8. Transactions in Nonfinancial Assets
- Sage De Clerck, and Tobias Wickens
- Published Date:
- March 2015
This chapter describes transactions in nonfinancial assets and their classification.
8.1Chapter 7 describes the balance sheet and the assets and liabilities recorded on it. As an integrated framework, GFS also includes the flows necessary to explain all changes between the balance sheet at the beginning of the period and the balance sheet at the end of the reporting period. As described in paragraphs 3.1–3.4, there are two types of flows—transactions and other economic flows—both of which can affect stock positions of assets and liabilities. This chapter describes the transactions that affect stock positions of nonfinancial assets. Chapter 9 describes the transactions that affect stock positions of financial assets and liabilities, and Chapter 10 describes other economic flows.
8.2 For each category of nonfinancial assets, there is an accounting identity linking successive balance sheets.1 The identity states that:
The value of a category of nonfinancial assets on the balance sheet at the beginning of the reporting period
The total value of that category of nonfinancial assets acquired in transactions during the reporting period
The total value of that category of nonfinancial assets disposed of in transactions during the reporting
The value of consumption of fixed capital for that category of nonfinancial assets during the reporting period
The net value of other economic flows that affect that category of nonfinancial assets during the reporting period
The value of the category of nonfinancial assets on the balance sheet at the end of the reporting period.
This identity requires that transactions, other economic flows, and stock positions be recorded consistently with regard to time of recording and valuation. The accounting rules governing these factors are described in Chapter 3.
8.3 Transactions can change stock positions of nonfinancial assets in different ways and all must be accounted for. The more important types of transactions follow:
Existing assets of all types can be acquired from or disposed to other units by purchase/sale, barter, or transfer in kind.
Newly produced fixed assets, inventories, and valuables can be sold or otherwise disposed of by their producers in the same manner as existing assets, or the producers can retain them for their own use.
A government unit may produce goods and services for own use as fixed assets (i.e., own-account fixed capital formation). These transactions are classified as acquisitions of fixed assets (and shown as a memorandum item).
Renovations, reconstructions, or enlargements that significantly increase the productive capacity or extend the service life of an existing fixed asset are classified as acquisitions of fixed assets even though physically they function as part of the existing asset. Land improvements are a separate category of fixed assets, distinct from the nonproduced land asset.
Consumption of fixed capital is an internal transaction that records the decrease in the value of fixed assets because they have been used repeatedly or continuously in production.
Inventories can be acquired (additions) or disposed of (withdrawals) through internal transactions as well as transactions with other units. For example, withdrawals from inventories of materials and supplies for use in the production of general government services and transfers of completed production from work-in-progress inventories to inventories of finished goods are internal transactions. Recurrent losses and spoilage of goods held in inventories are also treated as internal transactions.
8.4 All transactions that increase a unit’s holdings of nonfinancial assets are labeled acquisitions. With the exception of consumption of fixed capital, all transactions that decrease a unit’s holdings of nonfinancial assets are labeled disposals. Thus, the results of transactions in a particular category of nonfinancial assets can be presented either as total acquisitions, total disposals, and consumption of fixed capital, or as net investment in nonfinancial assets.2 The net investment in a nonfinancial asset is its acquisitions minus disposals minus consumption of fixed capital. The gross investment in a nonfinancial asset is its acquisitions minus disposals (i.e., consumption of fixed capital is not taken into account). On a cash basis, the purchases minus the sales of nonfinancial assets are referred to as the net cash outflow from investment in nonfinancial assets.
8.5 The remainder of this chapter first describes costs of ownership transfer, valuation, time of recording, consumption of fixed capital, and netting of transactions that affect nonfinancial assets and then provides details on the classification of transactions that affect specific categories of nonfinancial assets.
Costs of Ownership Transfer
8.6 Costs of ownership transfer are the costs associated with acquiring and disposing of nonfinancial assets (other than inventories3) and consist of:
All professional charges or commissions incurred by both units acquiring or disposing of an asset, such as fees paid to lawyers, architects, surveyors, engineers, and valuers, and commissions paid to estate agents and auctioneers
Any trade and transport costs separately invoiced to the purchaser
All taxes payable by the unit acquiring the asset on the transfer of ownership of the asset
Any tax payable on the disposal of an asset
Any delivery and installation or disinstallation costs not included in the price of the asset being acquired or disposed of
Any terminal costs4 incurred at the end of an asset’s life, such as those required to render the structure safe or to restore the environment in which it is situated.
