2012 Government Finance Statistics Course. Week 1. Case Studies - Solutions

Transcription

1 2012 Government Finance Statistics Course Week 1 Case Studies - Solutions

2 Index Case Study 3.1 ESA sequence of Accounts... 3 Case Study 3.4 Recording transactions with the ESA system... 7 Case Study 3.5 Accrual recording Case Study 4.1 Institutional units Case Study 4.2 Market and non-market units Case Study 4.3 Integration, consolidation and netting Case Study 5.2 Delimitation of the general government sector Case Study Financial accounts Main case study on government accounts and EDP Week 1 Compilation of non-financial and financial accounts Case Study 7.2 COFOG classification Case Study 8.1 Taxes Case Study 8.2 Taxes or services Case Study 8.3 Taxes Table Case Study 13.1 Interest

3 Case Study 3.1 ESA sequence of Accounts 1. The chicken farm I have some chickens and I sell their eggs at the village market. In month 1 my chickens eat 3 of chicken feed. They lay 300 eggs which I sell at 2 for 10. This is my only household income. I have no employees to pay but I spend 25 buying food and drink for my family for the month. These are the only final consumption expenditures I make. I open a bank account and deposit all the money I have left in it. I had no assets or liabilities at the start if the month. [n.b. my chickens do not meet the National Accounts definition of capital assets]. Q1. Using the simple sequence of accounts provided complete the flow accounts (my production account, my distribution and use of income account, my accumulation accounts) for the month and my balance sheet at the end of the month). I had no assets and liabilities at the beginning of the month. Flow accounts Uses ( out ) Resources ( in) Intermediate consumption 3 Output 60 Value added 60-3 = 57 Compensation of Employees 0 Value added 57 Mixed income 57-0=57 Final consumption expenditure 25 Disposable income 57 Saving 57-25=32 Changes in assets Changes in liabilities Capital assets 0 Saving 32 Net lending/borrowing 32 Currency and deposits =32 Currency and deposits 0 Loans 0 Loans 0 Net lending/borrowing 32-0=32 Here, as a result of the simplified accounting structure used, the disposable income balance brought down from the previous account is the same as for mixed income. Balance Sheet Assets Liabilities Non-financial assets Financial assets Currency & deposits Net worth Financial liabilities

4 In month 2 I have the same production, sales and costs, except I pay a boy 2 to help me at the market. During the month I spend 30 on food and drink for my family and buy a new chicken house for 100. To help make this purchase I take a bank loan of 50. Q2. Using the simple sequence of accounts provided complete the accounts for month 2: Flow accounts ( ) Uses ( out ) Resources ( in) Intermediate consumption 3 Output 60 Value added 60-3 = Compensation of Employees 2 Value added 57 Mixed income 57-2= Final consumption expenditure 30 Disposable income 55 Saving 55-30= Changes in assets Changes in liabilities Capital assets 100 Saving 25 Net lending/borrowing = Currency and deposits =-25 Currency and deposits 0 Loans 0 Loans Net lending/borrowing =-75 Remember that for the financial account - which here shows currency, deposits and loans no transfer of a closing balance from the non-financial accounts occurs. The financial account shows how the net lending/borrowing was achieved and, by theoretical definition, the closing balance should be identical to the net lending/borrowing in the non-financial account. Here we have net lending of - 75, which is better described as net borrowing of 75. Balance Sheet ( ) Assets Non-financial assets Liabilities Financial assets 32-25=7 Financial liabilities Net worth =57 The values at the start of the time period (the start of month 2, the opening balance sheet) are the same as the closing balance sheet at the end of month 1 that you calculated in question 1. There were cash deposits of 32. These were reduced by the financial transaction of 25 in month 2, leaving 7 at the end of the time period. 4

5 2. A simple financial account The financial account is an interesting account. It can have transactions without any counterpart activity in the non-financial account. 1. Put the following transactions into your financial balance sheet: a) You have cash of 150 in your pocket. b) Last year you were low on funds and friend gave you a loan of 300 so that you could visit Paris for a weekend. You still owe the money. c) Your have bank deposits with a balance of d) You have 500 shares in a Telecoms company. Each share is worth 3. Financial Balance Sheet (start month) Assets Liabilities AF.21 Cash 150 AF.22 Deposits 1200 AF.4 Loans AF.4 Loans 300 AF.5 Shares 1500 Assets Liabilities = You need to pay the loan back next month. Describe 3 different ways to achieve this then choose one and complete the financial account. Note: this flow account only shows the flows (changes + or -) due to financial transactions within the month. By reducing deposits, selling shares or taking a further loan. You could also do so by using your spare cash and a combination of some or all of the others. 5

