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STOCK FLOW AND CONCEPTS
7 Balance sheet data are known as stock, level or position data, and refer to the value of financial assets (and liabilities) in existence at a point in time, the end of a calendar quarter in the case of the Australian financial accounts. The value of the stock of financial assets changes during the course of a quarter, and the net value of the change is called economic flow. The net flow during a period may be decomposed into three broad elements: transactions, revaluations, and other changes in volume. Thus over time the following relationship between stocks and flows applies for any given combination of financial asset (or liability) type, sector of transactor, sector of counterparty transactor:
Opening period stock + net transactions + net revaluations + other changes in volume = closing period stock.
8 Transactions are how economic value is exchanged between transactors in the economy, in the case of the financial accounts these transactions take place in formally organised financial markets (such as the stock exchange) or in informally organised markets (often referred to as over-the-counter markets), such as the market for bank deposits.
9 Exchange of value implies a change of ownership of an asset, and this is a central principle in classifying a change in value to either a transaction or other economic flow. Examples of changes of ownership include purchase/sale of shares, issue/take up of debt securities, deposit of cash in a bank, provision of funds in exchange for a mortgage for a housing loan.
10 Exchanges of financial assets are requited in the sense that the provision of a resource (say cash) is exchanged for an obligation or claim (share, deposit account balance, debt security or mortgage documentation). These claims are legally enforceable according to general commercial law or specific agreements between the parties. In some cases the legal nature of the transaction and the economic effect of the transaction may be different, and 2008 SNA makes a small number of exceptions to the legal change of ownership principle to an economic change of ownership basis. For the financial accounts the major exception is financial leasing, where the legalities of the transaction are modified such that the leased asset is deemed to have been sold to the lessor in exchange for a loan, the financial lease. Commercial accounting standards also treat financial leasing in this manner.
11 In the financial accounts transactions are recorded at the value actually exchanged, that is market value. This may differ to the contractual value of claims arising from the transaction, for example the sale value of shares compared to the par value of the shares, or the proceeds value of a debt security issue rather than the nominal value of the debt securities. Transaction values are recorded without deducting transaction costs such as brokerage fees or commissions. Such fees or commissions are treated as sales of services, current account transactions not financial account transactions.
12 The exchange of value is recorded on an accrual basis, that is in the period where ownership changed. This may be different to when the payment for the exchange of value is made. For example an enforceable contract for the purchase/sale of shares comes into existence when a deal is struck on the stock exchange. This has to be settled two days later, and the settlement date may be in a different quarter to when the deal was made. This gives rise to a further financial claim in the form of an account payable/receivable to bridge the period.
13 Transactions for any particular class of transactor are recorded on a net basis in the financial accounts. For example bank deposit transactions are the net of new deposits less withdrawals, transactions in shares are the net of purchases and sales. For some economic analysis the components of net transactions are of interest, and there are some limited data on gross transactions available on request, such as new share issues.
14 Revaluations occur when the price of an asset changes causing an increase or decrease in the stock value of holdings of that asset. Revaluations are an economic flow that does not result from a change of ownership. Examples of the causes of revaluation are share price changes and the impact of exchange rate changes on assets denominated in foreign currency.
15 While revaluations are not transactions, they do have a significant impact on wealth (stock) aggregates from period to period and may have a significant impact on economic behaviour. For example the run down in valuation of superannuation balances in response to a fall in the price of shares may result in employees deferring retirement.
Other Changes in Volume
16 Asset values may change over time through causes other than transactions and price changes. For financial assets the most significant other changes in volume (OCV) result from phenomena such as bad debt write-offs or corporate failures. In such cases it is often difficult to distinguish between price changes (debt write down, share price fall) and OCV. In practice the financial accounts combines the known OCVs with revaluations to account for non-transaction changes in stock value.
17 OCVs also record statistical artefacts. One example is a transactor that changes sectoral classification as might occur through privatisation of a previously public sector owned corporation, or a building society that becomes a bank. Although the change in classification may be the result of transactions (such as share sales), treating the reclassification of all the assets and liabilities represented by the share value as transactions is not a satisfactory explanation of what has occurred.
18 Another statistical artefact arises in discontinuities in time series that arise because of the workloads involved in maintaining consistency over the full period of long time series. At some point in the time series the inconsistency in treatment between opening and closing stocks will be allocated to OCV rather than contaminate the transaction series.
THE CLASSIFICATION OF INSTITUTIONAL SECTORS AND SUBSECTORS
Transactors: Institutional Units
19 The units that can engage in financial transactions, own assets and incur liabilities are known in 2008 SNA as institutional units. The following description of institutional units is taken from Standard Economic Sector Classification of Australia, (SESCA) 2008 (cat. no. 1218.0).
20 Statistical units are businesses, government entities, households or other entities about which statistics are compiled. They are defined in a consistent way to enable users of ABS statistics to make valid comparisons of information compiled from different statistical sources and to enable composite pictures of the economy to be drawn.
21 The basic statistical unit that is classifiable by sector is the institutional unit. An institutional unit is one that is able to:
22 In some instances it is statistically advantageous to recognise as separate institutional units some entities which do not meet the above criteria. Although these units do not exist as separate institutional units from their owners, and therefore are not institutional units in their own right, where they operate autonomously and keep a full set of accounts, notional institutional units are created to enable their separate collection.
23 Institutional units can be originated either formally or informally. They can be created by formally, either individually, as in the case of some government authorities through an Act of Parliament; or as a specific type of unit, as in the case of corporations through the Corporations Act 2001. The law establishes the existence of such entities as separate from their owners or members. Institutional units can also be created informally, such as a household formed by individual members sharing a dwelling.
24 The ABS statistical unit is considered to closely approximate the institutional unit as defined here.
25 There are four main types of institutional units:
26 2008 SNA define a corporation as:
"a legal entity, created for the purpose of producing goods and services for the market, that may be a source of profit or other financial gain to its owner(s); it is collectively owned by shareholders who have the authority to appoint directors responsible for its general management". (para 4.39)
27 2008 SNA goes on to explain, corporations are typically:
28 The company structure of corporations enables profits to be distributed to their shareholders. Examples of corporations are proprietary companies, limited liability companies and no liability companies.
29 Some incorporated entities are prohibited from distributing profits to their shareholders or members. Most companies limited by guarantee and all incorporated associations fall into this category. These types of institutional units are 'not-for-profit institutions' (NPIs) and are discussed later.
30 As noted earlier, to qualify as a corporation a unit must be a recognised legal entity. The exception to this rule is where notional institutional units are created for 'foreign branches', or unincorporated enterprises owned by non-resident units (see below for further detail on the concept of residence). To qualify as a notional institutional unit, a foreign branch must:
31 Artificial subsidiaries and holding corporations whose activities are confined to owning the controlling level of equity in the group are not recognised as separate institutional units. For statistical purposes these are merged with the parent unit.
32 2008 SNA define Government units as:
"Legal entities established by political processes that have legislative, judicial or executive authority over other institutional units within a given area". (para 4.117)
33 SNA 08 goes on to explain, the principal functions of government units are:
34 The majority of government units are readily identifiable as their operations are mainly financed from taxation and they redistribute income by means of transfers (e.g. subsidies, grants, welfare payments) or engage in other forms of non-market production, such as the provision of government services (e.g. defence, education, health services, economic advice) free of charge or at nominal prices.
35 To qualify as a separate legal entity, a government unit must:
36 Units that do not meet all of these criteria are treated as part of a larger government unit, i.e. the collective legal entity comprising all government units included in the public accounts. Included in this collective legal entity are departments and agencies operating from the public accounts of the parent government.
37 The exception to this rule is where notional institutional units are created from entities which are part of the public accounts. These are usually government entities that do not exist as separate legal entities from the collective parent government unit, but that operate autonomously in the market. To be recognised as a notional institutional unit of government a unit must:
38 In practice notional institutional units of government will only be created where they engage in significant market activity.
39 Statutory authorities and companies created by legislation or regulation which operate outside the public accounts, along with local government authorities, qualify individually as government units.
40 In the event of dissolution of units under government control, the assets are returned to the government. As a result, units under government control do not meet the non-distribution criteria set out for NPIs detailed below.
41 2008 SNA defines Non-profit institutions (NPIs) as:
"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." (para 4.83)
42 2008 SNA goes on to explain, NPIs must have an enabling instrument which includes a clause that prohibits the NPI from distributing income, profit or other financial gain to its establishing, controlling or financing unit. This includes benefitting from the sale of assets in the event of the dissolution of the unit.
43 The productive activities of NPIs may generate either surpluses or deficits but any surpluses they make cannot be appropriated by the establishing, controlling or financing institutional unit. For this reason, they are frequently exempted from various kinds of taxes.
44 The main characteristics of NPIs are they:
45 A unit that is 'self-governing' is in charge of its own destiny. It is able to "dissolve itself, set and change its by-laws and alter its mission or internal structure without having to secure permission from any other authority than the normal registration officials" (Handbook on Non-profit Institutions in the System of National Accounts 2003, paragraph 2.18)
46 In the 2008 SNA and Australian System of National Accounts (ASNA) market NPIs are considered to be corporations; non-market NPIs are combined with households rather than the separate 2008 SNA sector of Non Profit Institutions serving households (NPISH).
