AUSTRALIAN GFS FRAMEWORK
2.1 The aim of this chapter is to provide a detailed account of the conceptual framework of the GFS system in Australia. The chapter sets out the broad objectives of the system, the institutional units that fall within the scope of the system, the coverage of those units achieved in the statistics, and the classifications that are applied to the units. The chapter also describes the broad nature of the economic flows and stocks that are recorded in the system and the accounting rules that govern that recording. The analytical framework in which flows and stocks are presented is then described, followed by detailed descriptions of the classifications that are applied to flows and stocks.
OVERVIEW OF THE ANALYTICAL FRAMEWORK
2.2 The analytical framework adopted by the ABS for compiling GFS has been structured to provide for:
2.3 To achieve these objectives the analytical framework has been designed to enable integrated recording of government economic flows and stocks. Thus, the framework requires that there be a balance between the opening values of economic stocks, the value of the transactions and other economic flows during the accounting period and the resulting values of the stocks at the end of the accounting period. The balancing requirement relates to the total of all stocks and to totals for individual classes of assets and liabilities.
- aggregation and consolidation of all government economic flows and stocks to provide a financial statement for the whole of the Australian public sector;
- a comprehensive financial view of economic flows (e.g. transactions) and stocks (e.g. assets and liabilities) of the Commonwealth, and each state, territory and local government in Australia;
- analysis of the economic flows and stocks of the three main components of the public sector (general government, public non-financial corporations and public financial corporations) within an integrated classification scheme;
- data recorded on an accrual basis with supplementary data recorded on a cash basis; and
- convenient derivation of data for input into the Australian System of National Accounts.
2.4 In order to provide statistics for each component of the public sector, the framework provides for the identification of the level of government, jurisdiction and economic sector of each statistical unit in the system. The framework includes consolidation rules that govern the aggregation of data for individual units into totals for each level of government, jurisdiction and sector. The rules provide for the consolidation of flows and stocks that occur between units in the same level of government, jurisdiction or sector.
2.5 As well as providing the foregoing classification of units by level of government, jurisdiction and sector, the framework provides for the classification of economic flows by type and function and economic stocks by type. At the broadest level, flows are subdivided between transactions other economic flows. Transactions are categorised as either revenues, expenses, net acquisition of non-financial assets, net acquisition of financial assets, net incurrence of liabilities or net contributions of capital. Stocks are subdivided by type between non-financial assets, financial assets, liabilities, and shares and other contributed capital. Each of the classifications is hierarchical, such that each of the broad categories is disaggregated into sub-categories, which in turn are further broken down into classes. The degree of disaggregation varies from category to category and is designed to cater for all analytical requirements.
2.6 The classification of stocks and flows by type reflects a set of three financial statements that comprise the basic structure of the analytical framework:
The prefix ‘GFS’ used in association with analytical balances is used to distinguish system elements that occur in accounting standards but are not defined in the same way as in the accounting standards.
- the GFS operating statement, which records GFS revenues, GFS expenses, and net acquisition of non-financial assets;
- the statement of stocks and flows, which records the opening values of stocks of assets, liabilities and equity, the values of transactions and other flows in the accounting period, and the resulting values of the stocks at the end of the accounting period;
- the cash flow statement, which records cash flows arising from operating, investing and financing activities.
2.7 The framework provides a structure within which very detailed presentations of GFS can be formulated. In theory, the items in each of the basic statements can be disaggregated to the finest levels of each of the stocks and flows classifications and cross-classified according to the level of government, jurisdiction and sector of each unit in the system. In practice, there are practical and quality limits to the degree of detail that can be tabulated. However, the previously discussed objectives of the framework are readily achieved with this design.
2.8 Statistical units are businesses, government agencies etc about which statistics are tabulated, compiled or published. Each statistical unit is classified according to the unit’s characteristics of analytical interest so that statistics can be presented for groups of units with common characteristics. The statistical unit is not always the same as the ‘collection unit’, which is the unit from which information is obtained. A collection unit might provide information relating to several statistical units or it might be necessary to split the information supplied by a collection unit to provide information relating to more than one statistical unit.
2.9 The ABS has developed a hierarchical model of standard statistical units for use in economic statistics. The model is defined according to principles set out in SNA93. Use of standard definitions of units across all economic statistics enables users to compare statistics in different fields knowing that the comparisons are not invalidated by the existence of different units of observation underlying the statistics being compared.
2.10 In the model, there is a ‘legal entity’ unit that is essentially the same in concept as the SNA93 concept of an ‘institutional unit’, which is discussed in Appendix 1 and is the recommended statistical unit in the IMF’s GFS system. A legal entity is defined as ‘a unit covering all the operations in Australia of an entity that possesses some or all of the rights and obligations of individual persons or corporations or that behaves as such in respect of those matters of concern for economic statistics’. However, the unit used in Australia’s GFS system is the ‘enterprise’, which is defined in the model as ‘all legal entities within an enterprise group that are classified to the same institutional subsector’. Thus, an enterprise can be a single legal entity or a combination of legal entities within the same ‘enterprise group’, which is a group of legal entities that are under common ownership or control.
2.11 In Australia’s public sector, most enterprises equate with a single legal entity and therefore match the SNA93 concept of an institutional unit. An exception occurs with government-owned corporations that are related as parent and subsidiaries. In that case, related corporations in the same institutional subsector are combined to form an enterprise unit (the concept of institutional subsectors is discussed ahead in the section entitled ‘Classification of units’). However, if each corporation prefers to report individually, they can each be treated as individual collection units.
2.12 The ABS concepts of legal entity and enterprise include the SNA93 concept of a quasi-corporation, which is discussed in Appendix 1. Thus, an unincorporated government entity that operates as if it is a separate corporation is treated as a legal entity and as an enterprise. Such an entity is regarded as operating like a separate corporation if it:
2.13 The concept of a ‘single legal entity’ requires some elaboration when applied to government departments and authorities that are primarily funded from budget allocations and subject to centralised control of their finances through the public accounts. Such entities do not have the degree of independence to meet the SNA93 criteria for recognition as institutional units and similarly do not qualify as single legal entities in the Australian units model. Thus, in concept, each jurisdiction (i.e. the Commonwealth and each state and territory) includes an enterprise that comprises all departments and authorities included in the jurisdiction’s public accounts.
- has the same relationship to its government owner as a corporation has to its shareholders; and
- keeps a full set of accounts, including a balance sheet.
2.14 However, individual departments and other budget-funded authorities of the Commonwealth, state and territory governments are separately identified as enterprise units in the computer systems supporting the ABS GFS system and are allocated to the various units classifications discussed ahead under the heading ‘Classification of units’. This procedure is adopted to provide the flexibility to compile data available for the lower-level units should such compilation be required. Because the departments and authorities carry the same unit classifications as their parent enterprise, the procedure has no effect on the accuracy of the unit-classified data reflected in GFS.
2.15 The entities that are identified separately in the GFS system are of two main types:
2.16 As previously noted, each statutory authority and departmental entity that is included in the public accounts of a jurisdiction is treated conceptually as part of a wider enterprise unit comprising all such units in the jurisdiction. Conversely, with one exception, each statutory authority and departmental entity that is not included in the public accounts of a jurisdiction is treated as an individual legal entity and therefore as an enterprise. The exception concerns units that operate as an integral part of another unit (e.g. they have no separate accounts and no separate employees); such units are merged with the unit of which they form an integral part.
- Statutory authorities - these are entities established by the Constitution or by an Act of Parliament of the Commonwealth or one of the states or territories. Statutory authorities include the Governor-General and the Governor of each state, each house of the parliaments of the Commonwealth and each state and territory and each court of law. Statutory entities are not restricted to entities created as ‘bodies corporate’, but include any other entity which is described in legislation as having been established by the legislation. Included are entities established under legislation which provides for the establishment of a class of entities (e.g. government-owned companies created under corporations law, and local government authorities created under local government legislation) rather than for each entity individually. The concept also includes entities which are created as statutory offices held by individual persons, or as statutory bodies comprising several statutory offices named in the legislation;
- Departmental entities - these include entities created as ‘Departments of State’ by the instrument (e.g. proclamation, Executive Council order) required by legislation in the Commonwealth and each state or territory. However, for statistical purposes, ‘departmental entities’ exclude any statutory entities which may be named as part of a department in the instrument of creation.
SCOPE AND COVERAGE
2.17 The term ‘scope’ is used to denote the group of statistical units that defines the intended boundary of a statistical system. The aim of a statistical system is to record a defined set of information relating to all of the statistical units defined as falling within the scope of that system. The term ‘in-scope units’ is often used to describe the group of units falling within the scope of a statistical system. The term ‘coverage’ is used to denote the extent to which the defined scope of a statistical system is actually achieved in practice. Ideally, scope and coverage would be identical but in practice there are many reasons why it may not be feasible to achieve full coverage.
SCOPE OF THE GFS SYSTEM
2.18 The scope of the ABS GFS system is defined as all enterprise units comprising the public sector of Australia. The public sector is defined in the ABS Public/Private classification, which is one of the standard sector classifications defined in Standard Economic Sector Classifications of Australia (SESCA) 2002 available in the ABS's Statistical Concepts Library. The SESCA defines the public sector as comprising:
2.19 It will be noted that the scope is defined in terms of ‘resident’ units. The concept of residence is based on the concept of the economic territory of a country, rather than legal or political concepts. The economic territory of a country is defined in the SNA93 as ‘the geographic territory administered by a government within which persons, goods and capital circulate freely’ (SNA93, paragraph 14.9). The economic territory of Australia includes the Cocos (Keeling) Islands and Christmas Island. It does not include the external territory of Norfolk Island. The economic territory includes ‘territorial enclaves’ in the rest of the world (i.e. clearly demarcated areas of land which are located in other countries and which are used by the government which owns or rents them for diplomatic, military, scientific or other purposes). Thus, the scope of the GFS system includes overseas operations at Australia’s embassies, consulates, trade offices, etc.
- all resident units that are classified in the Standard Institutional Sector Classification of Australia (SISCA) to the general government sector;
- all resident corporations and quasi-corporations that are classified in the SISCA to the non-financial corporations sector and are controlled by government units - such corporations and quasi-corporations are described in the system as public non-financial corporations; and
- all resident corporations and quasi-corporations that are classified in the SISCA to the financial corporations sector and are controlled by government units - such corporations and quasi-corporations are described in the system as public financial corporations.
- The SISCA is another of the sector classifications included in the SESCA. The institutional sectors included in the SISCA and the units of which they are comprised are defined in detail in the section below headed ‘Classification of units’.
2.20 The criterion for recognising government-controlled corporations and quasi-corporations is based on the SNA93 definition of control, which is ‘… the ability to determine general corporate policy by appointing appropriate directors, if necessary. Owning more than half the shares of a corporation is evidently a sufficient, but not a necessary, condition for control …' (SNA93, paragraph 4.30). Thus, a government controls a corporation when a government unit owns more than 50% of the shares in the corporation. However, in some cases, government control can also exist when a government unit owns 50% or less of the shares of a corporation. For example, government control can exist where special legislation or regulations empower a government to determine corporate policy or to appoint the directors of a corporation. Corporations controlled by other government-controlled corporations are considered to be government controlled.
2.21 For the purposes of the Public/Private classification, government control of corporations does not include a government’s ability to exercise general legislative or regulatory powers over corporations as a group. Government authority to determine the general policy of a corporation usually comes from legislation that is specific to the individual corporation over which control is exercised.
2.22 In some cases, the existence of government control may not be clear. In Australia, such is the case with universities (see paragraphs 2.35-2.38), and superannuation funds that governments have established for the benefit of their employees. Legislation places responsibility for the day-to-day operation of the superannuation funds with a board of trustees that is created as a separate legal entity. The establishing governments generally receive no monetary benefits from the funds. Although the establishing government has the power, under the legislation, to appoint and dismiss some or all of the trustees, the boards of trustees are typically not under the direction of government and are required to act in the beneficiaries’ interests, and not those of the government. Accordingly, the funds are not considered to be under government control. Although the circumstances of individual funds may vary, in the interest of uniformity, all superannuation funds with arrangements broadly similar to those described are included in the private sector.