8.7 The costs of ownership transfer on fixed assets, valuables, and nonproduced assets are treated as transactions in fixed assets. In particular, transactions in the:
Costs of ownership transfer on fixed assets are recorded as transactions in the relevant fixed asset
Costs of ownership transfer on valuables are recorded as transactions in valuables (313.1)
Costs of ownership transfer on land are recorded, by convention, with land improvements (31114.1), a fixed asset
Costs of ownership transfer on nonproduced assets other than land are recorded in fixed assets as transactions in costs of ownership transfer on nonproduced assets other than land (31133.1), as explained in paragraph 8.42; in the balance sheet, however, these costs of ownership transfer on nonproduced assets other than land are incorporated in the value of the asset to which they relate (see paragraph 3.111), even though the asset is nonproduced (i.e., there are no costs of ownership transfer on nonproduced assets other than land shown separately in the balance sheet).
8.8 Costs of ownership transfer are attributed to the purchaser or seller of the asset according to which unit bears the responsibility of meeting the costs. These costs of ownership transfer should be written off as consumption of fixed capital, as discussed in paragraph 6.60. Interest and other financing charges incurred in connection with a transaction are not costs of ownership transfer.
8.9 General principles for valuation of transactions in assets and liabilities are discussed in paragraphs 3.108–3.112. Acquisitions and disposals of fixed assets and valuables are valued at market prices (i.e., exchange value plus costs of ownership transfer). Fixed assets acquired through barter or transfer in kind are valued at a market price-equivalent. Fixed assets produced for own-account capital formation or for transfers in kind are valued at their estimated market prices before adding any taxes less subsidies, transport, or distribution margins, or by their costs of production when satisfactory estimates of market prices cannot be made.5
8.10 Additions to and withdrawals from inventories are valued at market prices applicable at the time of the addition or withdrawal, which in the case of withdrawals may be quite different from their value when acquired.6 No costs for installation or ownership transfer are added or subtracted for transactions in inventories.
8.11 Acquisitions and disposals of land are valued at their exchange value, and the costs of ownership transfer on land are included, by convention, with land improvements (311141.1). Acquisitions and disposals of nonproduced assets other than land are valued at their exchange value. The costs of ownership transfer on nonproduced assets other than land are recorded as a separate category of fixed assets, costs of ownership transfer on nonproduced assets other than land (31133.1), as explained in paragraph 8.42.
8.12 General government units may acquire or dispose of nonfinancial assets on a nonmarket basis as an element of their fiscal policy, either by purchasing an asset for more than its market value or by selling an asset for less than its market value. By their nature, such transactions involve a transfer component. If the asset’s market value can be determined, then the transaction should be valued at that amount and a second transaction should be recorded as an expense to account for the transfer.7 Usually, however, there is not an active market for the assets and it is difficult to estimate a market value. In this case, the value of the acquisition or disposal should be the amount of economic value exchanged, which could be in the form of ownership rights on physical objects (e.g., a dwelling) or intangible assets (e.g., a film original).
Time of Recording
8.13 As described in paragraph 3.62, on an accrual basis, transactions are recorded at the time economic value is created, transformed, exchanged, transferred, or extinguished. For transactions in nonfinancial assets, this time is when the economic ownership of the nonfinancial assets is obtained or relinquished. On a cash basis, transactions are recorded when cash payments are made.
8.14 Transactions (including by barter, payment in kind, or transfer in kind)8 in nonfinancial assets are, in principle, recorded the moment when economic ownership changes, which often may depend on the provisions in the sales contract. When change of ownership is not obvious, the time of recording by the transaction partners9 may be a good indication and, failing that, the moment when there is a change in physical possession or control.
8.15 The time of recording of the acquisition of a new nonfinancial asset depends on how the asset is acquired.
If the asset is acquired from the producing unit as a finished good, then the timing is determined in the same manner as for the purchase of an existing asset—that is, when economic ownership changes hands. Typically, this time is not the time at which the asset was produced or the time at which it is put to use in production.
When another unit produces buildings and structures under a contract of sale agreed in advance with the general government unit, and the production extends over more than one reporting period, then ownership of the structure is deemed to be transferred to the government unit as work proceeds; stage or progress payments may approximate the value of the transactions in fixed assets to be recorded.10 In the absence of a contract of sale, the incomplete production each period is added to work in progress of the contractor (see also paragraph 7.37).
When production is carried out on own account, there is no formal transfer of ownership. The producing unit effectively takes possession progressively as production proceeds, so that the asset is acquired as each transaction involved in its production is recorded. For example, if a government unit constructs a building using its own workforce, then each use of goods and services and work performed by employees is classified as an acquisition of the fixed asset as work takes place.
8.16 Consumption of fixed capital, in principle, should be recorded continuously throughout each reporting period. In practice, consumption of fixed capital can be computed only after the end of the reporting period because its value depends on the average price of the asset over the entire reporting period (see paragraphs 6.53–6.61).
8.17 Fixed assets acquired or disposed of by means of a financial lease are deemed to be acquired or disposed of when the lease is signed or economic control of the asset otherwise changes hands.
