10. Other Economic Flows
- Sage De Clerck, and Tobias Wickens
- Published Date:
- March 2015
This chapter describes the other economic flows that are recorded in the government finance statistics framework. The two major categories are holding gains and losses and other changes in the volume of assets.
10.1 Other economic flows are changes in the volume or value of assets or liabilities that do not result from transactions. This chapter describes the two major categories of other economic flows that change net worth:
A holding gain or loss1 is a change in the monetary value of an asset or liability resulting from changes in the level and structure of prices, excluding qualitative or quantitative changes in the asset or liability. Holding gains and losses can apply to almost all assets and liabilities and, in the case of assets and liabilities expressed in a foreign currency, include gains and losses resulting from changes in exchange rates.2
Other changes in the volume of assets are any changes in the value of an asset or liability that do not result from a transaction or a holding gain. Other changes in the volume of assets result from events that change the quantity or quality of an existing asset, events that add a new asset to the balance sheet or delete an existing asset from the balance sheet, and events that require a reclassification of existing assets.
10.2 Other economic flows are recorded in a Statement of Other Economic Flows; an abbreviated version is shown in Table 10.1. The balancing item to this statement is described as the changeinnetworthduetoothereconomicflows, which is defined as the sum of the change in net worth due to holding gains or losses and the change in net worth due to other changes in the volume of assets.
|9||Change in net worth due to other economic flows|
|4||Change in net worth due to holding gains and losses|
|5||Change in net worth due to other changes in the volume of assets and liabilities|
The balancing item changeinnetworthduetoholdinggains (or revaluations) is defined as the sum of the positive or negative holding gains on all assets and liabilities.
The balancing item changeinnetworthduetootherchangesinthevolumeofassets is defined as the sum of the positive and negative other changes in the volume of assets and liabilities.
10.3 Many other economic flows change both the value of an asset or a liability and the value of net worth by the same amount. For example, holding gains that lead to an increase in the value of assets increase net worth. In contrast, other economic flows related to reclassifications do not affect total net worth. These reclassifications change the value of two assets or two liabilities by the same amount but with opposite signs, or they change one asset and one liability by the same amount—for example, the reclassification of a loan when it becomes negotiable (see paragraph 7.149).
10.4 Other economic flows are classified by the type of asset or liability affected. The classification of assets and liabilities given in Chapter 7 is used for this purpose. In Table 10.2, total other economic flows are classified as being either holding gains and losses or other changes in the volume of assets. In addition, other economic flows can be classified by the type of event that caused the flow in as much detail as needed for fiscal analysis. The types of holding gains or specific types of other changes in the volume of assets could be introduced as an expansion of the table, if considered useful. For example, subcategories of other changes in volume of assets could identify whether the changes are due to the appearance, disappearance, or change in classification of assets and liabilities.
|Holding gains and losses||Other changes in the volume of assets||Total other economic flows|
|Change in net worth due to total other economic flows / holding gains and losses / other changes in the volume of assets||4||5||9|
|Buildings and structures||4111||5111||9111|
|Buildings other than dwellings||41112||51112||91112|
|Machinery and equipment||4112||5112||9112|
|Machinery and equipment other than transport equipment||41122||51122||91122|
|Other fixed assets||4113||5113||9113|
|Cultivated biological resources||41131||51131||91131|
|Intellectual property products||41132||51132||91132|
|Materials and supplies||41221||51221||91221|
|Work in progress||41222||51222||91222|
|Goods for resale||41224||51224||91224|
|Mineral and energy resources||4142||5142||9142|
|Other naturally occurring assets||4143||5143||9143|
|Noncultivated biological resources||41431||51431||91431|
|Other natural resources||41433||51433||91433|
|Intangible nonproduced assets||4144||5144||9144|
|Contracts, leases, and licenses||41441||51441||91441|
|Goodwill and marketing assets||41442||51442||91442|
|Monetary gold and Special Drawing Rights (SDRs)||4201||5201||9201|
|Currency and deposits||4202||5202||9202|
|Equity and investment fund shares||4205||5205||9205|
|Investment fund shares or units||42052||52052||92052|
|Insurance, pension, and standardized guarantee schemes [GFS]||4206||5206||9206|
|Nonlife insurance technical reserves||42061||52061||92061|
|Life insurance and annuities entitlements||42062||52062||92062|
|Pension entitlements [GFS]||42063||52063||92063|
|Claims of pension funds on pension manager||42064||52064||92064|
|Provisions for calls under standardized guarantee schemes||42065||52065||92065|
|Financial derivatives and employee stock options||4207||5207||9207|
|Employee stock options||42072||52072||92072|
|Other accounts receivable||4208||5208||9208|
|Trade credit and advances||42081||52081||92081|
|Miscellaneous other accounts receivable||42082||52082||92082|
|Same instrument breakdown as above, but excluding monetary gold||4212–4218||5212–5218||9212–9218|
|Same instrument breakdown as above||4221–4228||5221–5228||9221–9228|
|Special Drawing Rights (SDRs)||4301||5301||9301|
|Currency and deposits||4302||5302||9302|
|Equity and investment fund shares||4305||5305||9305|
|Investment fund shares or units||43052||53052||93052|
|Insurance, pension, and standardized guarantee schemes [GFS]||4306||5306||9306|
|Nonlife insurance technical reserves||43061||53061||93061|
|Life insurance and annuities entitlements||43062||53062||93062|
|Pension entitlements [GFS]||43063||53063||93063|
|Claims of pension funds on pension manager||43064||53064||93064|
|Provisions for calls under standardized guarantee schemes||43065||53065||93065|
|Financial derivatives and employee stock options||4307||5307||9307|
|Employee stock options||43072||53072||93072|
|Other accounts payable||4308||5308||9308|
|Trade credit and advances||43081||53081||93081|
|Miscellaneous other accounts payable||43082||53082||93082|
|Same instrument breakdown as above||4312–4318||5312–5318||9312–9318|
|Same instrument breakdown as above||4321–4328||5321–5328||9321–9328|
Holding Gains in General
10.5 Holding gains result from price changes and can accrue on almost all economic assets held for any length of time during a reporting period. It does not matter whether an asset is held the entire period, acquired during the period and held until the end of the period, held at the beginning of the period and disposed of during the period, or acquired and disposed of within the same period. In each case, a holding gain is possible and must be recorded for the entire difference between the opening balance sheet date (or at time of acquisition) and closing balance sheet date (or time of disposal).