47 2008 SNA defines a household as:
"a group of persons who share the same living accommodation, who pool some, or all, of their income and wealth and who consume certain types of goods and services collectively, mainly housing and food." (para 4.149)
48 2008 SNA goes on to explain, individual members of households are not treated as institutional units because many assets are owned (and liabilities incurred) jointly by two or more members of a household. Income can be pooled and expenditure decisions are often made for the household as a whole. As a result, the household as a whole, including all individual members, is considered to be an institutional unit.
49 The liability of the owners of unincorporated businesses is unlimited. As a result, these businesses are treated as household units since all the assets of the household, including the dwelling itself, are at risk if the enterprise goes bankrupt. The institutional unit of each household involved in the partnership therefore represents the individual members of the household as well as the share of the unincorporated partnership owned by each household.
50 The exception to this rule is where notional institutional units are created from unincorporated enterprises within household units. These are usually unincorporated enterprises that do not exist as separate legal entities from the household institutional unit, but:
51 Examples of the types of unincorporated enterprises recognised as notional institutional units include unincorporated financial enterprises (except for financial auxiliaries); unincorporated partnerships of companies and trading trusts; and all other unincorporated enterprises assessable for income tax purposes as companies.
52 The institutional units that are included in Australia's economic accounts are those that are Australian residents. The following passages from SESCA08 discuss residency.
53 Residence is used to define resident institutional units and to ultimately distinguish between Australia's national economy and the rest of the world. This concept underpins Australia's National Accounts and Balance of Payments statistics.
54 A unit's economic activity should be attributed to only one country based on residence. The residence of each institutional unit is the economic territory with which it has the strongest connection: its centre of predominant economic interest. An institutional unit can only be a resident of one economic territory.
55 If a unit has operated (or intends to operate) in Australia for one year or more, it is regarded as having a centre of economic interest in Australia.
56 Australia's economic territory is the area under the effective control of the Australian government. It includes the land area, airspace, territorial waters, including jurisdiction over fishing rights and rights to fuels and minerals. Australian economic territory also includes territorial enclaves in the rest of the world.
57 See SESCA08 and Balance of Payments and International Investment Position: Concepts, Sources and Methods, 2011 (cat. no. 5331.0) for an elaboration on residency and economic territory.
Market / Non-market Activity
58 Institutional units are considered to be corporations if they operate in the market. If they are non-market operators they could be considered as government units or Non-profit institutions serving households, depending on their control characteristics.
59 Market operators are units which respond to market forces. Market operators make decisions about what to produce and how much to produce in response to expected levels of demand and expected costs of supply and are exposed to the risks associated with this production. Market operators adjust supply either with the goal of making a profit in the long run or, at a minimum, covering capital and other costs.
60 Non-market operators are not likely to respond to changes in economic conditions in the same way as market operators. Their economic behaviour is influenced by the receipt of material financial support in the form of transfers such as grants and donations.
61 See SESCA08 and 2008 SNA for further discussion of market/non-market activity.
Classification to Economic Sector
62 Institutional units are classified to institutional sector, subsector, group and class in accordance with the Standard Institutional Sector Classification of Australia (SISCA). Additional SESCA classifications of Public / Private and where relevant Level of Government are applied to produce the building blocks for the financial accounts. Because financial transactions and other flows take place between institutional units, and financial positions are held between institutional units, the transactions, flows and positions are classified to the sectoral classification twice, once from the asset holder's point of view and the other from the liability issuer's point of view. For example household deposits with banks are classified to household sector assets and bank sector liabilities as a party/counterparty pair. The double classification is applied symmetrically for parties and counterparties to flow or positions. Also, although non-residents are not strictly a “sector” it is useful to consider all financial positions, transactions and other flows between residents and non-residents as involving a non-resident as if the non-residents were a sector called “Rest of World”. It should be noted that the Financial Accounts are compiled at a greater level of detail for the Financial Corporations Sector than the rest of the national accounts with regard to types of financial corporation, but without the public/private and level of government dimensions. The full building block structure employed in the Financial accounts is listed in the following:
63 This sector consists of all resident corporations and notional institutional units mainly engaged in the production of market goods and/or non-financial services and holding companies with mainly non-financial corporations as subsidiaries. Also included are NPIs that mainly engage in market production of goods and non-financial services, and investment funds investing in predominantly non-financial assets such as infrastructure and property.
Non-Financial Investment Funds
64 This class consists of all non-financial investment funds. These are collective investment schemes, such as trusts or corporations. They raise funds by issuing shares or units to the public, either via a prospectus or a distribution channel such as a platform. Investors are able to dispose of their holdings through well developed secondary markets such as the stock exchange or through readily accessible redemption facilities. The investment funds pool and invest in predominantly long-term non-financial assets such as property or infrastructure. Usually the management of the funds is undertaken by licensed fund managers external to the fund.
Other Private Non-Financial Corporations
65 This class consists of private sector controlled non-financial corporations mainly engaged in the production of market goods and/or non-financial services, other than non-financial investment funds. Non-financial corporations controlled by non-residents are classified here.
National Public Non-Financial Corporations
66 This class consists of non-financial corporations mainly engaged in the production of market goods and/or non-financial services, other than non-financial investment funds, controlled by the Commonwealth Government or any other general government body operating nationally, such as public sector universities.
State and Local Public Non-Financial Corporations
67 This class consists of non-financial corporations mainly engaged in the production of market goods and/or non-financial services, other than non-financial investment funds, controlled by State or Local general government body.
68 This sector consists of all resident corporations and notional institutional units mainly engaged in financial intermediation and provision of auxiliary financial services. Holding companies with mainly financial corporations as subsidiaries are also included, as are market NPIs that mainly engage in financial intermediation or production of auxiliary financial services.
69 Financial intermediaries are institutional units that engage in financial transactions in open markets by incurring liabilities for the purpose of acquiring financial assets.
Reserve Bank of Australia
70 This class includes only the RBA, which has responsibility for monetary policy, issuing banknote currency, holding Australia's international reserves, and providing banking services to the Commonwealth.
71 Deposit-taking corporations except the central bank have financial intermediation as their principal activity. To this end, they have liabilities in the form of deposits or financial instruments (such as short-term certificates of deposit) that are close substitutes for deposits. The liabilities of deposit taking corporations are typically included in measures of money broadly defined.
72 In general, the following financial intermediaries are classified in this sub-sector:
73 The Reserve Bank of Australia (RBA) includes three types of financial institution in their measures of broad money: APRA-licenced banks, other APRA-supervised authorised depository institutions, and money market investment funds. Because of the size and importance of the banks in Australia ABS compiles data for banks separately. 2008 SNA treats retained earnings of investment funds differently to those of corporations, and therefore there are some advantages in identifying money market investment funds separately from other broad money institutions. Thus there is a residual sector “other depository institutions” that includes non-bank, and other than money market investment funds. In principle, data can be compiled from the financial accounts for the equivalent of the RBA broad money institutions by consolidating banks, other depository corporations and money market investment funds.
74 This class consists of all financial resident financial corporations and notional institutional units which are licensed to operate as banks. They issue liabilities in the form of deposits or deposit substitutes such as short term certificates. Subsidiaries with a banking licence of foreign banks and licensed branches of foreign banks are included here.
Other Depository Corporations
75 This class consists of all authorised depository institutions other than those that are categorised as banks. Depository corporations have liabilities in the form of deposits or deposit substitutes such as short term certificates. This class includes building societies, credit unions, registered financial corporations (RFCs) such as finance companies and money-market dealers and special service corporations but excludes intra-group financiers. “Authorised” in this context means authorised by the APRA.
76 This class consists of all funds that provide retirement benefits for specific groups of people. They own assets and liabilities and undertake financial transactions in the market. Included are Approved deposit funds (superannuation), Autonomous funds established for the benefit of public sector employees, Superannuation funds that are regarded as complying funds for the purposes of the Superannuation Industry Supervision Act. Superannuation funds supervised by APRA and those supervised by the Australian Tax Office (ATO) are included.
Life Insurance Corporations
77 This class consists of all corporations supervised by APRA which provide life insurance. It includes the life insurance business of Friendly Societies.
Non-Life Insurance Corporations
78 This class consists of all corporations that provide insurance cover (other than life insurance), including reinsurance services provided to other insurance corporations. APRA supervises most private sector insurers (except Health Insurers) and collects data for public sector insurers. Health Insurers data is provided by the Private Health Insurance administrative council (PHIAC).
Financial Investment Funds
79 One of the changes introduced with 2008 SNA is the treatment of retained earnings of investment funds. It was argued that investors in funds can chose to withdraw earnings or reinvest earnings by withdrawing some of their equity or leaving their investment intact. In other words investors have control over earnings distribution decisions. Given these circumstances 2008 SNA recommends that any earnings an investment fund retains, that it does not distribute, be deemed to have been distributed and reinvested. To support this treatment separate identification of investment funds was also recommended.
