An Introduction to System of National Accounts Integrated Transaction Accounts Lesson: VII Part 1 Capital and Financial Accounts Main entries and Data Needs Second Intermediate-Level e-learning Course on 2008 System of National Accounts October - December 2013
Contents Capital and Financial Accounts Asset Boundary Asset classification Valuation of assets
Capital and Financial Accounts
Capital and Financial Accounts Capital and Financial Accounts The Production and Income accounts are the current accounts and record transactions in income and expenses. The Capital and Financial accounts are the accumulation accounts and record transactions resulting in changes in assets and liabilities. All changes in non-financial assets are recorded in the capital account, while all changes in financial assets are recorded in the financial account.
Capital and Financial Accounts Capital Account link to Income Accounts Recall that disposable income of institutional units gets distributed as follows by uses: Disposable income / GNDI Capital Account B.8 Net savings 33 B.12 Current external balance Capital transfers receivable 1 23 Gross Capital formation Capital transfers payable -2-10 CFC 19 B.9 Net lending / borrowing Changes in net worth due to savings & capital transfers 34
Capital and Financial Accounts Capital & Financial Accounts and KTA The non-financial transactions of the KTA correspond to the non-financial transaction accounts of the SNA. Thus, the sub-total of uses-side minus sub-total of resources side of the KTA gives the balance of real transactions - net lending / borrowing. The financial account of the SNA corresponds to the financial transactions of the KTA. The KTA shows: the difference between the sub-totals of non-financial transactions is equal to the difference between the change in financial assets and that of liabilities. Thus, the balance of transactions in financial assets and liabilities is by definition equal to the balancing item of the capital account, i.e. net lending / borrowing.
Capital and Financial Accounts Structure of Capital Account The labels of the two sides of the account are changes in assets and changes in liabilities and net worth Current external balance: the opening item for the RoW, which is the balancing item corresponding to savings for the RoW. Changes in net worth due to savings & capital transfers is the total of the right-hand side of the capital account, and NOT a balancing item. Changes in assets Changes in liability & net worth Total economy Transaction / balancing item Transaction / balancing item / total Total economy Capital Account B.8 Net savings 33 B.12 Current external balance Capital transfers receivable 1 23 Gross Capital formation Capital transfers payable -2-10 CFC 19 B.9 Net lending / borrowing Changes in net worth due to savings & capital transfers 34
Capital and Financial Accounts Structure of Financial Account The labels of the two sides of the account are changes in assets and changes in liabilities and net worth Net incurrence of liabilities less net acquisition of financial assets is equal in value, with the opposite sign, to net lending/borrowing, the balancing item in the capital account. Changes in assets Changes in liability & net worth Financial Account B.9 Net lending / borrowing Net acquisition of financial assets Net incurrence of liabilities
Capital and Financial Accounts Transactional Accumulation in Main Accounts The balance of real transactions is reflected in the capital accounts for total economy as follows Savings Change in net worth due to savings and capital transfers Capital formation Net lending to / borrowing from ROW
Assets Boundary
Asset Boundary Assets Boundary Economic assets are entities functioning as a store of value over which ownership rights are enforced by institutional units, individually or collectively, and from which economic benefits may be derived by their owners by holding them or using them over a period of time Economic benefits derived from: Use of an asset in the production process (operating surplus) Generation of property income by letting others use (interest, dividends, rent) Store of value (including possible holding gains/losses, that could be realized by disposing of the asset or terminating it)
Assets Boundary Extensions of Assets Boundary In the 2008 SNA, the following are included in the assets boundary: Intellectual property products Military weapon systems Water resources (extended) [not discussed in detail] Cultivated biological resources (in a different class) [not discussed in detail] 12
Assets Boundary Intellectual property products These consists of : outcome of R&D, mineral exploration and evaluation, computer software and databases, and entertainment, literary or artistic originals. These represent gathered knowledge. The knowledge remains an asset as long as its use can create some form of monopoly profits for its owner. When it is no longer protected or becomes outdated by later developments, it ceases to be an asset. 13