6 Choosing the option of reducing deposits: Financial Account Net acquisition of financial assets Net acquisition of financial liabilities F.21 Cash F.22 Deposits F.4 Loans F.4 Loans F.5 Shares Net lending/borrowing (assets minus liabilities) (- 300) (- 300) = 0 3. Explain the net lending/borrowing position. It will always be zero in this example. You are either reducing assets to reduce the same amount of liabilities, or increasing liabilities in order to decrease the same amount of liabilities. 4. Now complete your financial balance sheet at the end of the month? Choosing the option of reducing deposits: Financial Balance Sheet (end month) Assets Liabilities AF.21 Cash 150 AF.22 Deposits 900 AF.4 Loans AF.4 Loans AF.5 Shares 1500 Assets Liabilities = Why don t all of the transactions appear on both sides of your financial account? They are only a financial asset or a financial liability for you. The counterparty sector (e.g. for your bank deposit the counterparty is the bank) will have the corresponding financial liability or asset. 6

7 Case Study 3.4 Recording transactions with the ESA system Complete the simplified National Accounts tables for your transactions in each of the six questions. 1. Receiving a current transfer in cash At the start of period 1 you have 300 in cash. In period 1 you receive a current transfer in cash from government. The value of the transfer is 100. Q1. Complete the accounts. Non-financial account (Period 1) Uses Resources Consumption Inventories Current transfers 100 Insurance Capital transfers Total B.9 Net lending 100 Net lending = total resources (100) total uses (0). Financial Account (Period 1) Assets Liabilities Currency 100 Loans Shares Trade credit Total B.9f Net lending 100 Net lending = total transactions in financial assets total transactions in financial liabilities. Note that net lending from the non-financial account should equal net lending from the financial account. 7

8 Balance sheet Assets Liabilities Opening End-period 1 Opening End-period 1 Dwellings Finished goods Currency Loans Shares Trade credit Total B.90 Net worth Receiving a current transfer in kind At the start of period 1 you have 300 in cash. In period 1 you receive a current transfer in kind, government provides you with spectacles that it acquired directly from a manufacturer. The value of the transfer is 100. Q2. Complete the accounts. Non-financial account (Period 1) Uses Resources Consumption 100 Inventories Current transfers 100 Insurance Capital transfers Total B.9 Net lending 0 Net lending = total resources total uses. Although the transaction is directly between government and the producer, in National Accounts it is re-routed: a transfer is imputed from government to you, and then your consumption is imputed. Financial Account (Period 1) Assets Liabilities Currency Loans Shares Trade credit Total 0 0 B.9f Net lending 0 8

9 Net lending = total transactions in financial assets total transactions in financial liabilities. The net lending from the non-financial account should equal net lending from the financial account. Balance sheet Assets Liabilities Opening End-period 1 Opening End-period 1 Dwellings Finished goods Currency Loans Shares Trade credit Total B.90 Net worth Receiving a capital transfer in cash At the start of period 1 you have 600 in cash. In period 1 you receive a capital transfer in cash conditional on using it to purchase an asset. The asset is purchased in period 2. The value of the transfer is 500. Q3. Complete the accounts. Non-financial account (Period 1) Uses Resources Consumption Inventories Current transfers Insurance Capital transfers 500 Total B.9 Net lending 500 Financial Account (Period 1) Assets Liabilities Currency 500 Loans Shares Trade credit Total B.9f Net lending 500 9

10 Balance sheet Assets Liabilities Opening End-period 1 Opening End-period 1 Dwellings Finished goods Currency Loans Shares Trade credit Total B.90 Net worth Barter trade: buying a product giving another product in return. At the start of period 1 corporation A has 500 in cash and a non-financial produced asset (finished goods) worth 200. In period 1 it acquires another non-financial produced asset (dwellings) by exchanging its old asset for the new one. Q4. Complete corporation A s accounts. Non-financial account (Period 1) Uses Resources Consumption Inventories -200 Current transfers Insurance Capital formation Total 0 0 B.9 Net lending 0 Although there is an acquisition (use) and a disposal (resource) here, the changes in assets account for acquisition of non-financial assets is shown on a net basis: as acquisitions less disposals. As the value of the barter is identical, there is no change to net lending. Financial Account (Period 1) Assets Liabilities Currency Loans Shares Trade credit Total 0 0 B.9f Net lending 0 10

11 Balance sheet Assets Liabilities Opening End-period 1 Opening End-period 1 Dwellings Finished goods Currency Loans Shares Trade credit Total B.90 Net worth Purchase of a product with cash payment. At the start of period 1 you have 300 in cash. In period 1 you buy a non-financial product, for example a bike, television or electricity. This has no effect on inventories/non-financial assets in the balance sheet. You pay cash (currency). The value of the purchase is 100. Q5. Which transaction category should be used? Complete the accounts. The category is final consumption expenditure (for households, government or NPISH) or intermediate consumption for corporations. Non-financial account (Period 1) Uses Resources Consumption 100 Inventories Current transfers Insurance Capital transfers Total B.9 Net lending -100 Financial Account (Period 1) Assets Liabilities Currency -100 Loans Shares Trade credit Total B.9f Net lending

