. Other economic flows must be included to fully reconcile the balance sheet at the beginning of an accounting period with the balance sheet at the end of the period. Examples of other economic flows are price changes and the destruction of assets. By definition, other economic flows are noncash events, which means that they are not part of the GFSM 1986.

Valuation

A1.172 Assets and liabilities are valued at current market prices in the GFS framework, including debt securities that may have a different nominal value. Several assets/liabilities are valued at nominal value as proxy for market value—for example, loans generally are not traded and therefore do not have market values. They are recorded at their nominal values. In the GFSM 1986, debt securities are always valued at the amount the government is obligated to pay when the debt matures, which may differ from both the nominal value and the current market value. The GFS framework includes a provision for recording the nominal value of debt securities as a memorandum item.

Gross and Net Recording of Flows

A1.173 The presentation of flows on a gross or net basis is, for the most part, the same in the GFS framework and the GFSM 1986. The major exception pertains to the sales and expenses of market establishments. Generally speaking, a market establishment is a part of a general government unit that is situated in a single location and whose primary activity is to produce and sell goods and services at economically significant prices. In concept, it is possible to compile complete accounting records with respect to an establishment’s productive activity, including sales and the costs of production. In the GFS framework, the sales and costs of production of market establishments are presented on a gross basis as revenue and expense, respectively. In the GFSM 1986, the net value of sales less the costs of production is recorded as revenue if positive and as expenditure if negative.

Integration of Flows and Stocks

A1.174 The GFS framework is fully integrated—that is, the stock position at the end of a reporting period can be derived from the stock position at the beginning of the reporting period and the flows occurring during the period. As a result of this integration, all events that affect the financial performance, financial position, or liquidity situation of the general government sector are included. In the GFSM 1986, the stock positions included are limited to debt liabilities. The changes in the stock position of debt liabilities cannot be reconciled with the flows recorded. Flows in the GFSM 1986 represent only cash flows and will not account for changes in stocks related to flows other than cash, such as discounts allowed, debt assumption, debt forgiveness, etc. Supplementary tables are included that indicate the additional data that would be needed to complete the reconciliation.

Definitions and Classifications

A1.175 Revenue in the GFS framework is an increase in net worth resulting from a transaction. Thus, revenue includes grants but excludes proceeds from disposals of nonfinancial assets. In the GFSM 1986, revenue is defined as the set of all nonrepayable receipts other than grants. Thus, revenue includes proceeds from disposals of nonfinancial assets.

A1.176 Similarly, expense in the GFS framework is a decrease in net worth resulting from a transaction. Purchases of nonfinancial assets do not affect net worth and are not considered expense transactions. The term “expense” replaces “expenditure” from the GFSM 1986 because it is more closely associated with the accrual basis of recording and indicates that transactions in nonfinancial assets are excluded. Expenditure is defined in the GFSM 1986 as the set of all nonrepayable payments and includes purchases of nonfinancial assets.

A1.177 The classifications of revenue are substantially different in the two manuals. Revenue in the GFSM 1986 is classified as tax, nontax, or capital revenue. Grants form a separate, nonrevenue category of receipts. In the GFS framework, revenue is subdivided into taxes, social contributions, grants, and other revenue. In more detail:

• Taxes exclude social contributions in the revised GFS framework, but include them in the GFSM 1986.

• Social contributions in the GFS framework include social security contributions, which are classified as taxes in the GFSM 1986, and other social contributions to social insurance schemes operated for the benefit of government employees, which are classified as nontax revenue in the GFSM 1986.

• Other revenue in the GFS framework includes most of the category of nontax revenue in the GFSM 1986 plus capital transfers, which are classified as capital revenue in the GFSM 1986.

• Capital revenue in the GFSM 1986 consists of sales of nonfinancial assets and receipts of capital transfers. Sales of assets are not revenue in the GFS framework, but capital transfers are classified as revenue.

A1.178 Expense/expenditure is classified in two ways—by function and by economic type of transaction—in both the GFS framework and the GFSM 1986. The classification by function in both manuals is the Classification of Functions of Government (COFOG) published by the United Nations. The GFS framework incorporates the 2000 edition of COFOG.

A1.179 The classification of expense by economic type in the GFS framework is broadly similar to the corresponding classification in the GFSM 1986. The primary exception is that acquisitions of nonfinancial assets are not considered an expense in the GFS framework. Other changes include the following:

• Consumption of fixed capital is an expense in the GFS framework. As a noncash expense, it is excluded from the GFSM 1986.

• Transfer payments are classified by type of payment in the GFS framework. In the GFSM 1986, they are classified by the sector receiving the payment. The major types of transfer payments are subsidies, grants, social benefits, transfers not elsewhere classified, and premiums, fees, and claims related to nonlife insurance and standardized guarantee schemes.

A1.180 A new classification is dedicated to net investment in nonfinancial assets resulting from transactions because they are not classified as revenue or expense in the GFS framework. The classification follows the parallel classification in the 2008 SNA, which is based on the type of asset involved in the transaction. This classification includes consumption of fixed capital because it represents a decline in the value of fixed assets.

A1.181 “Lending minus repayments” is a category of transactions in the GFSM 1986 representing the net acquisition of financial assets for policy purposes, and is classified together with expenditure for the calculation of the overall deficit/surplus. In the GFS framework, these transactions are classified together with other transactions in financial assets. However, if supplementary information is available on policy lending, both the overall balance and policy lending can be calculated from GFS source data, as a fiscal indicator (see annex to Chapter 4, Table 4A.2).

Balancing Items

A1.182 Several new balancing items are introduced in the GFS framework, a consequence of the view that fiscal analysis must include a variety of considerations and that no single measure is sufficient for all purposes. In the GFSM 1986, the analytic framework is focused on a single balancing item, the overall deficit/surplus, although provision is made for other balancing items.

A1.183 The analytic framework of the integrated GFS features several balancing items. The Statement of Operations includes the following:

• The net operating balance, which is defined as revenue minus expense and represents the change in net worth resulting from transactions

• Net lending/net borrowing, which is defined as the net acquisition of financial assets minus the net incurrence of liabilities, or, alternatively, as the net operating balance minus the net investment in nonfinancial assets; it is also equal to the gross operating balance minus gross investment in nonfinancial assets.

A1.184 The Statement of Sources and Uses of Cash includes the cash surplus/deficit to indicate the balance of cash flows from government operations and the gross investment in nonfinancial assets. It is similar to the overall deficit/surplus of the GFSM 1986 except that net cash outflows from policy lending (lending minus repayment of policy-related transactions in financial assets or liabilities) are not subtracted.

A1.185 Another balancing item in the GFS framework is the overall balance, defined as net lending/net borrowing adjusted through the rearrangement of transactions in assets and liabilities that are deemed to be for public policy purposes. Notably, policy lending is added to expense while privatization proceeds (including fixed asset sales) are included as transactions in financial items in calculating the overall fiscal balance. It is the equivalent of the overall deficit/surplus in the GFSM 1986, but determined using the accrual basis of recording.

A1.186 Other balancing items in the GFS framework include net worth, net financial worth, the change in net worth, the change in net financial worth (all related to the balance sheet), the change in net worth from other economic flows, the primary balance, and savings. There are no similar balancing items in the GFSM 1986.

Harmonization with Other Statistical Systems

A1.187 The GFS framework is harmonized with other international macroeconomic statistical systems. That is, the basic concepts, definitions, and conventions are the same to the extent possible, given the objective of the GFS framework to provide data that support fiscal analysis. The other statistical manuals with which the GFS framework has been harmonized are the 2008 SNA, the sixth edition of the IMF’s Balance of Payments and International Investment Position Manual, and the IMF’s Monetary and Financial Statistics Manual (in the process of being updated). In contrast, the GFSM 1986 follows the 1968 version of the SNA where possible, but the degree of harmonization is much less, primarily because of the use of the cash basis of recording in the GFSM 1986. Appendix 7 of this Manual provides additional information on linkages of the GFS framework with other macroeconomic statistics.

Social Assistance

A2.25 Social assistance provides social protection benefits to all persons who are in need without any formal requirement to participate as evidenced by the payment of contributions. The eligibility to receive social benefits is not conditional on the payment of contributions by the protected persons or by other parties on their behalf. There may, however, be specific eligibility criteria, such as a “means test,” where the expression indicates a maximum qualifying level of income or assets. The benefits payable by such an arrangement are social assistance benefits. Social assistance benefits (272) are transfers payable in cash or in kind to households to meet the same needs as social insurance benefits but are not made under a social insurance scheme (see paragraph A2.30).

A2.26 All social assistance is organized and operated by government units and NPISHs. The benefits are payable to households, out of the unit’s general resources, according to the specified criteria. Eligibility is purely related to the criteria stipulated in the social protection arrangement.

A2.27 Social assistance benefits may be provided in cash or in kind. The classification of this expense is further discussed in paragraphs 6.101–6.102, and Table A2.1 illustrates the recording of flows related to social assistance. Social assistance benefits in kind are recorded when:

^{Table A2.1}

Illustrative Recording of Flows Related to Social Assistance

¹In a cash reporting environment, the expense will be recorded at the time of the cash flow. In an accrual reporting environment, an other account payable should be recorded in cases where the payment is not made when the eligibility criteria have been met.

²The flow of inventories will be recorded only in an inventory accounting system.

^{Table A2.1}

Illustrative Recording of Flows Related to Social Assistance

	Description	Debit		Credit
1.1 Government provides benefits payable to qualifying persons who have met the eligibility criteria of a social assistance arrangement
	Assistance to households in cash	2721	Social assistance benefits in cash	3212/3318	Currency and deposits / Other accounts payable1
1.2 Government provides goods purchased from market producers to persons who have met the eligibility criteria of a social assistance arrangement
	Government acquires the goods	31224	Inventories (goods for resale)2	3212/3318	Currency and deposits / Other accounts payable1
	Government provides goods	2722	Social assistance benefits in kind	31224	Inventories (goods for resale)2
1.3 Government reimburses market providers or households for goods and services acquired from market entities in accordance with the conditions of a social assistance arrangement
	Government reimburses providers or households	2722	Social assistance benefits in kind	3212/3318	Currency and deposits / Other accounts payable1
1.4 Government produces and provides goods or services to the population in accordance with the condition of a social assistance arrangement
	The operational costs incurred in the production of the goods and services are recorded as relevant	21, 22, 23	Compensation of employees, use of goods and services, and consumption of fixed capital	3212/3318	Currency and deposits / Other accounts payable1

¹In a cash reporting environment, the expense will be recorded at the time of the cash flow. In an accrual reporting environment, an other account payable should be recorded in cases where the payment is not made when the eligibility criteria have been met.

²The flow of inventories will be recorded only in an inventory accounting system.

View Table

^{Table A2.1}

Illustrative Recording of Flows Related to Social Assistance

	Description	Debit		Credit
1.1 Government provides benefits payable to qualifying persons who have met the eligibility criteria of a social assistance arrangement
	Assistance to households in cash	2721	Social assistance benefits in cash	3212/3318	Currency and deposits / Other accounts payable1
1.2 Government provides goods purchased from market producers to persons who have met the eligibility criteria of a social assistance arrangement
	Government acquires the goods	31224	Inventories (goods for resale)2	3212/3318	Currency and deposits / Other accounts payable1
	Government provides goods	2722	Social assistance benefits in kind	31224	Inventories (goods for resale)2
1.3 Government reimburses market providers or households for goods and services acquired from market entities in accordance with the conditions of a social assistance arrangement
	Government reimburses providers or households	2722	Social assistance benefits in kind	3212/3318	Currency and deposits / Other accounts payable1
1.4 Government produces and provides goods or services to the population in accordance with the condition of a social assistance arrangement
	The operational costs incurred in the production of the goods and services are recorded as relevant	21, 22, 23	Compensation of employees, use of goods and services, and consumption of fixed capital	3212/3318	Currency and deposits / Other accounts payable1

¹In a cash reporting environment, the expense will be recorded at the time of the cash flow. In an accrual reporting environment, an other account payable should be recorded in cases where the payment is not made when the eligibility criteria have been met.

²The flow of inventories will be recorded only in an inventory accounting system.

• Government provides directly to the households goods and services purchased from market producers.

• Market entities provide goods and services directly to households, with the government providing reimbursement either directly to the provider or to the household for expenses incurred. Although households are reimbursed in cash for eligible purchases of goods and services, the transaction should be recorded as social assistance benefits in kind.⁸

A2.28 A distinction should be made between social assistance benefits and certain other expense categories incurred by government—notably:

• When a government unit produces the goods and services provided to households as social assistance benefits, they are not recorded as social benefits but rather by type of expense incurred in producing these goods and services: compensation of employees (21), use of goods and services (22), and consumption of fixed capital (23).⁹

• If a government unit reimburses corporations for the cost of goods and services provided to targeted social assistance beneficiaries, the transfers are recorded as social assistance benefits in kind. These transfers to corporations should be distinguished from subsidies (25), which are transfers to enterprises intended to reduce prices or increase the provision of goods and services for the general population.

• Social assistance benefits do not include transfers payable in response to events or circumstances that are not normally covered by social insurance schemes (see paragraph A2.10).

A2.29 Typically, social assistance benefits will be recorded on an accrual basis as an expense when all eligibility criteria have been met and the benefits become payable. Although some benefits, such as disability or maternity payments, may be payable over several reporting periods, no liability for the future payments of social assistance benefits should be recorded on the balance sheet of government. Other accounts payable will be recognized only in cases where a benefit accrued but remained unpaid at the end of a reporting period.¹⁰ However, to increase transparency and allow an analysis of the sustainability of social assistance policies, an estimate of the present value of social assistance benefits that have already been earned, according to the existing laws and regulations, but are payable in the future, could be calculated in a manner similar to the liabilities of an employment-related insurance scheme.

Social Insurance Schemes

A2.30 Social insurance schemes provide social protection and require formal participation by the beneficiaries, evidenced by the payment of contributions (actual or imputed). These schemes are organized in such a way that a third party, usually an employer or the government, encourages or obliges individuals to participate in a scheme that provides benefits for a number of identified circumstances, including pensions in retirement. Social insurance schemes have much in common with direct insurance (see paragraph A4.68) and may be run by insurance corporations. The payment of contributions (corresponding to premiums in the case of direct insurance) and benefits (corresponding to claims in the case of direct insurance) is recorded according to the nature of the scheme. Participation is usually linked to employment, and contributions are payable either by the participants, an employer, or both. Therefore, a social insurance scheme is an insurance scheme for which the following two conditions are satisfied:

• The benefits receivable are conditional on participation in the scheme and constitute social benefits.

• At least one of the following three conditions is met:

  • Participation in the scheme is obligatory either by law or under the terms and conditions of employment of an employee, or group of employees.

  • The scheme is a collective one operated for the benefit of a designated group of workers, whether employed or unemployed, participation being restricted to members of that group.

  • An employer makes a contribution (actual or imputed) to the scheme on behalf of an employee, regardless of whether the employee also makes a contribution.