Assets Boundary Military weapon systems These include vehicles and other equipment such as warships, submarines, military aircraft, tanks, missile carriers and launchers, etc. are treated as fixed assets. Most weapons for single-use such as ammunition, missiles, rockets, bombs, etc. are treated as military inventories. (and intermediate consumption only when used.) Some single-use items, such as ballistic missile are treated as fixed assets. 14
Assets Boundary Military weapons (Contd.) For those treated as fixed assets, CFC should be charged on basis of their expected service life. Losses of military weapon systems in wars (or other military operations) should generally be recorded as other changes in volume of assets (OCVA). As in 1993 SNA, structures used by military establishments that can also be used for civilian purposes would be treated as fixed assets. In addition, weapons systems is also considered as fixed assets in 2008 SNA; weapon systems used for internal security are treated as fixed assets in 2008 SNA. 15
Assets Classification
Assets Classification Classification of Non-financial Assets Broad groups: Produced non-financial assets Fixed assets Inventories Valuables Non-produced non-financial assets Natural resources Contracts, leases and licences Goodwill & marketing assets The main changes are in the fixed assets category. Only one sub-category Military inventories is introduced under Inventories. 17
Assets Classification Classification of Fixed Assets Fixed assets by type of asset Dwellings Other buildings and structures Machinery and equipment Weapons systems Cultivated biological resources Animal resources yielding repeat products Tree, crop and plant resources yielding repeat products Costs of ownership transfer on non-produced assets Intellectual property products 18
Assets Classification Fixed Assets Classification of Fixed Assets (contd.) Intellectual property products Research and development Mineral exploration and evaluation Computer software and databases Computer software Databases Entertainment, literary or artistic originals Other intellectual property products 19
Assets Classification Fixed Assets Cost of Ownership Transfer This consists of: professional charges, commissions, trade & transport costs; delivery and installation or de-installation costs; and terminal costs incurred while acquiring or disposal. Costs of ownership transfer are treated as gross fixed capital formation. CFC is charged over a length of time the owner is expected to hold the asset. or CFC on this is charged in the year the cost is incurred. [2008 SNA,10.157] 20
Assets Classification Fixed Assets Mineral Exploration & Evaluation All related expenditures are included in gross fixed capital formation. These are valued NOT on the basis of the value of new deposits discovered, but by the value of the resources allocated to exploration during the accounting period (for own final use). If done thru contractors, the prices charged by these contractors. CFC may be calculated for such assets by using average service lives. 21
Assets Classification Fixed Assets Land Improvement Land improvements is a category of fixed assets distinct from the non-produced land asset as it existed before the improvement. If separate valuation is not possible, allocated to the major category among the two: land asset &land improvement. The costs of ownership transfer on all land are to be included with land improvements. CFC ought to be charged over a suitably long period of time. [2008 SNA, 10.160] 22
Valuation Valuation Current market value at prices of acquiring on the date. If non-financial assets in addition any associated costs of ownership transfer Major methods: Observable prices; e.g., for dwellings, land, equipment, livestock, marketable securities, inventories Current value of cumulative capital formation; e.g., for major construction, cultivated assets, mineral exploration Present value of future income; e.g., for intangible assets, subsoil assets Insurance value; e.g., for valuables
Valuation Net Worth Net worth = value of assets less the value of liabilities - may be either positive or negative For quasi corporations, net worth is by definition zero - since their equity liability is derived as a residual
End of Part-1 Lesson VII
An Introduction to System of National Accounts Integrated Transaction Accounts Lesson: VI Part 2 Capital and Financial Accounts Main entries and Data Needs Second Intermediate-Level e-learning Course on 2008 System of National Accounts June - August 2013
Contents Capital Account Financial Account
Capital Account
Capital Account Underlying Identity Capital Account Net lending / borrowing Gross Savings + (net) Capital transfer receivable minus (GFCF + CII + acquisition less disposal of valuables) - acquisition less disposal of non-produced nonfinancial assets