12 Note that currency is an asset, the transaction is a flow that reduces the size of the asset (e.g. you have less cash in your wallet) it does not turn it into a liability. Balance sheet Assets Liabilities Opening End-period 1 Opening End-period 1 Dwellings Finished goods Currency Loans Shares Trade credit Total B.90 Net worth Note that the product is not shown as an asset in the balance sheet: it is consumed when purchased. 6. Lending money and purchasing financial assets At the start of period 1 you have 20 in cash. In period 1 a bank grants you a loan of 100. In period 2 you use the 100 to buy shares. At the end of period 2 the market value of the shares is 90. Q6. Complete the accounts. Non-financial account Consumption Inventories Current transfers Insurance Capital transfers Uses Resources Period 1 Period 2 Period 1 Period 2 Total B.9 Net lending 0 0 No non-financial transactions occur. 12

13 Financial Account Assets Currency Liabilities Period 1 Period 2 Period 1 Period 2 Loans Shares Trade credit Total B.9f Net lending 0 0 The loan is a liability for you, but you also have a currency asset of 100 to match it. The acquisition of shares is recorded at the value they were acquired for (100). Balance sheet Dwellings Opening Assets Endperiod 1 Endperiod 2 Currency Opening Liabilities Endperiod 1 Endperiod 2 Loans Shares Trade credit Total B.90 Net worth The loss in value of the shares between the time of purchase and the end of period 2 is recorded in the other flows account as a holding loss (ESA95 category K.11). 13

14 Case Study 3.5 Accrual recording The time of recording of distributive transactions is: D.1 Compensation of employees wages and salaries (D.11) and employers actual social contributions (D.121) are accrued to the period when the work is done; bonuses and 13 th month payments when they are due to be paid. D.2 Taxes on production and imports - recorded when the activities or transactions which create the liability occur. D.3 Subsidies - recorded when the production, sale, import, etc which gives rise to the subsidy occurs. Where government gives subsidies to cover losses of a producer these are recorded at the time when government decides to cover the loss. D.41 Interest - recorded on an accrual basis, accruing continuously over the time. D.42 Dividends at time they are due to be paid. D.45 Rents accrued over the period when payable. D.5 Current taxes on income, wealth, etc - when the activity or transaction that creates the liability to pay, occurs. D.61 Social contributions - when the work that gives rise to the liability is done, except for selfemployed and non-employed contributions (D.6113), which are recorded when the liability to pay is created. D.62 Social benefits - when the claims on the benefits are established D.63 Social transfers in kind - when the service is provided or goods transfer. D.71 Net non-life insurance premiums over the period that they are earned. D.72 Non-life insurance claims at the time when the accident/event giving raise to the claim occurs. D.73 Current transfers within general government - at the time they are due to be made. D.74 Current international cooperation (D.74) for obligatory transfers at the time when they are due to be made; for voluntary transfers the time when they are made. D.75 Miscellaneous current transfers (D.75) when they are made, except for fines and penalties which are recorded when the liability arises. D.91 Capital taxes - when the tax liability arises. D.92 Investment grants - when the payment is due to be made or, if in kind, when the ownership of the asset is transferred. 14

15 D.99 Other capital transfers - when the payment is due to be made or, if in kind, when the ownership of the asset is transferred. For taxes and social contributions unlikely to be collected one of the three methods can be used: - a coefficient deducted from the declared or assessed amounts; - a coefficient recorded as a capital transfer payable; - time adjustment of cash receipts. 1. A fine. Q1. The financial statement for 2009 of a local authority shows a receipt of 25 for an environmental fine on a corporation. The fine was given in December How is this recorded in the national accounts of the local authority and what is the impact on local government net lending/net borrowing? Non-financial account Resources Period: Category: D B.9 Net lending 25 0 Financial account Assets Period: Category: F.2 25 F B.9f Net lending

16 2. Payment of a fine Q2. As for question 1, the fine was given in December This time 15 is paid in 2008 and the rest in How is this recorded? Non-financial account Resources Period: Category: D B.9 Net lending 25 0 Financial account Assets Period: Category: F F B.9f Net lending

17 3. Purchase of a product with delayed payment. You are part of a household. At the start of period 1 you have 300 in cash. In period 1 you acquire a bicycle. You pay in period 2. The value of the purchase is 100. Complete the accounts for periods 1 and 2. Non-financial account Uses Consumption Inventories Current transfers Insurance Capital transfers Resources Period 1 Period 2 Period 1 Period 2 Total B.9 Net lending The acquisition of the bicycle is P.3 final consumption expenditure. In National Accounts viewpoint you have consumed it already, so there is no value to record in the balance sheet. Financial Account Assets Currency Loans Shares Liabilities Period 1 Period 2 Period 1 Period 2 Trade credit Total B.9f Net lending A trade credit (F.71) is created in period 1 for the amounts to pay. This is a financial liability for you, since you have to pay. It is a financial asset for the seller. This financial claim is extinguished in period 2 when the cash is paid. Balance sheet Dwellings Opening Assets Endperiod 1 Endperiod 2 Currency Loans Shares Opening Liabilities Endperiod 1 Endperiod 2 Trade credit Total B.90 Net worth Note that the balances are the same as case study 3.4 question