A2.31 A social insurance contribution is the amount payable to a social insurance scheme in order for a designated beneficiary to be entitled to receive the social benefits covered by the scheme. A social insurance benefit is a social benefit payable because the beneficiary participates in a social insurance scheme and the identified circumstances have occurred.

A2.32 As indicated in paragraph A2.22, the types of beneficiaries covered by the social insurance scheme determine the next level in the typology of this scheme (see Figure A2.2). The individuals or households eligible to receive social insurance benefits are either a group of employees, the general population, or a large segment of the general population. Social security schemes are social insurance schemes that cover the community as a whole, or large sections of the community, and are imposed and controlled by government units. In contrast, as indicated in paragraph A2.40, social insurance schemes in which employers provide social insurance benefits only to their employees, former employees, or their beneficiaries are referred to as other employment-related social insurance schemes. Where the same scheme covers the general population and government employees, the scheme is treated as a social security scheme. However, if the conditions for participation and benefits payable, as determined by the employment contract, differ from those of the social security scheme for nongovernment employee participants, an employment-related scheme exists and the flows and stock positions of the two schemes should be distinguished within the social security fund (see paragraph 2.102).

Social security schemes

A2.33 Social security schemes are social insurance schemes covering the community as a whole, or large sections of the community, and are imposed and controlled by government units. These schemes cover a wide variety of programs, providing benefits in cash or in kind for old age, invalidity or death, survivors, sickness and maternity, work injury, unemployment, family allowance, health care, etc. There is not necessarily a direct link between the amount of the contribution payable by an individual and the benefits receivable.

A2.34 Social security schemes that are organized separately from the other activities of government units, hold their assets and liabilities separately from the latter, and engage in financial transactions on their own account qualify as institutional units. These institutional units are described as social security funds. A social security fund is a particular kind of government unit that is devoted to the operation of one or more social security schemes. These special types of government units are identified separately in a subsector to allow for the alternative methods of constructing subsectors of the general government sector (see paragraph 2.78). The existence of a social security fund depends on its organization as a separate institutional unit, not on other characteristics of the scheme, such as types of benefits provided or sources of finance.

A2.35 Not all social security schemes are operated by social security funds. Where a separate social security fund does not exist, the transactions of the social security scheme would be reported as an integral part of the transactions of the government unit that controls operations of the social security scheme. Social security schemes can therefore be operated by government units that are not social security funds. Consequently, statistics for the social security funds subsector may not include all social security schemes. If a social security scheme is not a separate institutional unit, however, there may be separate accounts to manage the scheme’s finances, which would permit compiling supplementary statistics on social security activities with broader coverage than that of the social security subsector.

A2.36 By definition, social security schemes are contributory—participants in the scheme are required to make regular contributions to be eligible to receive benefits for themselves or their dependents. The primary receipts of social security schemes are social security contributions. As shown in Table 5.1 in Chapter 5, social security contributions are classified according to their source, which may be employers or households. Participation in social security schemes can be compulsory or voluntary. Further breakdown in the classification of these social contributions would allow a distinction between contributions receivable in cash and in kind, and between compulsory and voluntary contributions. In addition to social contributions, social security schemes may receive grants from general government resources and may earn property income from the investment of their assets.

A2.37 Social security benefits [GFS] (271) payable are current transfers and are classified as one of the social benefits categories. These can further be classified as being payable in cash or in kind (see Table 6.1). Social security benefits in kind can be provided to beneficiaries in the same ways as social assistance benefits in kind (see paragraphs A2.27–A2.28). Table A2.2 illustrates the recording of some of the flows related to social security schemes.

^{Table A2.2}

Illustrative Recording of Flows Related to Social Security Schemes

Note: The net implicit obligation for future social security benefits should be recorded as a memorandum item (see paragraph 7.261).

¹In a cash reporting environment, the revenue/expense will be recorded at the time of the cash flow. In an accrual reporting environment, an other account receivable/payable should be recorded in cases where the payment is not made when the eligibility criteria have been met.

²The flow of inventories will be recorded only in an inventory accounting system. In a cash reporting environment, social benefits in kind will not be recorded. The purchases of goods and services distributed as social benefits in kind will be included in purchases of goods and services (22).

^{Table A2.2}

Illustrative Recording of Flows Related to Social Security Schemes

	Description	Debit		Credit
2.1 The government social security scheme receives contributions from various contributors
	Social security contributions receivable from employees, self-employed, and unemployed	3212 / 3218	Currency and deposits / Other accounts receivable1	1211 / 1213	Social security contributions: Employee contributions/self-employed, and unemployed
	Social security contributions receivable from employers	3212 / 3218	Currency and deposits / Other accounts receivable1	1212	Social security contributions: Employer contributions
2.2 The government as employer makes contributions to social security schemes on behalf of its employees
	Government contributions as employer become payable	2121	Actual employers’ social contributions	3212/3318	Currency and deposits / Other accounts payable1
2.3 The government social security scheme provides social security benefits to the eligible beneficiaries in accordance with the conditions of the scheme
	Social security scheme benefits become payable	2711	Social security benefits in cash	3212/3318	Currency and deposits / Other accounts payable1
2.4 The government social security scheme provides goods purchased from market producers to qualifying beneficiaries
	Social security scheme acquires the goods	31224	Inventories (goods for resale)2	3212/3318	Currency and deposits / Other accounts payable1
	Social security scheme provides goods to households	2712	Social security benefits in kind	31224	Inventories (goods for resale)2
2.5 The government social security scheme reimburses market providers or households for goods and services provided by market entities to eligible beneficiaries in accordance with the conditions of the scheme
	Social security scheme reimburses providers or households	2712	Social security benefits in kind	3212/3318	Currency and deposits / Other accounts payable1
2.6 The government social security scheme produces and provides goods or services to the population in accordance with the conditions of the scheme
	No social security benefits are recorded in GFS—the operational costs incurred in the production of the goods and services are recorded as relevant	21, 22, 23	Compensation of employees, use of goods and services, and consumption of fixed capital	3212/3318	Currency and deposits / Other accounts payable1

Note: The net implicit obligation for future social security benefits should be recorded as a memorandum item (see paragraph 7.261).

¹In a cash reporting environment, the revenue/expense will be recorded at the time of the cash flow. In an accrual reporting environment, an other account receivable/payable should be recorded in cases where the payment is not made when the eligibility criteria have been met.

²The flow of inventories will be recorded only in an inventory accounting system. In a cash reporting environment, social benefits in kind will not be recorded. The purchases of goods and services distributed as social benefits in kind will be included in purchases of goods and services (22).

View Table

^{Table A2.2}

Illustrative Recording of Flows Related to Social Security Schemes

	Description	Debit		Credit
2.1 The government social security scheme receives contributions from various contributors
	Social security contributions receivable from employees, self-employed, and unemployed	3212 / 3218	Currency and deposits / Other accounts receivable1	1211 / 1213	Social security contributions: Employee contributions/self-employed, and unemployed
	Social security contributions receivable from employers	3212 / 3218	Currency and deposits / Other accounts receivable1	1212	Social security contributions: Employer contributions
2.2 The government as employer makes contributions to social security schemes on behalf of its employees
	Government contributions as employer become payable	2121	Actual employers’ social contributions	3212/3318	Currency and deposits / Other accounts payable1
2.3 The government social security scheme provides social security benefits to the eligible beneficiaries in accordance with the conditions of the scheme
	Social security scheme benefits become payable	2711	Social security benefits in cash	3212/3318	Currency and deposits / Other accounts payable1
2.4 The government social security scheme provides goods purchased from market producers to qualifying beneficiaries
	Social security scheme acquires the goods	31224	Inventories (goods for resale)2	3212/3318	Currency and deposits / Other accounts payable1
	Social security scheme provides goods to households	2712	Social security benefits in kind	31224	Inventories (goods for resale)2
2.5 The government social security scheme reimburses market providers or households for goods and services provided by market entities to eligible beneficiaries in accordance with the conditions of the scheme
	Social security scheme reimburses providers or households	2712	Social security benefits in kind	3212/3318	Currency and deposits / Other accounts payable1
2.6 The government social security scheme produces and provides goods or services to the population in accordance with the conditions of the scheme
	No social security benefits are recorded in GFS—the operational costs incurred in the production of the goods and services are recorded as relevant	21, 22, 23	Compensation of employees, use of goods and services, and consumption of fixed capital	3212/3318	Currency and deposits / Other accounts payable1

Note: The net implicit obligation for future social security benefits should be recorded as a memorandum item (see paragraph 7.261).

¹In a cash reporting environment, the revenue/expense will be recorded at the time of the cash flow. In an accrual reporting environment, an other account receivable/payable should be recorded in cases where the payment is not made when the eligibility criteria have been met.

²The flow of inventories will be recorded only in an inventory accounting system. In a cash reporting environment, social benefits in kind will not be recorded. The purchases of goods and services distributed as social benefits in kind will be included in purchases of goods and services (22).

A2.38 Social security schemes are characterized by a degree of contingent reciprocity. Social security contributions secure entitlements to benefits that are contingent on the event underlying the social risk occurring. Nonetheless, the amount and timing of receipts of benefits by beneficiaries (if any) are subject to various eligibility criteria without necessarily a direct relationship between the amount of the contribution payable by an individual and the benefits receivable. Therefore, the link between benefits and contributions is not considered sufficiently strong to give rise to a financial claim on the part of contributors. The potential individual claims of contributors (and therefore the corresponding government obligations) are regarded as contingent. Also, because social security benefits can be changed at will by the government or legislature as part of its overall economic policy, there is uncertainty about the eventual payment or level of payment of these social benefits.¹¹ As a result, in GFS, no liabilities are associated with the potential future claims on social security schemes. An expense is recorded only when payment of the benefits is due.

A2.39 However, a high expectation exists that social security benefits earned according to the existing laws will be payable in the future. Therefore, an estimate equal to the net implicit obligations for future social security benefits should be presented as a memorandum item to the Balance Sheet, and details of it presented as a supplementary statement, the Summary Statement of Explicit Contingent Liabilities and Net Implicit Obligations for Future Social Security Benefits (see paragraphs 4.47 and 7.261).

Other employment-related social insurance schemes

A2.40 Other employment-related social insurance schemes derive from an employer-employee relationship in the provision of pension entitlement and other social benefit to employees as part of the conditions of employment. By definition, these schemes are contributory and, for government or public sector units, protect only their own employees and dependents. The provision of social insurance benefits by government to its own employees is considered to be part of an actual or implicit contract between the government, as employer, and the employees, to compensate them for the provision of their labor services. Therefore, employment-related social insurance schemes give rise to requited expense transactions for government when the social contributions became payable. To accurately reflect the accrued costs of employment, the actual and imputed social insurance contributions should be recorded as employers’ social contributions (212) in the expense category for compensation of employees (21) (see Table 6.1).

Employment-related pensions and other retirement benefit schemes

A2.41 Employment-related social insurance schemes that provide pensions and other retirement benefits can be organized as a funded or unfunded social insurance scheme. Table A2.3 illustrates the recording of some of the flows of employment-related pensions.

^{Table A2.3}

Illustrative Recording of Flows Related to Employment-Related Pension Schemes

¹In a cash reporting environment, the revenue/expense will be recorded at the time of the cash flow. In an accrual reporting environment, an other account receivable/payable should be recorded in cases where the payment is not made when the eligibility criteria have been met.

²These disbursements will primarily be reinvested in the fund as social contributions, while the portion that will meet the cost of operating the fund should be recorded as the purchases of a financial service from the pension fund.

^{Table A2.3}

Illustrative Recording of Flows Related to Employment-Related Pension Schemes

	Description	Debit		Credit
3.1 The government makes pension contributions on behalf of its employees to an autonomous pension fund maintained by an insurance company (i.e., it is part of the private financial corporation sector)
	Government pays social contributions as component of compensation of employees	2121	Actual employers’ social contributions	3212/3318	Currency and deposits / Other accounts payable1
3.2 The government makes pension contributions on behalf of its employees to an autonomous pension fund set up by government as a separate institutional unit (i.e., it is part of the public financial corporation sector)
	Government pays social contributions as component of compensation of employees	2121	Actual employers’ social contributions	3212/3318	Currency and deposits / Other accounts payable1
3.3 The government operates a funded nonautonomous pension fund for its employees (i.e., a separate reserve is maintained in the government account but it is not an institutional unit)
	Government pays social contributions as component of compensation of employees	2121	Actual employers’ social contributions	3212/3318	Currency and deposits / Other accounts payable1
	Receipts of social contributions by the pension fund account giving rise to a liability	3212 / 3218	Currency and deposits / Other accounts receivable1	3316	Insurance, pension, and standardized guarantee schemes
	Government, as owner of the pension fund account, receives property income on the investments of the pension fund	3212 / 3218	Currency and deposits / Other accounts receivable1	1411 / 1412	Interest Dividends
	Government attributes the property income to the policy holders2	2813	Property expense for investment income disbursements	3316	Insurance, pension, and standardized guarantee schemes
	Government provides pension benefit payments to eligible beneficiaries	3316	Insurance, pension, and standardized guarantee schemes	3212/3318	Currency and deposits / Other accounts payable1
3.4 Government operates an unfunded nonautonomous pension fund for its employees (i.e., there are no actual contributions and no separate reserve is maintained in the government account)
	Government provides pension benefit payments to eligible beneficiaries: cash basis of recording	2731	Employment-related social benefits in cash	3212	Currency and deposits
	Imputed social contributions as component of compensation of employees: accrual basis of recording	2122	Imputed employers’ social contributions	3316	Insurance, pension, and standardized guarantee schemes
	Government provides pension benefit payments to eligible beneficiaries: accrual basis of recording	3316	Insurance, pension, and standardized guarantee schemes	3212 / 3318	Currency and deposits / Other accounts payable1
	Government recognizes the increase in liability for benefit entitlements due to time passing	2813	Property expense for investment income disbursements	3316	Insurance, pension, and standardized guarantee schemes
3.5 All defined-benefit schemes can also be subject to other economic flows
	Pension liabilities increase due to unilateral changes in conditions of the scheme	5	Other changes in the volume of assets and liabilities	5316	Insurance, pension, and standardized guarantee schemes
	Pension liabilities increase due to changes in interest rates used to calculate the present value of the liability	4	Holding gains/losses	4316	Insurance, pension, and standardized guarantee schemes

¹In a cash reporting environment, the revenue/expense will be recorded at the time of the cash flow. In an accrual reporting environment, an other account receivable/payable should be recorded in cases where the payment is not made when the eligibility criteria have been met.

²These disbursements will primarily be reinvested in the fund as social contributions, while the portion that will meet the cost of operating the fund should be recorded as the purchases of a financial service from the pension fund.

