5256.0 - Australian National Accounts: Non-Profit Institutions Satellite Account, 2012-13 Quality Declaration 
Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 28/08/2015  Reissue
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APPENDIX 4 CONCEPTUAL FRAMEWORK


INTRODUCTION

The national accounts are a comprehensive set of economic data which are fully consistent and complete within the boundary of the economic activities they cover. Gross domestic product (GDP) is perhaps the most recognisable and important economic statistic from the core national accounts. Satellite accounts allow an expansion of the national accounts for selected areas of interest while maintaining the concepts and structures of the core national accounts. Satellite accounts present specific details on a particular topic in an account which is separate from, but linked to, the core accounts. An NPI satellite account highlights NPIs within the national accounting framework.

Implicitly, the data in respect of NPIs is included in the national accounts. The value of NPIs sales and transfers, compensation of employees and other items of income and expenditure are all part of the economic activity measured in the Australian national accounts. However, while all the production of NPIs is embedded in the accounts for industries such as health and community services and education, they are not separately identified.

An NPI satellite account provides a means by which the economic aspects of NPIs can be drawn out and analysed separately within the structure of the main accounts. One of the major features of an NPI satellite account is that it is set within the context of the whole economy, so that NPIs contribution to major national accounting aggregates can be determined. The NPI satellite account has two dimensions. The first is referred to as measurement on a national accounts basis. This is equivalent to production and other economic aggregates as defined in the national accounts. The second dimension is referred to as measurement on an NPI satellite account basis. This dimension extends the boundary of national accounts to include values for the non-market output of market producers and NPI services provided by volunteers. Measurement on an NPI satellite account basis provides a more complete picture of the value of NPIs to society than is evident in estimates included in the national accounts.


INTERNATIONAL STANDARDS

The international standard for national accounting is the System of National Accounts, 2008 (2008 SNA). It makes recommendations about the scope, concepts and classifications to be used in compiling national accounts estimates. Australia's national accounts, like those of most other countries, are compiled according to these recommendations.

The concepts and methods used in the Australian NPI satellite account are based on the Handbook on Non-Profit Institutions in the System of National Accounts (the Handbook). The Handbook was endorsed by the United Nations Statistical Commission in 2002.


THE SYSTEM OF NATIONAL ACCOUNTS

2008 SNA identifies five institutional sectors which are the core building blocks of the national accounts. These are:

  • Non-financial corporations
  • Financial corporations
  • Government units, including social security funds
  • Non-profit institutions serving households (NPISH)
  • Households

Each of these institutional sectors is made up of individual units capable of engaging in economic activities and transactions with other units, including non-residents. The allocation of NPIs depends on the nature of their operations. Those mainly engaged in market production are allocated to the relevant corporate sector. Those mainly engaged in non-market production are allocated to the general government sector if they are controlled by government, otherwise they are allocated to the NPISH sector. The SNA recommends the separate identification of NPISH. While separate estimates are being developed, NPISH are currently included with the household sector in Australia's national accounts.

Figure 4.1 shows the allocation of types of institutional units to institutional sectors in the Australian System of National Accounts (ASNA).

FIGURE 4.1
Diagram: Flowchart. This flowchart shows the allocation of Institutional Units to Institutional sectors.


According to the Standard Economic Sector Classifications of Australia (SESCA), 2008 (Version 1.1) (cat. no. 1218.0):

'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.' Examples of market NPIs include business and professional associations.

'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.' Examples of non-market NPIs include churches and most welfare organisations.
NON-PROFIT INSTITUTIONS

NPIs are typically thought of as charities or community service organisations, but they are more than this. NPIs cover a wide range of activities and may be engaged in either market production or non-market production, or a combination of both. 2008 SNA defines NPIs as 'legal or social entities created for the purpose of producing goods or 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.' (2008 SNA, paragraph 4.83)

Non-profit in the title does not mean that such institutions do not, or are not capable of making a profit in the generally accepted sense. 'In practice, their productive activities are bound to generate either surpluses or deficits but any surpluses they happen to make cannot be appropriated by other institutional units. The articles of association by which they are established are drawn up in such a way that the institutional units that control or manage them are not entitled to a share in any profits or other income they receive. For this reason, they are frequently exempted from various kinds of taxes.' (2008 SNA, paragraph 4.83)

2008 SNA (paragraph 4.85) describes the characteristics that distinguish NPIs from other institutional units. In summary, these include:
  • 'Most NPIs are legal entities created by process of law whose existence is recognised independently of the persons, corporations or government units that establish, finance, control or manage them.
  • Many NPIs are controlled by associations whose members have equal rights, including equal votes on all decisions affecting the affairs of the NPI.
  • There are no shareholders with a claim on the profits or equity of the NPI.
  • The direction of an NPI is usually vested in a group of officers, executive committee or similar body elected by a simple majority vote of all the members.
  • The term 'non-profit institution' derives from the fact that the members of the association controlling the NPI are not permitted to gain financially from its operations and cannot appropriate any surplus which it may make.'