18 4. Purchase of a product with advance payment. Q4. You are part of a household. At the start of period 1 you have 400 in cash. You buy a folding bicycle, which transfers to your ownership in period 2. You make your payment in advance, in period 1. The value of the purchase is 150. Complete the accounts. Non-financial account Uses Consumption Inventories Current transfers Insurance Capital transfers Resources Period 1 Period 2 Period 1 Period 2 Total B.9 Net lending Financial Account Assets Currency Loans Shares Trade credit Liabilities Period 1 Period 2 Period 1 Period 2 Total B.9f Net lending By paying in advance you have a trade credit financial asset a piece of paper that says you are owed a bicycle worth 150. This is a financial liability of the seller. This situation is extinguished in period 2, when the bicycle is acquired. Balance sheet Dwellings Opening Assets Endperiod 1 Endperiod 2 Currency Loans Shares Trade credit Opening Liabilities Endperiod 1 Endperiod 2 Total B.90 Net worth

19 5. The effect of fire and the ensuing repairs At the start of period 1 you have 3,000 in cash and a house worth 10,000. Your house is damaged by fire in period 1. The total damage is 1,000. You are insured and the insurer pays out on the insurance claim in period 2. In period 2 you use the cash to renew the house. Complete the accounts. Non-financial account Consumption Inventories Current transfers Uses Resources Period 1 Period 2 Period 1 Period 2 Insurance Capital formation Total B.9 Net lending The insurance claim (D.72) is recorded at the time of the event (period 1). It is a resource. It is balanced by an amount receivable in the financial account. This is in F.6, a special category for pensions and insurance, that is their equivalent of F.7. Financial Account Assets Liabilities Period 1 Period 2 Period 1 Period 2 Currency =0 Loans Shares Amounts receivable/payable Total B.9f Net lending In period 2 the amount receivable is repaid and replaced by cash. The cash is then spent. So, although two transactions in cash have occurred, the net effect is zero (= ). Balance sheet Assets Liabilities Opening Endperiod 1 Endperiod 2 Dwellings 10,000 9,000 10,000 Currency 3,000 3,000 3,000 Loans Shares Amounts receivable/ Payable 0 1,000 0 Opening Endperiod 1 Endperiod 2 Total 13,000 13,000 13, B.90 Net worth 13,000 13,000 13,000 Note that the net worth does not change. 19

20 6. Transport allowances In 2008, the State budget account recorded an amount of 130m for a new expenditure item: obligatory allowances for transport to and from work for certain civil servants who work while they travel. 10% of this 130m is for transport costs in December In 2009 the provisional budget recorded 150m under the same heading (of which 15m refers to December 2008). Q6. In which category should this be recorded in the national accounts in , and what is the impact on net lending (B.9) of central government in each year? Category: Intermediate consumption (P.2), see ESA95 paragraphs 4.07a(1) and 3.70h(1). ESA Wages and salaries do not include: a) expenditure by employers which is to their own benefit as well as to that of their employees, because it is necessary for the employers production process: (1) allowances or reimbursement of employees for travelling, separation, removal and entertainment expenses incurred in the course of their duties; Such expenditure on goods and services that employers are obliged to provide to their employees in order for them to be able to carry out their work is treated as intermediate consumption by employers. Impact on net lending (B.9): ESA Recorded at the time they enter the process of production, e.g. when they are consumed (10% of 130) (90% of 130 (=117) plus the 15 for December 2008) (= 150 minus the 15 for December 2008) 20

21 Case Study 4.1 Institutional units The local government of a city consists of various departments. It is structured along the lines of a holding company (the clerk s office) with subsidiaries (the various divisions). The divisions include the Registrar s office; Employment and social affairs division; Housing and construction division; Sport and tourism division; and the Computer and printing division. All these divisions have a separate management team. The clerk heads the clerk s office and is in charge of the total structure. Within an overall annual budget, each division s management can decide on the division s expenditure. Each division produces a complete set of annual accounts. These are presented to the Council in a non-consolidated manner 1. The Computer and printing division operates on a cost-recovery basis. This means that they charge the other divisions the cost of services they provide with no profit margin. 1. Classification of units? Q1. Present some arguments in favour of (A) recording the activity as belonging to a single local government unit; (B) recording each division as separate autonomous units. The first question to consider is whether there are separate autonomous institutional units. The clerk s office is clearly part of local government, but are the division s separate institutional units? ESA95 paragraph 2.12 tells us that that, if it is to be recognised as an institutional unit each division must have (i) decision-making autonomy in respect to its principal function and (ii) must keep its own accounts or have information available so we could compile them if needed. Each division has their own accounts [B] ESA95 paragraph 2.12 states that: In order to be said to have autonomy of decision in respect of its principal function, a unit must: (a) be entitled to own goods or assets in its own right; it will therefore be able to exchange the ownership of goods or assets in transactions with other institutional units; (b) be able to take economic decisions and engage in economic activities for which it is itself held to be directly responsible and accountable at law; (c) be able to incur liabilities on its own behalf, to take on other obligations or further commitments and to enter into contracts. 1 The word consolidation is used in the business accounting meaning of the word. 21