10.6 Holding gains may be unrealized or realized:
An unrealized holding gain is one accruing on an asset that is still owned or a liability that is still outstanding at the end of the reporting period. The values of the assets and liabilities in the closing balance sheet incorporate the unrealized holding gains or losses.
A holding gain is realized when an asset is sold, redeemed, used or otherwise disposed of, or a liability incorporating a holding gain or loss is repaid. The value of transactions includes the value of realized holding gains or losses. In other words, unrealized holding gains are realized when transactions take place.
10.7 The holding gain is recorded when the price change occurs, which may be at a different time from when the holding gain is realized. Thus, to capture the full value of the holding gains and losses that arose during the reporting period, both realized and unrealized gains and losses need to be covered.
10.8 Holding gains do not include a change in the value of an asset resulting from a change in the quantity or quality of the asset (which are other changes in the volume of assets)—in particular:
The decline in the value of the fixed assets due to physical deterioration, normal rates of obsolescence, and normal accidental damage should be recorded as consumption of fixed capital (23) and not as a holding loss.
Debt securities issued at a discount may increase in value progressively prior to redemption because of the accrual of interest. The increase in the market value of a bill or bond due to the accrual of interest should be recorded as a transaction in the asset and is not a holding gain.
10.9 It is not possible to calculate total holding gains using only balance sheet data since the stock positions do not reflect each of the economic events that may have occurred during a reporting period (see paragraphs 3.1–3.4). To measure holding gains directly, therefore, the calculation requires records to be maintained of all individual transactions and individual other changes in the volume of assets plus the price of each asset at the time of the opening and closing balance sheets. Observable market prices for nonfinancial assets are generally not as readily available as for financial assets and liabilities. If, in practice, not all of the requisite data are available, alternative estimation techniques must be employed to calculate holding gains.
10.10 A commonly used alternative method to estimate holding gains and losses is based on the identity that the ending balance sheet value for a category of assets must equal the opening balance sheet value plus the net value of transactions, other changes in the volume of assets, and holding gains that affect that category of assets or liabilities. If the information available on balance sheets, transactions, and other changes in the volume of assets is complete and accurate, then the net value of holding gains can be calculated to complete the identity. This formulation does not imply that the value of holding gains is a residual item—even if estimated this way, the results should always be carefully examined and evaluated.
10.11 For some analytic purposes, it may be desirable to divide the total value of holding gains accruing on a category of assets or liabilities into neutral and real holding gains.
Neutral holding gains and losses over a period are the increase (decrease) in the value of an asset that would be required, in the absence of transactions and other changes in the volume of assets, to maintain command over the same amount of goods and services as at the beginning of the period. It is the value needed to preserve the real value of the asset.
A real holding gain is defined as the value accruing to an asset as a result of a change in its price relative to the prices of goods and services in general. An increase in the relative price of an asset leads to a positive real holding gain, and a decrease in the relative price of an asset leads to a negative real gain.3
10.12 In concept, holding gains and losses occur continuously because prices change continuously. As a practical matter, holding gains for the entire reporting period are normally estimated at the end of the period.
Holding Gains for Particular Types of Assets
Fixed assets (411)4
10.13 Estimating the holding gains on fixed assets is complicated by the fact that the value of a fixed asset changes as a result of consumption of fixed capital as well as price changes. Consumption of fixed capital, however, is valued in terms of the average prices prevailing during a reporting period. Thus, estimating the change in the price of a given fixed asset of a given age and condition is critical for estimating both consumption of fixed capital and holding gains.
10.14 Holding gains may occur on existing fixed assets because the market price of the asset itself changes over time. If market prices are not readily available, market-value equivalent prices should be used (see paragraph 7.31). When assets of the same kind are still being produced and sold on the market, an existing asset should be valued in the opening or closing balance sheet at the current acquisition price of a newly produced asset minus the accumulated consumption of fixed capital (i.e., at written-down replacement cost) up to that time.
10.15 When new assets of the same type are no longer being produced, the valuation of existing assets may pose difficult conceptual and practical problems. If broadly similar kinds of assets are still being produced, it may be reasonable to assume that the prices of the existing assets would have moved in the same way as those of new assets if they were still being produced. Such an assumption becomes questionable, however, when the characteristics of new assets are much improved by technical progress.5
10.16 The estimation of holding gains on inventories is needed for the calculation of use of goods and services (22) using the indirect method, as illustrated in Table 6.3. However, estimation may be difficult because of a lack of data on transactions or other changes in the volume of inventories:
Many transactions in inventories are internal transactions, and the prices prevailing at the time they occur may not be adequately recorded.
Withdrawals from inventories include an allowance for recurrent losses that are part of the normal operations of a production process.
Other changes in the volume of assets are likely to consist of goods destroyed by natural disasters, major fires, and other exceptional events. Estimating the prices and quantities involved in these events may be difficult.
10.17 Thus, holding gains on inventories exclude both exceptional and recurrent losses on inventories. Certain types of inventories (e.g., stationery) have stable prices and are held over reasonably short periods of time, in which case the holding gains or losses are normally minimal. In other cases, such as strategic stocks, more sophisticated methods have to be applied. As records on transactions and other changes in the volume of assets may not be available, it becomes necessary to try to deduce the value of changes in inventories from the value and quantities of the opening and closing inventories using methods that attempt to partition the difference between the values of the opening and closing stock positions of assets into transactions and holding gains. Such methods are only as good as the assumptions on which they are based.6 In general, if assumptions are made, they should cover as short a period as possible. When there are high rates of inflation, estimating holding gains accurately in this way becomes more important.