View Table

^{Table A2.3}

Illustrative Recording of Flows Related to Employment-Related Pension Schemes

	Description	Debit		Credit
3.1 The government makes pension contributions on behalf of its employees to an autonomous pension fund maintained by an insurance company (i.e., it is part of the private financial corporation sector)
	Government pays social contributions as component of compensation of employees	2121	Actual employers’ social contributions	3212/3318	Currency and deposits / Other accounts payable1
3.2 The government makes pension contributions on behalf of its employees to an autonomous pension fund set up by government as a separate institutional unit (i.e., it is part of the public financial corporation sector)
	Government pays social contributions as component of compensation of employees	2121	Actual employers’ social contributions	3212/3318	Currency and deposits / Other accounts payable1
3.3 The government operates a funded nonautonomous pension fund for its employees (i.e., a separate reserve is maintained in the government account but it is not an institutional unit)
	Government pays social contributions as component of compensation of employees	2121	Actual employers’ social contributions	3212/3318	Currency and deposits / Other accounts payable1
	Receipts of social contributions by the pension fund account giving rise to a liability	3212 / 3218	Currency and deposits / Other accounts receivable1	3316	Insurance, pension, and standardized guarantee schemes
	Government, as owner of the pension fund account, receives property income on the investments of the pension fund	3212 / 3218	Currency and deposits / Other accounts receivable1	1411 / 1412	Interest Dividends
	Government attributes the property income to the policy holders2	2813	Property expense for investment income disbursements	3316	Insurance, pension, and standardized guarantee schemes
	Government provides pension benefit payments to eligible beneficiaries	3316	Insurance, pension, and standardized guarantee schemes	3212/3318	Currency and deposits / Other accounts payable1
3.4 Government operates an unfunded nonautonomous pension fund for its employees (i.e., there are no actual contributions and no separate reserve is maintained in the government account)
	Government provides pension benefit payments to eligible beneficiaries: cash basis of recording	2731	Employment-related social benefits in cash	3212	Currency and deposits
	Imputed social contributions as component of compensation of employees: accrual basis of recording	2122	Imputed employers’ social contributions	3316	Insurance, pension, and standardized guarantee schemes
	Government provides pension benefit payments to eligible beneficiaries: accrual basis of recording	3316	Insurance, pension, and standardized guarantee schemes	3212 / 3318	Currency and deposits / Other accounts payable1
	Government recognizes the increase in liability for benefit entitlements due to time passing	2813	Property expense for investment income disbursements	3316	Insurance, pension, and standardized guarantee schemes
3.5 All defined-benefit schemes can also be subject to other economic flows
	Pension liabilities increase due to unilateral changes in conditions of the scheme	5	Other changes in the volume of assets and liabilities	5316	Insurance, pension, and standardized guarantee schemes
	Pension liabilities increase due to changes in interest rates used to calculate the present value of the liability	4	Holding gains/losses	4316	Insurance, pension, and standardized guarantee schemes

¹In a cash reporting environment, the revenue/expense will be recorded at the time of the cash flow. In an accrual reporting environment, an other account receivable/payable should be recorded in cases where the payment is not made when the eligibility criteria have been met.

²These disbursements will primarily be reinvested in the fund as social contributions, while the portion that will meet the cost of operating the fund should be recorded as the purchases of a financial service from the pension fund.

A2.42 There are three types of employment-related pension schemes:

• A nonautonomous pension scheme that is therefore regarded as an integral part of the employer

• A separate institutional unit that operates a pension scheme that is therefore regarded as an autonomous pension fund

• A scheme managed by an insurance enterprise on behalf of the employer regarded as a financial corporation.

A2.43 The manner in which the employment-related pension scheme is organized determines the recording of the associated transactions. Insurance enterprises and autonomous pension funds are units of the financial corporations sector, while nonautonomous pension funds and unfunded employment-related social insurance schemes are units of the general government sector.

Nonautonomous employment-related pension schemes

A2.44 Nonautonomous social insurance schemes are operated by the employer, and these schemes are usually unfunded schemes because they are organized by the employer without assigning specific accounts or otherwise creating special reserves for the payment of benefits. Instead, the benefits are payable from the employer’s general resources.

A2.45 A nonautonomous pension fund for public sector employees does not meet the criteria to be considered an institutional unit, and is therefore deemed to be included in the unit that operates the scheme. This is also the case when the employer has established segregated reserves, but the organization and operations of the scheme do not meet the criteria to be an institutional unit (see paragraph 2.22). The economic flows and stock positions of nonautonomous employment-related pension funds are integrated with those of the controlling employer. All of the assets, liabilities, transactions, and other economic events of the pension fund are combined with the corresponding items of the employer operating the scheme, which may be a general government unit or a public corporation. The treatment of the assets, liabilities, transactions, and other economic events related to the nonautonomous pension fund is similar to that of an autonomous pension fund. However, in this case, the contributions payable as a component of compensation of employees, the receipt of the contributions by the pension scheme, and the associated liabilities are recorded by the same level of government. These flows are not eliminated in consolidation because households are regarded as, respectively, the recipient and payer. These flows should be rerouted as described in paragraph 3.28.

A2.46 In accordance with the accrual basis of recording, the amount that would be required to cover the accrual of the social benefits must be imputed. This will also ensure that the full cost of employment is accounted for by recording the imputed social contributions, with a counterpart entry that creates the associated liability for these pension benefits. This imputation recognizes the economic flows during the period in which the underlying economic event takes place. It also improves transparency because it records the cost of providing the social benefits to its employees and flags the risks associated with the future demands on resources. When these pension benefits are paid, the payment is recorded as a reduction in liabilities.¹²

Autonomous employment-related pension schemes

A2.47 To be regarded as autonomous, the entity responsible for the employment-related pension scheme must have the characteristics of an institutional unit (see paragraph 2.22). These institutional units are considered to provide financial services (i.e., insurance/ pensions) to the household sector, and are therefore classified in the financial corporations sector. They are classified as either private or public financial corporations, depending on whether they are controlled by the private or public sectors (see Box 2.2).

A2.48 An employer may contract with a third party to administer the pension funds for its employees. The employment-related pension scheme is then managed through an insurance enterprise or an autonomous pension fund. The employer’s primary responsibility with respect to the scheme is to pay the social contributions on behalf of its employees. The government unit records the payment as part of compensation of employees, under actual social contributions (see Table 6.1 and paragraph 6.21). No other transactions are recorded by the government unit as employer, as it has no direct liability for future provision of social benefits.

A2.49 However, in cases where the employer continues to determine the terms of the pension schemes and retains the responsibility for any deficit in funding, as well as the right to retain any excess funding, the employer is described as the pension manager and the unit working under the direction of the pension manager is described as the pension administrator. If the agreement between the employer and the third party is such that the employer passes the risks and responsibilities for any deficit in funding to the third party in return for the right of the third party to retain any excess, the third party becomes the pension manager as well as the administrator.

A2.50 When the pension manager is a unit different from the administrator, and the responsibility for any deficit, or claims on any excess, rests with the pension manager, the claim of the pension fund on the pension manager should be shown under the liability, claims of pension funds on pension managers (63064). By contrast, if the pension fund makes more investment income from the pension entitlements it holds than necessary to cover the increase in entitlements, the difference is payable to the pension manager of the scheme. The pension manager records this claim on the pension administrator as a financial asset, claims of pension funds on pension managers (62064).¹³

A2.51 If government controls the financial corporation that manages the employment-related pension scheme for government employees, the corporation will be part of the public financial sector, and the relevant flows and stock positions would be recorded when compiling GFS for the public sector. The receipt of social contributions by this insurance enterprise or pension fund gives rise to a liability, classified in the financial instrument insurance, pensions, and standardized guarantee schemes (6306), and more specifically in pension entitlements (63063). The liability originates from the obligation to pay future pension benefits—any subsequent payment of the benefits will be recorded as a reduction in this liability. Although the social contributions are payable directly by the employer to the financial corporation, they are recorded in GFS as if payable by the employer to households as compensation of employees: households in turn pay the contributions to the financial corporation. Because of this rerouting, these transactions should not be eliminated in consolidation of the public sector (see paragraph 3.28).

A2.52 For the financial corporation, revenue from the investment of the financial reserves should be classified as the relevant category of property income. However, since these resources are considered to give rise to an asset of the policyholders, such income should be attributed to policyholders. An expense is recorded, classified as property expense for investment income disbursements (2813), with a counterpart entry that increases the liability to reflect the policyholders’ increase in claims for pension entitlements.

A2.53 Autonomous employment-related pension schemes can be organized as a defined-benefit pension scheme or a defined-contribution pension scheme.

Defined-benefit pension schemes

A2.54 A defined-benefit pension scheme is one where the benefits payable to an employee on retirement are determined by the use of a formula, either alone or as a minimum amount payable. The level of benefits promised to participating employees is determined by a formula embodied in the terms of the social insurance scheme. These terms are usually based on factors such as the participants’ length of service and salary.¹⁴ The calculation of imputed contributions and net present value of future benefits requires advanced actuarial techniques, beyond the responsibility of GFS compilers. The present value of future benefit entitlements increases each period because there is one fewer period over which it is discounted. This increase should be a transaction in property expense for investment income disbursements (2813) (see paragraph 6.113). Furthermore, a holding gain should be recorded with respect to the liability in order to reflect any change in the value of the liability because of a change in the interest rate used to discount the future benefits. A change in the liability resulting from a change in the benefit structure should always be treated as an other volume change, because it does not constitute a transaction but represents a unilateral change brought about by the employer.

Defined-contribution pension schemes

A2.55 A defined-contribution pension scheme is one where the benefits payable to an employee on retirement are defined exclusively in terms of the level of the funds built up from the contributions made over the employee’s working life and the increases in value that result from the investment of these funds by the manager of the scheme. The risk of the scheme to provide an adequate retirement income is thus borne by the employee, and the benefits that will be payable depend on the assets of the fund.¹⁵ For a defined-contribution pension scheme, a pension fund is always deemed to exist.

A2.56 Contributions to a defined-contribution pension scheme are invested on behalf of the employees as future beneficiaries. The investment income on the cumulated assets of the pension fund is recorded as revenue for the fund, classified according to the nature of the respective property income revenue (usually including interest (1411), dividends (1412), or rent (1415)). The investment income is also recorded as being distributed to the beneficiaries (classified as property expense for investment income disbursements (2813)), who are deemed to reinvest the income in the pension fund as contributions. Therefore, the investment income payable on defined-contribution entitlements is equal to the investment income on the financial investments plus any net operating surplus earned by renting land or buildings owned by the fund.

A2.57 The value of the pension entitlement liability of a defined-contribution pension scheme is the market value of the financial assets held by the pension fund on behalf of the future beneficiaries. Any changes in the market value of these investments of the pension fund would include holding gains and losses. These holding gains and losses should be recorded as changes in the value of the relevant assets of the institutional unit administering the pension fund. In addition, these holding gains or losses should also be attributed to the policyholders. Therefore, a matching entry for the holding gain or losses in the liability of the pension fund toward households should be recorded.

A2.58 For a defined-contribution pension scheme, the risks and costs associated with the scheme are borne by the beneficiaries. There are no imputed contributions for defined-contribution pension schemes, unless the employer operates the scheme directly. In that case, the value of the costs of operating the scheme is treated as an imputed contribution payable to the employee as part of compensation of employees. This amount is recorded by the employer as the sale of a financial service to the employees, classified as imputed sales of goods and services (1424) (see paragraph 5.140). When the fund is operated by a unit other than the employer, the operating costs are financed from investment income retained by the fund to meet its costs and generate a profit. Therefore, in keeping with the recording of insurance, the investment income generated is treated as being attributed in full to the beneficiaries in the household sector who use part of the income to purchase a financial service from the fund, and reinvest the remainder with the fund.

A2.59 As indicated in paragraphs A2.3 and A2.21, defined-contribution schemes are similar to life insurance schemes.¹⁶ However, a scheme that may be defined in terms similar to a defined-contribution scheme, but with a guaranteed minimum benefit specified, or other hybrid schemes, should be treated as defined-benefit pension schemes in macroeconomic statistics.

Government assumption of employment-related pension obligations of other institutional units

A2.60 On occasion, large one-off transactions (lump-sum transactions) may occur between a government and another institutional unit, often a public corporation, linked to pension reforms or to privatization of the public corporations. The goal may be to make the corporation competitive, or financially more attractive, by removing existing pension liabilities from its balance sheet. This goal is achieved by government assuming the liability in exchange for an asset or assets from the other institutional unit. When the value of the asset(s) receivable is the same as the value of the liability assumed, the transaction is recorded as a transaction in financial assets and liabilities for both units involved.

A2.61 However, if the value of the asset(s) receivable by government is less than the value of the liability assumed, an expense in the form of a capital transfer from government to the corporation is recorded for the difference. The assumer (government) records an increase in liabilities for pension entitlements, an increase in the relevant financial and/or nonfinancial assets, and an expense in the form of capital transfer to the corporation (see paragraph 6.91). The corporation records a decrease in liabilities for pension entitlements, a decrease in financial and/or nonfinancial assets, and revenue in the form of a capital transfer from government.

A2.62 If the value of the asset(s) receivable is more than the value of the liability incurred, a capital transfer receivable from the corporation to the government is recorded for the difference (see paragraph 5.148). The corporation records a decrease in liabilities for pension entitlements, a decrease in financial and/or nonfinancial assets, and an expense in the form of a capital transfer to government.

A2.63 Even if the arrangement transforms the pension liability, so that it is to be administered as part of a social security fund, the initial assumption of the pension obligation should be recorded as in the foregoing paragraphs. The pension obligations absorbed by the social security fund continue to be classified as pension entitlement liabilities. These obligations are gradually extinguished as the benefits are paid out.

Employment-related nonpension social insurance schemes

A2.64 Employment-related nonpension social insurance schemes can be operated by the government or by autonomous nongovernment entities. In either case, the actual or imputed employers’ contributions are included as an expense in the compensation of employees, under social contributions. For funded schemes, the actual contributions made to the scheme are classified under actual employers’ social contributions. For unfunded schemes, the amount that would be required to purchase equivalent social benefits must be imputed by the employer, and should be classified under imputed employers’ social contributions. Where a scheme is operated by the government, a simultaneous transaction equal to the actual or imputed social contributions is recorded as revenue from the household sector back to government, and classified under other social contributions by employees. The social benefits provided by the government are classified as an expense under employment-related social benefits. Table A2.4 illustrates the recording of some of these flows of employment-related nonpension social insurance schemes.

^{Table A2.4}

Illustrative Recording of Flows Related to Employment-Related Nonpension Social Insurance Schemes

Note: The net implicit obligation for future social security benefits should be recorded as a memorandum item (see paragraph 7.261).

¹In a cash reporting environment, the revenue/expense will be recorded at the time of the cash flow. In an accrual reporting environment, an other account receivable/payable should be recorded in cases where the payment is not made when the eligibility criteria have been met.

²The flow of inventories will be recorded only in an inventory accounting system.