22 Each division has a clear principal function. Under (a), there is no evidence that a division can own goods or assets in its own right. It is also doubtful that the Sport and tourism division would have the managerial independence to sell the city sports stadium without a decision of the council. [A] Under (b), each division makes economic decisions and engages in economic activities, but there is no evidence that each division is legally accountable. Any legal action would probably be taken against the city government rather than the division. [A] However, ESA95 paragraph 2.13e states entities forming part of a group engaged in production can be a special case, deemed to have autonomy of decision making and be institutional units even if they partially surrender their autonomy to a central body. This allows the economic activity of subsidiaries to be separately identified where possible. [B] Under (c) each division has freedom to manage its own expenditure. They will be restricted by overall borrowing limits, but using 2.13e this is not a problem. [B] However, in terms of behaviour, most of the divisions appear to be acting like local government and involved in non-market activity [B]. There are two possible exceptions. The Computer and printing division performs an auxiliary function for the rest of the city government. Although it has a 100% result on the market test the provision of ancillary services is not the same as market activity, so we would not consider the revenue from this as sales unless there was good reason to (for example, evidence of competition against the market in tendering for contracts to provide printing services). So this suggests [A] for the Computer and printing division. The Sport and tourism division will have revenue from users so, if it passes the market test, could be classified as market activity [B]. However, if there is an overall judgement that the division is part of a single local government unit, we could separate out this market activity by forming a quasi-corporation [A]. Conclusion The divisions pass the test of being able to compile accounts. So, in practice we will need to find out whether these divisions can own goods or assets in their own right, take autonomous economic decisions, incur liabilities on their own behalf and enter into commitments and contracts before deciding on their classification. While this is possible it is unlikely. However, any divisions that are market producers can be deemed to have autonomy of decision making and separated out as quasi-corporations. 22

23 2. Income from private sector Q2. The city government needs to increase its revenue so allows the Computer and printing division to also operate on the market, for clients outside the general government sector. In scenario (i) this produces revenue equivalent to 60% of the division s costs, which is equivalent to 5% of the city government s total production costs. In scenario (ii) the revenue is 70% of the city government s total production costs. Discuss the classification options under these scenarios. (i) The division s sales as a proportion of its costs (60%) indicates that there is market activity. As this is close to 50% we need to be certain that this will continue so would probably request business plans or wait for further years results. If the division had been classified as part of one local government unit then we can separate it out as a public quasi-corporation (S.11001). (ii) If we applied the market test to the entire local government unit, this gives a 70% result. But would we reclassify a local government unit as a public corporation? The answer is no, since when classifying we are looking at similarity in economic behaviour. The economic reality is that one part of a local government unit (or possibly two depending on the sports division s results) is market but the rest is performing government activity. Therefore, we would create a quasi corporation out of this market activity. 3. Local savings bank Within this municipality, a separate division dedicated to household saving and consumer credit (a local savings and credit bank) also exists. This division is a subsidiary of the same legal entity (the clerk s office) as the other divisions. Management of the bank is with the bank s manager, who is also part of the management team of the municipality, as are the other heads of division. The division has its own legal identity and has been given a banking licence by the national central bank. The bank does not need the council s consent before incurring liabilities and large credits but does need the council s consent for large investments. The bank has to produce an annual budget and annual accounts that need the council s consent. Q6. What arguments are in favour of the inclusion of this local savings and credit bank as a component of the single Local Government institutional unit, and what arguments are in favour of recording it as a separate unit? 23

24 The local savings and credit bank operates as a financial intermediary. It collects funds on the market, transforms them and invests them on the market again. This division therefore should be classified as a separate unit, a public financial corporation, in sector S.122 (other monetary financial institutions). ESA95 paragraph 2.41 states that those units classified as S.122 by the EMI (nowadays its successor the ECB) for statistical purposes are included within this sub-sector. In practice, the existence of a banking licence will be enough to place the unit in the ECB s list. 24

25 1. The golf club Case Study 4.2 Market and non-market units Hole in one is a golf club owned by a municipality. It offers its members the right to use the course, have lunch or dinner in the club s restaurant and to introduce non-members. Additionally, the club offers non-members outdoor events combined with a lunch or dinner. The club has not made a profit in the last two years: its costs were equal to its total revenue. Government gives the club a grant to reduce the membership fee for the elderly who have only a small pension income. The size of the grant is based on the number of qualifying elderly people who are members. The following breakdown of the receipts is available: Description Year 1 Year 2 Amount Share Amount Share % % Annual membership fees Introduction fees Entrance fees (non-members) Food and beverage: members non-members Government support Sponsorship Room charges Total 1, , Q1. In determining whether Hole in One is market or non-market, which headings should be classified as sales and which should not? Would you classify the output as market or nonmarket? Annual membership fees - sale Introduction fees - sale Entrance fees (non-members) - sale Food and beverage - sale Room charges sale Government support sale. This is the most interesting item. From the perspective of government this is a social benefit transfer (D.6313 social assistance benefits in kind), which is re-routed to households who then use the proceeds to purchase services. So, from the perspective of the golf club, the price charged is inflated back the full market price. Sponsorship insufficient information: sale if for commercial purposes (e.g. advertising), capital transfer if a gift (e.g. donation). The market test gives 100% if sponsorship is included and 85.2% if it is excluded. So, it is clearly a market entity. 25