2.23 Instances can arise in which the public and private sectors share ownership of a corporation. In such cases, the corporation is allocated to the sector that has effective control over the determination of the activities and policy of the corporation.
2.24 For practical reasons, the ABS does not attempt to cover all economic activity of the public sector in its GFS system. Undercoverage can arise because units are omitted in their entirety or because some activities of some units are not covered. Units are omitted entirely from coverage only when the economic activity of the units is judged to be relatively insignificant and not worth the cost of collection. Units are omitted partially from coverage only when indirect sources of measuring the major part of the units’ activities are available and it is not worth the cost of collecting the missing information directly.
2.25 Units omitted entirely from coverage are few in number and consist mainly of small commodity marketing boards. Units for which partial coverage is achieved are restricted to units that are entirely or mainly funded from Commonwealth, state or territory budgets. Budget documents provide information about such units’ budget allocations, which can be used to impute measures of the units’ economic activity. However, this methodology does not cover any revenues that the units may raise in addition to their budget allocations and any activity that the units may fund from such revenues. Units for which this type of methodology is currently used include public hospitals and schools and many small statutory authorities with regulatory or advisory roles that are likely to be funded entirely from government budget allocations.
2.26 The ABS takes steps to ensure that undercoverage is not increased by changing circumstances. In particular, care is taken to ensure that there is not an increase in the level of activity of units that are not covered or an increase in the capacity of indirectly covered units to fund economic activity from their own resources. The non-coverage and indirect coverage of units do not affect the overall accuracy of GFS significantly (see Chapter 6).
CLASSIFICATION OF UNITS
2.27 Each GFS in-scope enterprise unit is allocated to a category within each of the following unit classifications:
2.28 Australia’s standards for defining institutional sectors and subsectors are based on the SNA93 standards described in Appendix 1. As previously noted, the Australian standard is the Standard Institutional Sector Classification of Australia (SISCA), which is set out in Standard Economic Sector Classifications of Australia 1998 (ABS Cat. no. 1218.0) or ‘SESCA’. The SISCA standards are applied in the classification of public sector units in the GFS system in Australia.
- institutional sector;
- level of government;
2.29 As discussed in Appendix 1, SNA93 defines three types of institutional units that can qualify as falling within the public sector:
2.30 The institutional sectors comprising the SISCA are as follows:
- Government units, which are defined as ‘unique kinds of legal entities established by political processes which have legislative, judicial or executive authority over other institutional units within a given area’ (SNA93, paragraph 4.104). Government units provide goods and services to individuals and the community at large; they redistribute income and wealth; and they engage in non-market production, which is production made available free or at prices that do not have a significant influence on the amounts that the producers are willing to supply or purchasers wish to buy;
- Public corporations and quasi-corporations, which are legal entities, predominantly owned and controlled by government, that are created for the purpose of producing goods and services for the market and may be a source of profit or other financial gain to their owner(s). Corporations are created by a process of law that establishes them as entities independent from their owners. As discussed previously, a quasi-corporation is an unincorporated entity that operates as if it were a corporation.
- Non-profit institutions (NPIs), which are legal or social entities, created for the purpose of producing goods and services, whose status does not permit them to be a source of income, profit or other financial gain for the units that establish, control, or finance them. Only non-profit institutions that are controlled and mainly financed by government can be included in the public sector.
2.31 Only the first three of these sectors are relevant in the GFS system because, as previously noted, the public sector comprises all units of the general government sector, all public non-financial corporations and quasi-corporations and all public financial corporations and quasi-corporations.
- non-financial corporations sector;
- financial corporations sector;
- general government sector;
- NPIs serving households sector;
- households sector.
2.32 The composition of the three public sector components in terms of units is discussed below.
2.33 General government comprises all government units (as defined in paragraph 2.29) of the Commonwealth Government, each state and territory government, and each local government authority, as well as all resident non-market NPIs that are controlled and mainly financed by those governments.
2.34 Included in the sector are government-controlled unincorporated enterprises that engage in market production but do not qualify as quasi-corporations because their operations are too closely integrated with the operations of other government units and because they do not have a separate full set of accounts.
2.35 All of Australia’s public universities are treated as NPIs that are controlled and mainly financed by government and are therefore included in the general government sector. Each university is established by legislation which gives it the capacity to own assets, incur liabilities and engage in economic activity in its own right. Therefore, each university clearly qualifies as a separate institutional unit.
2.36 Although these universities are funded indirectly from taxation, they each have a high degree of independent revenue-raising capacity and authority to decide how funds are expended. For these reasons, they are not considered to be government units as defined in paragraph 2.29. The universities are treated as NPIs because they cannot distribute surpluses. The question of the institutional sector classification of the universities therefore rests on whether they are controlled and mainly financed by government.
2.37 SNA93 defines government control of a NPI as the ability to determine policy by having the authority to appoint officers managing the NPI. Legislation establishing each of the universities vests responsibility for their management in senates or councils, which include appointees of the establishing government but also include elected and non-elected representatives of other stakeholders. The degree of government control exercised through appointment of officers varies from university to university. Also, other forms of government control are exercised. For example, the fact that the universities are mainly financed by the Commonwealth Government gives that government a significant degree of control.
2.38 Taking into account the combined degree of control of universities exercised in various forms by the Commonwealth Government and state governments and the high degree of government financing, the universities are considered to be mainly controlled and financed by government. Strict application of the rules to each public university individually might result in a minority of them falling outside the general government sector. However, uniform sector classification of all public universities is regarded as an overriding consideration and all have been classified as general government units in the multi-jurisdictional sector. The multi-jurisdictional sector contains units where jurisdiction is shared between two or more governments, or classification of a unit to a jurisdiction is otherwise unclear. The main type of units currently falling into this category is the public universities.
PUBLIC NON-FINANCIAL CORPORATIONS
2.39 This category comprises all resident government controlled corporations and quasi-corporations mainly engaged in the production of market goods and/or non-financial services. Market goods and services are those that are sold at ‘economically significant prices’, which are prices ‘that have a significant influence on the amounts that producers are willing to supply or on the amounts that purchasers wish to buy’ (SNA93, paragraph 4.24). Non-financial services are any services that do not qualify as financial intermediation or auxiliary financial services, both of which are defined in the section below relating to financial corporations. Examples of Australian public non-financial corporations include Telstra and Australia Post and the electricity, railway and port authorities of state and territory governments.
2.40 For the purposes of sector classification, ancillary corporations are merged with their parent corporation and are therefore included in the non-financial corporations sector if the parent corporation is mainly engaged in producing market goods and/or non-financial services. Ancillary corporations are wholly owned subsidiary corporations that mainly provide services to their parent corporation or other corporations in the same enterprise group.
PUBLIC FINANCIAL CORPORATIONS
2.41 This category comprises all resident government controlled corporations and quasi-corporations mainly engaged in financial intermediation and provision of auxiliary financial services. Financial intermediation is defined as ‘a productive activity in which an institutional unit incurs liabilities on its own account for the purpose of acquiring financial assets by engaging in financial transactions on the market’ (SNA93, paragraph 4.78). Financial intermediaries channel funds from lenders to borrowers by collecting funds from lenders and transforming or repackaging them in ways which suit the requirements of borrowers. Liabilities are incurred by accepting deposits and issuing bills, bonds or other securities. The funds are used to acquire financial assets, principally by making advances or loans to others but also by purchasing bills, bonds or other securities. Auxiliary financial activities are services that are closely related to, and designed to facilitate, financial intermediation. The activities may be performed as secondary activities, by financial intermediaries, or performed on an agency basis by specialists. Examples include securities brokers, flotation companies, loan brokers, agencies that guarantee bills by endorsement, and institutions that arrange hedging instruments such as swaps, options and futures.
2.42 Public financial corporations include institutions that undertake a central bank role, which includes monetary policy development, issuing national currency, acting as custodian of international reserves, providing banking services to government and regulating the financial system. Thus, the Reserve Bank of Australia and the Australian Prudential Regulation Authority (APRA) are both treated as public financial corporations. Also included as public financial corporations are government controlled banks, insurance companies, pension funds, and economic development corporations and financial auxiliaries owned by Australian governments.
2.43 A central borrowing authority (CBA) has been established by each state and territory government primarily to provide finance for public corporations and quasi-corporations, and other units owned or controlled by the government, and to arrange investment of their surplus funds. The CBAs borrow funds, mainly by issuing securities, and on-lend to their public sector clientele. Although the CBAs’ lending is confined to the public sector in their jurisdiction, they also engage in other financial intermediation activity for investment purposes, and may participate in the financial management activities of the parent government. Accordingly, the CBAs are treated as public financial corporations. The exception is the Australian Capital Territory’s CBA which does not qualify as a separate institutional unit and is treated as part of the general government sector.
2.44 Also treated as public financial corporations are various housing finance schemes established by state Governments to assist first home buyers. Although the schemes are established under a variety of arrangements, some of which indicate that the schemes could be considered part of general government, they are all classified as public financial corporations or quasi-corporations so that there is uniform treatment.
LEVEL OF GOVERNMENT
2.45 The level of government classification used in Australia’s GFS system is a standard ABS classification that is included in the SESCA. It is based on the SNA93 subdivision of the general government sector into subsectors representing three levels of government (central, state and local). In Australia, the corresponding levels of government are described as national, state/territory and local. The SNA93 level of government classification is an integral part of the institutional sector classification whereas, in Australia, a separate level of government (LOG) classification is defined which can be applied to public corporations as well as to the general government sector. Having a separate classification enables the public sector and each of its components to be classified by LOG, as shown in the following table.
2.46 All public sector units that have a national role or function are classified to the national LOG. Units are generally considered to have a national role or function if the political authority underlying their functions extends over the entire territory of Australia or the functions involve policies that are primarily of concern at a national level. The fact that a unit is controlled by the Commonwealth Government is prima facie (but not necessarily conclusive) evidence that the unit has a national role or function. Currently, all Commonwealth-controlled public sector units are classified to the national LOG. Such units include government units controlled by the Commonwealth Government, non-market NPIs that are controlled and mainly financed by the Commonwealth Government, and public non-financial and financial corporations (including the Reserve Bank) controlled by the Commonwealth Government.
2.47 Units that are not controlled by the Commonwealth Government can also be classified to the national LOG. Currently, the only such cases are ‘multi-jurisdictional’ units that have a national role or function. Multi-jurisdictional units are public sector units where jurisdiction is shared between two or more governments, or classification of a unit to a jurisdiction is otherwise unclear. The main multi-jurisdictional units currently classified to the national LOG are the public universities which, as described above, are mainly financed and partly controlled by the Commonwealth Government but are subject to a degree of control by the establishing state or territory government. On balance, the public universities are considered to be implementing policy (i.e. tertiary education) that is primarily of concern at a national level.
2.48 All public sector units that have a state or territory role or function are classified to the state/territory LOG. Units are generally considered to have a state or territory role or function if the political authority underlying their functions is limited to a state or territory or the functions involve policies that are primarily of concern at a state or territory level. The fact that a unit is controlled by a state or territory government is prima facie (but not necessarily conclusive) evidence that the unit has a state or territory role or function. Currently, all state/territory-controlled public sector units are classified to the state/territory LOG. Such units include government units controlled by a state or territory government, non-market NPIs that are controlled and mainly financed by a state or territory government, and all public non-financial and financial corporations that are controlled by a state or territory government.
2.49 Although units that are not controlled by a state or territory government, including multi-jurisdictional units, can be classified to the state/territory LOG, none of them are so classified currently.