^{Table A2.4}

Illustrative Recording of Flows Related to Employment-Related Nonpension Social Insurance Schemes

	Description	Debit		Credit
4.1 Social insurance contributions receivable from employers and employees
	Social insurance contributions receivable from employees	3212/3218	Currency and deposits / Other accounts receivable1	1221	Other social contributions: Employee contributions
	Social insurance contributions receivable from employers	3212/3218	Currency and deposits / Other accounts receivable1	1222	Other social contributions: Employer contributions
4.2 The government as employer makes contributions to social insurance schemes on behalf of its employees
	Government contributions as employer becomes payable	2121	Actual employers’ social contributions	3212 / 3318	Currency and deposits / Other accounts payable1
4.3 Government as employer imputes contributions to the social insurance scheme where no or insufficient contributions to obtain entitlement to benefits were made
	Imputed contributions	2122	Imputed employers’ social contributions	1223	Imputed contributions
4.4 Employer social insurance scheme provides benefits to government employees
	Employer social insurance scheme pays benefits in cash	2731	Employment-related social benefits in cash	3212 / 3318	Currency and deposits / Other accounts payable1
4.5 Employer social insurance scheme provides goods purchased from market producers to employees in accordance with the conditions of the scheme
	Employer social insurance scheme acquires the goods	31224	Inventories (goods for resale)2	3212 / 3318	Currency and deposits / Other accounts payable1
	Employer social insurance scheme provides goods to households	2732	Employment-related social benefits in kind	31224	Inventories (goods for resale)2
4.6 Employer social insurance scheme reimburses market providers or households for goods and services provided by market entities in accordance with the conditions of the scheme
	Employer social insurance scheme reimburses providers or households	2732	Employment-related social benefits in kind	3212 / 3318	Currency and deposits / Other accounts payable1
4.7 Government produces and provides goods or services to their employees in accordance with an employer’s social insurance scheme
	No employer social insurance benefits are recorded in GFS—the operational costs incurred in the production of the goods and services are recorded as relevant	21, 22, 23	Compensation of employees, use of goods and services, and consumption of fixed capital	3212 / 3318	Currency and deposits / Other accounts payable1

Note: The net implicit obligation for future social security benefits should be recorded as a memorandum item (see paragraph 7.261).

¹In a cash reporting environment, the revenue/expense will be recorded at the time of the cash flow. In an accrual reporting environment, an other account receivable/payable should be recorded in cases where the payment is not made when the eligibility criteria have been met.

²The flow of inventories will be recorded only in an inventory accounting system.

View Table

^{Table A2.4}

Illustrative Recording of Flows Related to Employment-Related Nonpension Social Insurance Schemes

	Description	Debit		Credit
4.1 Social insurance contributions receivable from employers and employees
	Social insurance contributions receivable from employees	3212/3218	Currency and deposits / Other accounts receivable1	1221	Other social contributions: Employee contributions
	Social insurance contributions receivable from employers	3212/3218	Currency and deposits / Other accounts receivable1	1222	Other social contributions: Employer contributions
4.2 The government as employer makes contributions to social insurance schemes on behalf of its employees
	Government contributions as employer becomes payable	2121	Actual employers’ social contributions	3212 / 3318	Currency and deposits / Other accounts payable1
4.3 Government as employer imputes contributions to the social insurance scheme where no or insufficient contributions to obtain entitlement to benefits were made
	Imputed contributions	2122	Imputed employers’ social contributions	1223	Imputed contributions
4.4 Employer social insurance scheme provides benefits to government employees
	Employer social insurance scheme pays benefits in cash	2731	Employment-related social benefits in cash	3212 / 3318	Currency and deposits / Other accounts payable1
4.5 Employer social insurance scheme provides goods purchased from market producers to employees in accordance with the conditions of the scheme
	Employer social insurance scheme acquires the goods	31224	Inventories (goods for resale)2	3212 / 3318	Currency and deposits / Other accounts payable1
	Employer social insurance scheme provides goods to households	2732	Employment-related social benefits in kind	31224	Inventories (goods for resale)2
4.6 Employer social insurance scheme reimburses market providers or households for goods and services provided by market entities in accordance with the conditions of the scheme
	Employer social insurance scheme reimburses providers or households	2732	Employment-related social benefits in kind	3212 / 3318	Currency and deposits / Other accounts payable1
4.7 Government produces and provides goods or services to their employees in accordance with an employer’s social insurance scheme
	No employer social insurance benefits are recorded in GFS—the operational costs incurred in the production of the goods and services are recorded as relevant	21, 22, 23	Compensation of employees, use of goods and services, and consumption of fixed capital	3212 / 3318	Currency and deposits / Other accounts payable1

Note: The net implicit obligation for future social security benefits should be recorded as a memorandum item (see paragraph 7.261).

¹In a cash reporting environment, the revenue/expense will be recorded at the time of the cash flow. In an accrual reporting environment, an other account receivable/payable should be recorded in cases where the payment is not made when the eligibility criteria have been met.

²The flow of inventories will be recorded only in an inventory accounting system.

A2.65 Some employers provide nonpension social benefits directly to their employees, former employees, or dependents without involving an insurance enterprise or autonomous pension fund, and without creating a special fund or segregated reserve for the purpose. Employees may be considered as being protected against various specified social risks, even though no reserves are built up to provide for future entitlement to social security benefits. An expense for employers’ social contributions should therefore be imputed for such employees (see paragraph 6.22), equal in value to the amount of social contributions revenue needed to obtain the de facto entitlements to the accrued social benefits. These amounts take into account any actual contributions made by the employer or employee. The amounts depend not only on the levels of the benefits currently payable but also on the impact on future employer’s liabilities of demographic and actuarial factors, such as expected changes in the numbers, age distribution, and life expectancies of their present and previous employees. Therefore, the values that should be imputed for the contributions ought, in principle, to be based on the same kind of actuarial considerations that determine the levels of premiums charged by insurance enterprises.

A2.66 In practice, however, it may be difficult to estimate such imputed contributions. The government unit may make estimates itself, perhaps on the basis of the contributions payable into similar funded schemes, in order to calculate its likely liabilities in the future. Otherwise, the only practical alternative may be to use the unfunded nonpension benefits payable by government during the same reporting period as an estimate of the imputed remuneration that would be needed to cover the imputed contributions. This is a second best option as the value of the imputed contributions may diverge from the unfunded nonpension benefits actually paid in the same period, due to factors such as the changing composition and age structure of the government labor force.

Debt Forgiveness

A3.7 Debt forgiveness (or debt cancellation) is defined as the voluntary cancellation of all or part of a debt obligation within a contractual arrangement between a creditor and a debtor. With debt forgiveness, there is a mutual agreement between the parties involved and an intention to convey a benefit. In contrast, with debt write-off, there is no such agreement or intention—it is a unilateral recognition by the creditor that the amount is unlikely to be collected (see paragraphs A3.32–A3.34).³ Debt forgiven may include all or part of the principal outstanding, inclusive of any accrued interest arrears (interest that fell due for payment in the past) and any other interest costs that have accrued. Debt forgiveness includes forgiveness of some, or all, of the principal amount of a credit-linked note arising from an event affecting the entity on which the embedded credit derivative was written. Also included is forgiveness of principal that arises when the debt contract stipulates that the debt will be forgiven if a specified event occurs, such as forgiveness in the case of a type of catastrophe. Debt forgiveness does not arise from the cancellation of future interest payments that have not yet fallen due and have not yet accrued.

A3.8 Debt forgiveness is always recorded as a capital grant or transfer from the creditor to the debtor, which extinguishes the financial claim and the corresponding debt liability. A government or public sector unit may be involved in debt forgiveness as a creditor or a debtor. Market prices are the basis for valuing debt forgiveness, except for loans, where nominal value is used.

A3.9 Although no transactions are recorded for debt forgiveness under the cash basis of recording, the stock positions relating to the debt liability and the corresponding financial asset would reflect the debt forgiveness.

Debt Rescheduling and Refinancing

A3.10 Debt rescheduling and refinancing involve a change in an existing debt contract and its replacement by a new debt contract, generally with extended debt service payments.⁴ Debt rescheduling involves rearrangements on the same type of instrument, with the same principal value and the same creditor as with the old debt. Debt refinancing entails a different debt instrument, generally at a different value, and possibly with a different creditor.⁵ For example, a creditor may choose to apply the terms of a Paris Club (see PSDSG, paragraphs 10.125–10.134) agreement either through a debt rescheduling option (changing the terms and conditions of its existing claims on the debtor) or through refinancing (making a new loan to the debtor that is used to repay the existing debt).

Debt Conversion and Debt Prepayment

Debt Assumption and Debt Payments on Behalf of Others

Debt assumption

A3.26 Debt assumption is a trilateral agreement between a creditor, a former debtor, and a new debtor (typically a government unit), under which the new debtor assumes the former debtor’s outstanding liability to the creditor, and is liable for repayment of debt. Calling a guarantee is an example of debt assumption. If the original debtor defaults on its debt obligations, the creditor may invoke the contract conditions permitting the guarantee from the guarantor to be called. The guarantor unit must either repay the debt or assume responsibility for the debt as the primary debtor (i.e., the liability of the original debtor is extinguished). A public sector unit can be the debtor that is defaulting or the guarantor. A government can also, through agreement, offer to provide funds to pay off the debt obligation of another government unit owed to a third party.⁷

A3.27 The statistical treatment of debt assumption depends on (i) whether the new debtor acquires an effective financial claim on the original debtor, and (ii) if there is no effective financial claim, the relationship between the new debtor and the original debtor and whether the original debtor is bankrupt or no longer a going concern.⁸ This implies three possibilities (see Figure A3.1):

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Decision Tree for the Statistical Treatment of Debt Assumption

¹ An “effective financial claim” is understood to be a claim that is supported by a contract between the new debtor and the original debtor, or (especially in the case of governments) an agreement, with a reasonable expectation to be honored, that the original debtor will reimburse the new debtor.

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• The debt assumer (new debtor) acquires an effective financial claim on the original debtor. The debt assumer records an increase in debt liabilities to the original creditor, and an increase in financial assets, such as in the form of loans, with the original debtor as the counterparty. The original debtor records a decrease in the original debt liability to the creditor and an increase in liabilities, such as in the form of a loan, to the debt assumer. The value of the debt assumer’s claim on the original debtor is the present value of the amount expected to be received by the assumer. If this amount is equal to the liability assumed, no further entries are required.

  If the amount expected to be recovered is less than the liability assumed, the debt assumer records an expense in the form of capital transfer/grant to the original debtor for the difference between the liability incurred and the financial asset acquired in the form of loans. For the debt assumer, gross debt increases by the amount of debt assumed.

• The debt assumer (new debtor) does not acquire an effective financial claim on the original debtor. This may be the case when the original debtor is bankrupt or no longer a going concern, or when the debt assumer seeks to convey a benefit to the original debtor. The debt assumer records an expense in the form of a capital transfer/grant to the original debtor, and an increase in debt liabilities to the original creditor. The original debtor records revenue in the form of a capital transfer/grant, which extinguishes the debt liability on its balance sheet.

  The exception to this case is when the original debtor is a public corporation that continues to be a going concern, which is discussed next.

• The debt assumer (new debtor) does not acquire an effective financial claim and the original debtor is a public corporation that continues to be a going concern. The debt assumption amounts to an increase in the equity owned by the debt assumer in the public corporation (original debtor). The debt assumer records an increase in debt liabilities to the original creditor, and an increase in financial assets in the form of equity and investment fund shares. The public corporation records a decrease in the debt liability to the original creditor, and an increase in nondebt liabilities in the form of equity and investment funds shares.

A3.28 A special case is where debt assumption involves the transfer of nonfinancial assets (such as fixed assets or land) from, for example, a public corporation (original debtor) to the debt assumer (new debtor). In this case, the debt assumer records an increase in debt liabilities to the original creditor and the acquisition of a nonfinancial asset(s). If the market value of the nonfinancial asset(s) is equal to the value of the liability assumed, no further entries are required. A capital transfer/grant between the debt assumer and original debtor is recorded for any difference between the value of the liability assumed and the market value of the nonfinancial assets.

A3.29 Although no transactions are recorded for debt assumption under the cash basis of recording, the stock positions would change due to the debt assumption. Any subsequent payments in cash relating to the assumed debt would be recorded as interest, and/or transactions in financial assets other than cash and liabilities, as relevant.

Debt Write-Offs and Write-Downs

A3.32 Debt write-offs or write-downs refer to unilateral reductions by a creditor of the amount owed to it. This usually occurs when a creditor concludes that a debt obligation has no value or a reduced value because part or all of the debt is not going to be repaid (frequently because the debtor is insolvent). For example, a public corporation that borrowed from the general government unit may be insolvent. As a result, the general government unit’s claim loses some, or all, of its value and is written down or written off on the balance sheet of the government unit (creditor).¹⁰ In contrast, a unilateral write-off by a debtor, or debt repudiation, is not recognized in the macroeconomic statistical systems.

A3.33 Unlike debt forgiveness (see paragraphs A3.7–A3.9), which is a mutual agreement and, therefore, a transaction, a debt write-off or write-down is a unilateral action and, therefore, recorded as other changes in the volume of assets. The financial asset is removed from the balance sheet of the creditor and the corresponding liability should be removed from the balance sheet of the debtor, also through other changes in the volume of assets, to maintain consistency in the macroeconomic statistics.¹¹

A3.34 Although no transactions are recorded for a debt write-off or write-down under the cash basis of recording, the stock positions relating to these operations would be reduced, reflecting the debt write-off or write-down.

New Money Facilities

A3.35 In some arrangements that assist the debtor to overcome temporary financing difficulties, new money facilities are agreed with the creditor to repay maturing debt obligations. The two debt instruments involved—the maturing debt obligation and the new money facility—are treated separately.

A3.36 The creditor records a reduction in the original claim on the debtor and an increase in a new claim on the debtor. Similarly, the debtor records a reduction in the original liability to the creditor and an increase in a new liability to the creditor. If the terms of the new borrowings are concessional, the creditor could be seen as providing a transfer to the debtor. (Debt concessionality is discussed in paragraphs A3.39–A3.41.)

Debt Defeasance

A3.37 With defeasance, a debtor unit removes liabilities from its balance sheet by pairing them with financial assets, the income and value of which are sufficient to ensure that all debt-service payments are met. Defeasance may be carried out by placing the assets and liabilities in a separate account within the institutional unit concerned or by transferring them to another unit. In either case, the macroeconomic statistical systems do not recognize defeasance as affecting the outstanding debt of the debtor. Thus, no transactions with respect to defeasance are recorded in the GFS framework, as long as there has been no change in the legal obligations of the debtor. When the assets and liabilities are transferred to a separate account within the unit, both assets and liabilities should be reported on a gross basis. If a separate entity resident in the same economy is created to hold the assets and liabilities, that new unit should be treated as an ancillary entity and consolidated with the defeasing unit.

A3.38 The sectorization of restructuring agencies (also referred to as “defeasance structures”) is discussed in paragraphs 2.129–2.131.

Debt Concessionality

A3.39 There is no consistent definition or measure of debt concessionality in macroeconomic statistics. However, it is generally accepted that concessional loans occur when units lend to other units and the contractual interest rate is intentionally set below the market interest rate that would otherwise apply. The degree of concessionality can be enhanced with grace periods,¹² and frequencies of payments and maturity periods favorable to the debtor.