80 2008 SNA offers little guidance on specific criteria for determining if an institution qualifies as an investment fund. To implement the notion for Australian conditions ABS decided, in consultation with a range of users, that in order to qualify as an investment fund, the institution must:
81 2008 SNA recommends that investment funds be classified to either Money Market Funds if their liabilities are a close substitute for deposits, or Non Money Market Funds if their liabilities are not a close substitute for deposits. However, ABS disagrees that investment funds whose main assets are real estate or other non-financial assets, and whose income is from rentals or tolls rather than investment earnings should be classified as financial corporations. Such investment funds are classified to a separate class of non-financial corporation.
82 In principle, a consolidated investment fund sector could be compiled by consolidating data for the three classes of investment funds included in the financial accounts.
Money Market Funds
83 This class consists of all money market funds. These are collective investment schemes, such as cash management trusts and cash common funds, that are constituted as legal entities. They raise funds by issuing shares or units to the public, either via a prospectus or a distribution channel such as a platform. The proceeds are invested primarily in money market instruments, money market shares/units, and transferable debt instruments with a residual maturity of less than one year, bank deposits, and instruments that pursue a rate of return that approaches the interest rates of money market instruments.
84 Money market fund shares or units may be regarded as a close substitute for deposits. The class includes Cash common funds, Cash management trusts and Money market funds.
Non-Money Market Financial Investment Funds
85 This class consists of all non-money market investment funds. These are collective investment schemes, such as trusts or corporations, which are constituted as legal entities. They raise funds by issuing shares or units to the public, either via a prospectus or a distribution channel such as a platform. The proceeds are used to purchase financial assets. The assets are owned by the investment fund, and usually managed by licensed fund managers external to the fund.
86 Non-money market investment fund shares or units are not close substitutes for deposits.
87 Investors are able to dispose of their units/shares on a well developed secondary market such as a stock exchange or through readily accessible redemption facilities. The class includes:
88 Excluded are:
89 This class consists of units which pool various types of assets such as residential mortgages, commercial property loans and credit card debt, and package them as collateral backing for bonds or short-term debt securities, referred to as asset backed securities, which are then sold to investors. There are a number of issues of detail concerning the classification of institutions as securitisers, including the nature of the “packaging”, how funds raised by issuing securities offshore are channelled back to the vehicle holding the assets, and separating securitisation specialist vehicles from more general financiers such as Registered Financial Corporations. Readers are referred to Assets and Liabilities of Australian Securitisers (cat no. 5232.0.55.001) for a discussion of these issues.
Other Financial Intermediaries
90 This class consists of all financial intermediaries not elsewhere classified. Included in this class are various housing finance schemes established by state governments to assist first home buyers and development funds and depository funds operated by religious institutions. Included are:
91 This class consists of all units providing auxiliary financial services that are closely related to, and designed to facilitate, financial intermediation. Units in this class are not financial intermediaries because they do not incur liabilities. Included are:
Captive Financial Institutions and Money Lenders
92 Captive financial institutions are characterised by having a balance sheet holding financial assets, usually on behalf of other companies. These institutions are usually legal entities such as corporations, trusts, or partnerships established by their parent unit for a specific and limited purpose. Captives typically have little or no employment or operations and usually do not undertake significant production.
93 Money lenders are units providing financial services where most of either their assets or liabilities are not transacted on open financial markets. Also included are units which provide financial services exclusively from their own funds, or funds provided by a sponsor, to a range of clients and incur the financial risk of the debtor defaulting.
Central Borrowing Authorities
94 This class consists of all Central Borrowing Authorities (CBAs) established by each state and territory government. CBAs primarily provide finance for public corporations and notional institutional units and other units owned or controlled by the government. They also arrange the investment of these unit's surplus funds. CBAs raise funds predominantly by issuing securities. They also engage in other financial intermediation activity for investment purposes, and may participate in the financial management activities of the parent government.
Money Lenders and Other Captive Financial Institutions
95 This class consists of units providing financial services, except CBAs, where most of either their assets or liabilities are not transacted on open financial markets. Also included here are units which provide financial services exclusively from their own funds, or funds provided by a sponsor, to a range of clients and incur the financial risk of the debtor defaulting. The class includes:
96 This class consists of government units of the Australian Government, each state and territory government, and all local government authorities. It includes:
97 It should be noted that Government owned corporations and notional institutional units engaged in market production are included in the relevant classes in Sector 1 Non-Financial Corporations or Sector 2 Financial Corporations.
National General Government
98 This class consists of government units of the Australian Government, and any other government units acting nationally such as courts and Government departments.
State and Local General Government
99 This class consists of government units of each state and territory government, and all local government authorities.
HOUSEHOLDS and NON-PROFIT INSTITUTIONS SERVING HOUSEHOLDS
100 This class consists of all resident households. Included are all unincorporated enterprises that are owned and controlled by households, other than those which are recognised as notional institutional units. Also included are Non-Profit Institutions that operate mainly on a non-market basis, that is dispose of their output at economically insignificant prices and cover their costs with grants and donations. The sector includes:
101 It should be noted that Unincorporated enterprises which qualify as notional institutional units are included in the relevant classes in Sector 1 Non-Financial Corporations and Sector 2 Financial Corporations.
REST OF THE WORLD
102 This class consists of all non-resident units that enter into transactions with or have financial positions involving Australian resident units.
FINANCIAL ASSETS AND LIABILITIES
103 The following descriptions of financial asset classes are quoted from the System of National Accounts, 2008 (2008 SNA).
104 As described in chapter 3, an asset is defined as follows. An asset is a store of value representing a benefit or series of benefits accruing to the economic owner by holding or using the entity over a period of time. It is a means of transferring value from one accounting period to another.
105 Benefits are exchanged by means of payments. From this a financial claim, and hence a liability, can be defined. There are no non-financial liabilities recognised in the System, thus the term liability necessarily refers to a liability that is financial in nature.
106 A liability is established when one unit (the debtor) is obliged, under specific circumstances, to provide a payment or series of payments to another unit (the creditor). The most common circumstance in which a liability is established is a legally binding contract that specifies the terms and conditions of the payment(s) to be made and payment according to the contract is unconditional.
107 In addition, a liability may be established not by contract but by long and well-recognised custom that is not easily refuted. In these cases, the creditor has a valid expectation of payment, despite the lack of a legally binding contract. Such liabilities are called constructive liabilities.
108 Whenever either of these types of liability exists, there is a corresponding financial claim that the creditor has against the debtor. A financial claim is the payment or series of payments due to the creditor by the debtor under the terms of a liability. Like the liabilities, the claims are unconditional. In addition, a financial claim may exist that entitles the creditor to demand payment from the debtor but whereas the payment by the debtor is unconditional if demanded, the demand itself is discretionary on the part of the creditor.
109 Financial assets consist of all financial claims plus gold bullion held by monetary authorities as a reserve asset and shares or other equity in corporations. Gold bullion held by monetary authorities as a reserve asset is treated as a financial asset even though the holders do not have a claim on other designated units. Shares are treated as financial assets even though the financial claim their holders have on the corporation is not a fixed or predetermined monetary amount.
110 Because of the symmetry of financial claims and liabilities, the same classification can be used to portray both assets and liabilities. Further, the same classification is used in all accumulation accounts for financial transactions. Within the System, the term “instrument” may be used to relate to the asset or liability aspect of an item on the financial balance sheet.
111 The ABS financial asset classification follows that recommended in 2008 SNA with some adaptations. Additional classification points are employed to provide more detail for debt securities to show “domicility” of securities (issued in Australia or issued offshore) and for short-term securities to discriminate between bills of exchange (three name paper) and other securities (one name paper). In some cases the 2008 SNA classification embeds counterparty sector information that more properly belongs to the sector classification, and is redundant in the Australian implementation, for example F221 Interbank positions. There are some 2008 SNA classification points that are combined for Australia, because of lack of data or workload considerations, for example the discrimination between shares and other equity. The following table shows the 2008 SNA classification and the corresponding ABS classification.
112 The following descriptions of financial asset classes are quoted from the System of National Accounts, 2008 (2008 SNA).
Monetary gold and SDRs
113 Monetary gold and Special Drawing Rights (SDRs) issued by the IMF are assets that are normally held only by monetary authorities.
114 Monetary gold is gold to which the monetary authorities (or others who are subject to the effective control of the monetary authorities) have title and is held as a reserve assets. It comprises gold bullion (including gold held in allocated gold accounts) and unallocated gold accounts with non-residents that give title to claim the delivery of gold. All monetary gold is included in reserve assets or is held by international financial organizations. Only gold that is held as a financial asset and as a component of foreign reserves is classified as monetary gold. Therefore, except in limited institutional circumstances, gold can be a financial asset only for the central bank or central government. The ASNA treatment of monetary gold differs from that outlined in 2008 SNA in that a liability of the rest of the world is imputed.
115 Special Drawing Rights (SDRs) are international reserve assets created by the International Monetary Fund (IMF) and allocated to its members to supplement existing reserve assets. The Special Drawing Rights Department of the IMF manages reserve assets by allocating SDRs among member countries of the IMF and certain international agencies (collectively known as the participants). SDRs are held exclusively by official holders, which are central banks and certain other international agencies, and are transferable among participants and other official holders. SDR holdings represent each holder’s assured and unconditional right to obtain other reserve assets, especially foreign exchange, from other IMF members. SDRs are assets with matching liabilities but the assets represent claims on the participants collectively and not on the IMF.