Consumption of Fixed Capital
8.18 Consumption of fixed capital is an internal transaction that reflects the fact that an institutional unit used up a portion of each of its fixed assets through its productive activities during the reporting period and the value of those assets declined correspondingly. As a result, consumption of fixed capital (23), which is recorded as an expense, is also recorded as a transaction that reduces the value of the respective category of fixed asset, so that there is no impact on expenditure nor net lending/net borrowing (see paragraph 4.20). The recording of consumption of fixed capital is discussed in detail in paragraphs 6.53–6.61 and Box 6.1.
Netting of Transactions
8.19 It is recommended that transactions in non-financial assets other than inventories be presented as acquisitions, disposals, and consumption of fixed capital, as indicated in Table 8.1. The net investment in a category of nonfinancial assets is computed as acquisitions minus disposals minus consumption of fixed capital.
|Acquisitions of||Disposals of||Consumption of|
|Nonfinancial assets||31.1||31.2||31.3 = 23||31|
|Buildings and structures||3111.1||3111.2||3111.3||3111|
|Buildings other than dwellings||31112.1||31112.2||31112.3||31112|
|Machinery and equipment||3112.1||3112.2||3112.3||3112|
|Other machinery and equipment||31122.1||31122.2||31122.3||31122|
|Information, computer, and telecommunication (ICT) equipment||311221.1||311221.2||311221.3||311221|
|Machinery and equipment|
not elsewhere classified
|Other fixed assets||3113.1||3113.2||3113.3||3113|
|Cultivated biological resources||31131.1||31131.2||31131.3||31131|
|Animal resources yielding repeat products||311311.1||311311.2||311311.3||311311|
|Tree, crop, and plant resources yielding repeat products||311312.1||311312.2||311312.3||311312|
|Intellectual property products||31132.1||31132.2||31132.3||31132|
|Research and development||311321.1||311321.2||311321.3||311321|
|Mineral exploration and evaluation||311322.1||311322.2||311322.3||311322|
|Computer software and databases||311323.1||311323.2||311323.3||311323|
|Entertainment, literary, and artistic originals||311324.1||311324.2||311324.3||311324|
|Other intellectual and property products||311325.1||311325.2||311325.3||311325|
|Costs of ownership transfer on nonproduced assets other than land||31133.1||31133.2||31133.3||31133|
|Materials and supplies||31221|
|Work in progress||31222|
|Goods for resale||31224|
|Mineral and energy resources||3142.1||3142.2||3142|
|Other naturally occurring assets||3143.1||3143.2||3143|
|Noncultivated biological resources||31431.1||31431.2||31431|
|Other natural resources||31433.1||31433.2||31433|
|Natural resources not elsewhere|
|Intangible nonproduced assets||3144.1||3144.2||3144|
|Contracts, leases, and licenses||31441.1||31441.2||31441|
|Marketable operating leases||314411.1||314411.2||314411|
|Permits to use natural resources||314412.1||314412.2||314412|
|Permits to undertake specific activities||314413.1||314413.2||314413|
|Entitlement to future goods and|
services on an exclusive basis
|Goodwill and marketing assets||31442.1||31442.2||31442|
|Own-account capital formation||3M1|
|Compensation of employees||3M11|
|Use of goods and services||3M12|
|Consumption of fixed capital||3M13|
|Other taxes on production minus other|
subsidies on production
Consumption of fixed capital is not recorded for inventories. It is recorded for nonproduced assets only to the extent of costs of ownership transfer on nonproduced assets other than land (a fixed asset). For land, the costs of ownership transfer are included, by convention, with land improvements (a fixed asset).
In GFS, only the net changes in inventories resulting from transactions are recorded, but gross acquisitions and disposals may be recorded, if needed.
Consumption of fixed capital is not recorded for inventories. It is recorded for nonproduced assets only to the extent of costs of ownership transfer on nonproduced assets other than land (a fixed asset). For land, the costs of ownership transfer are included, by convention, with land improvements (a fixed asset).
In GFS, only the net changes in inventories resulting from transactions are recorded, but gross acquisitions and disposals may be recorded, if needed.
8.20 Acquisitions of, use of, and disposals of inventories should be netted because the separate data for acquisitions and disposals are not economically meaningful. In addition, as a matter of practice, it is often impossible to estimate individual transactions in inventories (see paragraphs 8.44–8.47). Inventories are not subject to consumption of fixed capital.
Classification and Recording of Transactions in Nonfinancial Assets
8.21 The classification of transactions in nonfinancial assets is shown in Table 8.1. The table summarizes transactions in nonfinancial assets as acquisitions, disposals, and consumption of fixed capital.
8.22 The classification of transactions in nonfinancial assets is identical to the classification of stock positions in nonfinancial assets employed in Chapter 7 (Table 7.2). Chapter 7 also provides full definitions of the assets included in each category, and those definitions are not repeated here. This chapter provides guidance applicable to transactions affecting all or most categories of nonfinancial assets. The remainder of this section provides guidance only on those transactions for which the general guidance may not be sufficient.