A3.40 Since the terms of a concessional loan are more favorable to the debtor than market conditions would otherwise permit, concessional loans effectively include a transfer from the creditor to the debtor. However, the means of incorporating the transfer impact within macroeconomic statistics have not been fully developed, although various alternatives have been advanced. Accordingly, until the appropriate treatment of concessional debt is agreed, information on concessional debt should be provided in a memorandum item to the balance sheet (see paragraph 7.246) and/or in supplementary tables.

A3.41 The case of Paris Club debt concessionality is discussed in Chapter 4 of the PSDS Guide.

Debt Arising from Bailout Operations

A3.42 A bailout refers to a rescue from financial distress. It is often used when a government unit provides either short-term financial assistance to a corporation to help it survive a period of financial difficulty, or a more permanent injection of financial resources to help recapitalize the corporation. A bailout may, in effect, constitute nationalization if the government acquires control of the corporation it is bailing out. Bailouts of financial institutions are a case in point. They are likely to involve highly publicized, one-time transactions often involving large amounts and are, therefore, easy to identify.

A3.43 Analysts generally refer to “capital injections” made by government into corporations when some significant financial support is provided to capitalize or recapitalize the corporation in financial distress. The 2008 SNA uses “capital injections” to mean a direct intervention that is recorded in macroeconomic statistics either as a capital transfer, a loan, an acquisition of equity, or a combination of these. Direct intervention by general government units may take various forms—for example:

• Providing recapitalization through an injection of financial resources (“capital injection”) or the assumption of a failed corporation’s liabilities.

• Providing loans and/or acquiring equity in the corporations in distress (i.e., “requited recapitalization”) on favorable terms, or not.

• Purchasing assets from the financially distressed corporation at prices greater than their true market value.

A3.44 Indirectly, general government may intervene by extending the range of guarantees it is prepared to offer.

A3.45 Broadly, two main issues arise with bailout operations:

• The first issue is the sectorization of the entity or unit created to finance or manage the sales of assets and/or liabilities of the distressed corporation. The sectorization is important, in particular, for determining whether its transactions, other economic flows, and stock positions (debt liabilities and other assets and liabilities) are within the general government sector or public corporations sector.

• The second issue is the appropriate statistical treatment of “capital injections.”

Statistical treatment of “capital injections”

A3.47 The assistance provided by government (or another public sector unit) to the unit suffering financial distress is usually recorded as a loan, a capital transfer, or an equity injection. Figure A3.2 provides a decision tree for the statistical treatment of “capital injections.”

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Decision Tree for the Statistical Treatment of “Capital Injections”

¹ An “effective financial claim” is understood to be a claim that is supported by a contract between the new debtor and the original debtor, or (especially in the case of governments) an agreement, with a reasonable expectation to be honored, that the original debtor will reimburse the new debtor.² A realistic rate of return on funds is indicated by the intention to earn a rate of return that is sufficient to generate dividends or holding gains at a later date, and that is a claim on the residual value of the corporation.

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A3.48 When a public sector unit (investor unit), such as a government unit, intervenes by means of a capital injection that is legally in the form of a loan to the corporation in distress, the statistical treatment depends on whether the investor unit obtains an effective financial claim on the corporation, as described in paragraph A3.27.

A3.49 When a public sector unit, such as government, intervenes by means of a capital injection other than a loan to the corporation in distress, the statistical treatment depends on whether a realistic return¹⁴ can be expected on this investment:

• If the public sector unit (investor unit) can expect a realistic return on the investment, the investor unit records an increase in financial assets in the form of equity and investment fund shares, and a decrease in financial assets (e.g., currency and deposits) or an increase in liabilities, depending on how the acquisition of equity is financed. The corporation in financial distress records an increase in financial assets (e.g., currency and deposits), and an increase in nondebt liabilities in the form of equity and investment fund shares.

• The portion of the investment on which no realistic return can be expected—which may be the entire investment—is treated as a capital transfer.

A3.50 A capital injection in the form of a capital transfer (full or partial) is recorded when the funds are provided:

• Without receiving anything of equal value in exchange

• Without a reasonable expectation of a realistic rate of return

• To compensate for the impairment of assets or capital as a result of large operating deficits accumulated over two or more years, and exceptional losses due to factors outside the control of the enterprise.

A3.51 The unit providing the assistance records expense in the form of a capital transfer and a decrease in financial assets (e.g., currency and deposits) or an increase in liabilities, depending how this capital transfer is financed. The recipient records revenue in the form of a capital transfer and an increase in financial assets in the form of currency and deposits.

A3.52 In determining the magnitude of the capital transfers, the following points need to be taken into account:

• If the government buys assets from the corporation to be assisted, the amount paid may be more than the true market price of the assets.

• The purchase of assets should be recorded at the current market price, and, except for loans, a capital transfer should be recorded for the difference between the market price and the actual amount paid.

• Governments often buy loans from financial institutions during a bailout. Unless a loan becomes tradable and is traded at an established market value, it is always recorded in balance sheets at nominal value. Only if a market for the loans develops and the loans are regularly traded, they are reclassified as securities (see paragraphs 7.157 and 7.163) and also recorded at market value.

• When government buys a loan that has a fair value much less than its nominal value, no capital transfer for the difference in value is recorded as loans are recorded at nominal value on the balance sheet. Any difference between the price paid and the nominal value is recorded as a valuation change (see BPM6 paragraph 9.33). However, if there is reliable information that some loans are irrecoverable, their value is reduced to zero in the balance sheet (with an “other volume change”) and a capital transfer is recorded equal to the value paid by the government to the corporation. If some or all of these loans subsequently become recoverable, this is shown as a revaluation in the government’s balance sheet.

• If government extends a guarantee as part of a bailout, the guarantees should be recorded according to whether this is a one-off guarantee or part of a standardized guarantee scheme (see paragraphs 7.254–7.260 for details on the statistical treatment of guarantees).

A3.53 Additional factors should be taken into account for borderline cases, such as the following:

• If the capital injection is covering large operating deficits accumulated over two or more years or exceptional losses due to factors outside the control of the enterprise, the capital injection is, by definition, a capital transfer.

• If capital injection is made to a quasi-corporation that has negative equity (see Box 6.3), the capital injection is always a capital transfer.

• If the capital injection is undertaken for specific purposes relating to public policy in order to compensate a bank in financial distress for anticipated defaults/bad assets/losses within its balance sheet, the capital injection is a capital transfer, unless a realistic return can be expected, in which instance an equity investment is recorded.

• If there are private shareholders providing a significant share (in proportion to their existing shareholding) of equity during the injection, then the capital injection is an equity investment since the assumption is that private investors would be seeking a return on their investment.

Debt of Special Purpose Entities

A3.54 Special purpose entities (SPEs) are described in paragraphs 2.136–2.139. For GFS, the appropriate units and institutional sectorization of the SPE must be determined. If the SPE is part of the public sector, its debt should be part of the debt of the public sector or relevant subsector.

A3.55 As noted in paragraphs 2.41–2.45, governments may establish public corporations that sell goods or services exclusively to government, without tendering for a government contract in competition with the private sector. Such a public corporation is called an artificial subsidiary and should be classified as part of the general government sector (its parent unit). Often, such government artificial subsidiaries are set up as SPEs. These units, which are legally corporations, should be classified as part of the general government sector and their debt liabilities are thus part of general government debt.

A3.56 A government may conduct fiscal activities through an entity that is resident abroad. For example, a government may fund its outlays by issuing securities abroad through an SPE. This SPE is not part of the general government sector in either home or host economy. Such entities are not treated in the same way as embassies and other territorial enclaves because they operate under the laws of the host economy. Governments may be direct investors in these units/entities. However, special imputations of transactions and stock positions between the government and the SPE abroad must be used to ensure that any fiscal operations undertaken through nonresident entities are reflected in the transactions and stock positions of the home government concerned.¹⁵ As a result, the government will show an actual, or imputed, debt to its SPE arising from any debts the SPE incurs on behalf of the government.

A3.57 When an SPE entity resident in one economy borrows on behalf of the government of another economy, and the borrowing is for fiscal purposes, the statistical treatment in the accounts of that government is as follows:

• At the time of borrowing—A transaction creating a debt liability of the government to the borrowing entity is imputed equal to the amount borrowed. The counterpart entry is an increase in the government’s equity in the borrowing entity.

• At the time funds or assets acquired with the funds (as applicable) are transferred to the government—A transaction for the flow of funds or assets is recorded, matched by a reduction of the government’s equity in the borrowing entity by the same amount.

• At the time expenses are incurred, or assets are transferred by the borrowing entity to a third party (i.e., are not transferred to the government), where applicable—A current or capital transfer between the government and the entity is imputed, with the matching entry of a reduction in the value of the government’s equity.

A3.58 These entries are made symmetrically for both the government and the borrowing entity. The entries do not affect the transactions or stock positions between the borrowing entity and its creditors or other third parties, which are recorded as they occur, with no imputations.

Debt Arising from Securitization

A3.59 Securitization occurs when a unit, named the originator, conveys the ownership rights over financial or nonfinancial assets, or the right to receive specific future flows, to another unit, named the securitization unit. In return, the securitization unit pays an amount to the originator from its own source of financing. The securitization unit obtains its own financing by issuing debt securities using the assets or rights to future flows transferred by the originator as collateral.¹⁶ When asset-backed securities are issued by a public sector unit, they form part of public sector debt.

A3.60 Securitization results in debt securities for which coupon or principal payments (or both) are backed by specific financial or nonfinancial assets or future revenue streams. A variety of assets or future revenue streams may be used for securitization, including residential and commercial mortgage loans, consumer loans, government loans, and credit derivatives. A general government unit may issue debt securities backed by specific earmarked revenue. In macroeconomic statistical systems, the ability to raise taxes or other government revenue is not recognized as a government asset that could be used for securitization.¹⁷ Nevertheless, the earmarking of future revenue, such as receipts from toll roads, to service debt securities issued by a general government (or public sector) unit may resemble securitization (see paragraphs A3.64 and A3.66).

A3.61 Securitization schemes vary within and across debt securities markets. At the broadest level, a distinction is made about whether a securitization unit is involved. In securitization schemes where debt securities are issued by a securitization unit, the issuing institutional unit is a financial intermediary in the financial corporations sector. The securitization unit is often an SPE. However, as described in paragraph 2.137, resident SPEs functioning in only a passive manner relative to general government and carrying out fiscal activities are not treated as separate institutional units in the macroeconomic statistical systems. Such SPEs are treated as part of the general government sector regardless of their legal status—therefore:

• If a securitization unit is involved, four types of schemes may be distinguished from a macroeconomic statistics perspective:

  • True-sale securitization,¹⁸ which is schemes involving a true transfer (sale) of assets—from a macroeconomic statistics perspective¹⁹—from the original asset owner’s balance sheet to that of the securitization unit

  • No true-sale securitization,²⁰ which is schemes that do not involve a true transfer of assets—from a macroeconomic statistics perspective—from the original asset owner’s balance sheet to that of the securitization unit (see footnote 19)

  • No asset securitization,²¹ which is schemes involving securitization of future revenue streams that are not recognized as assets in macroeconomic statistics

  • Synthetic securitization with a securitization unit,²² which is schemes involving the transfer of credit risk only (but not the transfer of assets), through a securitization unit.

• If no securitization unit is involved, two types of securitization are possible:

  • On-balance sheet securitization,²³ which is schemes in which the original asset owner issues new debt securities and there is no transfer of assets

  • Synthetic securitization without a securitization unit,²⁴ which is schemes involving the transfer of credit risk only (but not the transfer of assets), through the direct issue of debt securities by the original asset owner.

A3.62 True-sale securitization involves debt securities issued by a securitization unit where the underlying assets have been transferred from the original asset owner’s (i.e., the originator’s) balance sheet to that of the securitization unit. The securitization unit uses the proceeds from selling the debt securities to investors to finance the acquisition of the assets. The revenue stream from the pool of assets (typically, interest payments and principal repayments on the loans) is used to make the coupon payments and principal repayments on the debt securities issued. In case of a true-sale securitization by a public sector unit, the original asset owner’s gross debt remains unchanged. The gross debt of the securitization unit increases as a result of the securities issued. If this unit is a public financial corporation, its debt is part of public sector debt. A resident securitization “unit” controlled by a government unit that is an SPE but does not meet the requirements of an institutional unit is treated as part of general government regardless of its legal status. Such an SPE’s debt is part of general government’s debt (see also paragraph A3.61).

A3.63 If no true sale had taken place from a macroeconomic statistics perspective (see footnote 19), the amount received from the securitization unit by the public sector unit as the originator is treated as borrowing, usually in the form of a loan.²⁵ The debt securities issued by the securitization unit are part of public sector debt, if the securitization unit is part of the public sector.

A3.64 No asset securitization involves securitization of future revenue streams. As mentioned in paragraph A3.60, the ability to raise taxes or other government revenue is not recognized as a government asset that could be used for true-sale securitization. In most cases, it is not the rights to the future revenue that are used as collateral, but the obligation of the public sector unit to use a sufficient amount of the future income to repay the borrowing in full. If more income is earned than is needed to repay the borrowing, the excess is retained by the public sector unit. So, if “rights” to future government revenue are transferred to a securitization unit, the amount received from the securitization unit by the public sector unit, arising from the proceeds of the debt securities issue, is treated as borrowing, usually in the form of a loan.²⁶ The revenue stream continues to accrue to government and government uses these proceeds to repay the loan from the securitization unit. The debt securities issued by the securitization unit are part of public sector debt if the securitization unit is part of the public sector.

A3.65 Synthetic securitization involves transfer of the credit risk related to a pool of assets without transfer of the assets themselves, either through a securitization unit or through the direct issuing of debt securities by the original asset owner.

• Synthetic securitization with a securitization unit: The owner of a pool of assets buys credit default swaps (CDS) (protection buyer) from the securi-tization unit (protection seller) for a premium to obtain protection against possible default losses on the pool of assets.²⁷ The protection seller issues a debt instrument. The proceeds from the issue of debt securities by the securitization unit are invested in low-risk, low-return financial assets (such as deposits), and the income accrued on this investment, together with the premium from the CDS, finances coupon payments on the debt securities due by the securitization unit to the investors. On maturity, the holders of the debt securities are reimbursed, provided there has been no default on the pool of assets. If there is a default, the protection buyer is compensated by the protection seller for the default losses related to the pool of assets, while the holders of the debt securities (investors) suffer losses for the same value, a realized holding gain for the protection seller.

  The debt securities issued by the securitization unit are part of public sector debt if the securitization unit is part of the public sector.