The Handbook provides a 'structural-operational' definition of NPIs as entities that are:
  • organisations;
  • do not exist primarily to generate profits and are non-profit distributing where they do make a profit;
  • institutionally separate from government;
  • self governing; and
  • non compulsory - 'means that membership and contributions of time and money are not required or enforced by law or otherwise made a condition of citizenship' (Handbook, 2.19).

These characteristics are consistent with the 2008 SNA description of NPIs and are the primary basis for the identification of NPI units on the ABS Business Register of organisations.


THE PRODUCTION BOUNDARY AND VALUATION OF NPI OUTPUT

The first dimension of the NPI satellite account provides estimates of production consistent with the production boundary of the national accounts. For the purposes of the satellite account publication, this is referred to as measurement on a national accounts basis. The second dimension extends the boundary beyond that defined for national accounts to include values for the non-market output of market producers and volunteer services. This extended dimension is referred to as measurement on an NPI satellite account basis.

For market NPIs, valuation of the output of NPIs on a national accounts basis is consistent with the valuation method for incorporated and unincorporated enterprises more generally in the national accounts. It is the sum of:
  • the total value of goods and services sold. In this context, the notion of income from service provision includes income received from governments on a volume basis (e.g. per student, per patient, per bed funding in hospitals or nursing homes, per service (travel, meals, cleaning) provided by organisations assisting the disabled or elderly) rent, leasing and hiring income, membership fees and sponsorships;
  • the total value of goods and services bartered or used as payments in kind, including to employees;
  • the total value of own-account capital formation; and
  • the total value of changes in inventories of finished goods and work in progress goods intended for one or other of the above uses.

The absence of a market price for non-market services means that the output of non-market NPIs is valued as the costs of production. These costs exclude interest payments and other transfers. Output for non-market units is the sum of:
  • purchases (including for own-account capital formation) or intermediate consumption of goods and services;
  • labour costs;
  • depreciation;
  • taxes less subsidies on production, e.g. land tax and payroll tax; and
  • the total value of the change in inventories of raw materials, fuels etc.

This valuation of non-market NPIs is consistent with the convention adopted for the valuation of General Government sector output, the other non-market sector in the national accounts.

Although non-market NPIs receive most of their income from sources such as transfers from government and donations, they may also receive revenue from sales of goods and services. If this were also included in the measure of output the value would be distorted by double counting. Once an NPI is defined as a non-market producer because it provides most of its output free or at prices which are not economically significant, all output is then valued at cost.


GROSS VALUE ADDED AND GDP

NPI gross value added and NPI GDP are the major economic aggregates derived in this satellite account.

Gross value added shows the value which a producer adds to the raw material goods and services it purchases in the process of producing its own output. NPI gross value added is measured as the value of the output of NPI goods and services less the value of the intermediate consumption inputs used in its production. As non-market NPI output is valued at cost, gross value added for non-market NPIs is also equivalent to the sum of labour costs, depreciation and other taxes less subsidies on production, e.g. land tax and payroll tax. Output and value added is measured at basic prices, that is before any net taxes (taxes paid less subsidies received) on products are added.

NPI GDP measures the value added of NPIs at purchasers prices. It therefore includes taxes paid less subsidies received on NPI goods and services, as these are reflected in the prices consumers actually pay.
NPI INCOME - TRANSFERS AND SALES

NPIs receive income from market sales of goods and services, from governments, private sponsorships and donations and from other sources such as interest and dividends received on investments in financial assets. The satellite account makes a distinction between what is termed 'transfer income' and 'sales of goods and services'. Transfers are transactions in which one unit receives resources from another unit without providing a good or service in return. Receipts of donations, bequests, membership fees paid to non-market NPIs, government funding which is not provided on a volume basis and income received from related or affiliated organisations are classified as transfers received. Sales of goods and services on the other hand are transactions where payment is received in return for a benefit provided. Sales income includes rent, leasing and hiring income, sponsorships, membership fees paid to market NPIs and government funding which is provided on a volume basis (e.g. per student, per patient).