2.50 All public sector units that have a local role or function are classified to the local LOG. Units are generally considered to have a local role or function if the political authority underlying their functions is limited to a local government area or other region within a state or territory, or the functions involve policies that are primarily of concern at a local level.
2.51 The fact that a unit is established as, or directly controlled by, a local government authority is prima facie (but not necessarily conclusive) evidence that the unit has a local role or function. Currently, all local government authorities and the units they control are classified to the local LOG. Such units include each local government authority constituted under one of the various Local Government Acts (or the equivalent) in each state and the Northern Territory, County Councils in New South Wales, Land Councils, Aboriginal Community Councils, all non-market NPIs that are controlled and mainly financed by a local government unit, and all public non-financial and financial corporations that are controlled by a local government unit.
2.52 Although units that are not controlled by local government, including multi-jurisdictional units, can be classified to the local LOG, none of them are so classified currently.
2.53 GFS are presented for each jurisdiction. In this context, ‘jurisdiction’ means the public sector units over which the Commonwealth Government or an individual state or territory government has direct control or (in the case of local government authorities) the government which administers the legislation under which the authority was established. Each public sector unit is classified to jurisdiction by reference to the government which exercises such controls over its activities. The categories making up the jurisdiction classification (JUR) are as follows:
2.54 In most cases, classifying units to JUR is straightforward. Thus, each unit that is controlled by the Commonwealth Government is classified to the Commonwealth jurisdiction and each unit that is controlled by a state or territory government is classified to the jurisdiction of the controlling government. Each local government authority, and all units controlled by local government authorities, are classified to the jurisdiction that administers the local government legislation under which the authority was created. In all cases, this is the state or territory in which the local government unit is located.
- New South Wales;
- Western Australia;
- South Australia;
- Northern Territory;
- Australian Capital Territory;
2.55 There are units, however, for which jurisdiction is shared between two or more governments, or classification of a unit to a jurisdiction is otherwise unclear. Such units are included in a ‘multi-jurisdictional’ category, and are excluded from statistics for each of the other jurisdictions.
2.56 All enterprise units are classified to an industry based on the predominant industry of establishments comprising the enterprise. In the hierarchy of standard statistical units, establishments are lower-level units that are used to measure production. They are classified to industry based on their predominant activity. The industries to which establishments can be classified are listed in Australian and New Zealand Standard Industrial Classification 1993 (ABS Cat. no. 1292.0), or ‘ANZSIC’. The industry classification is not used for the publication of GFS but is used internally by the ABS to provide industry-classified GFS information for use in the national accounts.
FLOWS, STOCKS AND ACCOUNTING RULES
2.57 The basic elements of the GFS system are its measures of the economic flows to and from in-scope units and the economic stocks held by those units. The system's accounting rules govern the ways in which these basic elements are measured and recorded. The Australian flow and stock concepts and accounting rules discussed below are based on the IMF GFS standard described in Appendix 2. The discussion therefore repeats some of the Appendix 2 discussion but reflects minor differences in terminology that are applied in Australia.
2.58 Economic flows reflect the creation, transformation, transfer exchange and extinction of economic value. They involve changes in the volume, composition, or value of a unit’s economic stocks. A flow can consist of a single event, such as the cash receipt of a tax payment from a tax payer, or can relate to the cumulative value of a set of events over the accounting period, such as the continuous accrual of interest expense on a government bond. Economic stocks are the assets and liabilities held by in-scope units. Stocks also include the government and other owners’ equity in public non-financial and financial corporations. The excess of the value of assets over the value of liabilities and owners’ equity is defined as a unit’s net worth.
2.59 Flows and stocks are integrated in the system, which means that all changes in stocks result from flows. Thus, the value of a stock at the end of the accounting period is equal to its value at the beginning of the accounting period plus the net result of the value of flows affecting that stock during the accounting period.
2.60 Two types of economic flows are recognised in the system:
2.61 In general, transactions represent changes to stocks that come about as a result of mutually agreed interactions between enterprise units. However, the system also recognises as transactions certain flows that occur within in-scope units where the unit is viewed as operating simultaneously in two different economic capacities. Thus, depreciation is recorded as a transaction because the unit is seen as simultaneously acting as owner of the depreciating asset and as consumer of the service provided by the asset.
- transactions; and
- other flows, which are subdivided between revaluations and other changes in the volume of assets.
2.62 Despite their compulsory nature, tax payments are regarded as ‘mutually agreed interactions’ between the government and taxpayers and are therefore treated as transactions. This is because there is collective recognition and acceptance by the community of the legal obligation to pay taxes. The types of unit interactions intended to be excluded from the definition of a transaction include events such as illegal seizure or destruction of a unit’s property by another unit.
2.63 Transactions can be either exchanges or transfers. Exchanges occur when one unit provides something of value and receives something of value in return. A transfer occurs when a unit provides something of value and receives nothing in return. Examples of exchange transactions include purchases of goods and services, sale of an asset, payment of wages to employees and issuance of a bond. Examples of transfers include grants, subsidies, social security payments and taxes. Taxes have some of the characteristics of exchanges inasmuch as taxpayers expect provision of government services in return for the taxes they pay. However, there is usually no direct link between taxes paid by an individual taxpayer and the government services consumed by that taxpayer. The value of government services consumed by a taxpayer may bear no relation to the amount of taxes paid by the taxpayer.
2.64 The system includes transactions in kind as well as transactions in which the final consideration is cash. Thus, the system includes transfers in which one unit provides goods and/or services free of charge to another unit, and barter transactions in which two units exchange goods and/or services. Examples of transactions in kind include grants of machinery and equipment, provision of services free of charge and provision of vehicles to employees as part of salary packages.
ATTRIBUTION OF TAX REVENUE TO LEVEL OF GOVERNMENT
2.65 In relation to the attribution of tax revenues to levels of government, paragraphs 5.24 to 5.28 of the International Monetary Fund's GFS Manual (2001) deal with the attribution of a tax where it is collected by one government unit and is then passed on to a second government unit. Depending on the arrangement, the taxes passed onto the second government unit may be reassigned as tax revenue of that unit, or recorded as tax revenue of the collecting unit and a grant recorded from the collecting unit to the second government unit.
2.66 The IMF manual states in paragraph 5.25 that a tax is attributed to the government unit that (a) exercises the authority to impose the tax (either as principal or through the delegated authority of the principal), (b) has final discretion to set and vary the rate of the tax, and (c) has final discretion over the use of the funds.
2.67 In the case of the Goods and Services Tax (GST), which was introduced on 1 July 2000, the tax is levied under the authority of the Commonwealth, the Commonwealth has the final discretion to set and vary the rate of the tax and the Commonwealth has final discretion over the use of the funds. Therefore, in accordance with the IMF Manual, the GST is treated as a Commonwealth tax in GFS.
2.68 In ABS GFS releases, because GST is recorded as a Commonwealth tax, a grant is also recorded from the Commonwealth to the states and territories, consistent with paragraphs 5.24 and 5.25 of the IMF manual.
OTHER ECONOMIC FLOWS
2.69 Other economic flows are changes in the volume or value of assets, liabilities and equity that do not result from transactions. The distinction between transactions and other economic flows is made to align the GFS system with SNA93. In SNA93, other economic flows are not recorded in the production, distribution and capital accounts and are not a determinant of the key analytical balances of saving and net lending/borrowing. Other economic flows are recorded in the capital accumulation accounts of SNA93 and are regarded as determinants of net worth that are not the direct result of production, income distribution or consumption.
2.70 Two main types of other economic flows are recognised: revaluations and other changes in the volume of assets. Revaluations are changes in the value of assets, liabilities and equity arising from price changes, including exchange rate movements. As discussed ahead, the system’s basis for valuing flows and stocks is market value. Therefore, changes in the market values of stocks should be recorded as revaluations, whether the holding gain or loss is realised or not. In practice it is not possible to always record stocks at market values, in which case revaluations will be under-recorded in any given accounting period. Capital gains and losses made on the sale of assets other than inventories are recorded as revaluations and not as revenues.
2.71 Other changes in the volume of assets are events, other than transactions and revaluations, that bring about an addition of a stock to the balance sheet or the removal or part-removal of a stock from the balance sheet, and thereby result in a change to net worth. Such events that add to net worth include mineral discoveries, and recognition of assets hitherto not included in the balance sheet. Events that result in reductions of net worth include the unilateral writing off of bad debts by creditors, destruction of assets by fire or some other catastrophe and depletion of natural assets (e.g. forest, fisheries) as a result of physical removal or use. Also included in other volume changes are changes to net worth resulting from reclassifications, such as the reclassification of central borrowing authorities that occurred in Australia’s GFS system in 1994. When CBAs were transferred from general government and classified as public financial corporations.
2.72 Accounting rules for recording flows and stocks assist the compilation of the statistics on a uniform, standard basis. While there are many similarities between GFS accounting rules and the accounting rules applied by businesses and governments in their financial reports, there are important differences. For example, accounting systems do not always require assets and liabilities to be valued at market value as does the GFS system, and the GFS system values sales at gross value rather than the net of the cost of goods sold. This section describes the various GFS accounting rules.
2.73 The system employs the standard conventions of double-entry accounting. Thus, each flow gives rise to two entries of equal value, a debit and a credit, that maintain the identity:
A = L + E + NW, where A = assets; L= liabilities; E = equity; and NW = net worth.
2.74 By convention, debit entries are made for increases in assets and decreases in liabilities, equity or net worth. Credit entries are made for decreases in assets and increases in liabilities, equity or net worth. Changes to net worth arising from transactions are recorded in the system as either revenues or expenses, which are discussed ahead in this chapter. Therefore, transaction entries that increase net worth (revenues) are credits, and transaction entries that decrease net worth (expenses) are debits.
2.75 A few examples will illustrate the nature of the system. Receipt of a grant of cash by a unit would be recorded as a debit to an asset account (say, cash on hand) and a credit to a revenue account. Sale of goods for cash would result in two entry pairs: a debit to the asset account cash on hand and a credit to a revenue account, and a debit to an expenses account and a credit to the asset account for inventories. Some transactions affect only one side of the identity. For example, a purchase of shares would be recorded as a debit to an asset account (say, investments) and a credit to another asset account (cash on hand).
TIME OF RECORDING FLOWS
2.76 Flows are recorded in the system on an accruals basis. Thus, flows are recorded when economic value is created, transformed, exchanged, transferred or extinguished. Therefore, economic events are recorded when they occur, irrespective of whether cash was received or paid or was due to be received or paid. In the time between the moment a flow of cash becomes due for payment and the moment it is paid, an account payable is recorded by the debtor and an account receivable is recorded by the creditor. The use of accrual in lieu of cash recording also ensures that non-cash transactions, such as depreciation and transfers in kind, are included in the system.
2.77 Using the accrual basis of recording in the GFS system brings the system into line with the basis of recording used in SNA93.
2.78 Applying the accrual basis is not always straight-forward. SNA93 provides guidance on the treatment of particular types of transactions. For example, all taxes should be recorded when the activities, transactions, or other events occur that create the liabilities to pay taxes. For example, a tax on the sale of goods and services should be recorded when a sale takes place. Some taxes are imposed on specific transactions or events. Examples include sales taxes, value-added taxes, import duties, and estate and gift taxes. Ideally, these taxes should be recorded at the times the underlying transactions or events occur but, in practice, information based on assessments is all that is readily available and so it is accepted for GFS purposes.
2.79 Income taxes pose particular difficulties. They should be recorded in the period in which the income is earned, but there may be a significant delay between the end of the accounting period and the time at which it is feasible to determine the actual liability. In practice, income taxes deducted at source, such as pay-as-you-earn taxes, may be recorded in the period they are paid as this would approximate closely the period in which the underlying income is generated. Other income taxes have to be recorded when there is documentary evidence of the amount of tax that has accrued. In Australia, such evidence is generally not available until assessments have been made, either by the taxpayer (when self assessment applies) or by the Australian Taxation Office (ATO).