• Synthetic securitization without a securitization unit: The owner of the asset issues credit-linked notes (CLN). CLN are debt securities that are backed by reference assets (such as loans and bonds), with an embedded CDS allowing credit risk to be transferred from the issuer to investors. There is usually a higher interest rate to compensate the investors for taking on higher risks. Credit protection for the pool of assets is sold by the investors to the protection buyer (or issuer of the CLN) by buying the CLN. Repayment of principal and interest on the notes is conditional on performance of the pool of assets. If no default occurs during the life of the note, the full redemption value of the note is paid to investors at maturity. If a default occurs, investors receive the redemption value of the note minus the value of the default losses.

  With synthetic securitization without a securitization unit, the debt securities (CLN) issued by a public sector unit are part of that unit’s debt.

A3.66 On-balance sheet securitization involves debt securities backed by a future revenue stream generated by the assets. The assets remain on the balance sheet of the debt securities issuer (the original asset owner), typically as a separate portfolio. There is no securitization unit involved. The issue of debt securities provides the original asset owner with funds and the debt securities form part of the original asset owner’s debt.

Debt Arising from Off-Market Swaps

A3.67 In macroeconomic statistics, swaps give rise to financial derivatives, which are nondebt instruments (see paragraph 7.215). However, off-market swaps have a debt component.

A3.68 An off-market swap is a swap contract that has a nonzero value at inception as a result of having reference rates priced differently from current market values—that is, “off-the-market.” Such a swap results in a lump sum being paid, usually at inception, by one party to the other. The economic nature of an off-market swap is a combination of borrowing (i.e., the lump sum), in the form of a loan, and an on-market swap (financial derivative). The loan component of an off-market swap is debt and, if a public sector unit receives the lump-sum payment, this will be part of public sector debt. Examples of swaps contracts that may involve off-market reference rates include interest rate and currency swaps.

A3.69 Because the economic nature of an off-market swap is equivalent to a combination of a loan and a financial derivative, two stock positions are recorded in the balance sheet:

• A loan—a debt instrument—which is equal to the nonzero value of the swap at inception and with a maturity date equivalent to the expiration date of the swap

• A financial derivative (swap) component—a nondebt instrument—that has a market value of zero at inception.

A3.70 The loan position is a liability of the party that receives the lump sum, while the derivative position may appear either on the financial asset or liability side, depending on market prices on the balance sheet date.

A3.71 Future streams of flows relating to these stock positions are also partitioned between those relating to the loan and financial derivative component, respectively.

On-Lending of Borrowed Funds

A3.72 On-lending of borrowed funds refers to a resident institutional unit, A (usually central government), borrowing from another institutional unit(s), B (usually a nonresident unit), and then on-lending the proceeds from this borrowing to a third institutional unit(s), C (usually state or local governments, or public corporation (s)), where it is understood that unit A obtains an effective financial claim on unit C. On-lending of borrowed funds is motivated by several factors—for example:

• Institutional unit A may be able to borrow from unit B at more favorable terms than unit C could borrow from unit B

• Institutional unit C’s borrowing powers are limited by factors such as foreign exchange regulations; only unit A can borrow from nonresidents.

A3.73 On-lending results in (at least) two separate financial claims. These claims should not be offset against each other in government finance and public sector debt statistics; institutional unit B has a debt claim on unit(s) A, and unit(s) A has a debt claim on unit C, which may be consolidated (see paragraph A3.76). Depending on the residence of institutional unit(s) B and C, respectively, these debt liabilities (and the corresponding financial claims) are classified as domestic or external.

A3.74 The statistical treatment of the two claims to be recorded if the resident institutional unit (A), which on-lends the borrowed funds to unit(s) C, obtains an effective financial claim on unit(s) C, depends on:

• The residence of the creditor(s) from which unit A is borrowing (i.e., unit(s) B)

• The residence of unit(s) C to which unit A is on-lending the borrowed funds (see Table A3.1).

^{Table A3.1}

Summary of the Statistical Treatment of On-Lending of Borrowed Funds by Institutional Unit A

^{Table A3.1}

Summary of the Statistical Treatment of On-Lending of Borrowed Funds by Institutional Unit A

1. Unit A borrows from unit(s) B	Depending on the residence of institutional unit(s) B, unit A has a domestic/external debt liability to unit(s) B. (Institutional unit(s) B has a domestic/external financial claim on unit A.)
2. Unit A on-lends to unit(s) C	Depending on the residence of institutional unit(s) C, unit A has a domestic/external financial claim on unit(s) C. (Institutional unit(s) C has a domestic/ external liability to unit A.)

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^{Table A3.1}

Summary of the Statistical Treatment of On-Lending of Borrowed Funds by Institutional Unit A

1. Unit A borrows from unit(s) B	Depending on the residence of institutional unit(s) B, unit A has a domestic/external debt liability to unit(s) B. (Institutional unit(s) B has a domestic/external financial claim on unit A.)
2. Unit A on-lends to unit(s) C	Depending on the residence of institutional unit(s) C, unit A has a domestic/external financial claim on unit(s) C. (Institutional unit(s) C has a domestic/ external liability to unit A.)

A3.75 The classification of the debt liability of institutional unit A to unit(s) B depends on the type of instrument(s) involved: typically, such borrowing is in the form of loans and/or debt securities. In such cases, institutional unit A’s debt liabilities in the form of loans and/or debt securities increase (credit) as a result of the borrowing from unit(s) B, with a corresponding increase (debit) in unit A’s financial assets in the form of currency and deposits. These events result in an increase in the gross debt position of unit A, but no change in its net debt position.

A3.76 The debt liability of institutional unit(s) C to unit A, as a result of the on-lending of the borrowed funds, is typically in the form of a loan. In other words, institutional unit C’s debt liabilities increase (credit) as a result of the borrowing from unit A, with a corresponding increase (debit) in unit C’s financial assets in the form of currency and deposits. Institutional unit A’s financial assets (e.g., loans) will increase (debit) as a result of the on-lending to unit C and its financial assets in the form of currency and deposits will decrease (credit). If institutional unit(s) C is classified to the same sector, subsector, or group of units as unit A, this debt liability (and corresponding financial claim) is eliminated in consolidation.

A3.77 The amortization of each of the debt liabilities (and corresponding financial assets) is recorded in the books of the unit in whose balance sheet the debt liability appears. Thus, if institutional unit A has a debt liability to unit B, the amortization of this (usually external) liability (debit) is recorded in the books of unit A, even if these borrowed funds were on-lent to unit C.

A3.78 Similarly, the amortization of institutional unit C’s (usually domestic) debt liability (debit) to unit A is recorded in the books of unit C. Unit A would record a decrease (credit) in its (domestic) financial claims on unit C. The amortization of institutional unit C’s debt liability to unit A improves unit C’s gross debt position, while its net debt position remains the same.

Stock Positions and Related Flows with the IMF

A3.79 This section briefly describes the stock positions and flows in countries’ financial assets and liabilities arising from membership in the International Monetary Fund (IMF), as they relate to public sector debt statistics. Debt data compilers first have to determine in which public sector unit(s) to record the stock positions and related flows with the IMF. Stock positions and flows in financial assets and liabilities of member countries with the IMF are usually recorded in the accounts of the public sector unit as determined by the legal and institutional arrangements in the member country.

A3.80 The IMF conducts its dealings with a member through the fiscal agency and the depository:

• Each member country designates a fiscal agency to conduct financial transactions with the IMF on behalf of the member.²⁸

• Each member is also required to designate its central bank as a depository for the IMF’s holdings of the member’s currency.²⁹ In most member countries, the central bank is both the fiscal agency and the depository.

A3.81 The next sections discuss member countries’ quotas in the IMF, their reserve positions in the IMF, remuneration (interest) receivable from the IMF, the account that is used for administrative payments (the “No. 2 Account”), and their Special Drawing Rights (SDRs) allocations and holdings.

Introduction

A4.2 Many transactions are specified in terms of a contract between two institutional units. The majority of contracts are such that one unit provides a good, service, or asset to the other unit for an agreed payment at an agreed time (possibly immediately after agreeing on the price). Such contracts may be written and legally binding or may be informal or even only implicit. However, these contracts are simply agreements about the terms under which goods, services, and assets are provided to the recipient along with the ownership of the item. In particular, these contracts can help to determine the point at which the transactions should be recorded in GFS in accordance with the accrual principles described in paragraphs 3.69–3.75.

A4.3 For certain types of contracts and legal agreements, variously described as leases and licenses (or permits), the terms of the agreement may affect not only the time of recording of transactions but also the classification of transactions and the ownership of the item subject to the agreement. The purpose of this section is to provide guidance on how transactions entered into under these more complex arrangements should be recorded in GFS.

Leases

A4.4 Three types of leases are recognized in macroeconomic statistics: operating leases, financial leases, and resource leases. Each of these leases relates to the use of a nonfinancial asset. Fundamental to the distinction between the different types of leases is the difference between legal and economic ownership. The legal owner of resources is the institutional unit entitled by law and sustainable under the law to claim the benefits associated with the asset. By contrast, the economic owner of resources is entitled to claim the benefits associated with the use of the asset in the course of an economic activity by virtue of accepting the associated risks. This distinction between legal and economic ownership is elaborated upon in paragraphs 3.37–3.41 and 7.5. The legal owner is often the economic owner as well. When they are different, the legal owner has divested itself of the majority of risks in return for agreed payments from the economic owner. Thus:

• In the case of operating leases and resource leases, there is no change of economic ownership: the legal owner continues to be the economic owner. Resource leases are agreements for the use of natural resources, such as land and radio spectrum. Operating leases are agreements for the use of all other nonfinancial assets.

• In the case of financial leases, there is a difference between economic ownership and legal ownership of the asset. Financial leases can apply to all nonfinancial assets, including natural resources under some circumstances.

A4.5 The following paragraphs discuss the treatment of operating leases, financial leases, and resource leases in detail.

Licenses and Permits to Use a Natural Resource

A4.18 In many countries, licenses and permits to use natural resources are issued by government because government claims ownership of the resources on behalf of the community. However, government could also issue these licenses and permits if the resources are privately owned.

A4.19 As illustrated in Figure A4.1, there are three different sets of conditions that may apply to the use of a natural resource:

• The owner may permit the resource to be used to extinction. This option results in the sale (or possibly an expropriation) of the nonproduced resource asset itself.

• The owner may permit the resource to be used for an extended period of time in such a way that, in effect, the user controls the use of the resource during this time with little if any intervention from the legal owner. This permit leads to the creation of an intangible nonproduced asset classified as contracts, leases, and licenses (31441) for the user, distinct from the resource itself; however, the value of the resource and the value of the nonproduced asset in the form of contracts, leases, and licenses are linked. An inverse relationship will exist between the value of the resource itself and the value of the intangible asset.⁵

• The owner can extend or withhold permission to continued use of the asset from one year to the next. This option corresponds to a resource lease on which rent is payable/receivable (see paragraphs A4.16–A4.17).

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Illustrating the Treatment of Licenses and Permits to Use a Natural Resource

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A4.20 The differences in treatment between the various options are not clear-cut.⁶ There is no single, universal, and clear-cut criterion to distinguish between rent and asset sales, so a range of criteria should be considered in making the decision (see Box A4.1).

A4.21 The considerations listed in Box A4.1 can be seen as a more specific parallel to the distinction of economic ownership from legal ownership used in distinguishing between operating and financial leases described earlier. The conditions for treatment of the payment as the acquisition of an asset or rent are indicative rather than prescriptive. A decision on the appropriate treatment when some of the conditions are not met will necessitate consideration of how to record those transactions. For example, if, on balance, the decision is to treat the payment as rent, but a large upfront payment was made, this should be treated as a prepayment, recorded on an accrual basis. However, if the recipient is not willing to consider a refund if the contract is suspended, this is indicative of the sale of an intangible nonproduced asset rather than the payment of rent.

A4.22 The application of these principles to the main types of natural resources is described in the following text.

Sharing Assets

A4.36 There are two ways in which assets may be shared, and the two cases require different treatments:

• The asset may be wholly legally owned by two or more units, each at different points in time.

• Alternatively, the risks of and benefits from the asset may be shared by two or more units at a single point in time.

A4.37 In macroeconomic statistics, even though the asset may be owned by different units at different times, when a balance sheet is drawn up, the whole of the value of the asset is attributed to one unit.

• For an asset subject to an operating lease, there is no ambiguity. The legal owner is also the economic owner and is the unit that shows the asset on its balance sheet.

• An asset subject to a financial lease is shown on the balance sheet of the economic owner. This is consistent with the views that the value of the asset represents the stream of future benefits coming from the asset and the economic owner is the unit entitled to receive these benefits in return for accepting the risks associated with using the asset in production.

• For an asset subject to a resource lease, the value is shown on the balance sheet of the legal owner.

A4.38 When licenses to use natural resources such as radio spectrum, land, timber, and fish satisfy the criteria to be classified as intangible assets under permits to use natural resources (314412), they are part of the subclass of nonfinancial assets in the form of contracts, leases, and licenses (31441) and are shown on the balance sheet of the licensee.

A4.39 Sharing the risks and rewards of an asset between different units at a point in time is unusual. The most common occurrence is that a single unit undertakes the activity in which the asset is used and that unit shares the returns among the owners in the form of distributed property income. However, occasionally it is possible that such a single unit does not exist and it is not meaningful to try to create it statistically. This is most common when the participating units are resident in different economies, as may be the case with an airline, or in the case of some unincorporated joint ventures. The terms under which unincorporated joint ventures are established are diverse, but one form allows that all members share the assets equally. In such cases, macroeconomic statistics record the assets shared between the owners in proportion to their ownership shares.

A4.40 In some joint ventures that are recognized as institutional units, one party may contribute an asset as its share of the costs. If this happens, an injection of equity equal to the value of the asset should be recorded along with the acquisition of the asset in question by the joint venture.

Permits to Undertake a Specific Activity

A4.41 In addition to leases and licenses to use an asset as described in the previous sections, permission may be granted by government to engage in a particular activity, independently of any assets involved in the activity. Permission to extract minerals in return for the payment of rent, for example, is not covered by this type of permit because the permit derives from the government’s ownership of the assets. The permits that give permission to engage in a particular activity are designed to limit the number of individual units entitled to engage in the activity. Such permits may be issued by government or by private institutional units and different treatments apply to the two cases. This section deals only with permits issued by government. Permits issued by units other than government are not discussed here because their treatment does not affect the government accounts.¹³

Leases as Assets

A4.53 As stated in paragraph A4.2, contracts underlie many transactions recorded in macroeconomic statistics and it is important to understand what the implications are for the time of recording and classification of transactions arising from a contract. Permits or licenses to use natural resources may constitute an asset, as may permits to undertake specific activities and contracts for future production.

A4.54 As indicated in paragraphs 7.105–7.106, a contract may be considered an asset when it is transferable to a third party (i.e., a unit other than the two specified in the original contract)—for example, a marketable operating lease acquiring a value as an asset. An example is given in Box A4.3. Assets reflecting such third-party property rights are always transitory: they exist only for the length of the lease and where there is a difference between the encumbered and unencumbered values.