26 2. Refuse collection The local governments of towns Y and Z both run separate divisions with principal function the weekly collection from households, industry, streets and parks. They are not legal entities. Town Y employs 50 people for this and uses 20 refuse collection cars. Town Z employs 68 people and uses 25 refuse collection cars. Both refuse divisions have a full set of annual accounts. Their revenue consists of: (i) (ii) (iii) (iv) annual fixed fees charged to the town s inhabitants and local industry for refuse collection, per household or business; contributions from the town councils for street sweeping; incidental fees for particular disposals where the parties involved are charged directly; and a transfer from local government. This subsidy from local government aims to reduce the annual fee for the inhabitants. The following information from the profit & loss accounts is available. 26

27 Table 2. Revenue of the local refuse collection system Description ZZZ YYY amount share amount share x 1,000 % x 1,000 % Revenue Annual fees: 9, , inhabitants 4,000 5,500 industry 5,000 7,000 Road sweeping 2, , Incidental fees 4, , Government subsidy 4, , Total 19, , Costs Salaries 10, , Overhead costs 2, , Various purchases 4, , Depreciation 1, , Total 18, , Net proft Q2. In determining whether the output is market or non-market, which headings should be classified as sales and which should not? Would you classify the producers as market or non-market? Inhabitants fees As there is a fixed fee (everyone is charged the same) then this implies there is redistribution from those who produce less refuse to those who produce more, therefore it should be recorded as a tax. If the fee was related to how much is collected then this would be a sale - these do not meet the definition of a tax (compulsory and unrequited) as the payment is requited, a service is provided in return. ESA95 paragraph 4.80d suggests that garbage disposal fees are usually not recorded as taxes, but does not rule out this possibility. Industry fees - As above. ESA95 paragraph 4.23f suggests payments made for collection and disposal of waste is intermediate consumption (a service cost). However, that first depends on whether the fees are payments for a service or a tax on production, for which the revenue is used to provide a service. Road sweeping As the payment is from local government, it could be seen as an ancillary service. Exclude this one from the market test analysis. If the entities are market without it, then include as a sale. Incidental fees Sale these are in proportion to amount disposed, so there is requitedness. Government subsidy This depended on the answer to the inhabitants and industry fee. Where the inhabitants/industry fees are recorded as taxes the payment from local government is recorded directly. If the entity is non-market then the payment is simply a current transfer within local government (D.73), which would be consolidated from the 27

28 accounts. If the entity is market, then it is a subsidy on production (D.39) and the amounts are not included as sales. Payments to cover overall deficits are excluded from the definition of sales (ESA95 paragraph 3.33a). However, the payments here are not designed to cover the deficits. If the inhabitants/industry fees were recorded as sales, then as the payments from government are designed to reduce the costs of inhabitants, they could be re-routed and recorded as subsidies (for the part reducing the costs of corporations) and social benefits (for the part reducing the costs of households), offset by an imputed payment of these amounts to the refuse divisions. The imputed increase in the fees would be recorded (a social transfer in kind in the case of the household) and so the government payments would end up being rerouted and increase sales. For both towns the producers are non-market. 3. Regional Water Board The Regional Water Board of region VVV runs a sewerage system that collects and cleans the sewage from the houses and buildings and carries it off to the neighbouring river. The water-board is solely financed through compulsory legal levies on the inhabitants and industries of the region. Q3. Is the output of the Regional Water Board market or non-market? It is non-market. The revenue is fully from a compulsory levy, which is classified as a tax and not a sale. 28

29 Case Study 4.3 Integration, consolidation and netting This example deals with two units, the sector classification of the units is not important. The commercial accounting balance sheets for the units are presented below. Unit 1 original balance sheet ( 1,000s) Assets Liabilities Real estate 500 Shares 300 Equipment 200 Bonds 350 Long-term deposits 75 Provisions 125 Cash balances 65 Loans 100 With banks 20 from banks 30 With unit 2 45 from unit 2 70 Debtors 110 Creditors 75 with clients 15 with suppliers 30 with unit 2 95 with unit 2 45 Total 950 Total 950 Unit 2 original balance sheet ( 1,000s) Assets Liabilities Real estate 1,450 Shares 1,250 Equipment 365 Bonds 610 Long-term deposits 250 Provisions 225 Cash balances 120 Loans 75 with banks 50 from banks 30 with unit 1 70 from unit 1 45 Debtors 130 Creditors 155 with clients 85 with suppliers 60 with unit 1 45 with unit 1 95 Total 2,315 Total 2, Integration The first step is to integrate both balance sheets, which means verifying that the assets and liabilities that exist between both units are recorded consistently, and modifying them if they are not. Q1. Find the entries in the accounts of both units that are positions between units 1 and 2. Check that they are consistent. 29