10.18 The nature of valuables is that they are held as a store of value in the expectation that their value will increase over time. Any increase/decrease in value of an individual valuable is treated as a holding gain/loss.
Nonfinancial assets disposed of during the reporting period
10.19 There are no remaining costs of ownership transfer included in the value of the asset when it is sold to a new owner, as the amount the old owner receives is equal to the amount the new owner pays except for any costs of ownership transfer incurred by the new owner. This is because consumption of fixed capital is calculated on the value of the asset excluding the costs of ownership transfer over the whole of its life, and the consumption of fixed capital in respect of the costs of ownership transfer is calculated only over the period that the owner expects to hold the asset (see paragraph 6.60).
10.20 When a nonfinancial asset is disposed of in a market-related transaction7 at a value that is different from the balance sheet value of the asset immediately prior to disposal, a revaluation should be recorded to reflect the current market value of the asset in the balance sheet. This applies to all nonfinancial assets but not to scrap.8
Monetary gold and Special Drawing Rights (SDRs) (4201, 4221, 4301, 4321)
10.21 The price of gold is usually quoted in dollars; therefore, monetary gold (including unallocated gold accounts) is subject to holding gains and losses because of changes in the exchange rate as well as in the price of gold itself.
10.22 The value of the SDR is based on a basket of key currencies; therefore, the value of SDRs is always subject to holding gains and losses. From time to time, new allocations of SDRs may be made; when this occurs, the allocation is recorded as a transaction.
Financial assets and liabilities with fixed monetary values
10.23 Not all financial assets and liabilities have market prices. Currency, deposits, most loans, and other accounts receivable/payable, such as trade credit and advances, are recorded at nominal value. As a result, holding gains resulting from market price changes on these assets are always zero in terms of the currency in which they are denominated. When these financial assets are denominated in a foreign currency or held as unallocated gold accounts (or similar accounts in other precious metals), their value in domestic currency terms can change because of a change in the exchange rate or a change in the value of the precious metal.
Debt securities (4203, 4213, 4223, 4303, 4313, 4323)
10.24 Debt securities typically have market prices that change over time. Changes in the value of the stock of debt securities between balance sheet dates arise from transactions in debt securities (i.e., acquisitions, disposals, and the accrual of interest), other changes in the volume of assets (such as write-offs), and revaluations (e.g., changes in the market rate of interest, exchange rate, expectation of creditworthiness, etc.).
10.25 When debt securities, especially deep-discount and zero-coupon bonds, are issued at a discount, then, in the absence of other changes, the price will gradually rise over the life of the bond until it reaches the maturity value. This gradual increase in the market price of a bond that is attributable to the accumulation of accrued interest is a transaction, not a holding gain. The converse treatment applies to bonds issued at a premium.
10.26 The values of debt securities may change when the market rates of interest and/or exchange rates change. With the exception of broad-based index-linked securities (see paragraph 6.77), changes in the values of debt securities that are attributable to changes in market rates of interest and exchange rates (for debt securities denominated in another currency) are holding gains. An increase in interest rates causes a decrease in the market value of the fixed-rate debt securities, which is a holding gain for the debtor and a holding loss for the creditor, and conversely for a decrease in interest rates.
10.27 Prices of bonds may also change because of a change in the creditworthiness of the issuer or guarantor. Such changes give rise to holding gains.
10.28 As explained in paragraphs 6.76–6.77, when the amount to be paid at maturity or when the coupon payments and the amount to be paid at maturity are indexed to a narrow index (e.g., a gold index) that includes a holding gain motive, any deviation of the underlying index from the originally expected path leads to holding gains or losses.
10.29 Holding gains or losses may accrue on bills in the same way as for bonds. However, because bills are short-term debt securities with much shorter times to maturity, the holding gains generated by interest rate changes are often much smaller than on bonds with the same face values.
Equity and investment fund shares (4205, 4215, 4225, 4305, 4315, 4325)
10.30 General government units may have financial assets or liabilities in the form of equity and investment fund shares. For example, a general government unit may own all or part of the equity of a public corporation or the equity of a quasi-corporation. As with any other asset, a change in the monetary value of these financial assets resulting from price changes is a holding gain or loss.
10.31 Several events can affect the valuation of shares and other equity. For purposes of explanation, a distinction is made between:
Shares issued by incorporated corporations that are listed (publicly traded) and unlisted shares whose value can be otherwise independently determined
Unlisted shares issued by incorporated corporations whose value cannot be independently determined and other equity of unincorporated enterprises, such as quasi-corporations.
10.32 If the shares of a public corporation are publicly traded or their value can be independently determined, then the holding gains or losses of the government unit or other public corporation that owns the shares are determined by reference to the market price per share or the independently determined price per share. Several factors may affect the market price per share, such as market perceptions on the profitability of the corporation and when shares go ex-dividend. Valuation changes in shares are recorded as holding gains and losses.
10.33 As explained in paragraph 7.229, net worth is zero for quasi-corporations9 and for public corporations for which the value of shares cannot be independently determined (most likely because the controlling government unit owns all of the shares). In these cases, the total value of the implicit equity of the quasi-corporation or shares of the corporation is equal to the total value of its assets minus the total value of its liabilities other than equity. As a result, a holding gain equal to the change in the total value of this measure of the equity needs to be recorded, taking into account all retained earnings, and other additions to and withdrawals from equity that may have occurred.
10.34 As mentioned in paragraphs 5.121 and 6.119, reinvested earnings on investment fund shares or of a foreign direct investment enterprise are treated as a type of property income and not holding gains.
Insurance, pension, and standardized guarantee schemes (4206, 4216, 4226, 4306, 4316, 4326)
10.35 When the reserves for nonlife insurance and standardized guarantee schemes are denominated in domestic currency, there are generally no holding gains and losses, just as there are none for currency or deposits and loans. In some exceptions, if an amount for a claim outstanding has been agreed upon and it has been agreed that it will be indexed pending payment, then there may be a holding gain or loss recorded for it.