A4.55 Permits to use natural resources and contracts for future production may also give rise to these types of third-party property rights assets. Similarly, permits to undertake specific activities may give rise to these types of assets even though the original payment, if payable to government, was treated as a tax. Financial leases do not give rise to these types of assets. If the value of the asset being leased increases by more than the payments due under the financial lease, the lessee may have the option of selling the asset, repaying the loan, and keeping the difference.

A4.56 In the case of marketable operating leases, the lease may be treated as an asset only when the two following conditions are satisfied:

• The lease specifies a predetermined price for the use of an asset that differs from the price the asset could be leased for at the current time.

• The lessee is able legally and practically to realize this price difference by subcontracting the lease to a third party.

A4.57 In practice, it is recommended that such assets should be recorded only when the value of the asset is significant and the lessee can actually exercise the right to realize the price difference.

Introduction

A4.58 Public-private partnerships (PPPs) are long-term contracts between two units, whereby one unit acquires or builds an asset or set of assets, operates it for a period, and then hands the asset over to a second unit. Governments engage in PPPs for a variety of reasons, including the expectation that private management may lead to more efficient production and that access to a broader range of financial sources can be obtained. Such arrangements are usually between a private corporation and government, but other combinations are possible, with a public corporation as either party or a private nonprofit institution as the second unit. For ease of reference, the second unit will be referred to as the private corporation. These schemes are referred to by different names depending on the type of contracts that are in place. Examples are: private finance initiatives (PFIs); design, build, operate, and transfer schemes (DBOT); build, own, and transfer schemes (BOTs); or build, own, operate, and transfer schemes (BOOTs). For ease of reference, the remainder of this section will refer to PPPs.

A4.59 The nature of activities that PPPs are involved with varies greatly. Generally, the private corporations construct and operate assets of a kind that are usually the responsibility of the general government or public corporations. These commonly include roads, bridges, water supply and sewerage treatment works, hospitals, prison facilities, electricity generation and distribution facilities, and pipelines.

A4.60 The private corporation expects to recover its costs and to earn an adequate rate of return on its investment. The government may make periodic payments during the contract period,¹⁴ or, alternatively, the private corporation may sell the services to the public (e.g., a toll road), or a combination of the two. The price is often regulated by the government and set at a level that will allow the private corporation to recover its costs and earn a return on its investment (benchmark price). If the regulated price is set at a level below such a benchmark price, the government will have to compensate the private partner, usually through subsidies or other transfers. There can be many variations in PPP contracts regarding aspects such as the disposition of the assets at the end of the contract, the required operation and maintenance of the assets during the contract, and the price, quality, and volume of services produced. At the end of the contract period, the government may gain legal and economic ownership of the assets, possibly without payment.

A4.61 The decision about economic ownership of the asset and whether to record PPP-related assets and liabilities in the government’s or the private corporation’s balance sheet is not straightforward. The private corporation is responsible for acquiring/constructing the fixed assets, although the acquisition/construction is often supported by the backing of the government. The contract often allows government to specify the design, quality, capacity use, and maintenance of the asset in accordance with government standards. Typically, the assets have service lives much longer than the contract period so that, for this reason alone, the government will control the assets, bear the risks, and receive the rewards for a major portion of the assets’ service lives. Thus, it is frequently not obvious whether the private corporation or the government controls the assets over their service lives or which party bears the majority of the risks and benefits from the majority of the rewards.¹⁵

Determining Economic Ownership of PPP-Related Assets

A4.62 The statistical treatment depends on the economic ownership of the asset(s) involved. In macroeconomic statistics, a distinction is made between legal ownership and economic ownership (see paragraphs 3.38–3.41) based on risks and benefits. With a PPP, the legal and economic owner may be different parties. Box A4.4 summarizes the associated risks to be considered.

A4.63 The macroeconomic statistics approach is broadly consistent with considerations listed by the International Public Sector Accounting Standards Board (IPSASB) for the recognition and measurement of a service concession asset.¹⁶ While it is not possible to prescribe rules applicable to every PPP type of arrangement, the considerations presented in Box A4.4 should guide the decision on which party is the economic owner of the asset(s) during and at the end of the PPP contract period. The International Public Sector Accounting Standards (IPSASs) considerations of control of the asset include aspects of risks and rewards, and should, in principle, lead to the same conclusions on economic ownership. Box A4.5 presents a brief discussion on how some countries apply, in practice, the concept of economic ownership related to PPPs.

Statistical Treatment

A4.64 The following description of the statistical treatment of PPPs is based on the guidelines prescribed in the 2008 SNA.¹⁷ If the government is considered the economic owner of the asset(s) during the contract period but does not make any explicit payment at the beginning of the contract, a transaction must be imputed to cover the acquisition of the asset(s). The recording of these depends on the specific contract provisions, how they are interpreted, and possibly other factors. Most frequently, these contracts will be recorded as the acquisition of the asset through an imputed financial lease because of the similarity with actual financial leases. In other cases, for example, a loan that equals the market value of the asset at acquisition could be imputed, the actual government payments to the private corporation could be partitioned, so that a portion of each payment represents the repayment of the loan (see paragraphs A4.10–A4.15), and the remainder could represent an expense for use of goods or services, subsidies, etc., in accordance with the contract.

A4.65 If the private corporation is considered the economic owner of the asset(s) during the contract period, any debt associated with the acquisition of the asset(s) should be attributed to the private corporation. Normally, the government obtains legal and economic ownership of the assets at the end of the contract without any significant payment. However, two approaches are possible to account for the acquisition of the asset(s) by government:

• Over the contract period, government gradually builds up a financial claim (e.g., other accounts receivable) and the private corporation gradually accrues a corresponding liability (e.g., other accounts payable), such that both values are equal to the residual value of the assets at the end of the contract period. At the end of the contract period, government records the acquisition of the asset, with a reduction in the financial claim (other accounts receivable) as the counterpart entry. The other unit records the disposal of the asset, with a reduction in the liability (other accounts payable) as the counterpart entry. Implementing this approach may be difficult because it requires new transactions to be constructed using assumptions about expected asset values and interest rates.

• An alternative approach is to record the change of legal and economic ownership from the private unit to government as a capital transfer at the end of the contract period. At the end of the contract period, government records revenue in the form of a capital transfer that finances the acquisition of the asset and the private unit records an expense in the form of a capital transfer payable to government, financed by the disposal of the asset. The capital transfer approach does not reflect the underlying economic reality as well as the first alternative, but data limitations, uncertainty about the expected residual value of the assets, and contract provisions allowing various options to be exercised by either party make recording a capital transfer in GFS acceptable on pragmatic grounds.

Introduction

A4.66 An insurance policy is an agreement between an insurer and another institutional unit, the policy-holder. Under the agreement, the policyholder makes a payment (premium) to the insurance corporation, which makes a payment (claim) to the policyholder if or when a specified event occurs. The policyholder protects itself against certain forms of risk. By pooling the risks, the insurer aims to receive more from the receipt of premiums than it has to pay out as claims to the insured.

A4.67 This section describes types of insurance and standardized guarantee schemes. It first defines some terminology and then provides statistical guidance on the recording of the relevant flows and stock positions related to nonlife insurance and standardized guarantee schemes.

Types of Insurance and Standardized Guarantee Schemes

A4.68 The most common form of insurance is called direct insurance, whereby the policy is issued by an insurer to another type of institutional unit.¹⁸ There are two types of direct insurance—namely, life and nonlife insurance. Both types of insurance involve pooling risks. Insurers receive many (relatively) small regular payments of premiums from policy-holders and pay much larger sums to claimants when the contingencies covered by the policy occur. During the interval between the receipt of premiums and the payment of claims, the insurance corporation earns income from investing the premiums received. This investment income affects the levels of premiums and benefits set by the insurer.

A4.69 Life insurance is an activity whereby a policyholder makes regular payments to an insurer, in return for which the insurer guarantees to provide the policyholder (or in some cases another nominated person) with an agreed sum, or an annuity, at a given date or earlier if the policyholder dies beforehand. For life insurance, an important relationship exists between premiums and benefits during the policy period. For policyholders, the benefits receivable are expected to be at least as great as the premiums payable, and this type of insurance can be seen as a form of saving. The insurer combines this aspect of a single policy with the actuarial calculations about the insured population concerning life expectancy (including the risks of fatal accidents) when determining the relationship between the levels of premiums and benefits. Life insurance mainly redistributes premiums payable over a period of time as benefits payable later to the policyholders or his/her beneficiaries. Essentially, life insurance premiums and benefits are transactions in financial assets and liabilities and not transactions in revenue and expense. Public sector units’ involvement in life insurance is most often provided in the context of social protection in the form of employment-related pension schemes and other social protection schemes, such as compulsory saving schemes. The GFS treatment of these types of schemes is elaborated in Appendix 2.

A4.70 Nonlife insurance is an activity similar to life insurance except that it covers all other risks, accidents, sickness, fire, etc. For nonlife insurance, the risks are spread over all policyholders, and the number of claimants is typically much smaller than the number of policyholders. Nonlife insurance includes policies that provide a benefit in the case of death within a given period but in no other circumstances, usually called term insurance. With nonlife insurance, a claim is payable only if a specified contingency occurs and not otherwise. This type of insurance consists of redistribution in the current period between all policyholders and a few claimants. While public corporations may be involved in various types of insurance schemes, general government units are usually not involved in nonlife insurance other than social insurance, as discussed in Appendix 2.

A4.71 Standardized guarantees are those kinds of guarantees that are issued in large numbers, usually for fairly small amounts, along identical lines. There are three parties involved in these arrangements, the borrower (debtor), the lender (creditor), and the guarantor. Either the borrower or lender may contract with the guarantor to repay the creditor if the debtor defaults. Similar to nonlife insurance, it is not possible to determine the likelihood of any particular debtor de faulting. Nevertheless, because the guarantees are very similar and numerous, it is possible to estimate the general likelihood of defaults the guarantor will have to cover. It is standard practice to estimate how many out of a batch of similar debts will default.¹⁹ Therefore, standardized guarantees are based on the same paradigm as that for nonlife insurance, and a similar treatment is adopted for these guarantees. Standardized guarantees are distinguished from one-off guarantees based on two criteria:

• They are characterized by often repeated transactions with similar features and pooling of risks.

• Guarantors are able to estimate the average loss based on available statistics by using probability-weighted concepts.

A4.72 Standardized guarantees may be provided by a financial institution, including, but not limited to, insurance corporations. It is possible (but unlikely) that nonfinancial corporations provide these kinds of guarantees. However, government units are often involved as the guarantor in standardized guarantee schemes. The most common examples are export credit guarantees, deposit insurance schemes,²⁰ and student loan guarantees. Specifically, when a government unit provides standardized guarantees without fees or at such low rates that the fees are significantly less than the calls and administrative costs, the unit should be treated as a nonmarket producer within the general government. If government recognizes the probability of having to finance some of the calls under the guarantee scheme to the extent of including a provision in its accounts, a transfer of this size from government to the units concerned and a liability of this amount (under provisions for calls under standardized guarantee schemes) should be recorded. If a standardized guarantee scheme is operated by a corporation or quasi-corporation on behalf of government, any transfers to cover recurrent losses are classified as subsidies (see paragraph 6.89) and any transfers to cover large operating deficits accumulating over two or more years or exceptional losses due to factors outside the control of the corporation/quasi-corporation are recorded as capital transfers (see paragraphs 6.91–6.124).

Defining Terminology Used in Insurance

A4.73 Defining some of the terms peculiar to the insurance industry is helpful in clarifying the discussion on the statistical treatment of insurance and standardized guarantees. The term “premiums” is used for payment to the insurer, while the term “fees” is used to describe the payment to the guarantor in the case of standardized guarantees. Payments by the insurer are called “claims” in the case of nonlife insurance policies and “benefits” in the case of life insurance policies. In the case of standardized guarantees, “calls” relate to expected defaults on the guarantees.

A4.74 The actual premium (fee) is the amount payable to the insurer (guarantor) to secure insurance coverage for a specific event over a stated time period. Coverage is frequently provided for one year at a time, with the premium payable at the outset, though coverage may be provided for shorter (or longer) periods and the premium (fee) may be payable in installments—for example, monthly.

A4.75 The premium earned is the part of the actual premium that relates to coverage provided in the reporting period. For example, if a new annual policy with a premium of 120 units comes into force on April 1, and GFS are being prepared for a calendar year, the premium earned in the calendar year is 90. The unearned premium is the amount of the actual premium received that relates to the period past the reporting period. In the example just given, at the end of the reporting period there will be an unearned premium of 30, intended to provide coverage for the first three months of the next reporting period.

A4.76 Net premiums are defined as actual premiums plus premium supplements minus the insurance service charge payable by the policyholders. Premiums are usually payable regularly, often at the start of an insurance period, whereas claims fall due later, in the case of life insurance, often many years later. The amounts accumulating between the periods the premiums were payable and when a claim becomes payable create a liability (reserves) for the insurer. These amounts are at the disposal of the insurer to invest in assets and earn income from it. The income allows the insurance corporation to charge lower premiums than would be the case otherwise. The property income earned in this way is attributed to the policyholders and is subsequently recorded as premium supplements from the policyholders.

A4.77 A claim (benefit or call) is the amount payable to the policyholder by the insurer in respect of an event covered by the policy occurring in the period for which the policy is valid. Claims generally become due when the event occurs, even if the payment is made some time later. An exception is made in cases where making a claim is possible only long after the event has happened.²¹ In such a case, the claim is recorded at the time the insurance company accepts the liability. Claims that become due are described as claims incurred. In some contested cases, the time between the occurrence of the event giving rise to the claim and the settlement of the claim may be several years. Claims on an accrual basis are recognized as due when an event takes place that gives rise to a valid claim, regardless of whether paid, settled, or reported during that period.

Statistical Treatment of Nonlife Insurance and Standardized Guarantees

A4.78 Under a nonlife insurance policy (or standardized guarantee), the insurer (or guarantor) accepts a premium (or fee) from a client and holds it in reserve (liability) until a claim (or call) is made or the period of the insurance expires. In the meantime, the insurer (guarantor) invests the amounts available due to pre-payments of premiums, reserves held against outstanding claims, and actuarial reserves held against outstanding risks. These assets generate investment income. The property income represents income forgone by the client, and so is treated as property expense attributed to the policyholders. It is therefore rerouted and subsequently recorded as an implicit supplement to the actual premiums. The insurer (guarantor) sets the level of the actual premiums (fees) to be such that the sum of the actual premiums plus the property income earned on assets, minus the expected outstanding claims will leave a margin that the insurer can retain. As an insurer or guarantor, the general government or public sector unit incurs liabilities equal to the present value of the expected claims or calls on outstanding guarantees, net of any recoveries.²² The statistical treatment of nonlife insurance and standardized guarantee schemes in GFS will depend on whether the general government or public sector unit acts as the insurer (guarantor), or whether they are policyholders.