2.80 Grants and other voluntary transfers often have requirements or eligibility conditions attached to them. Examples are the prior incurrence of expenses for a specific purpose, the passage of legislation to authorise participation in a program, or the beginning of a period such as the start of a new financial year. These transfers should be recorded when all requirements and conditions are satisfied. In Australia, recipients of grants generally do not record them until they have control over the funds granted.
2.81 Dividends and withdrawals from income of quasi-corporations should be recorded as of the date on which they are declared payable or, if no prior declaration occurs, on the date they are actually paid.
2.82 Transactions in goods and non-financial assets should be recorded when legal ownership changes. If that time cannot be determined precisely, the time of recording may be when there is a change in physical ownership or control. Change of ownership of goods acquired under finance leases is imputed to have taken place with the physical transfer of the assets.
2.83 Transactions in services should be recorded when the services are provided. Some services and certain types of exchange transactions are supplied or take place on a continuous basis. For example, renting, insurance, and housing services are continuous flows and, in concept, should be recorded continuously for as long as they are being provided. Similarly, interest, compensation of employees, rent, some social benefits, and consumption of fixed capital occur on a continuous basis over a period. In practice, such activities are allocated to periods based on assumptions about the amount of the activities that occurs during each period.
2.84 Transactions in most types of financial assets, such as securities, loans, currency and deposits, should be recorded when legal ownership changes. In some cases, the parties to a transaction may perceive ownership to change on different dates because they acquire the documents evidencing the transaction at different times. For transactions between government units, the date on which the creditor records the transaction should be the date of recording.
2.85 Various payables and receivables, such as accounts payable, interest payable, and wages payable, result from a counterpart transaction, such as the purchase of a good on credit, interest expense, and compensation of employees expense. In these cases, the financial claim is deemed to arise when the counterpart occurs.
2.86 Other economic flows may take place at a point in time or continuously over a period and should be recorded accordingly. For example, the destruction of an asset by fire happens at a specific time and holding gains and losses occur continuously. Changes in structure and classification should be recorded at the moment a unit or an asset is classified into a different category.
2.87 As previously discussed, in Australia the sources of data for the GFS system are the accounting records of the public sector entities covered by the system. Accounting standards require these entities to prepare financial reports on an accrual basis. The standards specify a time for recording economic flows that is expressed differently but appears to be broadly consistent with the time of recording specified in SNA93. However, specific instances have arisen where the ABS has had to adjust the recorded data to reflect a time of recording that is closer to the SNA93 concept. The ABS adopts the approach that time of recording data in source records is accepted as consistent with the SNA93 accrual principles unless information is at hand that suggests otherwise. In that case, the matter is investigated and, if necessary, the source record data are adjusted to more closely reflect the SNA93 principle.
2.88 In keeping with SNA93 and IMF principles, all flows and stocks should be valued in the GFS system at current prices. Flows should be valued at the prices current on the dates for which they are recorded. Stocks should be valued at the prices current on the balance sheet date.
2.89 In practice, the valuation of stocks and flows in Australia’s GFS system is heavily dependent on valuations applied in the source data used to compile the statistics. The source data are obtained from the public accounts and the accounts of public sector entities that are not included in the public accounts. These data are valued in accordance with requirements specified in accounting standards, which generally do not require universal or continual application of current values.
2.90 For transactions involving money, SNA93 recommends valuation at the price agreed by the transactors, which is also the valuation to be expected in source documents. Thus, for a high proportion of transactions, valuation will be in accordance with SNA93 principles. However, for transactions in kind, valuation should be made by reference to prices for analogous goods and services. In practice, consistent application of such a valuation method is unlikely to occur in source documents.
2.91 Consistent valuation of stocks at current prices is most unlikely to occur in source documents. At best, accounting standards recommend regular revaluation of assets, but not at intervals sufficiently frequent to guarantee valuation at current prices in every compilation of GFS. Valuation at current prices is most likely for financial assets and liabilities that are traded on financial markets. At the other extreme, current price valuation of public sector assets for which there is no identifiable market is unlikely to ever be possible. In between these two extremes, a mixture of valuations is likely to be present in any particular set of source data. ABS adjustment of the source data to a current value basis is generally not feasible.
2.92 According to SNA93, flows expressed in a foreign currency should be converted to their value in the national currency at the rate prevailing at their time of recording, and stocks should be converted at the rate prevailing on the balance sheet date. In general, this principle of converting foreign values for flows and stocks is applied in source data.
2.93 Derived measures are obtained by performing arithmetic operations on values recorded for the flows or stocks of individual units. Derived measures are included in the GFS system because of their utility for fiscal analysis. There are two types of derived measures: aggregates and analytical balances.
2.94 Aggregates are summations of individual units’ data relating to a class of flows or stocks. For example, tax revenues are the sum of all units’ flows that are classified as taxes. Aggregates and classifications are closely linked inasmuch as classifications are designed to produce the aggregates considered to be most useful to users of GFS. In the GFS system, aggregates are produced after consolidation, which eliminates flows and stocks that occur between units contributing to the same aggregate. Consolidation is discussed later in this section.
2.95 Analytical balances are economic constructs that are obtained by differencing aggregates and are of particular utility in fiscal analysis. For example, the GFS net operating balance is an analytical balance obtained by subtracting the expenses aggregate from the revenues aggregate. The various analytical balances in the GFS system are described later in this chapter.
GROSS AND NET RECORDING OF FLOWS AND STOCKS
2.96 Flows and stocks can be presented on a gross or a net basis. The following practices are adopted in the GFS system:
AGENCY AND TRUSTEE TRANSACTIONS
2.97 Agency transactions are transactions undertaken by one government on behalf of or as an agent for another. Such transactions are excluded from the transactions of the agent government and are attributed to the government deemed to be the principal in the transaction.
- Categories of revenues are presented gross of expenses for the same or related category. In particular, interest revenues and interest expenses are both presented gross rather than by netting interest revenues against interest expenses. Similarly, grants received and grants paid, and rent income and rent expenses, are presented on a gross basis. Sales of goods and services are presented gross of the expenses incurred in their production;
- Categories of revenues are presented net of refunds of revenues, and expense categories are presented net of inflows of expenses arising from erroneous or unauthorised transactions. For example, refunds of income taxes may be paid when the amount of taxes withheld or otherwise paid in advance of the final determination exceeds the actual tax due. Such refunds are recorded as negative tax revenues. Similarly, if monetary transfers paid in error to households are recovered, then such recoveries are recorded as negative expenses;
- Acquisitions and disposals of non-financial assets other than inventories are presented on a gross basis. For example, acquisitions of land are presented separately from disposals of land;
- Changes in inventories are presented on a net basis. That is, the change in inventories is presented as the value of additions less withdrawals. Acquisitions and disposals of financial assets are also presented on a net basis. For example, only the net change in the holding of cash is presented, not gross receipts and disbursements of cash. Similarly, liquidation of liabilities is netted against incurrence of liabilities;
- Revaluations are presented on a net basis. That is, the net holding gain for each asset and liability is presented, not the gross holding gain and the gross holding loss;
- Stocks of non-financial assets are presented net of depreciation, revaluations, depletion, and other changes since their acquisition;
- Stocks of financial assets and liabilities are presented net of revaluations and other changes since their acquisition;
- Stocks of the same type of financial instrument held both as a financial asset and a liability are presented gross. For example, a unit’s holding of bonds as assets is presented separately from its liability for bonds.
2.98 Governments sometimes operate trust funds as trustees. The governments do not own the assets of such funds but they are sometimes able to use money from the funds to finance government operations. Such government use of trust fund money is recorded as government borrowing from the funds, which are regarded as separate units outside of the public sector.
2.99 Consolidation is the process of eliminating intra-group flows and stocks from aggregates for a group of units for which statistics are to be presented. In the GFS system, data are consolidated whenever they are presented for a group of units. In the Australian system, data have to be consolidated for many different groups of units, covering the nation as a whole and each jurisdiction individually. For example, each of the cells in the table below represents a grouping for which consolidated data must be produced whenever units fall within the groupings. In addition, separate consolidations represented by the cells in the table below must be done for each of the nine jurisdictions (including multi-jurisdictional units) in the system.
2.100 Consolidation can be thought of as a particular type of netting that should be considered separately from the gross and net recording described in an earlier section. Consolidation involves the elimination of all transactions and debtor-creditor relationships that occur between two units being consolidated. In other words, a transaction or stock holding of one unit is paired with the corresponding transaction or stock holding recorded for the second unit, and then the paired transactions or stock holdings are eliminated from the aggregates for the group.
2.101 For example, in compiling accounts for the public sector as a whole, if a general government unit owns a bond issued by a public financial corporation, then the stocks of the bond held as assets of the general government unit and the counterpart bond liability of the public financial corporation are eliminated from the aggregates for bond assets and liabilities of the public sector. Similarly, interest revenues and interest expenses related to the bond are also eliminated from the relevant public sector aggregates.
2.102 Full consolidation at all levels in a classification hierarchy is rather demanding in terms of data requirements and processing complexities. Practical considerations often limit the extent to which transactions within groupings can be eliminated through consolidation. Where extensive resources are required to eliminate intra-group transactions and stock holdings of small magnitudes, cost-effectiveness considerations dictate that the aggregates be left on a gross basis. In practice, the consolidation process can produce aggregates that lack absolute precision as a record of a grouping's transactions and debtor-creditor relationships with units outside the grouping.
ANALYTIC FRAMEWORK FOR PRESENTATION OF STOCKS AND FLOWS
2.103 The framework for presenting information about flows and stocks is designed to show the balance between opening stocks, flows during the accounting period and closing stocks, and to enable the derivation of key balances of importance in fiscal analysis. Thus, the framework requires that, for each category of stocks, the values at the beginning of an accounting period, plus the value of transactions and other economic flows during the accounting period, are equal to the values of the stocks at the end of the accounting period. The key analytical balances that can be derived from the framework are the net operating balance, net lending(+)/borrowing(-), net worth and change in net worth. Change in net worth can be broken down into change in net worth arising from transactions, revaluations, and other changes in the volume of assets. Table 2.1 below shows the broad structure of the framework and the relationships between items contained therein. The items and relationships are explained in the following paragraphs.
Table 2.1. ANALYTICAL FRAMEWORK FOR PRESENTATION OF FLOWS AND STOCKS
2.104 Table 2.1 is intended to illustrate how the closing value of stocks equals the opening values of stocks plus economic flows during the accounting period. The lightly shaded cells in the ‘transactions’ column show the items covered by the primary financial statement in the system, the operating statement. The operating statement records revenues and expenses, and net acquisition of non-financial assets. Net acquisition of non-financial assets also appears in the statement of stocks and flows, which covers all cells in the table except the cell relating to revenues and expenses. The difference between revenues and expenses, the net operating balance, is equal to the change in net worth arising from transactions, which appears in the last cell of the ‘transactions’ column. These relationships are explained further in later paragraphs.
2.105 In the table cells, analytical balances are shown in bold. The balances that embrace all public sector activities are shown in the bottom row of the table. They are net worth (defined as assets minus liabilities, shares and other contributed capital) and change in net worth (defined as the closing value of net worth minus the opening value of net worth). As illustrated in the table, change in net worth can be broken down into a change in net worth due to transactions, change in net worth due to revaluations, and change in net worth due to other changes in the volume of assets.
2.106 The operating statement includes two balancing items. The first of these is the previously mentioned net operating balance, which is derived as total revenues less total expenses. Revenues and expenses are, respectively, inflows and outflows of economic value arising from operational transactions, and usually result in a change to net worth. Certain exchange transactions, such as acquisition of fixed assets for cash, do not change net worth but simply change the composition of assets, liabilities or equity (such transactions cannot be revenues or expenses). As noted, the net operating balance is equal to the change in net worth due to transactions because all changes to net worth arising from transactions are recorded as either revenues or expenses. All other transaction-induced changes to assets, liabilities and equity cancel out and do not affect net worth. For example, acquisition of a financial asset increases one financial asset at the expense of another (cash).