NON-MARKET OUTPUT OF MARKET PRODUCERS

The NPI satellite account extends the SNA production boundary beyond that which is usually measured in the national accounts. One extension to the production boundary is the inclusion of a value for the non-market output of market producers.

The non-market output of market producers measures that component of the output of market NPIs which is not captured when output of market units is valued under the standard SNA convention of valuation by sales. The Handbook argues that if such an adjustment is not made to value any non-market output produced by market units, then the value of the output of market NPIs is understated as such units can produce significant amounts of output which are supported by charitable contributions or other transfers that is not evident in sales revenue.

The non-market output of market producers is valued as the difference between the output of market units when calculated by the standard SNA valuation method for non-market units of cost summation, and output as calculated by the standard SNA method for market units of valuation by sales. Where output on a cost valuation basis exceeds output on a sales valuation basis, the difference is taken to be the non-market output of market producers. Where output on a sales basis exceeds output on a cost basis, non-market output of market producers is assumed to equal zero.


VOLUNTEER SERVICES

The second extension to the SNA production boundary which is seen in the NPI satellite account is the inclusion of a value for the services provided to NPIs by volunteers. 2008 SNA excludes all unpaid labour, including the value of volunteering.

The Handbook recognises that as volunteer labour is critical to the output of NPIs and their ability to produce a level and quality of service, it is important to capture and value this activity in the NPI satellite account. The Handbook proposes three methods by which volunteer services can be valued. Each method involves assigning a wage rate to the total number of hours worked by volunteers.

The first such valuation method mentioned in the Handbook is referred to as the "opportunity cost" approach. The notion behind this approach is that each hour of volunteer time should be valued at what the time is worth to the volunteer in some alternative pursuit. The applicable wage rate at which an hour of volunteer time is valued in this instance is therefore the wage rate associated with the usual occupation of the volunteer. The Handbook recognises that while theoretically desirable for some analytical purposes, this valuation approach is not often used. The ABS has considerable reservations as to the appropriateness of this valuation method, as it assumes that paid work is foregone in order to undertake voluntary work. Most workers, however, have limited choices in the hours they work and are more likely to be giving up leisure time for voluntary work. This being the case, the opportunity cost should not be based on the wage they receive in the market but on the value they place on leisure. Valuation of goods and services at market prices is fundamental to national accounting. In this context, two volunteers involved in identical unpaid activity should be valued at the same hourly rate irrespective of what they could each earn in their paid occupations. Additionally, this method raises the issue as to which is the appropriate wage rate to apply to those volunteers who do not have a usual occupation, for example those who are retired or unemployed or otherwise not in the labour force.

The second valuation method proposed in the Handbook is the "replacement cost" or "market cost" approach. This approach recommends that each hour of volunteer time be valued at what it would cost the organisation to replace the volunteer with paid labour. The applicable wage rate at which an hour of volunteer time is valued in this instance relates to the particular activity being undertaken by the volunteer. While this method is preferred over the opportunity cost approach, the value of volunteer services may be under or over estimated using this approach depending on variations in the productivity of volunteers compared with labour provided to the market sector. The estimate of volunteer services included in this satellite account is based on this approach.

The Handbook recognises that both the opportunity and replacement cost methods require more information on the activities in which volunteers engage than is likely to be available in most countries. Where detailed data on volunteering are not available, the Handbook recommends a fallback option which values each hour of volunteer time at the average gross wage for the community, welfare and social service occupation category. The Handbook argues that the work of volunteers is most likely to resemble this occupation category, and that the associated wage rate is conservative and typically towards the low end of the income scale but not at the very bottom.


CLASSIFICATIONS

The classification system used in this satellite account is a reduced version of the classification that is recommended in the Handbook, the ICNPO. Although ICNPO does include some purpose criteria, it is fundamentally an activity classification. ICNPO permits a fuller specification of the components of the non-profit sector than the industry classification used in Australia, the Australian and New Zealand Standard Industrial Classification (ANZSIC). In some instances the detailed ANZSIC codes cut across several ICNPO groups and sub groups. In keeping with the current availability of data, a number of the broad level ICNPO groups have been combined in this publication and estimates have not been produced for classifications below the group level. A full version of ICNPO and the concordance between ICNPO and the ANZSIC classification are shown in Appendix 1 and Appendix 2 of this publication.

The 2012-13 data on voluntary work was collected using an activity classification which is similar to ICNPO, at least at the Group level. Appendix 3 contains a concordance between the voluntary work data type of organisation and ICNPO.

The principles detailed in the Standard Economic Sector Classifications of Australia (cat. no. 1218.0) have been applied to determine the market/non-market classification of NPI data.