10.36 Liabilities for pension entitlements include liabilities for the future payment of pensions and other retirement benefits of defined-benefit schemes. The value of these liabilities can change for several reasons, one of which is the passage of time. The liability is computed as the present value of the future benefits, and it will increase each period because there is one fewer period over which it is discounted. In GFS, this increase is treated as a property expense for investment income disbursements (2813) (see paragraphs 6.113–6.118).
10.37 In GFS, a holding gain is recorded with respect to the liability for a defined-benefit pension scheme when there is a change in the value of the liability because of a change in the interest rate used to discount the future benefits. The liability should be reviewed periodically and revalued as necessary for changes in market interest rates.
10.38 At first sight, it would seem that there are no other economic flows involved for a defined-benefit pension scheme since the two components recorded as the pension contributions and property expense for investment income disbursements are matched by equal-value increases in entitlements. However, because the nature of a defined-benefit pension scheme is that the level of benefit entitlements is determined by a formula, there are other factors that may intervene to affect changes in the level of entitlements. These factors include a price escalation clause, changes in the formula used to determine benefits, and demographic assumptions about lifespan.
10.39 The factors that change the level of entitlements (i.e., changes in the formula used to determine the benefits and demographic assumptions) should be recorded as other changes in the volume of assets (see paragraph 10.73); the adjustments from changes in the price escalation formula are recorded as holding gains or losses.
10.40 The impact of promotions, merit increases, and other real salary increases on entitlements is a special case.10 Many defined-benefit pension schemes use a formula to set benefits based on either the final salary or average salary as a key determinant. Therefore, this implies that any promotion or other real increase in salaries means that the total pension entitlements accrued to date are increased to take account of the new salary level. This is a significant benefit for the individual and has consequences for the employer’s pension liabilities. It is recommended that a simple and adequate solution would be to treat the impact of promotions for the unit as a whole as a price change and record this change as a holding gain. If the projected benefit obligation method is used to value pension entitlements, an adjustment in the form of other changes in the volume of assets is needed if the enterprise makes a structural change in the way promotions and merit increases are awarded (see paragraph 10.72).
10.41 An equal-valued holding gain should be recorded with respect to the liability for a defined-contribution pension scheme whenever a holding gain is recorded with respect to the assets of the fund. The investment of accumulated pension entitlements of a defined-contribution pension scheme leads to holding gains (and possibly losses). These come about through the management of investment in assets held by the fund. The holding gains appear under entries for the relevant assets for the pension fund, with a matching entry for the increase in the liability of the pension fund toward the policyholders (households).
Financial derivatives and employee stock options (4207, 4217, 4227, 4307, 4317, 4327)
10.42 Financial derivatives have quoted prices or have prices that can be derived from the underlying item that is the subject of the derivative. Thus, financial derivatives register holding gains and losses.
10.43 Employee stock options can also register holding gains and losses. In principle, any change in value between the grant date and vesting date should be recorded as compensation of employees, while any change in the value between vesting date and exercise date is treated as a holding gain or loss. In practice, and for pragmatic reasons, the whole of the increase between grant date and exercise date is treated as a holding gain or loss (see paragraph 9.80). An increase in value of the share price above the strike price is a holding loss for the employer.
Financial assets denominated in foreign currencies
10.44 The value of a financial asset denominated in a foreign currency is its current value in the foreign currency converted into the domestic currency at the current exchange rate. Therefore, holding gains may occur not only because the price of the asset in the foreign currency changes but also because exchange rates change.
Debt instruments that do not accrue interest
10.45 There may be an unusually long time11 before payment is due on an outstanding debt liability (or the corresponding financial asset in the form of a debt instrument) on which no interest accrues (see paragraph 7.30). If so, the value of the principal should be reduced by an amount that reflects the time to maturity and an appropriate existing contractual rate, such as for similar debt instruments. Once the value of the principal is reduced through a revaluation, interest should accrue until actual payment is made, at the rate used to discount the principal.
Other Changes in the Volume of Assets
10.46 Other changes in the volume of assets cover a wide variety of events. For the purpose of description, these events are divided into three groups:12
Events that involve the appearance or disappearance of existing resources as economic assets. In other words, certain assets enter and leave the GFS balance sheet through events other than by transactions
The effects of external events—exceptional and unexpected—on the economic benefits derivable from assets (and corresponding liabilities)
Changes in classification.
10.47 Many other volume changes occur at specific times and should be recorded when the event occurs. Some other volume changes occur continuously or at frequent intervals, such as the depletion of subsoil and other naturally occurring assets or environmental damage to assets. These changes should be recorded in the same manner as holding gains.
Appearance or Disappearance of Existing Economic Assets
10.48 For a resource to be an economic asset, ownership rights over it must be enforced and it must be capable of providing economic benefits. If a resource that is known to exist but is not classified as an economic asset becomes an economic asset because of a change in relative prices, technology, or some other event, an entry in other changes in the volume of assets should be recorded to recognize the asset’s value and add it to the balance sheet. Conversely, an economic asset may need to be removed from the balance sheet because it is no longer capable of supplying economic benefits or because the owner is no longer willing or capable of exercising ownership rights over the asset.
10.49 The recording of events relating to the appearance and disappearance of assets can be grouped according to the main type of asset under consideration based on whether they relate to:
The economic recognition of produced assets
Entry and exit from the asset boundary of natural resources
Contracts, leases, and licenses
Changes in goodwill and marketing assets, or
Financial assets (and liabilities).
10.50 Usually, two types of assets can appear under the economic recognition of produced assets: public monuments and valuables. These are existing goods that may not already have been recorded in the balance sheets as public monuments or valuables for any of several reasons; they may date from a time before the reporting period covered by the accounts, they may have been originally recorded as expense for use of goods, or they may be structures that have already been written off.