116 Currency consists of notes and coins that are of fixed nominal values and are issued or authorised by the central bank or government. (Commemorative coins that are not actually in circulation should be excluded as should unissued or demonetised currency.) A distinction should be drawn between domestic currency (that is, currency that is the liability of resident units, such as the central bank, other banks and central government) and foreign currencies that are liabilities of non-resident units (such as foreign central banks, other banks and governments). All sectors may hold currency as assets, but normally only central banks and government may issue currency. In some countries, commercial banks are able to issue currency under the authorisation of the central bank or government.
117 For Australia the currency asset refers solely to domestic currency. There is little foreign currency in general circulation, and significant holdings are classified as foreign deposits.
118 2008 SNA does not provide a precise definition of a deposit. As a result the distinction between deposits and loans in the financial accounts is made by the convention that deposit liabilities can only be incurred by institutions included in RBA broad money, and therefore their asset counterpart is similarly restricted. Additionally, the conventions that all account balances (not evidenced by a security) between broad money institutions are classified as, deposits, and that all domestic non-security borrowings by broad money institutions are classified as deposits are adopted. As a result of these conventions there are some classes of financial asset that may be described as deposits, such as account balances at State Treasuries, but are classified as loans in the financial accounts.
119 In the Financial Accounts deposits are further classified into transferable deposits and other deposits.
120 The following descriptions of financial asset classes are quoted from the System of National Accounts, 2008 (2008 SNA).
121 Transferable deposits comprise all deposits that are exchangeable for banknotes and coins on demand at par and without penalty or restriction and directly usable for making payments by cheque, draft, giro order, direct debit/credit, or other direct payment facility.
122 Other deposits comprise all claims, other than transferable deposits, that are represented by evidence of deposit. Typical forms of deposits that should be included under this classification are savings deposits (which are always non-transferable), fixed-term deposits and non-negotiable certificates of deposit. The category also covers shares or similar evidence of deposit issued by savings and loan associations, building societies, credit unions and the like. Deposits of limited transferability that are excluded from the category of transferable deposits are included here. Claims on the IMF that are components of international reserves and are not evidenced by loans should be recorded in other deposits. Repayable margin payments in cash related to financial derivative contracts are included in other deposits only when the counterparty is a broad money institution, otherwise it is included as a loan.
123 Debt securities are negotiable instruments serving as evidence of a debt. They include bills, bonds, certificates of deposit, commercial paper, debentures, asset-backed securities, and similar instruments normally traded in the financial markets. Bills are defined as securities that give the holders the unconditional rights to receive stated fixed sums on a specified date. Bills are issued and usually traded in organised markets at discounts to face value that depend on the rate of interest and the time to maturity. Examples of short-term securities are Treasury bills, negotiable certificate of deposit, bankers’ acceptances and commercial paper. Bonds and debentures are securities that give the holders the unconditional right to fixed money incomes or contractually determined variable money incomes, that is, the earning of interest is not dependent on earnings of the debtors. Bonds and debentures also give holders the unconditional rights to fixed sums as payments to the creditor on a specified date or dates.
124 A supplementary sub-classification of debt securities by maturity into short-term and long-term should be based on the following criteria.
Short-term Debt Securities
125 For Australia most short-term debt securities on issue are discount instruments (the issue value is lower than the face value, the difference representing interest payable) with an original term to maturity ranging between 30 to 180 days. There are two basic types of securities: bills of exchange and other securities labelled one name paper by ABS.
Bills of Exchange
126 2008 SNA uses the term “bankers acceptance” to describe the instrument known in Australia as a bill of exchange. The following descriptions of financial asset classes are quoted from the System of National Accounts, 2008 (2008 SNA).
127 A banker’s acceptance involves the acceptance by a financial corporation, in return for a fee, of a draft or bill of exchange and the unconditional promise to pay a specific amount at a specified date. Much international trade is financed this way. Bankers’ acceptances are classified under the category of debt securities. The banker’s acceptance represents an unconditional claim on the part of the holder and an unconditional liability on the part of the accepting financial corporation; the financial corporation’s counterpart asset is a claim on its customer. Bankers’ acceptances are treated as financial assets from the time of acceptance, even though funds may not be exchanged until a later stage.
128 In Australia bills of exchange may have 3 parties to the contract, the drawer, the acceptor and the endorser (holder), hence also being known as “3 name paper”. The instrument is used not only for international trade finance, but also for liquidity management by banks, money market dealers and corporate treasuries. Because of its use and characteristics ABS compiles data for bills of exchange separately from other short-term debt securities. The data cover only those bills accepted by Australian residents.
One Name Paper
129 In contrast to bills of exchange one name paper is the liability of a single issuer and does not rely on the credit enhancement provided by acceptance. Examples are Treasury notes (issued by the Commonwealth Government), short-term negotiable bank certificates of deposit, and short-term asset-backed securities and short-term debt issued by major corporations.
130 The data is further classified by “domicility”, that is the market into which the issue was made, being in Australia or Offshore.
Long-term Debt Securities
131 Long-term debt securities include those securities that have an original maturity of more than one year. Claims with optional maturity dates, the latest of which is more than one year away, and claims with indefinite maturity dates should be classified as long-term. Many bonds on issue in Australia pay interest at a set % of face value every six months (know as “coupon interest) for the life of the bond. Such bonds are known as fixed interest bonds. However, there are a significant amount of variable rate bonds and some deep discount (or zero coupon) bonds on issue. Some other characteristics of bonds are discussed in 2008 SNA. The following descriptions of financial asset classes are quoted from the System of National Accounts, 2008 (2008 SNA).
132 Non-participating preferred stocks or shares are those that pay a fixed income but do not provide for participation in the distribution of the residual value of an incorporated enterprise on dissolution. These shares are classified as debt securities. Bonds that are convertible into equity should also be classified in this category prior to the time that they are converted.
133 Asset-backed securities and collateralised debt obligations are arrangements under which payments of interest and principal are backed by payments on specified assets or income streams. Securitisation may also be used as a term to describe this process. Asset-backed securities may be issued by a specific holding unit or vehicle, which issues securities that are sold to raise funds to pay the originator for the underlying assets. Asset-backed securities are classified as debt securities because the security issuers have a requirement to make payments, while the holders do not have a residual claim on the underlying assets; if they did, the instrument would be equity or mutual funds shares. Asset-backed securities are backed by various types of financial assets, for example, mortgages and credit card loans.
134 The data is further classified by “domicility”, that is the market into which the issue was made, being in Australia or Offshore.
Loans and Placements
135 Loans are financial assets that are created when a creditor lends funds directly to a debtor, and are evidenced by documents that are not negotiable.
136 The category of loans includes overdrafts, instalment loans, hire-purchase credit and loans to finance trade credit. Claims on or liabilities to the IMF that are in the form of loans are also included. An overdraft arising from the overdraft facility of a transferable deposit account is classified as a loan. However, undrawn lines of credit are not recognised as a liability as they are contingent. Financing by means of a financial lease may also be classified as loans.
137 Placements are customers’ account balances with entities not regarded as deposit-taking institutions. Examples are account balances of State and Local public non-financial corporations with their Central borrowing authorities, of public sector pension funds with their State Treasuries, and 11 am money placed with corporate treasuries. As discussed under the deposits category, there is no clear legal distinction between loans and deposits, therefore to avoid confusion the ABS classifies by convention all interbank position as deposits, and this is in accordance with 2008 SNA.
138 Loans may be divided, on a supplementary basis, between short- and long-term loans. Short-term loans comprise loans that have an original maturity of one year or less. Loans repayable on the demand of the creditor should be classified as short-term even when these loans are expected to be outstanding for more than one year. In the financial accounts, this includes credit cards and other forms of revolving credit as well as some placements between state governments and its respective central borrowing authority.
139 Long-term loans comprise loans that have an original maturity of more than one year and which are not classified as short-term. Typically this category includes residential mortgages,
Equity and investment fund shares
140 Equity and investment fund shares have the distinguishing feature that the holders own a residual claim on the assets of the institutional unit that issued the instrument. Equity represents the owner’s funds in the institutional unit. In contrast to debt, equity does not generally provide the owner with a right to a predetermined amount or an amount determined according to a fixed formula.
141 Equity comprises all instruments and records acknowledging claims on the residual value of a corporation or quasi corporation after the claims of all creditors have been met. Equity is treated as a liability of the issuing institutional unit (a corporation or other unit).
142 Ownership of equity in legal entities is usually evidenced by shares, stocks, participations, depository receipts, or similar documents. Shares and stocks have the same meaning, while depository receipts are securities that facilitate ownership of securities listed in other economies; a depository issues receipts listed on one exchange that represent ownership of securities listed on another exchange. Participating preferred shares are those that provide for participation in the residual value on the dissolution of an incorporated enterprise. Such shares are also equity securities, whether or not the income is fixed or determined according to a formula. (Non-participating preferred shares, are treated as debt securities as explained above.)