Custom Unions

A5.6 A custom union is a form of regional arrangement whereby agreement exists on a common tariff (custom duties) vis-à-vis the other economies, while the movement of goods within the arrangement tends to be duty-free, although it may exclude exemptions in certain sectors.² This type of arrangement is different from bilateral cooperation agreements between two countries in commercial areas that have little impact, if any, on GFS.³

A5.7 In compiling GFS for members of a customs union, the main issue is the recording of custom duties in the accounts of the member governments participating in the union. Duties on imports from countries outside the customs union are usually collected on a mutually agreed basis at custom union entry points. As these entry points may be concentrated in one or a small group of members of the customs union, revenue-sharing formulas among member countries are implemented. Recording customs duties in the GFS of individual members of the customs union is thus affected by the institutional and administrative organization of the customs union.

A5.8 The following paragraphs set out four possible types of regional arrangements:⁴

• A designated agency levies,⁵ collects, and distributes the proceeds from the duties.

• A designated agency levies and distributes duties, but member governments collect duties on behalf of the designated agency.

• Member governments have collective rights (i.e., the right is shared by everyone in the group) to levy, collect, and distribute the duties.

• Member governments have collective rights to levy the duties, but only one member collects and distributes the duties.

A5.9 In all four scenarios where there are economic arrangements involving a small group of economies, it is recommended that the governments involved agree on common, appropriate recording procedures to avoid bilateral asymmetries.⁶ The required information should be readily available from customs services. If a portion of the amount of customs duties is retained as collection fees (regardless of how the amount is calculated by the collecting agency or government), these fees should be recorded gross of the grants expense when the customs pool is distributed to the members. The retained amount should be recorded as incidental sales by nonmarket establishments (1423) in the accounts of the collecting agency or government, and use of goods and services (22) in the accounts of the member government receiving the grants.

A5.10 Tax attribution rules (see paragraphs 5.33–5.38) should be used to determine the attribution of customs duties revenue and the transfers associated with sharing the revenue pool among the members. The recording of such customs duties and grant transfers for four types of arrangements are discussed in paragraphs A5.11–A5.18.

Economic Unions

Monetary and Currency Unions

A5.32 A monetary union exists where there is the presence of a single monetary policy among economies, established by an intergovernmental legal agreement. In a monetary union, the decision-making related to monetary policy is transferred to a centralized body. There are different models—for instance, a single central bank for the whole union (possibly having only branches in the national economies)¹¹ or a federal-like system where national central banks still exist, keeping some specific activities not directly linked to monetary policy.¹²

A5.33 However, the core characteristic of a monetary union is that the monetary policy is exclusively conducted at the union level. There is a single set of intervention rates, and the national central banks (or branches) may in no way autonomously adjust the monetary policy to national conditions. They may, however, perform some specific tasks in the implementation process of the monetary policy, such as the management of collaterals that may be required for access to central bank liquidity and the delivery of banknotes in the different economies.¹³

A5.34 If a monetary union replaces national currencies with a common currency, they form a currency union. For statistical purposes, a currency union is defined as a union to which two or more economies belong and that has a regional central decision-making body, commonly a currency union central bank, endowed with the legal authority to conduct a single monetary policy and issue the single currency of the union.

A5.35 Monetary and currency unions do not raise specific issues for GFS, even in cases where a single, common central bank is a substitute for a domestic central bank in the context of the relationships between central bank and government. The currency union central bank is an institutional unit in its own right, owning assets and incurring liabilities, and is nonresident of any currency union member economy but resident in the currency union (see paragraph 2.21). Distributions of profits of such regional central banks should be classified as income on the financial asset to which member economies’ subscriptions are attributed.

Conceptual Differences between IPSASs and GFS Reporting Guidelines

A6.9 The conceptual differences between IPSASs and GFS reporting guidelines are discussed under the following headings:

• Objectives

• Reporting entity

• Recognition criteria for some assets, liabilities, revenue, and expense

• Valuation (measurement) differences for certain types of assets and liabilities

• Revaluations and other volume changes.

A6.10 Box A6.1 compares IPSASs and GFS reporting guidelines in these areas.

Reporting entity

A6.13 One of the fundamental differences between GFS reporting guidelines and IPSASs relates to the definition of the reporting entity and the process of consolidation (collectively often referred to as “identification of the reporting entity boundary”). Under GFS reporting guidelines, as described in Chapter 2 of the GFSM 2014 and in Chapter 4 of the 2008 SNA, institutional units are aggregated and consolidated into statistical sectors and subsectors. The focus of statistical reporting is primarily on consolidated sectors and subsectors. Although it is theoretically possible to create GFS reports for individual institutional units, separate statistical reports for individual units are usually not disseminated. Each individual entity in the economy is analyzed with respect to its ability to hold assets and liabilities and exercise full economic ownership over them, to determine if it can be considered an institutional unit.

^{Box A6.1}

Summary Comparison of GFS and IPSASs

There is considerable commonality between IPSAS and GFS reporting guidelines. There are also some important conceptual differences within each area. Presentation and terminology differences are described in paragraph A6.34.

Note: IPSASs = International Public Sector Accounting Standards.

Government Finance Statistics	IPSASs
Objectives
Evaluate economic impact: Government finance statistics are used to (i) analyze and evaluate the outcomes of fiscal policy decisions, (ii) determine the impact on the economy, and (iii) compare national and international outcomes. The GFS reporting framework was developed specifically for public sector input to other macroeconomic datasets.	Evaluate financial performance and position: General purpose financial statements are used to (i) evaluate financial performance and financial position, (ii) hold management accountable, and (iii) inform decisionmaking by users of the general purpose financial statements.
Reporting entity
Institutional units and sectors: The statistical reporting unit is an institutional unit, defined as an entity that is capable, in its own right, of owning assets, incurring liabilities, and engaging in economic activities in its own name. The reporting entity may be an institutional unit, but the primary focus is on a group of institutional units (consolidated sector or subsector). Control and the nature of economic activities determine consolidation and the scope of the reporting entity. The general government sector does not include institutional units primarily engaged in market activities.	Economic entity and consolidation: The reporting unit for financial statements is an economic entity, defined as a group of entities that includes one or more controlled entities. Control is the main criterion that determines consolidation. The whole of the government reporting entity, at the highest level of consolidation, may include, in addition to government departments, subnational bodies such as state governments, and government-owned businesses that primarily engage in market activities.
Recognition criteria
The key difference relates to some liabilities.
Economic events recognized: GFS recognize economic events on the accrual basis of recording when economic value is created, transformed, exchanged, transferred, or extinguished. To maintain symmetry for both parties to the transaction, some provisions recognized in IPSAS reporting may not be recognized under GFS reporting. While not recognized, those provisions may instead be disclosed as GFS memorandum items, as is the case, for example, with exposures to explicit one-off guarantees and provisions for doubtful debts.	Past events with probable outflows recognized: IPSASs recognize liabilities, including provisions, when a past economic event has taken place; the amount can be reliably estimated; and future outflows are probable. These factors allow, in certain cases, recognition of items that do not involve a counterparty recognizing a symmetrical amount. For example, so long as criteria are met, IPSASs require recognition of restructuring provisions.
Valuation (measurement)
Current market prices: Current market prices are used for all flows and stocks of assets/liabilities, but allowance is made for the use of alternative valuation methods where an active market does not exist.	Fair value, historic cost, and other bases: Fair value, historic cost, or other bases are used for the measurement of assets and liabilities. Similar assets and liabilities must be valued consistently and the bases disclosed. Where an entity reports an item using historic cost, IPSASs often encourage disclosure of fair value if there is a material difference between the reported cost and the item’s fair value. Often IPSASs also allow entities to choose between fair value and historic cost.
Revaluations and other volume changes
Record all revaluations and changes in volume in the Statement of Other Economic Flows: Separating all these “other economic flows” is viewed as useful for fiscal analysis, on the basis that revaluations and changes in volume do not represent fiscal policy decisions directly within the control of government. GFS distinguishes between value changes and volume changes.	Realized and unrealized gains and losses: Some gains or losses due to revaluations or changes in volume of assets are reported in the Statement of Financial Performance, while others are reported directly in the Statement of Changes in Net Assets/Equity. Some other gains and losses—for example, market value changes for property, plant, and equipment carried at historic cost—are not reported at all.

Note: IPSASs = International Public Sector Accounting Standards.

View Table

Government Finance Statistics	IPSASs
Objectives
Evaluate economic impact: Government finance statistics are used to (i) analyze and evaluate the outcomes of fiscal policy decisions, (ii) determine the impact on the economy, and (iii) compare national and international outcomes. The GFS reporting framework was developed specifically for public sector input to other macroeconomic datasets.	Evaluate financial performance and position: General purpose financial statements are used to (i) evaluate financial performance and financial position, (ii) hold management accountable, and (iii) inform decisionmaking by users of the general purpose financial statements.
Reporting entity
Institutional units and sectors: The statistical reporting unit is an institutional unit, defined as an entity that is capable, in its own right, of owning assets, incurring liabilities, and engaging in economic activities in its own name. The reporting entity may be an institutional unit, but the primary focus is on a group of institutional units (consolidated sector or subsector). Control and the nature of economic activities determine consolidation and the scope of the reporting entity. The general government sector does not include institutional units primarily engaged in market activities.	Economic entity and consolidation: The reporting unit for financial statements is an economic entity, defined as a group of entities that includes one or more controlled entities. Control is the main criterion that determines consolidation. The whole of the government reporting entity, at the highest level of consolidation, may include, in addition to government departments, subnational bodies such as state governments, and government-owned businesses that primarily engage in market activities.
Recognition criteria
The key difference relates to some liabilities.
Economic events recognized: GFS recognize economic events on the accrual basis of recording when economic value is created, transformed, exchanged, transferred, or extinguished. To maintain symmetry for both parties to the transaction, some provisions recognized in IPSAS reporting may not be recognized under GFS reporting. While not recognized, those provisions may instead be disclosed as GFS memorandum items, as is the case, for example, with exposures to explicit one-off guarantees and provisions for doubtful debts.	Past events with probable outflows recognized: IPSASs recognize liabilities, including provisions, when a past economic event has taken place; the amount can be reliably estimated; and future outflows are probable. These factors allow, in certain cases, recognition of items that do not involve a counterparty recognizing a symmetrical amount. For example, so long as criteria are met, IPSASs require recognition of restructuring provisions.
Valuation (measurement)
Current market prices: Current market prices are used for all flows and stocks of assets/liabilities, but allowance is made for the use of alternative valuation methods where an active market does not exist.	Fair value, historic cost, and other bases: Fair value, historic cost, or other bases are used for the measurement of assets and liabilities. Similar assets and liabilities must be valued consistently and the bases disclosed. Where an entity reports an item using historic cost, IPSASs often encourage disclosure of fair value if there is a material difference between the reported cost and the item’s fair value. Often IPSASs also allow entities to choose between fair value and historic cost.
Revaluations and other volume changes
Record all revaluations and changes in volume in the Statement of Other Economic Flows: Separating all these “other economic flows” is viewed as useful for fiscal analysis, on the basis that revaluations and changes in volume do not represent fiscal policy decisions directly within the control of government. GFS distinguishes between value changes and volume changes.	Realized and unrealized gains and losses: Some gains or losses due to revaluations or changes in volume of assets are reported in the Statement of Financial Performance, while others are reported directly in the Statement of Changes in Net Assets/Equity. Some other gains and losses—for example, market value changes for property, plant, and equipment carried at historic cost—are not reported at all.

Note: IPSASs = International Public Sector Accounting Standards.

A6.14 Those government-controlled units that are primarily engaged in nonmarket (including redistributive) activities are included within the general government sector. Although all resident government-controlled entities, including public corporations engaged in market activities, are included within the public sector, nonmarket activities determine the delineation of the general government sector, as a distinct subsector within the public sector. The general government sector does not include institutional units primarily engaged in market activities. The general government sector presents consolidated data, which means that transactions and stock positions between general government sector units are eliminated.

A6.15 In IPSASs, the “reporting entity” is a government or other public sector organization, program, or identifiable activity that prepares general purpose financial reports (GPFRs). Within a jurisdiction, reports may be prepared on either a compulsory or voluntary basis. A key characteristic of a reporting entity is that there are users who depend on GPFRs for information about the entity. A reporting entity may be a “group reporting entity.”

A6.16 A group reporting entity consists of two or more separate entities that present GPFRs as if they are a single entity. A group reporting entity is identified where one entity has the authority and capacity to direct the activities of one or more other entities so as to benefit from the activities of those entities. It may also be exposed to a financial burden or loss that may arise as a result of the activities of entities whose activities it has the authority and capacity to direct. If these conditions are met, then the entity is described as a “controlling entity,” with control defined according to the principle of exercisable power to govern the financial and operating policies of another entity so as to benefit from its activities.

A6.17 The requirement to consolidate entities differs in IPSASs and GFS. Under IPSAS 6, Consolidated and Separate Financial Statements, consolidated financial statements are the financial statements of a group of entities presented as those of a single entity. This means that a controlling entity will consolidate the financial statements of all of its controlled entities, irrespective of whether they are: (i) resident units, (ii) market/nonmarket entities, or (iii) the IPSAS equivalent of a market entity—that is, a “government business enterprise” (GBE). This contrasts with the general government sector consolidation approach, described earlier, where nonresident and resident market institutional units are included as a single line showing net investment, rather than fully consolidated into the general government sector.

A6.18 Nevertheless, IPSASs provide for the disclosure of financial information about the general government sector. IPSAS 22, Disclosure of Financial Information about the General Government Sector, specifically sets aside the application of IPSAS 6 while retaining the application of all other IPSASs. This allows—though does not require—an aggregate presentation that does not consolidate controlled interests in entities in other sectors.

A6.19 IPSASs also have a requirement (see IPSAS 18, Segment Reporting) that a reporting entity provides disaggregated financial information about each of its segments. The information provided includes segment assets, liabilities, revenue, and expense. Segments are usually defined either in terms of geographical regions or services. GFS include data on expenditure by function of government.

Presentation and Terminology Differences

A6.34 Presentation and terminology differences between IPSASs and GFS reporting guidelines also exist. As a result, the GFS and IPSAS financial statements and disclosures look different, even though the information reported is largely the same, apart from the recognition and measurement differences discussed elsewhere in this paper. This subsection describes the main presentation and terminology differences between GFS guidance and IPSAS requirements.

A6.35 The main presentation and terminology differences are as follows:

• Different names for the IPSAS equivalents of the GFS statements.

• The types of classification structures included in the balance sheet (statement of financial position), operating statement (statement of financial performance), and cash flow statement for the two reporting frameworks differ, which, in some cases, also necessitate differences in terminology.

• GFS sets out a minimum level of detail for a comprehensive list of standard line items that all entities must report in their GFS statements, while IPSASs establish a minimum set of standard line items, while providing principles and guidance on further line items that a reporting entity may need to report.

• The way in which additional information about the data is disclosed differs in the two frameworks.

• The definition and/or value of key statement totals (such as total assets, net worth, total revenue, and surplus/deficit) may differ.

A6.36 Each of these main differences is discussed in paragraphs A6.37–A6.46.