8.23 In addition to the classification of transactions in nonfinancial assets described in this chapter, the Classification of the Functions of Government (COFOG) can also be applied to the acquisitions minus disposals of these assets. COFOG is described in the annex to Chapter 6.
Fixed Assets (311)11
8.24 The cost of acquisition of assets from third parties is determined by the market price of the transactions. Government or public sector units can also incur costs associated with the production or the maintenance of fixed assets. To determine the amount of these costs that should be recorded as the value of own-account production of fixed assets during the reporting period, a distinction between major improvements of assets and maintenance of assets is necessary. The section on Fixed Assets first describes how to distinguish transactions that should be recorded as acquisitions of fixed assets from transactions that should be recorded as expense related to maintenance. The recording of transactions in specific categories of assets follows.
Major improvements versus maintenance and repair
8.25 Major improvements (such as renovations, reconstructions, and enlargements) to existing assets that increase their productive capacity, extend their service lives, or both, are classified as acquisitions of fixed assets. On the other hand, maintenance and repair of fixed assets constitute an expense classified as the use of goods and services (22) (as mentioned in paragraph 6.45). By definition, however, major improvements do not lead to the creation of new assets that can be separately identified and valued. Instead, the value of such an improvement is added to the value of the existing underlying asset.
8.26 Although the distinction is not clear-cut, major improvements to assets are distinguished from maintenance and repairs by the following features:
The decision to renovate, reconstruct, or enlarge an asset is a deliberate investment decision that may be undertaken at any time and is not dictated by the condition of the asset. Major renovations of ships, buildings, or other structures are frequently undertaken well before the end of their normal service lives.
The major renovations, reconstructions, or enlargements increase the performance or capacity of existing assets or significantly extend their previously expected service lives. Enlarging or extending an existing road, building, or structure constitutes a major change in this sense, but a complete refitting or restructuring of the interior of a building also qualifies.
8.27 Maintenance and repairs are distinguished by two features:
They are activities that owners or users of assets are obliged to undertake periodically in order to be able to utilize such assets over their expected service lives. They are current costs that cannot be avoided if the fixed assets are to continue to be used. The owner or user cannot afford to neglect maintenance and repairs as the expected service life may be drastically shortened otherwise.
They do not change the fixed asset or its performance, but simply maintain it in good working order or restore it to its previous condition in the event of a breakdown. Defective parts are replaced by new parts of the same kind without changing the basic nature of the fixed asset.
Buildings and structures (3111)
8.28 In addition to the transactions reflecting the acquisition of newly constructed buildings and structures, acquisitions of buildings and structures include all amounts payable for site clearance and preparation and the cost of all fixtures, facilities, and equipment that are integral parts of buildings and structures.
8.29 Certain structures, such as buildings, roads, and bridges, may be produced for communal use by groups of households. After the construction is completed, the ownership of such structures may then be transferred to a general government unit that will assume responsibility for their maintenance. When the transfer occurs, an acquisition of a structure is recorded together with the receipt of a capital transfer in kind.
8.30 The construction of new public monuments, as well as major improvements to existing public monuments, constitutes an acquisition of buildings and structures, either as dwellings (31111), buildings other than dwellings (31112), or other structures (31113), as explained in paragraphs 7.42–7.43.12 However, when the special archaeological, historical, or cultural significance of a structure or site not already recorded in the balance sheet is first recognized, it is recorded as an other change in the volume of assets, as explained in paragraph 10.50.
8.31 The costs of land improvements (31114) are recorded as transactions and, in subsequent periods, transactions in consumption of fixed capital (23) are recorded, based on the service life of the improvement. Any excess in the increase in the value of the land over the value of land improvements or any increase in price levels due to adjacent capital activity is recorded as holding gains. Other changes in the volume of assets (economic appearance) of the nonproduced asset land (5141) should be recorded when adjacent activities bring land into the asset boundary (see paragraph 10.52).
8.32 Acquisitions of tunnels and other structures associated with the mining of mineral deposits are classified as acquisitions of structures and not as improvements to land. These assets are used separately from the land through which they are drilled or bored. The costs of ownership transfer on land are included, by convention, with land improvements, and these costs are written off over the period the owner expects to own the land.
Machinery and equipment (3112)
8.33 The determination of which goods should be classified as machinery and equipment is normally straightforward. However, as explained in paragraphs 6.43 and 7.40, some flexibility may be needed in the recording of small/hand tools.