30 Unit 1 balance sheet ( 1,000s) Assets Liabilities Real estate 500 Shares 300 Equipment 200 Bonds 350 Long-term deposits 75 Provisions 125 Cash balances 65 Loans 100 with banks 20 from banks 30 with unit 2 45 from unit 2 70 Debtors 110 creditors 75 with clients 15 with suppliers 30 with unit 2 95 with unit 2 45 Total 950 Total 950 Unit 2 balance sheet ( 1,000s) Assets Liabilities Real estate 1,450 Shares 1,250 Equipment 365 Bonds 610 Long-term deposits 250 Provisions 225 Cash balances 120 Loans 75 with banks 50 from banks 30 with unit 1 70 from unit 1 45 Debtors 130 creditors 155 with clients 85 with suppliers 60 with unit 1 45 with unit 1 95 Total 2,315 Total 2, Aggregation Q2. Aggregate the two units together and produce accounts according to ESA95 categories. Aggregated balance sheet ( 1,000s) Assets Liabilities Produced assets 2515 Currency & deposits 510 Currency & deposits Securities o. t. shares 0 Securities o. t. shares 960 Loans 0 Loans 175 Shares and other equity 0 Shares and other equity 1550 Other accounts receivable 240 Other accounts payable 230 Total 3265 Total

31 The aggregated data are the sum of the entries for Units 1 and 2. The overall asset total ( 3,265) equals the balance sheet total of Unit 1 ( 950) and Unit 2 ( 2,315). The overall liability total has been reduced from the 3,265 originally stated to 2,915 because provisions ( 350m) are not recorded in National Accounts. 3. Consolidation Q3. The two units are part of the same sector, consolidate them. Consolidated balance sheet ( 1,000s) Assets Liabilities Produced assets 2515 Currency & deposits 395 Currency & deposits Securities o. t. shares 0 Securities o. t. shares 960 Loans 0 Loans 60 Shares and other equity 0 Shares and other equity 1550 Other accounts receivable 100 Other accounts payable 90 Total 3010 Total 2660 With consolidation a business accounting concept all interrelations are eliminated. In National Accounts entities within the same sector (or sub-sector depending on the level of the accounts) have any transactions that occur between them, and the resulting balance sheet positions, eliminated (ESA95 paragraph 1.58). While ESA95 does not recommend such consolidation in the production of National Accounts, it does recognise the importance of consolidated accounts, which are used in a number of analysis, including the Excessive Deficit Procedure. So, the positions between Units 1 and 2 (totalling 255m) are eliminated. 4. Netting Q4. Produce accounts that are both consolidated and netted. Consolidated balance sheet ( 1,000s) Net assets Produced assets 2,515 Currency & deposits 395 Securities o. t. shares -960 Loans -60 Shares and other equity -1,550 Other accounts rec/pay 10 Total

32 Netting involves simplifying the entries in the same non-financial categories (e.g. those having both a resource and use, such as interest receivables and payables) or financial account and balance sheet category (e.g. those having both an asset and a liability, such as issuing its own bonds and owning the bonds issued by another). Here, the only financial account category to net is the other accounts receivable/payable, where we have 100 of assets and 90 of liabilities, so the net assets are =10. 32

33 Case Study 5.2 Delimitation of the general government sector Some non-profit institutions (NPIs) operate within the local community: operating the local theatre, music school and museum. Their income (resources) and expenditure (uses) is about the same. Some of their income is from transfers from the local government and some from fees. Details are in the table below. The NPIs boards are appointed by local government. The NPIs need government s consent before engaging in large investments. The NPIs each produce a full set of annual accounts, which require the approval of local government. Charges/fees Transfers Production costs Theatre Music School Museum Q1. In which sector/sub-sector of the economy will you classify them? The NPIs are autonomous institutional units. There is public sector control, but sufficient autonomy of decision for autonomous institutional units to be recognised. The NPIs boards are appointed by local government so they are in the public sector. The additional rights held by government (financial controls over large investments plus approval of accounts) further strengthen the case, but the appointment rights are sufficient by themselves. The next step is to consider whether their output is market or non-market. For the theatre and museum the majority of the income is from government grants, so their market test result is less than 50% and they are therefore non-market producers. Non-market producers controlled and mainly financed by government are classified in the general government sector (ESA95 paragraph 2.69b). So, for these two they are consolidated into the local government sector (S.1313) despite being separate institutional units. For the music school only 30% of the income is from government grants, so their market test result is more than 50% and they are market producers. They will be classified as public nonfinancial corporations (S.11001) and their government grants classified as subsidies (D.39). 33