2.107 The second analytical balance in the operating statement, GFS net lending(+)/borrowing(-), is derived as the net operating balance less net acquisition of non-financial assets. GFS net lending(+)/borrowing(-) is also equal to the net change in financial assets, liabilities and equity arising from transactions. Using other relationships shown in Table 2.1, this equality can be demonstrated arithmetically as follows:
where NLB = net lending(+)/borrowing(-), NOB = net operating balance, CNFA = change in non-financial assets due to transactions, CNWT = change in net worth due to transactions, CFA = change in financial assets, liabilities and equity due to transactions.
(1) NLB = NOB - CNFA
(2) NOB = CNWT
(3) CNWT = CNFA + CFA
(4) NOB = CNFA + CFA
and substituting in (1)
(5) NLB = CNFA + CFA -CNFA
(6) NLB = CFA
The relationship is useful inasmuch that GFS net lending(+)/borrowing(-) measures the public sector’s financing requirement which, using the relationship, can be related to transaction-induced changes to public sector financial assets, liabilities and equity. As a result, users are able to see how the financing requirement was financed.
2.108 Revenues are defined in the system as transactions that increase net worth. Proceeds of sales of non-financial assets other than inventories are excluded from revenues because receipt of the proceeds is offset by the value of the asset relinquished. Any profit or loss on the sale is treated as a revaluation rather than a transaction and any change to net worth arising from the sale is attributed to the revaluation and not to the transaction. Proceeds from sales of goods from inventories are included as revenues because such sales are recorded on a gross basis (i.e. the cost of the goods sold is treated separately as an expense and not offset against or netted off the related revenue). Thus, even though such sales in the general government sector may be made at cost or less than cost, the sale proceeds are treated as a revenue and the withdrawal of the goods from inventories is treated as an expense. Revenues exclude all receipts (e.g. proceeds of borrowing, repayments of loans) resulting from transactions in financial assets, liabilities and equity because such transactions always create offsetting changes of equal value to other financial assets, liabilities or equity and there is no change in net worth. For example, revenues exclude contributions of capital by the owners of public corporations because such contributions create an equal financial claim on the corporation that is deducted from its assets in deriving its net worth.
2.109 Expenses are defined in the system as transactions that reduce net worth. Expenses exclude purchases of goods and other assets because the monetary outflow is matched by an equally valued inflow of goods so the transaction does not change net worth. Goods purchased for resale or use in production do not enter expenses until they are withdrawn from inventories for sale or use in production. Purchases of services (other than those that are capitalised) are expenses because the services are consumed when provided and net worth is reduced by the cost of the services. Purchases of non-financial assets are excluded from expenses because use of the assets (depreciation) is the appropriate expense measure.
2.110 Assets are defined in the system as instruments or entities over which ownership rights are enforced by institutional units and from which economic benefits may be derived by holding them, or using them, over a period of time. Financial assets are assets that are in the form of financial claims on other economic units. They are the counterparts of liabilities of the units on which the claims are held. All other assets are described as non-financial assets and include fixed assets, inventories, valuables (e.g. works of art) and non-produced assets (e.g. natural forests, mineral reserves). Each of these classes of assets is described more fully in the section ahead on classification of flows and stocks.
2.111 Liabilities are defined in the system as obligations to provide economic value to another economic unit. Liabilities are the counterparts of financial assets held by the claimant economic units.
2.112 Shares and other contributed capital of public corporations and quasi-corporations are viewed as financial claims on the corporations and quasi-corporations and the counterpart of financial assets of the owners of the corporations (i.e. the proprietor governments and minority shareholders).
2.113 As previously discussed, the GFS net operating balance (NOB) is equal to change in net worth due to transactions. All changes to net worth arising from transactions are recorded as either revenues or expenses. All transactions other than revenues and expenses do not change net worth. For example, acquisitions of non-financial assets in exchange for cash to the same value do not change net worth. The NOB is equal in concept to the national accounting balance of net saving plus capital transfers but, in Australia, is not the same in value because of measurement differences between the GFS system and the ASNA, as discussed in Chapter 7. When the NOB is positive, it indicates that surplus funds have been generated from current operations and are available to finance capital acquisitions. When the NOB is negative, it indicates that a shortfall has been incurred on current operations and that it has been necessary to liquidate assets, incur liabilities or increase equity in order to finance the operations.
2.114 GFS net lending(+)/borrowing(-) represents the balance remaining after current operations and the net acquisition of non-financial assets. It is equivalent in concept to the national accounting balance of the same name, but may be different in value due to measurement differences. When net lending(+)/borrowing(-) is positive it indicates that, on a net basis, the subject unit or sector had to purchase financial assets and/or repay liabilities in order to defray surplus funds. When net lending(+)/borrowing(-) is negative it indicates that, on a net basis, the subject unit or sector had to liquidate financial assets, incur liabilities and/or increase equity in order to finance current operations and capital acquisition.
2.115 GFS net worth represents the value of an entity’s assets at a point in time less the value of financial claims on the entity by other units, including shareholders and owners. Net worth may be positive or negative. For public corporations, for example, net worth will be negative if the market value of the corporation’s shares exceeds the value of its net assets (i.e. asset less liabilities) and positive only if the market value of the shares is less than net assets. For this reason, net assets may be used in preference to net worth in some presentations involving public non-financial and financial corporations. It should be noted that, net assets and net worth are identical for general government. Change in net worth is a measure of the extent to which the current period’s operations, revaluations and other volume changes have added to or subtracted from net worth during the accounting period. It therefore includes the assessed changes in the market value of assets, liabilities and shareholders’ funds during the accounting period, which is measured by change in net worth due to revaluations.
THE MAIN FINANCIAL STATEMENTS IN THE SYSTEM
2.116 Three main statements are employed in the GFS system to present information about public sector flows and stocks:
2.117 The first two statements can be derived directly from the analytical framework. The cash flow statement cannot be derived directly from the analytical framework because the framework is accrual based whereas the cash flow statement reflects flows of cash at a detailed level. However, cash flows are integral to the analytical framework inasmuch that they are part of transactions that result in changes to holdings of cash and deposits, which are included with financial assets in the accrual framework.
- the GFS operating statement;
- the statement of stocks and flows;
- the cash flow statement.
THE GFS OPERATING STATEMENT
2.118 A broad outline of the GFS operating statement is given in Table 2.2.
2.119 The GFS operating statement covers only transactions and therefore excludes revaluations and other changes to the volume of assets, which are recorded in the statement of stocks and flows. It covers all items in the second column of the analytical statement shown in Table 2.1 except net acquisition of financial assets, net incurrence of liabilities and contributions of capital, which are recorded in the statement of stocks and flows. Revenues, expenses and net acquisition of non-financial assets can be recorded in the statement at whatever degree of classification detail is required. The classifications of revenues, expenses and net acquisition of non-financial assets are explained in the next major section dealing with the classification of stocks and flows. Two analytical balances are recorded in the statement: the GFS net operating balance and GFS net lending(+)/borrowing(-).
THE STATEMENT OF STOCKS AND FLOWS
2.120 A broad outline of the statement of stocks and flows is given in Table 2.3.
2.121 The statement of stocks and flows covers all opening and closing stocks, and the results of all transactions and other economic flows. Shares and other contributed capital apply only to public non-financial and financial corporations (because, by definition, general government units cannot issue shares or acquire other forms of equity). The opening value of stocks in each category, plus the value of transactions and other economic flows relating to each category must equal the closing value of stocks in each category. Assets, liabilities, and shares and other contributed capital can be recorded in the statement at whatever degree of classification detail is required. The analytical balances shown in the statement are GFS net worth, change in net worth due to transactions, change in net worth due to revaluations and change in net worth due to other changes in the volume of assets. The latter three balances are the derived entries in the second, third and fourth cells of the bottom row of the table.
THE CASH FLOW STATEMENT
2.122 A broad outline of the cash flow statement is given in Table 2.4.
2.123 All items in the cash flow statement are recorded on a net basis (i.e. cash payments are netted from cash receipts). The net cash flow from operating activities represents cash receipts arising from operating activities (the activities recorded in the operating statement) less cash payments for operating activities. Net cash flow from investments in non-financial assets represents cash received from the sale of non-financial assets less cash paid for the acquisition of such assets. The distinction between investments in financial assets for policy and liquidity management purposes is based on the government’s motivation for acquiring the assets. Where the assets are acquired for the purpose of implementing or promoting government policy (e.g. loans to assist industry development), the acquisition of the assets is treated as being for policy purposes. Where the assets are acquired for the purposes of managing the government’s cash reserves (e.g. investment in shares with the aim of maximising returns), the acquisition is treated as being for liquidity management purposes. Net cash flows from acquiring financial assets for both these purposes represents cash received from liquidating such assets, including repayments by debtors, less cash outlaid for acquiring the assets. Net cash flows from financing represents cash receipts from borrowing, share issues and capital injections (public corporations only) less cash repayments of borrowing, and cash payments of dividends and other distributions.
2.124 A close approximation of the surplus/deficit concept that was used in the former (cash) version of the GFS system can be derived using the identity shown below. However, methodological differences between the present and former systems prevent a precise reconciliation between items in the cash flow statement and the surplus/deficit.
The cash surplus/deficit is a measure of a sector's cash flow requirements and if positive (i.e. a surplus), it reflects cash available to governments to either increase financial assets or decrease liabilities. When this measure is negative (i.e. a deficit), it identifies the extent to which a government needs to run down its financial assets in order to finance the cash shortfall. Distributions paid are dividends and other returns to owners and shareholders made by public corporations. In the cash flow statement these distributions are included in the net cash flows from financing activities. However, such payments impact on the cash surplus/deficit so they must be included in the surplus/deficit formula. Assets acquired under finance leases are not included in the cash flow statement but, like distributions, these payments are considered to be cash outlays and, as such, must form part of the surplus/deficit calculation.
Net cash flows from operating activities
Net cash flows from acquisition and disposal of non-financial assets
Value of assets acquired under finance leases and similar arrangements
CLASSIFICATION OF FLOWS AND STOCKS
2.125 Flows and stocks classifications are applied to all flows and stocks of in-scope enterprise units. Certain classifications apply exclusively to general government units and others apply exclusively to non-financial and financial corporations but most are common to both types of units.
2.126 The main classification, the economic type classification (ETF), is used to classify flows and stocks according to their economic nature (e.g. revenues, expenses, assets, liabilities). The government purpose classification (GPC) is used to classify expense transactions according to the government purpose (e.g. health, education, defence) of the expenditure.
2.127 Flows and stocks classifications can be viewed from two perspectives, an input perspective and an output perspective. The input perspective takes into account the nature and structure of the data that enter the system. The main sources of GFS data are government accounts and they provide accounting data that have to be reclassified and reorganised on an economic basis to be suitable for conversion to statistical output. As well, the input perspective identifies flows and stocks (e.g. those subject to elimination in consolidated aggregates) that do not enter final output as such. The output perspective views the classifications almost entirely as the lists of items that appear in published statistics. The classifications which are set out in Appendix 3 are input classifications and are designed for use in classifying data from government accounts. In this chapter, an output perspective of the classifications is used as a basis for discussing the concepts underlying published GFS.
ECONOMIC TYPE CLASSIFICATION
2.128 The economic type classification of stocks and flows is organised in sections that, in part, reflect the financial statements discussed in the previous section. However, the statement of stocks and flows is not reflected directly as a separate statement because the relevant items appear in different statements. The structure and broad content of the classification from an output perspective are set out in Table 2.5 below. The table indicates (with ‘xx’) whether the listed items apply to general government and public corporations.
2.129 Each of the classification categories in Table 2.5 is discussed in the following paragraphs. The discussion of the balance sheet items includes, where appropriate, discussion of transactions and other economic flows relating to the balance sheet items.