Public monuments are included with dwellings, buildings other than dwellings, or other structures, as appropriate, in the classification of fixed assets (see paragraphs 7.42–7.43). 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 classified as an economic appearance and recorded as other changes in the volume of assets. For example, such recognition might be accorded to an existing structure or site that is fully written off and thus no longer recorded in the balance sheet. Alternatively, a structure or site that is already within the asset boundary, but is new or only partially written off, may be assessed as having the status of a public monument. If the monument was previously written off, then its recognition as a public monument is recorded as an economic appearance of an asset. If it was previously classified as another type of asset, it is recorded as a reclassification of an asset (see paragraphs 10.80–10.84) and if at the same time a new valuation is placed on the monument, this increase in value is recorded as an economic appearance.
Valuables, such as precious stones, antiques, and other art objects, for which the high value or artistic significance has not already been recorded in the balance sheet, should be recognized as an economic appearance. Hitherto, the object may have been of little value and not considered an asset. For example, the item might have been considered an ordinary good whose purchase was recorded as an expense, classified in use of goods and services (22). Recognition of its worth as a store of value leads to its entrance into the balance sheet as a valuable. The recognition of the value of a previously unvalued item is often necessitated by a sale (e.g., at auction). The sale is recorded as a transaction under the disposal of nonfinancial assets only after the asset first entered into the balance sheet of the seller through an entry in other changes in the volume of assets.
10.51 Conversely, a nonfinancial asset that no longer has economic value because of a change in technology, relative prices, or other event must be removed from the balance sheet. For example, the commercial exploitation of mineral reserves, land, forests, fish stocks, aquifers, and other naturally occurring assets may become unfeasible. If so, then a negative entry in other changes in the volume of assets would be recorded to remove the asset from the balance sheet.
10.52 It may be difficult to determine the exact time at which a natural asset should be added to the balance sheet, and to determine the value that should be attributed to it at that time. Often, the date at which the first substantial commercial exploitation begins or the signing of a contract to permit commercial exploitation is used to establish the time of recording. Several events may result in natural resources to enter or exit the asset boundary:
Discoveries/extractions and upward/downward reappraisals of subsoil resources—The value of these resources may increase in the balance sheet by the discovery of new exploitable deposits, whether as a result of systematic scientific explorations or surveys, or by chance. Economic appearance may also occur because a deposit of subsoil minerals has become economically exploitable as a result of technological progress or relative price changes.
Conversely, the value of these resources may decrease in the balance sheet by the depletion of deposits of subsoil assets as a result of the physical extraction and use of the assets, or from downward reappraisals that reduce their exploitability because of changes in technology or relative prices.
Natural growth/harvesting of noncultivated biological resources—The natural growth of noncultivated biological resources, such as natural forests and fish stocks, may take various forms: a stand of natural timber may grow taller, or fish in the estuaries may become more numerous. Although these resources are economic assets, growth of this kind is not under the direct control, responsibility, and management of an institutional unit and thus is not treated as a transaction in net investment in fixed assets. In principle, natural growth should be recorded gross, and the depletion of these resources should be recorded as economic disappearance, as described in the next bullet. This recording would be consistent with the gross recording of transactions in acquisitions and disposals described under the net investment in nonfinancial assets. In practice, however, many countries will record natural growth net because only the net physical measures are likely to be available. The net physical measure multiplied by the market price for a unit of the asset may be used in estimating the value of the volume change to be recorded.
The depletion of natural forests, fish stocks in the open seas, and other noncultivated biological resources included in the asset boundary of general government or public sector units as a result of harvesting, forest clearance, or other use beyond sustainable levels of extraction constitutes an economic disappearance of assets and should be recorded as negative other changes in the volume of assets.
Transfers of other natural resources to/out of economic activity—Not all land included in the geographic surface area of a country is necessarily within the asset boundary of GFS. Land may make its economic appearance when, for example, general economic development in nearby areas transforms the land from a wild or waste state to a state in which ownership rights can be enforced and the land can be put to economic use.13 Land may also make its economic appearance (or enter the asset boundary) because of activity in the vicinity—for example, land that becomes more desirable because a new development is established nearby or an access road built. Any excess in the value of the land over the value of land improvements or any increase due to adjacent capital activity is recorded as economic appearance. For virgin forests, gathering firewood is not commercial exploitation, but large-scale harvesting of a virgin forest for timber is and brings the forest into the asset boundary. Similarly, drawing water from a natural spring does not bring an aquifer into the asset boundary of GFS, but a significant diversion of groundwater does. A move to charge for regular extraction from a body of surface water may also bring a water resource into the balance sheet.
A government unit can create an economic asset by exerting ownership rights over a naturally occurring asset that had not previously been recognized as an asset, such as the electromagnetic spectrum or fish stocks in exclusive economic zones. When this occurs, the asset enters the balance sheet through other changes in the volume of assets.
It is possible that some natural resources cease to be exploited because of changed technology or reduced demand for the resulting product, or for legislative reasons, such as the suspension of fishing to ensure the survival of fish stocks. When this change in use occurs, the asset is removed from the balance sheet through other changes in the volume of assets.
Quality changes in natural resources due to changes in economic uses—In this case, the asset is already within the asset boundary. The change in quality of the asset due to changes in its economic use is regarded as the appearance of additional amounts of the asset. For example, the use of bare rural land changes when it becomes land underlying buildings and may result in a change in the balance sheet value that is effected through an other change in the volume of the asset.
All degradation of land, water resources, and other natural assets caused by economic activity should be recorded as negative other changes in the volume of assets. The degradation may be the anticipated result from regular economic activity or less predictable erosion and other damage to land from deforestation or improper agricultural practices.
The difference between a quality change and a price change is a matter of degree, and it may not always be clear whether other changes in the volume of assets or a holding gain is most appropriate. For example, activities adjacent to land may bring land into the asset boundary (recorded as another volume change), while the value of land in the vicinity may also increase due to a rise in general price levels of land (recorded as holding gains).
10.53 It is recommended to recognize assets in the form of contracts, leases, and licenses in the balance sheet of the holder only when the value of the asset can be realized (see paragraph 7.106). In this case, they are first recorded as other changes in the volume of assets and, subsequently, form the basis of a transaction (or series of transactions). The value of the contract, lease, or license that is treated as an asset is equal to the present value of the excess of the prevailing price over the contract price. The value will decline as the remaining contract period shortens. Changes in the value of the contract, lease, or license due to changes in the prevailing price are recorded as holding gains or losses (revaluations); changes due to the expiration of the time over which the contract, lease, or license is valid are recorded as other changes in volume of assets (i.e., to write off the cost of the asset). The rate at which the value is written down should be in accordance with internationally accepted accounting standards. The treatment of contracts, leases, and licenses is discussed more extensively in Appendix 4.