143 Equities are sub-divided into: listed shares; and unlisted shares. Both listed and unlisted shares are negotiable and are therefore equity securities.
144 2008 SNA also recommends that equity other than shares be tabulated separately. The data requirements and workloads associated with this recommendation are such that ABS has not followed it. SNA “Other equity” is combined with shares data in the financial accounts. In practice this means units in unit trusts are treated as shares.
Listed shares and other equities
145 Listed shares are equity securities listed on an exchange. They are also referred to as quoted shares. The existence of quoted prices of shares listed on an exchange means that current market prices are usually readily available.
146 In ABS statistics listed shares are restricted to those equities listed on the Australian Securities Exchanges (ASX). Data sources cannot support classification of foreign shares to listed or unlisted categories.
Unlisted shares and other equities
147 Unlisted shares are equity securities not listed on an exchange. Unlisted shares can also be called private equity; venture capital usually takes this form. Unlisted shares tend to be issued by subsidiaries and smaller scale businesses and typically have different regulatory requirements but neither qualification is necessarily the case.
Insurance, pension and standardised guarantee schemes
148 Insurance, pension and standardised guarantees schemes all function as a form of income redistribution mediated by financial institutions. The redistribution may be between individual institutional units in the same period or for the same institutional unit over different periods or a combination of the two. Units participating in the schemes contribute to them and may receive benefits (or have claims settled) in the same or later periods. While they hold the funds, insurance corporations invest them on behalf of the participants. The part of the investment income that is distributed to the participants as property income is returned as extra contributions. In all cases, net contributions or premiums are defined as actual contributions or premiums plus distributed property income less the service charge retained by the financial institution concerned. Entries in the financial account, therefore, reflect the difference between net contributions or net premiums paid to the schemes less benefits and claims paid out. Significant other additions to the reserves of the schemes come via other changes in the volume of assets and especially holding gains. There is more extensive discussion on the recording of all these schemes in chapter 17 (of 2008 SNA).
149 There are five sorts of reserves applicable to insurance, pension and standardised guarantees schemes. These are non-life insurance technical reserves, life insurance and annuities entitlements, pension entitlements, claims of pension funds on the sponsor and provisions for calls under standardised guarantees.
150 ABS does not implement the five classification points as instrument classifications. Life insurance and annuity entitlements, pension entitlements and claims of pension funds on the sponsor are grouped as one instrument concerned mainly with retirement incomes. Context is provided by the double classification to sector of issuer/holder. Casualty insurance and standardised guarantee claims are separately classified.
Prepayments of premiums and reserves
151 Non-life insurance technical reserves consist of prepayments of net premiums and provisions to meet outstanding non-life insurance claims. They consist of premiums paid but not yet earned (called unearned premiums) and claims due but not yet settled, including cases where the amount is in dispute or the event leading to the claim has not yet been reported (called claims outstanding). The only transactions for non-life insurance technical provisions recorded in the financial account are accrual adjustments.
Net equity in reserves
152 Net equity in reserves represents policy-holders’ claims on life insurance businesses and pension funds. These technical reserves are calculated by deducting all repayable liabilities from the value of total assets. Life insurance and annuities entitlements show the extent of financial claims policy holders have against an enterprise offering life insurance or the provision of annuities. The only transaction for life insurance and annuity entitlements recorded in the financial account is the difference between net premiums receivable and claims payable.
153 Pension entitlements show the extent of financial claims both existing and future pensioners hold against either their employer or a fund designated by the employer to pay pensions earned as part of a compensation agreement between the employer and employee. The only transaction for pension entitlements recorded in the financial account is the difference between net contributions receivable and benefits payable. The increase in pension entitlements shown in the financial account matches the entry in the use of income accounts for the change in pension entitlements.
154 An employer may contract with another unit to manage the pension funds for his employees. Depending on the nature of the agreement between them, the contractor may have an obligation to repay any surplus funds or, more probably, have a claim on the employer for any deficit. When this occurs, the claim of the pension fund on the employer or other sponsor is shown under this heading. (The entry may be positive if the pension fund makes more investment income from the pension entitlements it holds than is necessary to cover the increase in entitlements and the difference is due to the sponsor of the schemes.)
155 Unfunded superannuation claims represent the liabilities of the General Government to public sector employees in respect of unfunded retirement benefits. In Australia most governments operate, or used to operate, super schemes for their employees that are unfunded or only partly funded. Some government unfunded super schemes have one component funded through direct employee contributions, and another (the employers contribution) which is unfunded. Other government unfunded super schemes comprise only an unfunded employer component. The outstanding liability in relation to unfunded super claims is recorded as a liability in the General Government sectors and as an asset in the Household sector. The main data on National General Government by counterparties are obtained from balance sheet information from commonwealth Government ledgers from Department of Finance and Administration. The main data on State and Local General Government by counterparties are obtained from Government Finance Statistics.
Derivatives and employee stock options
156 Financial derivatives are financial instruments that are linked to a specific financial instrument or indicator or commodity, through which specific financial risks can be traded in financial markets in their own right. The value of a financial derivative derives from the price of the underlying item: the reference price. The reference price may relate to a commodity, a financial asset, an interest rate, an exchange rate, another derivative or a spread between two prices. The derivative contract may also refer to an index or a basket of prices.
157 An employee stock option is an agreement made on a given date (the “grant” date) under which an employee may purchase a given number of shares of the employer’s stock at a stated price (the “strike” price) either at a stated time (the “vesting” date) or within a period of time (the “exercise” period) immediately following the vesting date. Transactions in employee stock options are recorded in the financial account as the counterpart to the element of compensation of employees represented by the value of the stock option.
158 In the Australian financial accounts data are not available to separately classify derivatives by type.
159 Margins are payments of cash or collateral that cover actual or potential obligations under financial derivatives, especially futures or exchange-traded options. Repayable margins consist of deposits or other collateral deposited to protect a counterparty against default risk, but that remain under the ownership of the unit that placed the margins. Although its use may be restricted, a deposit is classified as repayable if the depositor retains the risks and rewards of ownership.
160 Repayable margin payments in cash are transactions in deposits, not transactions in a financial derivative. The depositor has a claim on the exchange or other institution holding the deposit. Some compilers may prefer to classify these margins within other accounts receivable/payable in order to reserve the term deposits for monetary aggregates.
161 In the Australian financial accounts margins on derivatives are recorded as loans, except where the broker is a deposit taking institution, in which case the margin will be classified as a deposit.
162 A repurchase agreement (repo) involves the sale of securities or other assets with a commitment to repurchase equivalent assets at a specified date. The buyer may on-sell these securities to another party. The 2008 SNA treats repos as collateralised loans or as other deposits if repos involve liabilities classified under national measures of broad money. The collateralised loan treatment is not supported by the ABS. The ABS maintains that the best statistical representation of a repo is that of a sale of securities, with the obligation to sell/buy back similar securities recorded as a forward contract, i.e. a form of derivative. This treatment has the advantage of unduplicated recording of securities assets. The ABS maintains that the best statistical representation of a repo is that of a sale of securities, with the obligation to sell/buy back similar securities recorded as a forward contract, i.e. a form of derivative. This treatment has the advantage of unduplicated recording of securities assets.
Other accounts receivable/payable
163 In the Australian financial accounts it is not possible to separate the two categories of accounts payable/receivable discussed in 2008 SNA, or into short- and long-term
164 This category comprises trade credit for goods and services extended to corporations, government, NPISHs, households and the rest of the world, and advances for work that is in progress (if classified as such under inventories) or is to be undertaken. Trade credits and advances do not include loans to finance trade credit, which are classified as loans.
165 This category includes accounts receivable and payable, other than those described previously, that is the amounts are not related to the provision of goods and services. It covers amounts related to taxes, dividends, purchases and sales of securities, rent, wages and salaries, and social contributions. Interest that accrues but is not paid is included in this item only if the accrued interest is not added to the value of the asset on which the interest is payable (as is usually the case).
SOURCES OF DATA
166 The quarterly sectoral capital accounts in the flow of funds matrices are prepared using a variety of indicators to dissect annual estimates based on survey data. Some of the indicators used are known to be of poor quality and hence these estimates should be used with caution.
167 Most of the financial data in this publication are derived from statistical surveys conducted by the ABS. Some other data sources are used particularly for valuation adjustments. The information sources for each of the sectors and subsectors are described below. Because there are two parties to financial transactions, 'counterpart' information about groups of units can be derived from the records of other units with which they have engaged in financial transactions. Instances of use of counterpart information in compiling the statistics are noted in the following text.
Non-financial investment funds
168 Balance sheet data for listed and unlisted property trusts which are open to the general public are obtained from an ABS quarterly survey of public unit trusts. Counterpart information is sourced from administrative sources, market capitalisation information from the Australian Stock Exchange, and aggregate data from the ABS Survey of International Investment.
Private other non-financial corporations
169 Because there are so many of these enterprises, estimates for this sector are derived from data obtained from several different sources, including counterpart information from banks, market capitalisation information from the Australian Stock Exchange, and aggregate data from the ABS Survey of International Investment. Balance sheet data are obtained directly from the largest company groups.