Capital Account Accounting Structure Changes in assets Capital Account Gross Fixed capital formation Acquisition less disposal of fixed assets Costs of ownership transfers on non-produced assets Changes in Inventories Acquisition less disposal of valuables CFC Acquisition less disposal of non-produced assets B.9 net lending/borrowing Changes in liabilities & net worth B.8g Savings (net) Capital transfers receivable Capital transfers payable Changes in net worth due to savings & capital transfers
Capital Account Gross fixed capital formation Acquisitions, less disposals, of (tangible) fixed assets: dwellings other buildings and structures land improvement machinery and equipment information, computer and telecommunications (ICT) equipment cultivated assets, e.g. trees and livestock Weapons system Acquisitions, less disposals, of intellectual property products: mineral exploration computer software entertainment, literary or artistic originals other intangible fixed assets Costs associated with the transfers of ownership of non-produced assets (though the acquisition of these assets themselves is not included) 31
Capital Account Consumption of fixed capital Represents the amount of fixed assets used up, during the accounting period Should be distinguished from the depreciation allowed for tax purposes or the depreciation shown in business accounts Should be estimated on the basis of the stock of fixed assets and the probable average economic life The perpetual inventory method (PIM) is recommended for the calculation of the stock of fixed assets The stock of fixed assets should be valued at the purchasers prices of the current period 32
Capital Account Changes in inventories Measured by the value of the entries into inventories Less value of withdrawals and the value of any recurrent losses of goods held in inventories (normal damages) Types: materials and supplies work-in-progress finished goods goods for resale 33
Capital Account CII - Valuation Materials and supplies: at actual /estimated purchasers prices Output of finished goods: at current basic prices Additions to work-in-progress: in proportion to the estimated current basic price of the finished product Reductions in work-in-progress as withdrawn from inventories: valued at current basic prices of the unfinished product Goods for resale: at actual /estimated purchasers prices Goods for resale withdrawn: at the purchasers prices at which they can be replaced at the time they are withdrawn 34
Capital Account Valuables Goods that are not used primarily for production or consumption, do not deteriorate (physically) over time under normal conditions and that are acquired and held primarily as stores of value Types of valuables: precious stones and metals such as diamonds, non-monetary gold, platinum, silver antiques and other art objects, such as paintings, sculptures, etc. other valuables, such as jewelry fashioned out of precious stones and metals and collectors items 35
Capital Account Valuables - valuation Acquisition - at the purchasers prices paid for them, including any agents fees or commissions and trade margins when bought from dealers, Disposals - at the prices received by sellers, after deducting any fees or commissions paid to agents or other intermediaries 36
Capital Account Non-produced non-financial assets Natural resources that are used in the production of goods and services, such as subsoil assets, uncultivated biological resources and water resources Contracts, leases and licences: marketable operating leases, permissions to use natural resources, permissions to undertake specific activities, entitlement to future goods and services on an exclusive basis, Goodwill and marketing assets: Goodwill: The premium offered (or might be offered) above the net value of the assets and liabilities. Marketing assets: Items like brand names, mastheads, trademarks, logos and domain names 37
Capital Account Capital Transfers Current vs. capital transfers Current transfers increase/reduce the saving Capital transfers do not affect the saving Capital taxes Capital levies Taxes on capital transfers Investment grants: capital transfers in cash or in kind made by governments or by RoW for acquiring fixed assets Other capital transfers 38
Capital Account Accounting Structure a numerical example A mobile phone service provider company makes the following expenditures during an accounting period. Purchase of land 5.0 of which, payment to real estate broker 1.5 Expenditure made on land improvement 0.5 Expenditure on construction of a building 33.5 payment to engineering consultant 2.0 payment to contracted builder 31.5 Expenditure on own-account R&D 1.5 Payment for license to use radio spectra 5.0 Capital transfer received 7.0 Capital transfer paid 5.0 Assuming that its CII as 8, CFC as 20 and that its net disposable income as 34, prepare the capital account for the company in the next slide.