Other fixed assets (3113)
Cultivated biological resources (31131)
8.34 As explained in paragraphs 7.59–7.63, cultivated biological resources comprise animal resources yielding repeat products (311311) and tree, crop, and plant resources yielding repeat products (311312). Acquisitions of cultivated biological resources include acquisitions from other units of plants and animals that are cultivated for the products they yield year after year and the value of similar plants and animals produced on own account.13 Disposals consist of animals and plants sold or otherwise disposed of, including animals sold for slaughter or slaughtered by their owners and plants cut down before the end of their service lives. Disposals do not include exceptional losses of animals and plants due to major outbreaks of disease, contamination, drought, famine, or other natural disasters, which are recorded as other changes in the volume of assets. Consumption of fixed capital on these resources includes incidental losses of animals and plants from natural causes, as well as the decline in an animal’s or plant’s value as it gets older.
8.35 The net investment in livestock that are cultivated for the products they yield year after year (e.g., dairy cattle) is equal to the total value of all mature animals and immature animals produced on own account or acquired by users of the livestock minus the value of their disposals minus consumption of fixed capital.
8.36 The net investment in plantations, orchards, etc. is equal to the value of the acquisitions of mature trees, shrubs, etc. (including immature trees, shrubs, etc. produced on own account) minus their disposals minus consumption of fixed capital. The value of immature trees, shrubs, etc. may be approximated, if necessary, by the value of accumulated costs incurred in their production.
Intellectual property products (31132)
8.37 As explained in paragraphs 7.64–7.73, intellectual property products comprise:
Research and development (311321)
Mineral exploration and evaluation (311322)
Computer software and databases (311323)
Entertainment, literary, and artistic originals (311324)
Other intellectual and property products (311325).
8.38 The value of expenditure on research and development (311321) should be determined in terms of the economic benefits it is expected to provide in the future. It is treated as an asset except in cases where it is clear that the activity does not entail any economic benefits for its owner (see paragraphs 7.66–7.67).
8.39 As mentioned in paragraph 7.68, expenditure incurred on exploration is classified as the acquisition of mineral exploration and evaluation (311322). Mineral exploration expenditure includes the costs of actual test drillings and borings and all other costs incurred to make it possible to carry out the tests, such as prelicense, license, acquisition, and appraisal costs, the costs of aerial and other surveys, and transportation and other costs incurred to make the exploration possible. Consumption of fixed capital may be calculated for such assets by using average service lives similar to those used by mining or oil corporations in their own accounts.
8.40Computer software and databases (311323) include acquisitions of computer software that comprise programs, program descriptions, and supporting materials for both systems and applications software that are expected to be used for more than one year. The net investment in nonfinancial assets in the form of computer software includes both the initial development and subsequent extensions of software, as well as acquisition of copies that are classified as assets. Software developed in-house is valued at its cost of production. This category also includes the purchase, development, or extension of large databases that the unit expects to use for more than one year. When a database is created, its value will generally have to be estimated by a sum-of-costs approach. These costs include the cost of preparing data in the appropriate format, staff time estimated on the basis of the amount of time spent in developing the database, and costs of items included as use of goods and services.14 Not included are the cost of the database management system and the cost of acquiring or producing the data. Transactions in databases sold should be valued at their market price, which includes the value of the information content. If the value of a software component in a database that is sold is available separately, it should be recorded as the sale of software.
8.41 The production of new entertainment, literary, and artistic originals (311324) is recorded at their current market price when they are actually traded. However, this asset category is often undertaken on own account. Subsequently, they may be sold outright or by means of licenses. When produced on own account, it may be difficult to establish their market value, which depends on the present value of the future benefits the owner expects to derive from their use. In the absence of information, it may be necessary to value the acquisition of the original by its cost of production.
Costs of ownership transfer on nonproduced assets other than land (31133)
8.42 Transactions in the costs of ownership transfer on nonproduced assets15 other than land are treated as transactions in fixed assets because these costs are considered a produced asset. The costs of ownership transfer on nonproduced assets other than land are subject to consumption of fixed capital, which is also included in this category. However, in the balance sheet, these costs of ownership transfer, as well as the consumption of fixed capital on these costs, are reflected in the value of the respective nonproduced assets. The additional entries necessary for this treatment are discussed in paragraph 10.83. The treatment of costs of ownership transfer on nonproduced assets is illustrated in Figure 8.1.
Figure 8.1Illustrating the Treatment of Costs of Ownership Transfer on Nonproduced Assets
• Costs of ownership transfer on land are, by convention, included with land improvements. This applies to the transactions as well as the stock position of land improvements.
• There are no stock positions in costs of ownership transfer on nonproduced assets other than land shown separately in the balance sheet. These costs are included with the respective nonproduced assets in the balance sheet.
• Transactions in the costs of ownership transfer on nonproduced assets other than land are recorded as part of fixed assets.
• Costs of ownership transfer on nonproduced assets (and on produced assets other than inventories—which are not shown in this example) are subject to consumption of fixed capital over the period the owner expects to hold the asset.