Operating statement items
2.130 As previously noted, revenues are defined as inflows of economic value arising from operational transactions.
2.131 Taxation revenue is revenue arising from compulsory levies imposed by government. There is usually no clear and direct link between payment of taxes and the provision of goods and services. Taxes are levied, inter alia, on incomes, wealth, production, sale and use of goods and services, and the performance of activities. The amount of tax revenue accruing in a period is the amount generated when the underlying transactions or events which give rise to the government’s right to collect the taxes occur in that period.
2.132 Governments may regulate certain activities by issuing licences for which fees are payable. If the issue of such licences involves little or no work by the government then the revenues raised are deemed to be taxation revenue. However, if the government uses the issue of licences to exercise some regulatory function, such as checking the competency or qualifications of a would-be licensee, then the revenues raised are deemed to be revenues from the sale of services by government unless they are clearly out of all proportion to the costs of providing the services.
2.133 Taxes that are levied on a regular or periodic basis are deemed to be current taxes. Taxes that are levied infrequently and at irregular intervals or under exceptional circumstances are deemed to be capital taxes.
2.134 The different types of taxes are broken down into the following broad categories on the operating statement:
2.135 Sales of goods and services refers to revenues from the direct provision of goods and services by general government and public corporations, excluding GST. The item includes:
- Taxes on income - this category refers to taxes on income, profits and capital gains, including income and capital gains taxes levied on individuals and enterprises. Income taxes levied on non-residents are included in the category;
- Other current taxes - this category refers to current taxes other than ‘taxes on income’, ‘taxes on products’ and ‘other taxes on production’. The category includes current taxes on capital, which consist of those taxes that are periodically payable on property or net wealth that is not used for production. Also included in the category are miscellaneous current taxes payable regularly such as vehicle registration fees and taxes, and stamp duty on vehicle registrations payable by persons or households. The category excludes revenues from drivers’ licences and the now discontinued broadcasting listeners’ licences and television viewers’ licences, both of which are treated as sales of goods and services;
- Taxes on products - taxes on products are levied per unit of quantity or per the unit price of goods and services produced, sold, imported, exported, transferred, leased or delivered. The category includes general taxes on the provision of goods and services, goods and services taxes, excises, taxes on international trade, taxes on gambling and taxes on insurance;
- Other taxes on production - this category consists of all taxes on production, except taxes on products, that: (i) are levied as a result of enterprises engaging in the production of goods and services; and (ii) are payable irrespective of the profitability of the production. They may be payable on labour, fixed assets and land used in the production process. The category includes payroll taxes and other employer’s labour force taxes, taxes on immovable property, taxes on financial and capital transactions, registration taxes on vehicles used by producers, road transport and maintenance taxes, franchise taxes, broadcasting station licences and television station licences. Betterment levies are not included here and are treated as capital taxes;
- Capital taxes - this category covers capital levies and taxes on capital transfers. Capital levies are imposed at irregular and infrequent intervals on the value of assets or net worth owned by institutional units. Taxes on capital transfers are imposed at irregular and infrequent intervals on the value of assets transferred between institutional units as a result of legacies, gifts or other transfers. The category includes betterment levies, stamp duty on property transfers, estate duties, probate and succession duties, and gift duties.
2.136 As previously noted, fees from regulatory services are treated as revenues from sales if the government exercises some proper regulatory function, such as checking the competency or qualifications of a would-be licensee. If there is little or no work involved or if the revenues raised are clearly out of all proportion to the cost of providing the service then the fees are treated as taxation revenue.
- fees and charges for services rendered and sales of goods and services by general government and public corporations;
- fees from regulatory services;
- revenues of general government enterprises for work done acting as an agent for other government and private enterprises;
- rental income under operating leases.
2.137 Operating leases are leases in which most of the risks and benefits of ownership rest with the lessor. Rental income recorded under sales of goods and services is confined to income from leases of produced assets such as buildings, ships, aircraft, vehicles, buildings, copyrights, patents, trademarks, etc. Income from leases of land and other non-produced assets is recorded as property income.
2.138 Property income refers to income accrued from the ownership of financial assets or tangible non-produced assets (mainly land and sub-soil assets). Property incomes accrue when the owners of such assets put them at the disposal of other entities. Property income on financial assets is in the form of interest, dividends, etc. Property income on land and sub-soil assets is in the form of land rent.
2.139 Interest income refers to income accrued by owners of financial assets such as deposits, securities other than shares, loans and accounts receivable in return for providing funds to other entities. Interest income can accrue on advances to the private sector, public corporations, building societies and foreign governments, and on bank account balances, fixed deposits held with banks, government securities, intra-sector deposits and short-term money market balances. Interest excludes cash settlements of interest swap contracts, which are treated as financial transactions in keeping with the revised SNA93 treatment (see SNA93, paragraph 2.76).
2.140 Property income includes general government returns on their equity in public corporations in the form of dividends and other transfers of income, and dividends received by public corporations from subsidiaries. Dividends are a form of property income to which shareholders are entitled as a result of their ownership of equity in other entities. Also included as property income are dividends from shares held as investments in private and public corporations and income from the IMF (except revenues from the IMF’s gold disbursements). Dividend income is distinguished from the sale or other divestment of equity holdings, which are sales of financial assets and not revenues.
2.141 Property income also includes general government income received from public corporations as income tax and wholesale sales tax equivalents. These revenues are treated as property income rather than tax revenue in the GFS system because they are levied by state and territory governments (which do not levy income taxes) on their public corporations rather than by the Commonwealth Government on all corporations under income tax legislation.
2.142 Land rent is a form of property income that refers to rent for the use of land and other non-produced assets. It includes rent on leasehold land in the territories and other leasing of crown lands. Rentals on buildings or other produced assets are not land rent and are recorded with sales of goods and services.
2.143 Royalties are included as property income. They are a form of land rent relating to the use of non-produced assets such as deposits of minerals or fossil fuels. Royalties are mainly paid for off-shore petroleum, minerals and timber that is not from plantation and regrowth forests.
2.144 Seigniorage is the profit earned by the Commonwealth Treasury and the Reserve Bank of Australia (RBA) on the issue of coins and notes (i.e. the difference between the face value of coins and notes and the costs of their production). Because notes and coin on issue are liabilities of the issuer, the face value of note and coin issues, including any seigniorage, is recorded as a financial transaction (i.e. incurring a liability). The costs of minting coin and printing notes are treated as expenses. However, the difference between the face and sale value of commemorative coins sold at greater than face value is recorded as sales of goods and services.
2.145 Other current revenues refers to current revenue other than current revenue from taxes, sales of goods and services, and property income. It includes grants and subsidies received for current (rather than capital) purposes. Other current revenue also includes revenue from fines, which are defined as civil and criminal penalties imposed on law breakers other than penalties imposed by tax authorities. Penalties imposed by tax authorities are classified as tax revenue. This item also includes all revenue received by local governments in lieu of municipal rates, items such as gifts and conscience moneys, and unclaimed moneys such as unclaimed lottery prizes, and unclaimed moneys in bank accounts.
2.146 Capital revenues refers to revenues from grants and other unrequited transfers for capital purposes, including in-kind receipts of non-financial assets. The item includes grants received from other (including foreign) governments or international organisations with the requirement that they be used for capital purposes. Acquisitions of non-financial assets free or at a price below fair value are recorded as capital revenues when they are of an economic nature and where valuations are realistically obtainable. Such transfers are valued on the basis of equivalent money transactions. Also included as capital revenues are transfers to sinking funds, capital levies from local government, and transfers from private bodies to government for capital works, e.g. donations for road construction.
2.147 As previously noted expenses are defined as outflows of economic value arising from operational transactions. Expenses are recorded net of recoverable GST.
2.148 Employee expenses relate to uncapitalised compensation of employees for services provided in the current period. They include the costs of wages and salaries, and the accrued costs of annual leave, long service leave and superannuation.
2.149 Employee expenses include amounts payable by employers to superannuation schemes, in respect of services provided by employees in the current period, to finance future superannuation benefits. Superannuation schemes to which employers pay contributions are described as ‘funded’ schemes. A funded scheme is usually a separately constituted legal entity into which an employer contributes, on a regular basis, an amount actuarially determined to fully fund future superannuation liabilities. Except for relatively small amounts which may be in the nature of working balances, the employer does not carry the superannuation liability on its balance sheet. Technically, a funded scheme may include a defined benefit plan or an accumulation plan or both as its components.
2.150 Also included as employee expenses are unfunded superannuation expenses, which are superannuation expenses accrued under an unfunded scheme for services provided by employees in the current period. In an unfunded scheme the employer does not make contributions to a separately constituted legal entity and pays benefits to employees as payment of the benefits falls due. In the GFS system, the accruing cost of the future benefits payments rather than the cash payment of benefits has to be recorded as expenses. The employer is regarded as compulsorily borrowing from employees the increase in superannuation liability each period. The amount of the liability accruing during the accounting period is split between employee expenses and the interest cost of the notional borrowing, which is classified as property expense. Pensions and lump sums paid to former employees are recorded as financial transactions in the statement of stocks and flows (i.e. repayment of the money ‘borrowed’ from employees).
2.151 Amounts payable or accrued as a result of actuarial reviews and reassessments of funded and unfunded superannuation schemes will generally not relate to services provided by employees in the current period. Such amounts are either treated as revaluations if they are due to price changes or reallocated to appropriate time periods.
2.152 The major part of employee expenses is made up of wages, salaries and supplements. Allowances for overtime, shift-work, living away from home and travel are included, as are in-kind payments such as accommodation, vehicles and clothing provided by employers. Employee expenses also include accrued expenses for the period relating to accident compensation premiums, sick leave, annual leave, long service leave, retirement and redundancy.
2.153 Importantly, employee expenses charged to capital works (e.g. on own-account construction) are excluded from this category and are recorded directly as acquisition of non-financial assets. Taxes paid on employers’ payroll and labour force are not included as employee expenses but are recorded as current transfer expenses. Expenses relating to usage of labour hire agencies are classified as non-employee expenses.
2.154 Non-employee expenses are operating expenses that are not included elsewhere in the classification of expenses. They include expenditure by government on goods and services that are provided directly to households as social transfers in kind, for example medical and pharmaceutical benefits, telephone rental concessions, concessional railway fares, rental subsidies, reduced utility charges, etc. Non-employee expenses also includes usage or ‘intermediate consumption’ of goods and services by public sector units in the accounting period. Usage of goods can be derived as the opening value of inventories plus purchases less the closing value of inventories. Also included as non-employee expenses are rentals for the use of buildings or the right to use copyrights, patents, trademarks, etc.
2.155 In keeping with national accounting concepts, non-employee expenses also include purchases of certain types of defence equipment that, in conventional accounting, would be regarded as purchases of non-financial assets. As well as treating expenditure on destructive weapons (e.g. missiles, rockets, bombs) as current expenditure, SNA93 also treats expenditure on the platforms (e.g. warships, submarines, missile carriers and launchers, etc.) from which the weapons can be launched as current expenditure. Consequently, non-employee expenses includes expenditures on such weapon platforms, which are effectively treated as fully consumed during the accounting period in which they are acquired.
2.156 As is the case for employee expenses, non-employee expenses that are charged directly to capital works (e.g. own-account construction) are not included in this category but are recorded directly as acquisition of non-financial assets.
2.157 Depreciation refers to the estimated consumption of non-financial assets during the accounting period. In Australia’s GFS system, depreciation is recorded in lieu of the national accounting concept of consumption of fixed capital because only depreciation information is available from government accounts. The estimates of consumption of fixed capital in the ASNA are derived independently by the ABS and are in insufficient detail to be used in the GFS system. In keeping with the treatment of purchases of defence weapon platforms as current expenses, depreciation of such platforms is not recorded as an expense.