Capital Account Accounting Structure [First try yourself] Changes in assets Capital Account Changes in liabilities & net worth B.8g Savings (net)? 34? 40 Gross Fixed capital formation Capital transfers receivable? 7 38.5? 1.5? Acquisition less disposal of fixed assets Costs of ownership transfers on non-produced assets 8.0? Changes in Inventories 0-20.0? CFC 5.0? Acquisition less disposal of valuables Acquisition less disposal of non-produced assets 3.0? B.9 net lending/borrowing Capital transfers payable?-5 Changes in net worth due to savings & capital transfers? 36
Financial Account and Classification of Financial Assets & Liabilities
Financial Account Financial Account Entries are changes in the financial assets and liabilities and are made by type of financial instrument, The classification of assets and liabilities used in the financial account is identical to that used in the balance sheets Left side of the account records acquisitions less disposals of financial assets, while the right side records incurrence of liabilities less their repayment Net incurrence of liabilities less net acquisition of financial assets is equal in value, with the opposite sign, to net lending/borrowing, the balancing item in the capital account. 42
Financial Account Financial Transactions These are exchange of financial assets and liabilities: recorded only in the financial account change the distribution of the portfolio of financial assets and liabilities may change the totals of both financial assets and liabilities, but they do not change the difference between total financial assets and liabilities. 43
Financial Account Valuation of Financial Transaction The actual payment in financial transaction almost always represent more than one transaction in the SNA. For example, payments of interest on loans and deposits involve both interest and a service fee. Recording of these transaction in the SNA require partitioning the actual payments. In some cases more than one adjustment may be needed to identify and re-route both the service charge and interest associated with the asset. 44
Financial Account Counterparts of financial transactions Most transactions involving the change of ownership of a good or non-financial asset, or provision of a service or labour, entail a counterpart entry in the financial account. In the SNA, many transactions take place entirely within the financial account. Examples: when one financial asset is exchanged for another or a liability is repaid with an asset, existing financial assets are exchanged for other financial assets The net lending/net borrowing changes when the counterpart transaction of a financial transaction is not a financial transaction. 45
Classification of Financial Assets & Liabilities Financial Asset Classification The broad categories are: 1. Monetary gold and SDRs 2. Currency and deposits 3. Debt securities 4. Loans 5. Equity and investment fund shares 6. Insurance, pension and standardized guarantee schemes 7. Financial derivatives and employee stock options 8. Other accounts receivable/payable. 46
Classification of Financial Assets & Liabilities Monetary gold Monetary gold: gold to which the monetary authorities have title and is held as a reserve asset. It comprises gold bullion (included in allocated gold accounts) and unallocated gold accounts with non-residents that give title to claim the delivery of gold. Gold bullion can be a financial asset only for the central bank or central government. The unallocated gold accounts are treated as financial assets and liabilities 47
Classification of Financial Assets & Liabilities Special Drawing Rights (SDR) Special Drawing Rights (SDRs): international reserve assets created by the IMF These are allocated to its members to supplement existing reserve assets. Creation of SDR: allocations of SDRs Extinguished SDR: cancellations of SDRs These are recorded at the gross amount in the financial accounts of the monetary authority of a member country and the counterpart in that of the RoW. SDRs are held exclusively by official holders. SDRs are assets with matching liabilities. 48
Classification of Financial Assets & Liabilities Currency and deposits This category consists of: Currency: Currency consists of notes and coins - issued or authorized by the central bank or government. Transferable deposits: Further classified in 2008 SNA as Inter-bank positions: deposits and liabilities of deposittaking corporation with the Central Bank (in most cases) Other transferable deposits: one party or both parties to the is not a bank. Other deposits: Other than transferable deposits. 49
Classification of Financial Assets & Liabilities Currency and deposits (Contd.) Other deposits: This includes deposits like savings deposits, fixed-term deposits and nonnegotiable certificates of deposit. shares issued by savings and loan associations, building societies, credit unions Claims (non loans) on the IMF that are components of international reserves The unallocated gold account: deposit denominated in gold 50
Classification of Financial Assets & Liabilities Debt securities These are negotiable instruments serving as evidence of a debt. This category was called Securities other than shares in the 1993 SNA They include: bills, bonds, negotiable certificates of deposit, commercial paper, debentures, asset backed securities, and similar instruments normally traded in the financial markets. 51
Classification of Financial Assets & Liabilities Loans Loans are financial assets that are: a. created when a creditor lends funds directly to a debtor, and b. evidenced by documents that are not negotiable. 52
Classification of Financial Assets & Liabilities Equity and investment fund shares Called Shares & other securities in the 1993 SNA. Equity: claims on the residual value of a corporation or quasicorporation after the claims of all creditors have been met. Equities are subdivided into: a. listed shares; b. unlisted shares; and c. other equity. 53
Classification of Financial Assets & Liabilities Financial derivatives A component of the category Financial derivatives & employee stock options newly introduced in the 2008 SNA. 54
End of Lesson VII
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