• Costs of ownership transfer on nonproduced assets other than land and consumption of fixed capital on these costs are reclassified, through other changes in the volume of assets, to the respective nonproduced assets to maintain the integration of stock positions and flows. These reclassifications are considered to take place at the time of recording the transactions. The costs of ownership transfer on land, which are included with land improvements, are not reclassified to land and remain part of the stock of land improvements.
Weapons systems (3114)
8.43 The acquisitions and disposals of weapons systems that meet the general definition of assets include vehicles and other equipment such as warships, submarines, military aircraft, tanks, missile carriers and launchers, etc. The acquisitions of most single-use weapons they deliver, such as ammunition, missiles, rockets, bombs, etc., are classified as transactions in military inventories and their use as withdrawals from military inventories. However, some single-use items, such as certain types of ballistic missile with a highly destructive capability, may be classified as fixed assets(see paragraph 7.74).
8.44 In principle, net investment in inventories (change in inventories) is measured by the value of the additions to inventories minus the value of withdrawals from inventories minus the value of any recurrent losses of goods held in inventories during the reporting period.16 In general, additions to and withdrawals from inventories should be recorded according to the same principles used for recording transactions in other nonfinancial assets. Additions to inventories are recorded when products are purchased, produced, or otherwise acquired, and withdrawals from inventories are recorded when products are sold, used up in production, transferred to a different category of inventories, or otherwise relinquished.
8.45 In contrast to other nonfinancial assets, however, no costs of ownership transfer are included in the values of additions to or withdrawals from inventories, and no consumption of fixed capital is attributed to inventories, as indicated by the shaded area in Table 8.1. Further, only the net value of additions minus withdrawals of inventories is usually estimated rather than separate, gross values for additions and withdrawals, unlike for other nonfinancial assets. This estimate of the changes in inventories is used in the formula to determine an estimate of expense in the form of use of goods and services (22), as explained in paragraph 6.29.
8.46 To understand the various transactions in inventories, it is useful to distinguish between two functions performed by a unit: its function as a producer of goods and services and its function as an owner of assets. When a good is entered into inventories, it is acquired as an asset by the unit in its capacity as owner either by purchase (or barter) or by an internal transaction with itself as the producer. Conversely, a good leaving inventories represents the disposal of an asset by the owner either by sale or other use, by an internal transfer to the producer, or possibly as a result of recurrent losses (recurrent wastage, accidental damage, or pilfering).
8.47 Many transactions in inventories (i.e., additions to and withdrawals from) are purchases from or distributions to other units, but other acquisitions and disposals reflect internal transactions. All additions to and withdrawals from inventories, such as for use of goods or investment in fixed assets, should be valued at current market prices. Because of the continuous or frequent withdrawals from materials and supplies inventories and the additions to and withdrawals from work-in-progress inventories, information is usually not available to record these internal transactions accurately, and estimates may be necessary.
When materials and supplies (31221) are transferred to a production process, a transaction is recorded for the withdrawal, which is balanced by an addition either to work-in-progress inventories (31222), use of goods and services (22), or, in the case of own-account capital formation, a specific fixed asset or possibly valuables (313). In other words, the balancing entry depends on the nature of the production process. The acquisition of gold, diamonds, etc. intended for use in production is recorded under materials and supplies (31221), but the acquisition of the same items to hold as a store of value is recorded under valuables (313).
Transactions that add to work-in-progress inventories (31222) are, in principle, recorded continuously as production takes place. The counterpart transactions are reduction in other assets, such as materials and supplies, and the other costs incurred in production.17 When production is completed, all work in progress is reclassified as finished goods (31223). This reclassification is recorded as other changes in the volume of assets under the respective subcategories of inventories. Withdrawals of work-in-progress inventories (31222) should be valued at their cost of production, where all inputs are valued at their current market prices at the time of withdrawal rather than the prices paid for them. The difference between the prices payable for the inputs and their current market prices is a holding gain or loss. The ownership of work-in-progress inventories is transferable, if necessary. For example, it may be sold under exceptional circumstances, such as the liquidation of a public corporation.
Work-in-progress inventories should be recorded for single-use cultivated biological resources. Any cultivation of resources with repeat yields, other than on own account or under an agreed contract with another unit, is also included in work-in-progress inventories. However, repeat-yield resources, being cultivated on own account or under an agreed contract with another unit, are recorded as the acquisition of fixed assets.
A good is finished when its producer has completed its intended production process and such inventories of finished goods (31223) may be held only by the units that produce them. When finished goods are sold or otherwise disposed of (e.g., as compensation of employees in kind or social benefits in kind), a transaction must be recorded to reduce inventories of finished goods (31223), which is balanced by an increase in use of goods and services (22). The distribution of finished goods as compensation of employees in kind or social benefits in kind is always recorded as use of goods and services (22) by the unit that produced these goods (see paragraph 6.39).