34 The University of Economics and Finance is a budgetary NPI organisation. Its accounts for the last three years show: University Accounts Total costs Transfer from central budget Revenue from research contracts Revenue from fees The university is controlled by its board. This is appointed by the Ministry of Education. The university has autonomy in deciding its research programmes. Forecasts shows that total costs for 2010 and 2011 are expected to be mainly covered by transfers from the central budget and that it will borrow if other revenue is insufficient. All the costs included within total costs are production costs. We want to make a sector classification of the university. Q2. The first step is to consider whether the unit is an autonomous unit. Autonomous unit? See ESA95 paragraph Key aspects are whether the unit has decision-making autonomy in the exercise of its principal function and either keeps or can construct a set of accounts. It appears to meet the first criterion. We are told it has accounts so it meets the second criterion. Therefore it is an autonomous unit. Q3. The second step is to determine whether the unit is public sector or private sector, which involves determining whether it is controlled by the public or private sectors. Control is defined in ESA95 as the ability to decide the general policy or strategy of the institutional unit. This is usually determined by the powers to appoint the directors of the board, although control can be determined by other means. Possession of a majority of the shares in a corporation is a sufficient condition for determining control. Public or private sector? The Ministry of Education, which will be part of the central government sub-sector, appoint the board. Therefore the university is public sector controlled and part of the public sector. Q4. The third step is to apply the market test (50% criterion) by determining the percentage of costs that are covered by sales. This will determine whether the unit is market or nonmarket. 34

35 Market test The revenue from research and fees are considered as sales. The market test results are: 2007: 400/1000 = 40% 2008: 600/1200 = 50% 2009: 750/1400 = 54% This indicates that the unit may have moved from non-market to market in However, the 50% criterion should be considered over a number of years (see ESA95 paragraph 3.33) and must hold for several years and be expected to hold in the near future. The forecasts show that in 2010 and 2011 we expect the percentage to be less that 50. Therefore 2009 is a minor fluctuation from the usual position. Therefore the university is non-market. The next step, if necessary is to check against the ESA95 paragraph 2.68 definition of a general government unit. This also includes non-market units that are mainly financed by compulsory payments made by units belonging to other sectors and/or units principally engaged in the redistribution of income and wealth. Q5. In which sector and sub-sector should the university be classified? Sector classification A non-market public sector unit is classified in the general government sector (S.13). Sub-sector classification As we have determined that the unit is general government, the sub-sector options are central government, state government, local government and social security funds. The latter is a provider of social benefits so is not the case here. To determine which of the other subsectors is appropriate we consider whether the economic activity of the unit extends over the entire economic territory (central government), is restricted to the territory of a state (state government) or restricted to the territory of local governments (local government). The university s economic activity is not restricted by geographic territory, so it is classified as central government (S.1311). Now consider the case of the university as before with one change. Instead of the board being appointed by the Ministry of Education, only the President of the Board is. The remaining members of the board are appointed by the private sector. 35

36 Q6. In which sector/sub-sector should the university be classified? As the majority of the board are appointed by the private sector the university would be considered private sector, unless there were other powers in place that enables government to control general policy via special legislation, decree, regulation or contract. We must be careful to check that the President of the Board does not have a veto over every decision as in that case the President controls the policy and not the board, and hence appointment of the President would be the important criterion. We have no information to suggest any of these exceptions apply so the university will be a private sector non-market unit. It will be classified as a Non-profit institution serving households (S.15). The Religious High School of Iaşi is a private sector organisation. The management of the school are appointed by the religious community, which is separate from the state here. The accounts of the school for the last three years show: High School accounts Total production costs Revenue from research contracts and fees Payments from local administration Donations from religious community Q7. In which sector/sub-sector should the school be classified? The school appears to be an autonomous unit and there is no indication of exceptional government control. It is private sector. The payments from local administration and donations from the religious community are not sales. The market test produces the following results: 2007: 200/1000 = 20% 2008: 400/1200 = 33% 2009: 450/1400 = 32% Therefore, the unit is non-market. It will be classified as a Non-profit institution serving households (S.15). 36

37 Reconsider the case of the Religious High School of Iaşi with one difference. The director of the school is now appointed by the local administration of Iaşi and the number of pupils in the school and the curriculum are decided by the Ministry of Education. Q8. In which sector/sub-sector should the school be classified? The Manual on Government Deficit and Debt (page 13) provides further information on the classification of schools. Government is considered as controlling if government approval is needed to create new classes, make significant capital formation, or to borrow, or it can prevent the school ending its relationship with government. If government just finances the school or supervises the quality of education (for example setting the curriculum and restricting the maximum pupils per class) this is not considered government control. However, the director of the school controls the general policy of the school within these constraints. The director is appointed by local government. Therefore the school is classified as general government (S.13). The school operates within the local administrative region so is classified as local government (S.1313). If you complete questions 1-8 quickly, try this one. Q9. In which sector/sub-sector should the UK public sector hospitals be classified? Eurostat agreed with the classification as general government, for the reasons set out in the note. 37