2.158 Current transfers are amounts payable for current purposes for which no economic benefits are receivable in return. The distinction between current and capital transfers is based on the nature of the activities or assets for which the transfers are made. If the activities or assets relate to the acquisition of assets, other than inventories, that will be used in production for one year or more, the transfers are treated as capital transfers. Otherwise they are treated as current transfers.
2.159 Current transfers include grants for current purposes to private non-profit institutions serving households, grants made to foreign governments and organisations including grants made for aid projects, and current grants from one level of government to another (e.g. Commonwealth to state). Current transfers also include subsidies, which are transfers made by general government to public and private corporations and unincorporated enterprises. Subsidies include transfers to public corporations to offset recurring losses that are a consequence of government policy to maintain the corporations’ prices at a level that does not cover the cost of production.
2.160 An important component of current transfers is monetary transfers (e.g. old age pensions and unemployment benefits) to individuals or households, who are not required to provide any significant amount of goods or services in return. ‘Work for the dole’ schemes are treated as transfers as the main purpose of such schemes is the transfer of monetary benefits and acquisition of employment skills.
2.161 Current transfers also include the direct tax expenses (taxes on income) of government units. All indirect tax expenses (taxes on production) are treated as non-employee expenses.
2.162 Capital transfers are unrequited payments of a capital nature (i.e. they relate to the acquisition of assets, other than inventories, that will be used in production for one year or more). Capital transfers are usually non-recurrent and irregular for donor or recipient. Capital transfers include government grants for capital purposes to private non-profit institutions serving households, capital grants made to foreign governments and organisations (including grants made for aid projects), and capital grants from one level of government to another (e.g. Commonwealth to state). Included are transfers for the purpose of compensating the recipient for damage or destruction of non-financial assets, or to increase the financial capital of the recipient. Compensation to primary industry marketing authorities for losses on overseas debts resulting from devaluations is included. Home savings grants are included as are grants to science laboratories and libraries in private schools, university residential colleges, etc.
2.163 Donations of non-financial assets are included as capital transfers by imputing the value of the assets from equivalent transactions. Such transfers are also recorded as the acquisition of non-financial assets.
2.164 Payments made to finance the debt redemption of other bodies are included in capital transfers. In SNA93 and in GFS, bad debts written off by mutual agreement between debtor and creditor are treated as capital transfers and bad debts written off unilaterally are treated as other changes in the volume of assets. Such bad debts may be written off from provisions for bad and doubtful debt accounts or directly without prior provisioning.
2.165 Property expenses are requited current transfers involving payment for the use of property rights. Included in property expenses are interest payable, dividends and other income transfers payable by public corporations, land rent payable and royalties.
2.166 Interest included in property expenses includes interest on advances, loans, overdrafts, bonds and bills, deposits and the interest component of finance lease repayments. Also included is the nominal interest on unfunded superannuation liabilities (see paragraph 2.150). Interest excludes cash settlements of interest swap contracts, which are treated as financial transactions in keeping with the revised SNA93 treatment (see SNA93, paragraph 2.76).
2.167 As indicated, property expenses include income transferred by public corporations as dividends, transfer of profits or other transfers of income. The income transfers include those payable by public corporations to the parent governments, by subsidiary corporations to their parent corporation, and by parent and subsidiary corporations to minority shareholders. Also included are transfers, to their parent governments by state and territory public corporations, of income tax and wholesale sales tax equivalents. These are amounts levied by parent governments on their corporations to place the corporations on an equivalent tax basis to private corporations. However, the transfers are recorded as property rather than tax expenses, because the taxes to which the payments are equivalent are Commonwealth Government taxes but the payments are made to state and territory governments.
2.168 Land rent and royalty expenses refer to the use of non-produced assets such as land and subsoil assets. Royalty payments are made for the right to exploit natural resources. Rentals on produced assets such as buildings, copyrights, patents, trademarks, etc. are included with non-employee expenses.
Net acquisition of non-financial assets
2.169 Net acquisition of non-financial assets is defined as gross fixed capital formation less depreciation plus changes in inventories plus other transactions in non-financial assets. Any recoverable or deductible GST is excluded. As previously explained, GFS net operating balance plus net acquisition of non-financial assets is equal to GFS net lending(+)/borrowing(-).
2.170 Gross fixed capital formation is a national accounting concept and is defined as the value of acquisitions less disposals of new and existing produced assets that can be used in production, other than inventories. Acquisition and disposal of valuables are excluded because, although they may be produced assets, valuables are not used in production. Gross fixed capital formation also excludes the acquisition and disposal of non-produced assets such as land, sub-soil assets, virgin forests, etc. (see the discussion ahead under ‘Balance sheet items’ for further explanation of produced and non-produced assets). In practice, for transactions involving land and structures located on the land, separation of the value of land from the value of the structures may be difficult and the transactions are classified to the category (gross fixed capital formation or other transactions in non-financial assets) accounting for the major part of the value of the transaction. Acquisition of produced assets includes own-account capital works. Disposal of produced assets excludes their consumption through depreciation.
2.171 Depreciation is recorded as an expense and as a negative component of net acquisition of non-financial assets. This ensures its exclusion from GFS net lending(+)/borrowing(-), which is derived as the GFS net operating result plus net acquisition of non-financial assets. As a non-cash item, depreciation cannot determine net lending/borrowing, which measures the public sector’s net requirement for finance.
2.172 Changes in inventories refers to the change in the value of inventories arising from transactions over the accounting period. It is recorded as part of net acquisition of non-financial assets because it represents a change to the public sector’s assets during the accounting period. As previously discussed, usage rather than purchases of inventories is included as an expense and a component of the GFS net operating balance. Adding changes in inventories to net acquisition of non-financial assets ensures that GFS net lending(+)/borrowing(-) reflects the net purchases (purchases less sales) of inventories in the accounting period.
Cash flow statement items
2.173 As shown in Table 2.4, the cash flow statement identifies the cash flows from the operating, investing and financing activities of government. ‘Cash’ refers to cash on hand and cash equivalents. Cash on hand includes notes and coins held, and deposits held at call with a bank or financial institution. Cash equivalents are highly liquid investments which are readily convertible to cash on hand at the investor’s option.
2.174 Cash flows from operating activities is a net measure representing cash receipts arising from operating activities less cash payments arising from operating activities. ‘Operating activities’ are the types of activities recorded in the operating statement. Cash flows from operating activities include cash receipts from taxation, sales of goods and services, grants and subsidies, property income, and all other revenue earning activities recorded in the operating statement. The item also includes cash payments for employee expenses, including cash contributions to superannuation schemes, purchases of goods and services, and payment of subsidies and grants, current and capital transfers, property expenses and all other expense-incurring activities recorded in the operating statement. Cash flows related to acquisition and disposal of non-financial assets (other than inventories), financial assets, liabilities and equity, are excluded.
2.175 Cash flows from investments in non-financial assets is a net measure representing cash receipts from sales of non-financial assets less cash payments for acquisition of non-financial assets. Non-financial assets are defined in the section ahead relating to the balance sheet. Receipts from sales of non-financial assets include disposal of previously rented dwellings, non-residential buildings, used plant and equipment, and sales of land (including the sale of residential leases in the ACT). Payments for the acquisition of non-financial assets include payments for the acquisition of new and second-hand assets, non-produced assets such as land, mineral deposits, timber tracts, and patents and copyrights. Included are capitalised payments for employee and non-employee expenses associated with capital works. The item includes reimbursements received by public authorities, for amounts spent on capital works, while acting as an agent for other government and private bodies.
2.176 Cash flows from investments in financial assets for policy purposes refers to cash receipts from the repayment and liquidation of investments in financial assets for policy purposes less cash payments for acquiring financial assets for policy purposes. Acquisition of financial assets for policy purposes is distinguished from investments by the underlying government motivation for acquiring the assets. Acquisition of financial assets for policy purposes is motivated by government policies such as encouraging the development of certain industries or assisting citizens affected by natural disaster. On the other hand, investments are motivated by a desire to maximise returns on surplus funds.
2.177 Acquisitions of financial assets, other than equity, for policy purposes are called ‘advances’. Advances can be made by public authorities to persons, private schools, religious organisations, etc. (e.g. for housing, school building). They include loans for the purchase of homes (e.g. Commissioner for Housing loans in the ACT), war service land settlement and, occasionally, for the purchase of assets sold to persons and non-profit institutions. Advances are often made by public sector units to other public sector units, for example one level of government to another and between units at the same level of government (e.g. general government to public corporations). Included also is the provision of funds to public financial corporations for re-lending. Advances can also be made to foreign governments and organisations, such as when subscriptions are made to the International Bank for Reconstruction and Development and the International Development Association.
2.178 In addition to advances, net acquisition of financial assets for policy purposes includes the acquisition and disposal by government of shares and other equity in public and private enterprises. Disposal of financial assets acquired for policy purposes includes proceeds from sales of equity in public and private corporations, including privatisations and sale of subsidiaries by public corporations.
2.179 Cash flows from investments in financial assets for liquidity management purposes refers to cash receipts from liquidation or repayment of investments in financial assets for liquidity management purposes less cash payments for such investments. Investment for liquidity management purposes means making funds available to others with no policy intent and with the aim of earning a commercial rate of return.
2.180 Cash flows from financing activities refers to cash receipts from borrowing by public sector units less cash repayments or redemption of such borrowing in the past. Borrowing is the creation of liabilities through, for example, sale of bonds and bills in the capital market, raising loans through direct agreements with lenders or issuing shares and other equities (public corporations only). Borrowing includes the receipt of advances from other government units and receipt of deposits. Also included are borrowing from the International Bank for Reconstruction and Development, borrowing under credit arrangements with foreign governments and authorities, and the issue of stocks and bonds abroad.
2.181 Borrowing also includes the receipt of deposits. Deposits include cash held in public accounts by treasuries on behalf of other government units (e.g. public non-financial corporations) that operate through a trust account held in the public accounts. Deposits lodged by public non-financial corporations and other public sector units with Central Borrowing Authorities are included, as are deposits lodged by private sector entities with public financial corporations.
2.182 This item does not include the increase in liability or borrowing related to the initial entry into a finance lease or similar arrangement since, at that point, no cash flows have actually occurred. When cash flows associated with a finance lease or similar arrangement do occur they are reflected in the cash flow statement for that period. The reduction in liability from subsequent lease repayments is split into a principal and an interest component. Repayments of lease principal are included here. Interest repayments in cash are classified as cash flows from operating activities.
Balance sheet items (including items in the statement of stocks and flows)
2.183 The discussion in this section refers to the classification of balance sheet items and includes discussion, where appropriate, of transactions and other economic flows that relate to the balance sheet items and are recorded in the statement of stocks and flows.
2.184 As previously noted, assets are defined as instruments or entities over which ownership rights are enforced by institutional units and from which economic benefits may be derived by holding them, or using them, over a period of time.
Financial assets are assets that are in the form of financial claims on other economic units. In the system, financial assets are classified to the following instrument categories:
2.185 The statement of stocks and flows records the results of transactions, revaluations and other volume changes on the value of each of the categories of financial assets described above at the end of the accounting period. Transactions in financial assets represent acquisitions of financial assets less liquidation of such assets (e.g. debtors’ repayment of the financial claims represented by the assets). Acquisition of financial assets includes making deposits of cash with financial institutions, making advances to other units of the public sector or to private sector entities, making investments in other units, and purchasing shares or making other forms of capital contribution to public and private sector corporations for policy or liquidity management purposes. Revaluations occur most often for financial assets, such as shares and securities, that are traded on financial markets or are subject to exchange rate fluctuations. Other volume changes that may have an effect on financial assets include the writing off of bad debts by a creditor. Only write-offs that are not made by mutual agreement between creditor and debtor are treated as other volume changes (those made with mutual agreement are treated as capital transfer expenses).