Finished goods entering inventories are valued at the prices of those goods before adding any taxes, transport, or distribution margins, at the times the entries take place; finished goods withdrawn from inventories are valued at the prices before adding any taxes, transport, or distribution margins, at the time when their withdrawals take place. The difference between the “entering” and “withdrawal” values of finished goods is a holding gain or loss.
When goods held as goods for resale (31224) are sold or otherwise disposed of, two transactions are recorded. First, reduce inventories of goods for resale (31224) and record a counterpart transaction in expense, recorded as use of goods and services (22) expense at the purchase price. Second, record (at the sale price) a sales of goods and services (142), which is balanced by either an increase in currency and deposits (3202) or other accounts receivable (3208). The difference between the value recorded as sales of goods and services and use of goods and services is reflected in the net operating balance (NOB). By convention, goods acquired by government for distribution as social transfers in kind or other transfers in kind but that have not yet been so delivered are also included in goods for resale. The distribution of such goods is recorded as a reduction in inventories of goods for resale (31224), and an increase in subsidies (25), grants (26), social benefits (27), or current transfers not elsewhere classified (2821).
Goods for resale added to inventories are valued at their actual or estimated purchase prices, including any transportation charges paid to other units but not the costs of any transport services produced on own account by the unit taking delivery. In principle, goods acquired by barter are valued at their estimated purchasers’ prices at the time of acquisition. However, because there are no taxes or margins on bartered goods, the purchaser’s price is the same as the basic price. Goods for resale withdrawn from inventories are valued similarly at the purchase prices at which they can be replaced when they are withdrawn, which may differ from the prices that were paid to acquire them and the prices for which they were sold.18 Reductions in inventories are valued in this way whether the goods withdrawn are sold at a profit or at a loss, or even not sold at all as a result of physical deterioration, recurrent accidental damage, or pilfering.
When military inventories (31225) are used or otherwise disposed of, their cost is recorded as use of goods and services (22) expense. A counterpart transaction is recorded as the withdrawal of military inventories (31225). Additions and withdrawals of military inventories are valued in a manner similar to finished goods or goods for resale, depending on how they were acquired.
Recurrent losses of inventories resulting from physical deterioration, normal accidental damage, or pilfering should be treated as withdrawals in the same way as inventories withdrawn on purpose. In practice, determining the time of recording may be difficult because the time at which the inventories were stolen or spoiled may be unknown. Exceptional inventory losses are included as other changes in the volume of assets (see paragraph 10.70).
8.48 Acquisitions of valuables are valued at the prices payable plus any associated costs of ownership transfer incurred by the units acquiring the assets. Disposals are valued at the sales price minus any associated costs of ownership transfer incurred by the units disposing of the assets. Costs of ownership transfer may be significant for the services of appraisers, auctioneers, and dealers. Units fulfilling some functions of the monetary authority may have transactions in both monetary and nonmonetary gold, and care needs to be taken to classify them correctly and to record the other changes in the volume of assets needed to transfer gold from one category to the other.
Nonproduced Assets (314)
8.49 Transactions reflecting a change in the ownership of nonproduced assets should be recorded in the same manner as transactions in existing fixed assets. The recording of the costs of ownership transfer on nonproduced assets other than land and the consumption of fixed capital on these costs are discussed in paragraphs 8.42 and 10.83.
8.50 Purchases and sales of land exclude the costs of ownership transfer on land for both buyers and sellers. These costs are, by convention, included in land improvements (31114). Actions that lead to major improvements in the quantity, quality, or productivity of land, or prevent its deterioration (such as land clearance,19 land contouring, creation of wells and watering holes that are integral to the land in question, etc.), are also treated as resulting in land improvements (31114), not the acquisition of land (3141). When a government unit acquires land that is physically located in a foreign country (for use as an embassy, base, or other territorial enclave), the transaction converts the land into part of the economic territory of the country of the acquiring government and, therefore, it enters the balance sheet by means of a transaction (i.e., the acquisition of a nonfinancial asset).
8.51 Buildings, or other structures, and plantations are often purchased or sold together with the land on which they are situated, without separate valuations being placed on the structures and the land. Even if it is not feasible to obtain separate valuations, as may be the case for existing structures, it may be possible to determine whether the land or the structure accounts for most of their combined value and to classify the transaction as the purchase of land or of a structure, depending upon which has the greater value. If it is not possible to determine whether the land or the structure is the more valuable, by convention, the transaction should be classified as the purchase of a structure (i.e., as the acquisition of a fixed asset in the form of buildings and structures (3111)). A similar convention holds for plantations. In most cases, subsoil assets may be owned separately from the land and separate valuations should be estimated if possible. On the other hand, the law may stipulate that the ownership of the subsoil assets is inseparably linked to that of the land. For a financial lease of a building or plantation on the land when the assets are inseparable, see paragraph 7.95.