10.54 When an enterprise—whether a corporation, quasi-corporation, or unincorporated enterprise—is sold, the price payable may not equal the sum of all the assets minus the liabilities of the enterprise. The difference between the price payable and the sum of all the assets minus liabilities is called the purchased goodwill and marketing assets of the buyer. The value may be positive or negative (or zero). When the buyer includes this asset in the calculation of the net worth of the enterprise at the moment it is bought, net worth is exactly zero.
10.55 The value of purchased goodwill and marketing assets is calculated at the time of the sale, and entered in the books of the seller as an other change in the volume of assets. Subsequently, it is then exchanged as a transaction with the purchaser. Thereafter, the value of the purchased goodwill and marketing asset must be written down in the books of the purchaser via entries under other changes in the volume of assets. The rate at which it is written down should be in accordance with internationally accepted accounting standards. These standards are typically conservative in the amount that may appear on the balance sheet of an enterprise and should be subject to an “impairment test” whereby accountants can satisfy themselves that the remaining value is likely to be realizable in case of a further sale of the enterprise.
10.56 Goodwill that is not evidenced by a sale or purchase is not considered an economic asset in GFS. In some exceptions, a marketing asset may be subject to sale. When this is the case, entries should be made for the buyer and the seller along the lines of those made for purchased goodwill and marketing assets when the entire enterprise is sold.
10.57 Financial assets and liabilities may appear on or disappear from the balance sheet in several ways—for example:
A creditor may determine that a financial claim can no longer be collected because of the debtor’s bankruptcy or other factors. If so, the creditor writes off the debt and removes the claim from its balance sheet by means of an entry in other changes in the volume of assets.14
Cancellations of employee stock options are recorded as other changes in the volume of assets.
10.58 The creation of SDRs (referred to as allocations of SDRs) and the extinction of SDRs (cancellations of SDRs) are treated as transactions, not other changes in the volume of assets.15
The Effect of External Events on the Value of Assets
10.59 There are three principal causes of the reduction in the value of an asset, or even its disappearance, that are not related to the nature of the asset but to conditions prevailing in the economy that impact either the value or ownership of assets. These are catastrophic losses, uncompensated seizures, and other changes in the volume of assets not elsewhere classified. Each is discussed in the remainder of this section.
10.60 A catastrophic loss is the partial or complete destruction of a significantly large number of assets within any of the asset categories resulting from a large-scale, discrete, and recognizable event. Such events will generally be easy to identify. They are usually sudden or one-time events of large proportions. They include major earthquakes, volcanic eruptions, tidal waves, exceptionally severe hurricanes, droughts, and other natural disasters; acts of war, riots, and other political events; and technological accidents, such as major toxic spills or release of radioactive particles into the air. Included here are such major losses as deterioration in the quality of land caused by abnormal flooding or wind damage; destruction of cultivated assets by drought or outbreaks of disease; and destruction of buildings, equipment, or valuables in fires or earthquakes. An entry in other changes in the volume of assets is recorded to reduce or eliminate the value of any asset damaged or destroyed.
10.61 Although produced assets are the most likely candidates to be damaged or destroyed by a catastrophic loss, nonproduced assets and financial assets are also subject to damage or destruction. For example, major decreases in the value of land and other natural assets caused by abnormal flooding or wind damage and the accidental destruction of currency or bearer securities as a result of natural catastrophes or abnormal political events would be included.
10.62 Government units may take possession of the assets of other institutional units without full compensation for reasons other than the failure to pay taxes, fines, or similar levies. Such seizures of assets, legal or illegal, are not capital transfers because they do not take place by mutual agreement of the units involved. The difference between the market value of the assets seized and any compensation provided is recorded as an other change in the volume of assets, in the form of an uncompensated seizure. Foreclosures and repossessions of assets by creditors are transactions when the contractual agreement between debtor and creditor provides this avenue of recourse.
Other volume changes not elsewhere classified
10.63 The value of a fixed asset is continuously reduced by consumption of fixed capital until the asset is disposed of or has no remaining value. It is possible for the assumptions underlying the calculation of consumption of fixed capital to be inaccurate, in which case corrections to the value of the asset need to be made through other changes in the volume of assets. Similarly, if the assumption about the rate of shrinkage of inventories was inaccurate, this should also be corrected through an entry in other changes in the volume of assets. Financial assets and liabilities, such as those related to insurance, pension, and standardized guarantee schemes, can also be affected by volume changes.16
Fixed assets (511)
10.64 The calculation of the consumption of fixed capital reflects an assumption about normal rates of physical deterioration, obsolescence, and accidental damage. Each of these assumptions may prove to be faulty. In that case, an adjustment in the form of other changes in the volume of assets must be made.
10.65 Physical deterioration may include the effect of unforeseen environmental degradation on fixed assets. Entries must, therefore, be made through other changes in the volume of assets for the decline in the value of the fixed assets from, for example, the unforeseen effects of acidity in the air and acid rain on building surfaces or vehicle bodies.
10.66 The introduction of improved technology can render an asset obsolete or accelerate the rate of obsolescence. For example, improved models of the asset or of a new production process that no longer requires the asset may lead to unforeseen obsolescence. In consequence, the amount included in consumption of fixed assets for their expected obsolescence may have been underestimated, so an entry in other changes in the volume of assets should be recorded.
10.67 The amount included for normally expected damage—as included in the calculation of consumption of fixed capital—may fall short of the actual damage. Adjustments must therefore be made through other changes in the volume of assets for the decline in the value of the fixed assets due to these events. While these losses may be larger than normal, they are not on a scale sufficiently large to be considered catastrophic—they are therefore included in other volume changes not elsewhere classified.