National public non-financial corporations
170 The largest of these report in the ABS's quarterly Survey of Financial Information.
State and local public non-financial corporations
171 As most financing by these bodies is conducted through the central borrowing authorities (which report to the ABS), counterpart information is sourced for all except the largest State corporations, which provide quarterly balance sheet information to the ABS. Annual reports of the State and Territory housing commissions are used to estimate their financial position.
172 The Reserve Bank provides a full balance sheet each quarter. However, there are timing and other differences with other information available to the ABS. To achieve the necessary consistency between the different data sources, the ABS has used some counterpart information extensively in preparing the estimates for this sub-sector. Accordingly, the information presented in this publication for the Reserve Bank does not reflect the legal position of the Bank. The main data difficulties are as follows.
173 At the end of each month each bank provides APRA with a balance sheet which consolidates only the activities of its domestic banking businesses. (Other domestic businesses of banks such as their finance companies report separately and are classified to the appropriate subsector).
Other depository corporations
174 Arrangements for reporting data have varied over the years. Current reporting arrangements are:
175 Arrangements for reporting of data have varied over the years. Current arrangements are:
176 These data are supplemented by an ABS collection from professional fund managers, which report the quarterly asset breakdown of the pension funds they manage (i.e. the indirectly invested funds).
Life insurance offices
177 The ABS Survey of Financial Information collects balance sheet information from the large life corporations. This information is supplemented by data provided by APRA, which requires all privately owned life insurance corporations to provide it with assets and liabilities information quarterly. Large friendly societies provide quarterly balance sheet information to the ABS.
Non-life insurance corporations
178 All private general insurance companies are required to provide a quarterly statement of assets and liabilities to APRA. The ABS uses this information, supplemented by its own quarterly survey of government-owned general insurers. Data for health insurance companies are estimated from annual statistics provided by the Private Health Insurance Administration Council (PHIAC).
Money market financial investments funds
179 Balance sheet data for money market financial investment funds are obtained from an ABS quarterly survey. Counterpart information is sourced from administrative sources, market capitalisation information from the Australian Stock Exchange, and aggregate data from the ABS Survey of International Investment.
Non-money market financial investment funds
180 Balance sheet data for non-money market financial investment funds are obtained from an ABS quarterly survey. Counterpart information is sourced from administrative sources, market capitalisation information from the Australian Stock Exchange, and aggregate data from the ABS Survey of International Investment.
Central borrowing authorities
181 Data are provided to the ABS on a quarterly basis by all central borrowing authorities.
182 Balance sheet data for securitisers are obtained from an ABS quarterly survey. Counterpart information is sourced from administrative sources and aggregate data from the ABS Survey of International Investment.
Other financial corporations
183 Balance sheet data for other financial corporations are obtained from an ABS quarterly survey. Counterpart information is sourced from administrative sources, market capitalisation information from the Australian Stock Exchange, and aggregate data from the ABS Survey of International Investment.
184 The various government-owned financial institutions included in this sector provide quarterly balance sheet information to the ABS.
185 Security brokers' own-account holdings of financial assets are estimated.
National general government
186 The asset profile for this subsector is prepared using information collected from:
State and local general government
187 Data for the State governments are obtained from the State Treasuries and state and Territory central borrowing authorities.
188 No data are collected for local governments, universities or other educational institutions as most of their funding comes from other government agencies and estimates are derived using counterpart information.
Households, including unincorporated enterprises
189 The ABS does not collect balance sheet information from households and small unincorporated businesses. Estimates for a large part of this sector are made using counterpart information and all other information for the sector is derived residually (i.e. as an amount that balances the tables).
190 The ABS has no information about households' holdings of notes and coin. The estimates that appear in these statistics are made by taking the value of notes and coin outside the banking system and allocating half of this amount to households and the other half to private non-financial corporations.
Rest of the world
191 The data for the rest of the world in Table 21 are financial transactions between residents of Australia and residents of the rest of the world. The flow of funds information for the rest of the world is similar to the data published as the financial account in Balance of Payments and International Investment Position, Australia (cat. no. 5302.0). The main source of data for the Balance of Payments financial account and the rest of the world sector in this publication is the ABS Survey of International Investment. In the Financial Accounts the information is presented from the point of view of non-residents; assets are not netted against liabilities (nor conversely).
192 The levels (stock) tables are prepared by gathering together balance sheet information from various sources and selecting the better estimates. As noted previously, a choice is often possible because different data sources provide alternative or counterpart measures of the same item. For example, borrowing by state owned non-financial corporations will be reported by the state central borrowing authorities or Treasuries as assets and by the non-financial corporations as liabilities. The subsector aggregates derived from these data do not agree because the ABS does not survey all state owned non-financial corporations. In this case, the data from the central borrowing authorities and Treasuries are therefore used to estimate both the asset and liability aspects of these borrowings.
193 After the levels data have been finalised, net financial transactions are derived by taking the difference between closing and opening levels of balance sheet items and, where possible, eliminating changes on the balance sheet caused by valuation effects such as exchange rate movements.
194 In some cases, directly-collected transactions data are used instead of deriving transactions from the difference in consecutive levels.
195 2008 SNA states explicitly that the national accounts should record transactions on an accrual basis (as opposed to a cash or 'due for payment' basis), to reflect the time when economic value is transferred rather than when cash relating to the transaction is paid or falls due for payment.
196 Furthermore, non-financial corporate enterprises may report on an accrual basis for the quarter that coincides with the end of their tax year (usually June), but are less likely to do so for the other quarters. This causes some distortion in the data for the two quarters surrounding the end of the tax year.
197 2008 SNA states that assets and liabilities are to be valued using a set of prices that are current on the date to which the balance sheet relates and that refer to specific assets. These prices should be observable prices on markets whenever such prices are available for the assets and liabilities in question.
198 In these statistics tradeable securities, which include shares listed on the Australian Securities Exchange (ASX) and debt securities traded on organised markets, are valued at market prices.
199 Other securities are assigned estimated market values. For example, equity not listed on ASX is valued on the basis of value of total assets of the enterprise in question less the value of any repayable liabilities.
200 Respondents to ABS surveys are asked to mark each derivative contract to net market value. Such values may result in net asset or liability value being recorded for the contract.
Valuation and Other Accounting Rules
201 2008 SNA makes recommendations about valuation and other accounting rules to ensure consistency across the various accounts.
Consistency with Commercial Accounting Standards
202 The SNA builds on commercial accounting standards but has some important differences worth noting. A significant difference is that the commercial accounting standards are based on a double entry method, whilst the SNA employs a quadruple entry method. This arises from the SNA requirement to treat transactions, other flows and positions symmetrically for the parties involved. Thus a sale of goods in exchange for cash involves four entries in the SNA accounts, all of the same value: for the seller the entries required are + sales (income account), + cash (financial account) and for the purchaser + purchases (expenditure), - cash (financial account). From this example it can be seen that income = expenditure and that financial transactions (net lending) sums to zero as a result of the exchange, all for the same time period. By contrast the commercial accounting standards address the entries for the purchaser and seller as separate phenomena with no requirement for consistency of recognition, valuation or timing.
203 Another way of looking at the same question is that the commercial accounting standards employ a different accounting entity to the SNA: commercial accounting is concerned with outcomes for individual companies or groupings of companies, governments, unincorporated entities etc. SNA is concerned with outcomes for the economy as a whole and its institutional sectors. Some important considerations emerge from this difference. Commercial accounting standards can be a starting point for assembly of data in an SNA framework, but at some point measurement choices will be required between different views of the same transactions. A stark example is measurement of accrued tax liabilities of corporations, and accrued company tax revenue of government. In principle these should be the same, but the sum of the tax provisions of corporations is most unlikely to equal the value recorded by the government, due to many different people making different assumptions about the elements involved in estimating tax liability/revenue. Additionally, the assumptions made may not be in accordance with SNA accrual rules. It should be no surprise that the SNA estimates are often different to assessments made by both tax payers and tax receivers.
204 Further differences arise from the account structure. There are no direct equivalents in commercial accounting standards to the distinction between income, capital transactions and financial transactions on the one hand, and the distinction between transactions, revaluation and other changes of volume, on the other. Thus SNA requires "unbundling" and reclassification of transactions and other flows from entries in commercial accounting that may combine the various elements that impact commercial profits. In the context of the financial accounts these differences in objectives between commercial accounting and SNA can sometimes result in issues of provider burden when data are sought on an SNA basis from accounting systems not designed to support that objective. A stark example of this is accounting for financial derivatives, where commercial accounting concentrates on measuring net gains/losses (changes in value) from a portfolio rather than separating changes of value into income transactions, financial transactions and revaluation components required by SNA. Under these circumstances the national accountant has to resort to modelled estimates.