- Cash and deposits - this includes: (i) notes and coins on hand; (ii) cheques held but not yet deposited; (iii) cash and deposits in both Australian currency and foreign currency, which are recoverable or transferable on demand and are held at all banks, non-bank financiers and other deposit taking institutions; (iv) deposits placed in the Short Term Money Market (for example grants received from the Commonwealth and deposited overnight); and (v) units issued by cash management trusts and withdrawable share capital of building societies. The item excludes bank certificates of deposit and fixed deposits held with banks;
- Investments, loans and placements - this includes: (i) non-negotiable, non-transferable loans, other than advances; (ii) credit foncier loans; (iii) deferred payment schemes (re-purchase agreements); (iv) securities such as promissory notes; (v) bills of exchange; (vi) certificates of deposit; (vii) fixed term deposits; (viii) Treasury notes and bonds; (ix) redeemable preference shares; (x) debentures; (xi) long term notes; and (xii) net value of swaps and other derivatives that are in a net asset position;
- Accounts receivable - this includes short and long term trade credit and accounts receivable, accounts and interest receivable, and prepayments made;
- Advances outstanding - this category refers to loans and other non-equity financial assets acquired for policy rather than liquidity management purposes. As a general rule, all loans made by general government to other government bodies, except loans made by central borrowing authorities, are deemed to be for policy purposes. Included are long and short term loans, non-marketable debentures, and long and short term promissory agreements (bonds and bills) issued to public sector units for the purpose of achieving government policy objectives. Excluded are government equity in public corporations (see next item), grants and non-repayable funds, and investments for liquidity management and income generation purposes;
- Equity - this category refers to claims on other entities entitling the holder to a share of the income of the entity and a right to a share of the residual assets of the entity should it be wound up. The item includes the market value of shares on issue in listed corporations and preference shares and convertible notes after conversion. It excludes convertible notes before conversion. The item also includes the book value of assets (real and financial) less liabilities of unlisted public corporations.
2.186 Non-financial assets, which are all assets other than financial assets, are classified in the following categories:
2.187 The statement of stocks and flows records the results of transactions, revaluations, and other volume changes on the value of each of the categories of non-financial assets described above at the end of the accounting period. Transactions that change the stock of non-financial assets are also recorded in the operating statement and have already been discussed above under the sub-heading ‘Net acquisition of non-financial assets’. Revaluations of non-financial assets reflect changes in the market price of the assets over the accounting period. In practice, revaluation of assets at market prices may only occur when the assets are sold. In that case, any profit or loss from the sale is recorded as a revaluation and only the book value of the asset is recorded as the transaction value. Other volume changes that can affect non-financial assets include additions to the stock of such assets resulting from mineral discoveries or addition of previously unrecorded assets, and destruction or depletion of assets through natural disasters, degradation or exploitation (of natural assets).
- Non-financial produced assets - refers to assets created by a production process and held by producers mainly for the purposes of production; includes produced assets, such as buildings (including dwellings), infrastructure (e.g. railways, roads, bridges, tunnels, airports, harbours, pipelines, dams), plant and equipment, cultivated assets (e.g. livestock, vineyards, orchards, plantations), intangible assets (e.g. capitalised mineral exploration, computer software, artistic originals), inventories (including materials, supplies, defence weapon platforms, work in progress, finished goods and goods for resale), and valuables (e.g. precious metals and stones, antiques and works of art);
- Non-financial non-produced assets - are assets held by producers mainly for the purposes of production that have not themselves been produced. They include land and subsoil assets such as mineral deposits; non-cultivated biological resources and water resources such as virgin forests, fishing grounds and natural water resources; and intangible non-produced assets such as patents, copyrights and goodwill;
- Other non-financial assets - assets not elsewhere classifiable.
2.188 As previously noted, liabilities are obligations to provide economic value to another economic unit and are the counterparts of financial assets held by the claimant economic units. Liabilities are classified to the following categories:
2.189 The statement of stocks and flows records the results of transactions, revaluations and other volume changes on the value of each of the categories of liabilities described above at the end of the accounting period. Transactions in liabilities include contracting of new liabilities and repayment of past liabilities. Contracting of liabilities includes acceptance of deposits, receipt of advances from other government units, borrowing on financial markets and issuing securities such as bonds and notes. Revaluations of liabilities occur most often for instruments, such as securities, that are traded on financial markets or are subject to exchange rate fluctuations. Changes to liabilities from events other than transactions and revaluations are rare. It should be noted that cancellation of debt by mutual agreement between creditor and debtor is treated as a capital transfer between creditor and debtor and is not recorded as an other volume change in liabilities.
- Deposits held - this category includes currency on issue (i.e. coins on issue from the Commonwealth Treasury and notes on issue from the Reserve Bank of Australia), which are liabilities of the government. Also included are holdings of cash balances or deposits from other public sector or private sector bodies, including trust accounts held on behalf of other public sector or private bodies. Excluded are employee superannuation trust fund balances or any trust balances held to reduce employee entitlement liability;
- Proceeds from advances - this item includes loans and other repayable funds received from government authorities for policy purposes rather than income generation or liquidity management purposes. The item excludes loans from non-government sources and grants and non-repayable funds received;
- Borrowing - this item refers to liabilities, other than advances, created through direct agreements with lenders, the sale of securities and acquisition of finance leases. The item includes: (i) finance leases, which are lease arrangements in which most of the risks and benefits of ownership rest with the lessee; (ii) loans, including bank overdrafts; long and short term loans in both Australian currency and foreign currency; credit foncier loans; and deferred payment schemes (re-purchase agreements); and (iii) securities, including promissory notes; bills of exchange; certificates of deposit; fixed term deposits; Treasury notes and bonds; debentures; long term notes; net value of swaps and other derivatives in a net liability position;
- Accounts payable - this item includes short and long term trade debt and accounts payable, accounts and interest payable, and prepayments received;
- Provisions that are in the nature of liabilities - this item excludes provisions which are in the nature of reserves (e.g. provision for future losses and provision for self-insurance) and which do not meet the definition of liabilities. The item includes: (i) provisions for unfunded superannuation; (ii) provisions for other employee entitlements such as sick leave paid on resignation or retirement, recreation leave, long service leave, workers’ compensation (where benefits are paid by an employer and not a separate insurer), and accrued wages and salaries; and (iii) provisions other than those for employee entitlements, such as provisions for income tax and dividends if the underlying amounts are liabilities of the entity. The item excludes provisions for bad debts;
- Other liabilities - this item covers all liabilities not elsewhere classifiable.
Shares and other contributed capital
2.190 The shares and other contributed capital item is relevant only for public corporations because general government units are not owned by other units and cannot have any form of equity. The item represents the market value of shares and other contributed capital and is grouped with liabilities in the analytical framework because it represents a financial claim on the assets of public corporations. Together with the value of liabilities, it is deducted from assets in the derivation of net worth. The statement of stocks and flows records changes in shares and other contributed capital arising from transactions, revaluations, and other volume changes. Transactions that increase shares and other capital include share issues and other receipts of capital contributions from owners. Transactions that decrease shares and other contributed capital include share redemptions in which a corporation buys back shares from shareholders (payments of dividends and other income transfers are recorded as expenses). The main instances of revaluations that affect shares and other contributed capital are changes in the market value of listed public corporation’s shares on the share market. Other volume changes that affect shares and other contributed capital are rare and are likely to be restricted to reclassifications.
GOVERNMENT PURPOSE CLASSIFICATION
2.191 The Government Purpose Classification (GPC) is used to classify revenues, expenses, and net acquisition of non-financial assets of the public sector in terms of the purposes for which the transactions are made. The GPC is based on the SNA93 Classification of the Functions of Government (COFOG), which is also applied in the IMF GFS system.
2.192 The structure of the GPC is hierarchical and consists of a 2-digit level (major group), a 3-digit level (group) and a 4-digit level (subgroup). The major groups reflect the broad objectives of government and the groups and subgroups detail the means by which these broad objectives are achieved.
2.193 The GPC is grouped according to type of government function or purpose. General services are those government activities that cannot be associated with services to persons or to business. They are collective services that cannot be allocated to particular groups of beneficiaries. They include general public services, defence, and public order and safety.
2.194 Community and social services are services supplied directly to the community, and to households and persons. They include education, health, social security and welfare, housing and community amenities, and recreation and culture.
2.195 Economic services are government activities associated with the regulation and more efficient operation of business. These services include fuel and energy, agriculture, forestry, fishing, hunting, mining and mineral resources, manufacturing, construction, transport, and communications.
2.196 Other functions included in the classification relate to public debt transactions, general purpose transactions and natural disaster relief.
2.197 In principle, the unit of classification for the GPC is the individual transaction. However, it is often difficult to identify individual transactions with the headings in the GPC. In these circumstances classifications are assigned to departments, agencies, programs, and similar units within government that can be more readily identified with categories in the GPC. When units have more than one function, transactions are classified to the dominant purpose category.
2.198 Some government transactions are not related to current activities and are not regarded as being in respect of a particular type of service. Interest payments reflect the fact that past expenses were financed by borrowing rather than by taxation. This type of expense is not related to current activities. Interest payments are included under public debt transactions in the GPC.
2.199 Administrative expenses are included in the functional grouping of the activities being administered. Research is distinguished in the GPC only where it is considered to be of particular significance. Otherwise it is included with the function to which it relates.
2.200 The major groups of the GPC are shown in Table 2.6 below. The full classification is presented in Appendix 3.
2.201 General public services (GPC 21) include legislative and executive affairs, financial and fiscal affairs, external affairs, foreign economic aid, general research, general economic and social services, general statistical services, and government superannuation benefits.
2.202 Defence (GPC 22) includes military and civil defence affairs, foreign military aid and defence research.
2.203 Public order and safety (GPC 23) includes police and fire protection services, law courts and legal services, prisons and corrective services, and control of domestic animals and livestock.
2.204 Education (GPC 24) includes primary and secondary education, university and other higher education, technical and further education, preschool and special education, and transportation of students.
2.205 Health (GPC 25) includes general hospitals, repatriation hospitals, mental health institutions, nursing homes, special hospitals, hospital benefits, medical clinics and practitioners, dental clinics and practitioners, maternal and infant health, ambulance services, medical benefits, school and other public health services, pharmaceuticals, medical aids and appliances, and health research.
2.206 Social security and welfare (GPC 26) includes sickness benefits; benefits to ex-servicemen and their dependants; invalid and other permanent disablement benefits; old age benefits, widows, deserted wives, divorcees and orphans benefits; unemployment benefits; family and child benefits; sole parents benefits; family and child welfare; and aged and handicapped welfare.
2.207 Housing and community amenities (GPC 27) includes housing and community development, water supply, household garbage and other sanitation, sewerage, urban stormwater drainage, protection of the environment, and street lighting.
2.208 Recreation and culture (GPC 28) includes public halls and civic centres, swimming pools and beaches, national parks and wildlife, libraries, creative and performing arts, museums, art galleries, broadcasting, and film production.
2.209 Fuel and energy (GPC 29) includes coal, petroleum, gas, nuclear affairs, and electricity.
2.210 Agriculture, forestry, fishing and hunting (GPC 30) includes agricultural land management, agricultural water resources management, agricultural support schemes, agricultural research and extension services, forestry, fishing, and hunting.
2.211 Mining and mineral resources, other than fuels; manufacturing; and construction (GPC 31) includes activities relating to prospecting, mining and mineral resources development; manufacturing activities and research into manufacturing methods, materials and industrial management; and activities associated with the building and construction industry.
2.212 Transport and communications (GPC 32) includes road construction, road maintenance, parking, water transport, rail transport, air transport, pipelines, multi-mode urban transit systems, and communications.
2.213 Other economic affairs (GPC 33) includes storage, saleyards, markets, tourism and area promotion, and labour and employment affairs.
2.214 Other purposes (GPC 34) includes public debt transactions, general purpose inter-government transactions, and natural disaster relief.