10.68 As explained in paragraph 6.60, costs of ownership transfer should, in principle, be written off over the expected time the asset will be in the possession of the purchaser. If the asset is disposed of before the costs of ownership transfer are completely written off, the remainder should be recorded as an other change in the volume of assets.
10.69 Production facilities with long construction periods may cease to have an economic use before they are completed or are put into service. For example, a nuclear power plant or industrial site may never be put into service. When the decision to abandon is made, the value of the fixed asset (or in some cases, work-in-progress inventories) as recorded in the balance sheet should be written off through an other change in the volume of assets.
Exceptional losses in inventories (512)
10.70 Exceptional inventory losses from fire, robbery, insect and vermin infestation of grain stores, and unusually high levels of disease in livestock, etc. are included as other changes in the volume of assets. In this context, exceptional losses indicate that the losses are not only large in value but also irregular in occurrence. Even very large losses that occur regularly should be taken into account when calculating the net change in inventories, as explained in paragraph 8.47. The adjustment for unforeseen damage could be an increase in assets if the actual damage falls short of the amount covered by the allowance for losses.
Life insurance and annuities entitlements (52062, 52162, 52262, 53062, 53162, 53262)
10.71 For an annuity, the relationship between the expected net premiums and benefits is usually determined when the contract is entered into, taking account of mortality data available at that time. Any subsequent changes will affect the liability of the annuity provider toward the beneficiary, and the consequences should be recorded as other changes in the volume of assets.
Pension entitlements (52063, 52163, 52263, 53063, 53163, 53263)
10.72 In defined-benefit pension schemes, the level of benefits promised to participating employees is determined by a formula that is usually based on the participants’ length of service and salary. Changes in pension entitlements that are imposed without negotiation are recorded as other changes in the volume of assets.17 That is because such changes are assumed to be imposed unilaterally by the employer and do not constitute a capital transfer negotiated by mutual agreement.
10.73 As explained in paragraph 10.38, for a defined-benefit pension scheme, any changes in the value of the liability due to changes in the formula used to determine benefits and due to changes in demographic assumptions about the lifespan should be recorded as other changes in the volume of assets. If the projected benefit obligation method is used to value pension entitlements, an adjustment in the form of other changes in the volume of assets is needed if the enterprise makes a structural change in the way promotion and merit increases are awarded (see paragraph 10.40).
10.74 No such adjustments are needed for defined-contribution schemes where the benefits are determined solely in terms of the contributions and investment earnings of the scheme.18
Provisions for calls under standardized guarantee schemes (52065, 52165, 52265, 53065, 53165, 53265)
10.75 Changes to provisions for calls under standardized guarantee schemes not resulting from transactions and holding gains and losses are shown as other changes in volume of assets. For example, such other changes in volume of assets occur whenever a significant change to the expected level of calls is recognized beyond any asset recovery (see paragraph A4.79).
Changes in Classification
10.76 The composition of the general government or public sector’s balance sheet may change because there has been a reclassification of an entire institutional unit, the structure of a unit, or a group of assets and liabilities. A reclassification rearranges assets and liabilities without adding to or subtracting from total net worth.
Changes in sector classification and structure
10.77 An entire unit may be reclassified from the general government sector to another sector or to the general government sector from another sector without a change of ownership or control, normally because the unit either begins or ceases to sell its output for economically significant prices. When a unit is reclassified out of the general government sector, all of the unit’s assets and liabilities are removed from the general government sector’s balance sheet and the net value of those assets and liabilities is replaced by a financial asset, equity and investment fund shares, to reflect the continued ownership or control of the unit by a general government unit. The reverse will be true when a unit is reclassified into the general government sector. By contrast, when a public corporation is privatized, all of the unit’s assets, liabilities, and net worth are reclassified from being that of a public corporation to a private corporation.19
10.78 A change in the structure of units is also recorded as an other change in the volume of assets—for example, when two general government units merge into a single unit, or a single unit splits into two units. When two units are merged, all financial claims and liabilities that existed between them are eliminated. Symmetrically, when a unit splits into two or more units, new financial claims and liabilities may appear between the new units.
10.79 In cases where general government units issue negotiable securities that sell in secondary markets, the holders of the securities may change during the life of the security. In debt data classified by counterparties, this change in the debtor/creditor relationship should be recorded as a reclassification under other changes in the volume of assets (see also paragraphs 9.25 and 9.86). For example, a central government debt security may be sold originally to a bank and then subsequently sold by the bank to a local government unit. To show on the central government’s balance sheet that the new holder of the security on the reporting date is the local government, entries in other changes in the volume of assets are recorded in the central government accounts, reducing the security liability to the bank and increasing the liability to the local government.20 No transactions between the central government, bank, and the local government should be imputed to reclassify the holder of the securities.
Changes in classification of assets and liabilities
10.80 Depending on the degree of detail of the classifications of assets, there may be reclassifications of existing assets and liabilities from one category to another, usually when there is a change in the purpose for which an asset is used. The change in classification is recorded as other changes in the volume of assets with the same value for both entries. If the change in the use also means a change in its value, then a second entry in other changes in the volume of assets is recorded for the entrance into the asset boundary of the asset with the higher value. It is not recorded as a revaluation since the value increase is due to the change in use and is not due to price changes.
10.81 The use of a structure may be changed from a dwelling to a government office building or vice versa. If these types of structures are classified separately, then an entry in other changes in the volume of assets is recorded. The positive change in one asset category is balanced by a negative change in the other asset category. A conversion resulting solely from new investment in a building is not an other change in the volume of the asset but a transaction in fixed assets (see paragraph 8.28).
10.82 In all instances, work in progress needs to be reclassified to finished goods prior to sale, through an entry in other changes in the volume of assets. In principle, reclassification from one type of inventory to another or from fixed assets to inventories should not involve a change in value. If at the time of conversion, the previous value is different from the appropriate new value, an entry in other changes in the volume of assets should be recorded under economic appearance or disappearance as appropriate. If this is found to be happening systematically, the valuation techniques for inventories should be re-examined.