205 Associated with differences in income recognition are the differences in the treatment of “provisions” made in commercial accounts for future eventualities. Some of these provisions, for example provisions for employee leave entitlements, are recognised in SNA as actual accrued expenses. Others are less certain, and moreover, with the SNA requirement for symmetry between transactors the assessment of certainty, the recognition and/or valuation of the eventuality, is unlikely to be the same for the counterparties. An example of this is the treatment of possible impairments on loan assets. Many institutions make a general provision for loan losses based on known characteristics of the loan portfolio and its performance over time. Because the provision is general, the specific loan contracts, and therefore counterpart liability incurrers, are not identifiable, making it conceptually difficult to record such a provision in the SNA accounting structure. By contrast, specific provisions for impairment arising from poor performance of an individual loan contract are more certain as to likely occurrence and counterparty identification. Because of this the Australian financial accounts takes into account specific loan loss provisions in valuing loan portfolios and their counterparts, but not general loan loss provisions. Note this treatment varies from 2008 SNA which recommends recording loan portfolios and their counterparts at nominal values (i.e. not recognising any loan loss provisions).
206 Aggregation of financial data poses some questions. An aggregate derived by simple summation of, say, liabilities observations runs the risk of misinterpretation through double counting. Consider a State Treasury that borrows funds by issuing debt securities and on-lends them to other State government agencies. Summing the liabilities of all agencies and the Treasury for that State government will double count the borrowings. Two possible solutions to this problem include netting assets and liabilities for the State government and consolidation of assets and liabilities by eliminating asset/liability relationships between entities in the State government. Both solutions provide the correct aggregate result, but the process of netting results in a loss of explanatory detail, in this case by netting debt security liabilities with loan assets. ABS has preferred a consolidation procedure, even though more data is needed to support it.
207 Consolidation outcomes are sensitive to the domains within which the practice is to be pursued. In commercial accounting consolidation is usually undertaken to eliminate double counting in the aggregate accounts for a group of companies. That is the consolidation domain is determined by relatedness criteria specified in legislation and accounting standards. However, it is useful to form consolidation domains for economic analysis purposes based on other than relatedness criteria. In the formal sectoral presentation of the financial accounts all transactions and positions between entities in the same subsector or each successive aggregation of subsectors is eliminated. Consider a bank that incurs a deposit liability and in turn places the funds on deposit with another, but unrelated, bank. The question of “what is the value of bank sector deposits” is most properly answered from a sectoral behaviour point of view by consolidation (elimination) of the intra-bank sector deposit. One consequence of this type of consolidation is that aggregation of subsectors to broad sectors, say all subsectors of the financial corporations sector, will produce smaller results than the simple summation of the components. Consolidation of financial accounts for all domestic sectors to a whole of economy aggregate will result in an exact counterpart to the Rest of World accounts.
208 For some types of economic analysis the formal sectoral consolidation has some drawbacks. For financial market analysis, say, for determining potential for issuing various instruments, it is useful to know the gross rather than net size of the market. Thus for the financial accounts presentation of financial markets data the entries eliminated in the example given above are retained. The bank deposits markets table will disclose the value of bank deposits with banks.
209 It should be pointed out that the Australian financial accounts take consolidation practices further than 2008 SNA recommendations.
210 A key principle for 2008 SNA is to record transactions at the values that were actually exchanged and positions at realisable values rather than cost. In practice this means use of market valuation consistently. A consequence is the role that the revaluations account has in reconciling asset price changes during a period with stock values at the end of each period. In line with market valuation principles, assets denominated in foreign currency are valued by converting to domestic currency at prevailing foreign exchange rates.
211 For financial assets tradeable on active markets market valuation poses few measurement problems. However, for non-tradeable assets there are no observable market prices. Various proxies for market prices can be used, including pricing by analogy to a similar but tradeable asset and estimation of asset value by discounting expected future income streams over the life of the asset by an appropriate interest rate. For unlisted equity, market value may be proxied by netting the relevant entities known market asset values less known market values of repayable liabilities to derive a net asset value. In some cases there is little choice other than to use cost or nominal values.
The Effects of Market Practices
212 Certain market practices result in commercial accounting data that are difficult to interpret within an 2008 SNA accounting framework. These arise through differences in objectives and/or the requirements for symmetrical treatment and valuation under SNA that is not required under commercial accounting. Many of the difficulties arise from the general approach to commercial accounting known as “exposure accounting” or “hedge accounting”. Under this approach the emphasis is on the net effect of various contractual obligations on profits and net worth. While this is the standard objective of commercial accounting, the notion is extended by bundling together a contracts associated with a particular deal or strategy and recording the net results at that level of detail.
213 An example of this practice is accounting for contracts that involve foreign exchange risk, for example issue of debt security liabilities denominated in US dollars issued to investors in the USA, bundled with the contracts that hedge that foreign currency risk, for example a US dollar / Australian dollar financial derivative, negotiated with an Australian bank. The outcome of this bundling is that there is no foreign currency exposure resulting from the combination. The problem that bundling poses for recording in the financial accounts is that the it is netting two contracts with different contractual parties that are in different sectors (in this example they are in different countries) where one contract is a liability, and the other is in an asset position potentially. The bundled result cannot be sensibly aggregated with any particular asset class or under any sector classification, and hence cannot contribute usefully to economic analysis.
214 More extreme examples of exposure reporting may be imposed by some administrative/regulatory reporting regimes where the concern is risk assessment of individual corporations. An example of exposure reporting is classification of investments in equity securities, say units in an investment trust, to the asset class of the “underlying” risk, say, “real estate” if the major asset of the investment trust is real estate. The financial account are concerned with recording contractual obligations at current values and not with risk adjusted accounting.
215 Another example of bundling of contracts for a net result is the notion of structured finance, where various combinations of debt, equity and derivatives can be bundled to give a tailored outcome, quite often associated with tax effective outcomes. The results can also be represented as “hybrid” or “synthetic” securities. Another practice with similar aims is “stapled securities”.
216 Another set of practices that bundle together a number of contracts that may be represented as one are those of “stock lending” and “repurchase agreements”. Whilst stock lending and repurchase agreements are different types of arrangements, the impact on the financial accounts is essentially the same. Both involve the sale of a security with an obligation to reverse the transaction at a future date, thus imposing an obligation to sell back / buy back the same or similar securities on the parties. There are two ways of looking at this transaction: one is that economic effect where the arrangement looks like a loan of cash and the original security holder continues to have the benefits of ownership of the security sold; the other is the legalities of the arrangement where the parcel of securities change ownership and an additional forward contract comes into existence. In this instance 2008 SNA recommends the economic effect treatment, whereas ABS has treated such arrangements on the legalities, that is unbundling the component contracts to the arrangement. The reason for so-doing is that the securities originally “lent” can be on-sold to a third party. This will result in double counting of the same bundle of securities, and a difficult to explain negative security asset by the security borrower if the double count is to be avoided.
217 For the financial accounts the data in respect of structured products, bundled products and contracts reported under exposure methods is to unbundle and classify the components on the basis of the legalities of the situation, not the economic effect. The overall economic effect of such contracts will be reflected in the aggregate balancing items in the national accounts that will reflect accurately the operating surplus, property income flows, financial transactions, revaluations and net worth that result and also provide the basis for how those outcomes evolved.
Symmetric application of market valuations
218 The difference between commercial accounting standards and 2008 SNA with regards to the accounting entity (corporations/groups vs. sectors/economy) generates some tensions for data that have sensitive policy implications. An example of this is the accounting for government debt and interest in a situation where the debt is widely traded. The market value of fixed interest debt securities is sensitive to changes in the interest yield curve and the value will adjust such that effective yields on securities adjust to match those indicated by the market, that is the yield curve. This creates some tension about what valuation to use for government liabilities particularly when governments have no control of market dynamics resulting in yield curve changes and government revenue and expenditures are a legislated constraint, such as for EEC countries under the Maastricht Treaty.
219 The result of a long debate about this issue, is that 1993 SNA, and reaffirmed in 2008 SNA, recommends that interest on debt securities be recorded in accordance with the “debtor principle”. Under this principle, interest payments are the contractual payments evidenced by the “coupon” payable in these contracts. To the extent that coupon interest is not aligned with market yields, the market value of the debt securities will adjust, downwards if coupon is less than market yield and upwards if coupon is greater than market yield. There are some difficulties implementing the debtor principle for securities where the contractual interest is variable through referencing external indicators.
220 The alternative to the debtor principle is to use market values and interest yields consistently. This is called the “creditor principle” in the debate. Not only is the creditor principle conceptually coherent, it also copes with variable interest instruments. The adjustment in value of debt securities is seen as a financial transaction (new issue if increase, repayment if decrease) under this scenario. The downside is that government debt value and interest expenditure can change not through the activity of governments but by variations in the market. ABS will continue to apply the creditor principle in the national accounts as a whole, including the financial accounts.
ACCURACY OF THE ESTIMATES
221 Deficiencies in the capital account of the matrix: the estimates of saving shown in the capital account are derived residually as the balances in the national income account. Hence any errors and omissions in the estimates of income and expenditure are reflected as inaccuracies in the estimates of saving. Also, the estimates of inter-sectoral transfers of real estate and second-hand assets are known to be of poor quality.
222 Deficiencies in the coverage of financial surveys: The ABS does not presently collect balance sheet information from small non-financial corporations, solicitors' and similar trust funds, and financial auxiliaries (such as stock brokers), some of which buy securities on their own account. Although broad information reported by professional fund managers includes funds they invest on behalf of such investors, the fund managers provide asset profiles only for monies they invest on behalf of pension funds. If the coverage deficiency were not corrected it would cause errors in some of the estimates for the household sector. As an interim measure the ABS has made estimates for these unreported assets using the partial information reported by fund managers.