8.52 When governments acquire land (or other assets) under a compulsory sale by the owners, any difference between the market value of the assets acquired and any compensation provided is recorded as other changes in the volume of assets, in the form of an uncompensated seizure (see paragraph 10.62).
8.53 There is no consumption of fixed capital on land, but there are transactions in consumption of fixed capital on land improvements (31114) and costs of ownership transfer on land (which are included in land improvements).
Mineral and energy resources (3142)
8.54 Transactions in mineral and energy resources (3142) refer to acquisitions or disposals of deposits of mineral and energy resources in which the ownership of such assets passes from one institutional unit to another. Reductions in the value of known reserves of mineral and energy resources resulting from their depletion as a result of extracting the assets for purposes of production are not transactions but other changes in the volume of assets, as described in paragraph 10.52. Similarly, increases in the values resulting from discoveries are treated as other changes in the volume of assets. Decreases arising from reappraisals are also recorded as other changes in the volume of assets. The transactions in mineral and energy resources refer only to those mineral and energy resources over which ownership rights have been established.
Other naturally occurring assets (3143)
8.55 Transactions in noncultivated biological resources, water resources, and other natural resources relate to acquisitions or disposals of deposits of these resources in which the economic ownership of such assets passes from one institutional unit to another. Similar to mineral and energy resources, depletion of noncultivated biological resources, water resources, or other natural resources, because a portion of the asset has been extracted, is recorded as other changes in the volume of assets, as described in paragraph 10.52, and not as a transaction in nonfinancial assets.
Intangible nonproduced assets (3144)
8.56 As explained in paragraphs 7.104–7.117, intangible nonproduced assets consist of contracts, leases, and licenses (31441) and goodwill and marketing assets (31442).
8.57 Contracts, leases, and licenses may be marketable operating leases, licenses to use natural resources, permits to undertake specific activities and entitlement to future goods and services on an exclusive basis. The specific stocks and flows involved with contracts, leases, and licenses are discussed in Appendix 4.
8.58 As explained in paragraphs 7.113–7.117, goodwill is recorded in GFS only when its value is evidenced by a market transaction, usually the sale/ purchase of the whole corporation. The amortization of goodwill and marketing assets or other intangible nonproduced assets is an other economic flow rather than a transaction (see paragraph 10.55).
With the exception of consumption of fixed capital, the same identity could be applied to financial assets and liabilities.
The net investment in inventories is referred to as “changes in inventories.” Net investment in nonfinancial assets can be positive or negative.
Usually, there are no costs of ownership transfer on inventories.
In the case of some significantly large and important assets, such as oil rigs and nuclear power stations, there may also be major costs associated with the decommissioning of the asset at the end of its productive life. For some land sites, such as those used for landfill, there may be large costs associated with rehabilitation of the site. These are referred to collectively as terminal costs.
In GFS, it is assumed that market prices of fixed assets constructed by general government units will not be known, and these values are calculated as the sum of expense on compensation of employees, use of goods and services, and the consumption of fixed capital used for own-account production of these assets. This treatment also applies to the production of valuables and major improvements to land when carried out on own account.
Holding gains on inventories are discussed in paragraphs 10.16–10.17.
The expense often will be a capital transfer to a market enterprise and classified as capital transfers not elsewhere classified (2822). It would be a capital grant if the recipient is a general government unit. For inventories, this type of transfer is a subsidy (see paragraph 6.91).
These acquisitions and disposals are excluded from a pure cash basis of recording.
To maintain symmetry in the macroeconomic system, the time of recording should be the same for both partners to the transaction.
A transaction in other accounts receivable/payable is recorded if the value of the stage payment exceeds the value of the work put in place. As work proceeds, an acquisition of fixed assets is recorded by the final owner until the other accounts receivable/ payable are exhausted.
The numbers in parentheses after each classification category are the GFS classification codes. Appendix 8 provides all classification codes used in GFS.
Consumption of fixed capital on new public monuments as well as major improvements to existing public monuments should be calculated on the assumption of appropriately long service lives.
Plants and animals grown for a single use, such as animals grown for slaughter and trees grown for timber, are treated as inventories rather than fixed assets (see paragraphs 7.60–7.61).
If the database is created in-house, compensation of employees and use of goods and services related to this own-account capital formation are excluded from compensation of employees (21) and use of goods and services (22).
Transactions in nonproduced assets are discussed in paragraphs 8.49–8.58.
These changes in inventories are as a result of transactions. The value of the stock of inventories may also change due to other economic flows.
As explained in paragraph 6.27, an adjustment is made to use of goods and services (22) to account for those items used to produce nonfinancial assets, such as work-in-progress inventories.
The difference between the price at which goods for resale is added to inventories and the price at which it is withdrawn is a holding gain or loss.
Costs relating to site clearance and preparation of land for purposes of construction are excluded; these are classified as the acquisition of buildings and other structures.