10.83 As explained in paragraph 8.42, transactions in the costs of ownership transfer of nonproduced assets other than land are classified as fixed assets and these costs are subject to consumption of fixed capital. To maintain the integration of stock positions and flows, the costs of ownership transfer of nonproduced assets other than land and the consumption of fixed capital relating to these costs are reclassified to the respective nonproduced assets through an entry in other changes in the volume of assets.21 This reclassification is considered to take place at the time of recording the transactions in cost of ownership transfer and consumption of fixed capital, respectively.
10.84 Some examples of changes in the classification of financial assets and liabilities are:
When monetary gold held in the form of gold bullion becomes a reserve asset, it enters the financial assets in the balance sheet as a reclassification via other changes in the volume of assets from valuables to monetary gold. At the time it is acquired by a monetary authority, it is first classified as inventory or a valuable.22 The same recording is followed for allocated gold accounts that become part of monetary gold. When unallocated gold accounts become reserve assets, they are reclassified from currency and deposits to monetary gold, also through other changes in the volume of assets. Monetary gold may be sold to another monetary authority, but otherwise, any reduction in holdings follows a similar declassification path; the monetary gold is reclassified to be either a valuable or inventories (in the case of gold bullion) or currency and deposits (in the case of unallocated gold accounts). Subsequent transactions are recorded in terms of inventories or valuables or currency and deposits and not in terms of monetary gold.
In cases when benefits under a defined-contribution pension scheme are converted to annuities, a reclassification should be recorded from pension entitlements to annuities entitlements.
When loans become tradable in the conditions stated in paragraph 7.149, a reclassification should be recorded from loans to debt securities.
If arrears arise and the contract provides for a change in the characteristics of a financial instrument when it goes into arrears, this change should be recorded as a reclassification in the other changes in the financial assets and liabilities account. The reclassification applies to situations where the original contract remains, but the terms within it changes (e.g., interest rates or repayment periods).
If the amount payable under a derivative remains due for payment after the derivative matures, the amount due no longer represents a derivative because the value is fixed. It is therefore reclassified under other accounts receivable or payable.23
Bonds that are convertible into equity are reclassified as equity and investment fund shares when the option is exercised.
In cases where government units acquire equity in a public corporation or quasi-corporation as a result of legislation or an administrative change creating the corporation or quasi-corporation, this event will amount to a reclassification of the corporation’s existing assets and liabilities that results in an addition of equity and investment fund shares to the balance sheets of government and the corporation (see paragraph 9.50).
Revaluation may also be used with the same meaning as holding gain or loss.
A holding gain or loss always affects net worth. The words gain and loss are used in reference to the direction of the change in net worth. A flow that increases the value of an asset or decreases the value of a liability will increase net worth and is referred to as a holding gain. A flow that decreases the value of an asset or increases the value of a liability will decrease net worth and is a holding loss. References to financial assets can be assumed to refer also to liabilities.
Information on the calculation and interpretation of neutral and real holding gains is in the 2008 SNA, paragraphs 12.87–12.93.
The numbers in parentheses after each classification category are the GFS classification codes. Appendix 8 provides all classification codes used in GFS.
See Organisation for Economic Co-operation and Development, Measuring Capital—OECD Manual: Measurement of Capital Stocks, Consumption of Fixed Capital and Capital Services (Paris, 2009), for more details.
Also see the 2008 SNA, paragraph 12.99.
If there is a transfer element to the transaction, the economic value of the transfer should be recorded as a separate transaction (see paragraph 3.122).
In cases where the scrap value does not coincide with the residual balance sheet value of the asset immediately before disposal, an adjustment is to be made to the value of the asset via the other changes in the volume of assets account.
Because quasi-corporations do not issue shares, market prices do not apply to them.
Also see the 2008 SNA, paragraphs 17.180–17.186.
What constitutes an unusually long time in this context will depend on the circumstances. For example, for any given time period, the higher the level of interest rates or the longer the delay in payment, the greater is the opportunity cost of delayed payment.
The distinctions made here are only for purposes of description; the GFS classifications do not specify this breakdown.
For the treatment of land improvements, including land reclamation, see paragraphs 7.49–7.51.
Usually, debt is written off as uncollectible because of the bankruptcy or liquidation of the debtor; however, it may sometimes be written off for other reasons, such as a court order. The write-off may be full or partial; partial write-offs may arise, for example, under a court order, or if the liquidation of the debtor’s assets allows some of the debt to be settled. Recognition that the debt is uncollectible should be distinguished from internal accounting provisions of the creditor for the possibility of default (such as adjustments to fair value of nonperforming loans). Although such provisions may be useful for analysis, they do not mean that the debt should no longer be recognized as existing and should therefore not be considered as written off. In contrast, as described in paragraphs 6.124 and A3.7–A3.9, a reduction in a financial claim by mutual agreement between the creditor and debtor is a transaction rather than an other change in the volume of assets.
See paragraphs 7.131–7.134 and 9.31.
See paragraphs 10.39–10.40 and A2.54.
The cases where changes in pension entitlements are recorded as transactions are discussed in paragraphs 9.63–9.67. The distinction between transactions and other changes in the volume of assets remains theoretical, as it is recognized that the distinction between what is negotiated and what is imposed without negotiation will be difficult to determine in practice, with different situations prevailing in different countries.
Also see the 2008 SNA, Chapter 17, Part 2.
In the balance sheet of the shareholder (such as government), the privatization transaction will lead to a reduction in the financial asset equity and investment fund shares.
Because the local government has a claim on central government, without the central government being involved in the transaction, the same other volume change would be recorded on the local government’s balance sheet to show that the central government is the creditor.
Two entries are recorded in other changes in the volume of assets: a reduction in the fixed asset costs of ownership transfer on nonproduced assets other than land (31133) and an increase in the value(s) of the respective nonproduced assets.
Gold is reclassified to inventories if not primarily held as a store of value.
The creation and exhaustion of financial derivatives are transactions in financial assets (and liabilities), not other changes in the volume of assets.