223 The ABS is aware of the following deficiencies in reported data:
224 Problems in estimating financial transactions from balance sheet information: The revaluation data available to the ABS for frequently traded securities are of reasonable quality. These include estimates for listed shares and Commonwealth and State government bonds/bills. The revaluation data available for securities that are less frequently traded, such as unlisted shares, are of only fair quality.
225 Accuracy of the estimates, conclusion: Despite the described problems, the ABS considers that these statistics are of an acceptable standard for the purposes they are intended to serve. An indication of the overall quality of the data can be gained by considering the levels information for the household sector (Table 20), which are judged by the ABS to be the poorest quality data in the publication. All the liabilities data are good quality counterpart data from the asset records of financial institutions. In addition, households' deposit and loan assets are measured directly elsewhere and 'counterparted' into this sector. Only households' holdings of tradeable securities are derived residually and so reflect errors and omissions in the estimates for the other sectors. Households' holdings of shares are the lowest grade estimate in these statistics. A high proportion of the household data are therefore of high quality despite being considered of poorer quality than the balance of the statistics.
Related statistics and articles
226 Related ABS publications which may also be of interest include:
227 Related articles are listed in the following table:
NOTES TO ASSIST INTERPRETATION OF SELECTED TABLES
228 An explanation of how to interpret the statistical tables is given below:
229 Table 1 (Credit Market Outstandings) of the financial accounts shows the key liabilities of each of the domestic non-financial sectors. Included are borrowings, debt securities, and equities.
230 All 'off-market' funding arrangements are excluded. For example:
231 Excluded also are non-conventional instruments, including:
232 This table, called Demand for Credit, is the flow equivalent of Table 1 and so has the same exclusions. It shows quarterly net raisings of debt and equity on conventional credit markets worldwide by each of the non-financial domestic sectors. The aggregate at the head of the table is a measure of the primary credit flow in Australia, that is, credit which is to be used primarily to finance non-financial outlays such as investment in plant and equipment.
233 These tables show the level (stock) of financial assets and liabilities of each domestic subsector of the economy at market prices. Since the aim of these tables is to present an analytically useful financial profile of each of the subsectors, they are consolidated to eliminate holdings of financial instruments by the subsector which issued them. For example, the block Bonds etc. in the table for Central borrowing authorities (Table 15) shows the stock of bonds etc. held as assets by this subsector. A central borrowing authority may be expected to hold long-term debt securities issued by other central borrowing authorities but these holdings are eliminated on consolidation (and the outstanding liability of this subsector for this instrument is reduced accordingly). In contrast, in the table called The Bonds Market (Table 28) a different basis of consolidation is used and these intra-sector holdings are shown (and shown to be substantial).
234 In Tables 3-20, the primary classification is the financial instrument (e.g. Currency and deposits) and the secondary classification is counterparty sector (e.g. currency and deposits accepted by: Banks).
235 Statistics for the financial assets and liabilities of subsectors of the non-financial public sector (Tables 5, 6, 18 and 19) are broadly comparable with statistics published in Government Finance Statistics, Australia (cat. no. 5501.0.55.001).
236 These tables now also include transactions. They show inter-sectoral transactions in financial assets and liabilities classified by financial instrument. Most instruments are disaggregated to show the subsector of the counterparty. For example, the line Loans and placements in the table for Other depository corporations (Table 9) shows the growth (or contraction) in lending by these financial institutions to the other subsectors.
237 In these tables, an entry without an arithmetic sign indicates a net increase in either financial assets or liabilities. An entry with a negative sign indicates a net decrease in financial assets or liabilities.
238 Australia's net international investment position-level of investment at end of period-as published in Balance of Payments and International Investment Position, Australia (cat. no. 5302.0) can be derived from Table 21.
239 Financial Assets and Liabilities of the Rest of the World. It is equal to total financial assets (of non-residents) less total liabilities (of non-residents).
240 When comparing the data in Tables 26 and 27 as published in cat. no. 5302.0 and data in Table 21 in this publication, it is important to note the following differences.
241 Note: In September quarter, 2009 the treatment of reinvested earnings that is applied in 2008 SNA and ABS balance of payments and international investment position statistics was adopted in the financial accounts and is applied throughout this publication.
242 This table presents the flow of funds matrix. The purpose of the matrix is to provide a framework for analysing the interrelationships between saving, capital formation and financial transactions in the economy. These national accounting relationships are shown in the accompanying diagram.
243 At the top of the matrix is a capital account. This shows the funds accumulated during the period by each of the sectors for the purchase of assets (Gross saving and capital transfers) together with estimates of expenditure on capital accumulation and the resulting positive or negative balance (Total net capital accumulation and net lending/net borrowing). A surplus in this account is called net lending; by convention a deficit (i.e. net borrowing) is shown as negative net lending.
244 The lower half of the matrix is called the financial account. This shows the net financial transactions taking place between sectors, classified broadly by financial instrument. These data are the most consolidated in the publication. All claims between entities within the same broad institutional sector (e.g. General government) are eliminated.
245 The lines under the heading Net incurrences of liabilities show the growth (or decline) in the market for each of the financial instruments during the period, by sector. The lines under the heading Net acquisition of financial assets show the increase (or decrease) of asset holdings by sector to accommodate the growth (or contraction) in the market.
246 In concept, a sector's Net lending/borrowing (in the capital account) should be the same as its Net change in financial position (in the financial account). Because this equality is unlikely to be realised in practice (due to the use of different sources of information to derive each aggregate) the item Net errors and omissions is included to show the difference between these alternative estimates of the same concept. This difference can be caused by errors and omissions in both the capital account and the financial account.
247 Given the accounting relationship between saving and net lending evident in the accompanying diagram, it is possible to use information from the financial accounts to derive an alternative measure of household saving to that published in the national income and expenditure accounts. This can be done by substituting Change in financial position for the household sector from the financial accounts for net lending in the following identity, relating to the household sector:
Consumption of fixed capital less
Capital transfers plus
Gross fixed capital formation plus
Change in inventories plus
Acquisitions less disposals of non-produced non-financial assets.
248 The rest of the world column in Table 22 is an alternative presentation of Australia's quarterly balance of payments statistics, as published in Balance of Payments and International Investment Position, Australia (cat. no. 5302.0). In the financial accounts, these transactions are presented from the point of view of non-residents. The cell at the intersection of line net Lending/net borrowing and the rest of the world column is the balance of payments Current account plus Capital account (with opposite arithmetic sign). The cell below is the balance of payments Net errors and omissions (with opposite sign). The Net change in financial position for the rest of the world is the balance of payments Financial account. It may also be found as Change in net international investment position reflecting transactions.
249 Information in Table 22 is not fully comparable with information for the general government sector published in Government Financial Estimates, Australia (cat. no. 5501.0.55.001). There are conceptual differences in the treatment of some classes of financial transactions, arising from differences between the International Monetary Fund Manual on Government Finance Statistics with which cat. no. 5501.0 is compatible, and the 2008 SNA, with which this publication is compatible. Conceptual differences aside, there are also known valuation, timing and coverage differences between the sources used to compile cat. no. 5501.0 and the sources used for this publication.
250 Two statistical discrepancies are shown in the flow of funds matrix. The first of these is the statistical discrepancy carried through from the capital account and represents the statistical discrepancy in the expenditure-based estimates of gross domestic product less the statistical discrepancy in the income-based estimates of gross domestic product (see Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0) for an explanation of these discrepancies). This discrepancy is shown against Net lending/net borrowing in the capital account in Table 22, in the column headed Discrepancy.
251 The second discrepancy, which is shown against the item labelled Net errors and omissions in Table 22, has been discussed previously in this section. It represents the difference between Net lending/net borrowing (carried through from the capital account in cat. no. 5206.0) and Net change in financial position (derived in the financial transactions account).
252 These tables present - as far as possible - the whole market for each of the financial instruments, that is, the level of financial assets and liabilities at market prices for each instrument. These tables are less consolidated than Tables 3 - 20. Claims between enterprises within the same company group are eliminated; claims between enterprises which are outside the company group but inside the same subsector are not eliminated. For example, claims between a bank and its banking subsidiaries are eliminated on consolidation but not claims between banking groups.
253 The top line in each of these tables shows all outstanding liabilities of residents of Australia for that financial instrument. Liabilities, for example, bonds, issued in international markets are included with those issued in the domestic market. This total is then dissected into the several sectors which issued this instrument-the primary classification and under each of these lines there is an indented block showing the counterparty sectors which hold these instruments as assets. Tables 27 and 28 relating to the One-name paper and Bond markets respectively, also split the total liability between the total issued in Australia and the total issued offshore.
RELATED PRODUCTS AND SERVICES
254 This issue of the Australian Financial Accounts uses data consistent with the latest releases of:
255 The ABS also issues a daily Release Advice on the web site which details products to be released in the week ahead.
OTHER PUBLISHED INFORMATION
256 Special data reports are available covering:
EFFECTS OF ROUNDING
257 Any discrepancies between totals and sums of components in the tables are caused by rounding.
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