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2.56. The basic elements of the GFS system are its measures of the economic flows to and from in-scope units and the economic stocks held by those units. The system's accounting rules govern the ways in which these basic elements are measured and recorded. The Australian flow and stock concepts and accounting rules discussed below are based on the IMF GFS standard described in appendix 2. The discussion therefore repeats some of the appendix 2 discussion but reflects minor differences in terminology that are applied in Australia.
2.60. In general, transactions represent changes to stocks that come about as a result of mutually agreed interactions between enterprise units. However, the system also recognises as transactions certain flows that occur within in-scope units where the unit is viewed as operating simultaneously in two different economic capacities. Thus, depreciation is recorded as a transaction because the unit is seen as simultaneously acting as owner of the depreciating asset and as consumer of the service provided by the asset.
2.61. Despite their compulsory nature, tax payments are regarded as ‘mutually agreed interactions’ between the government and taxpayers and are therefore treated as transactions. This is because there is collective recognition and acceptance by the community of the legal obligation to pay taxes. The types of unit interactions intended to be excluded from the definition of a transaction include events such as illegal seizure or destruction of a unit’s property by another unit.
2.62. Transactions can be either exchanges or transfers. Exchanges occur when one unit provides something of value and receives something of value in return. A transfer occurs when a unit provides something of value and receives nothing in return. Examples of exchange transactions include purchases of goods and services, sale of an asset, payment of wages to employees and issuance of a bond. Examples of transfers include grants, subsidies, social security payments and taxes. Taxes have some of the characteristics of exchanges inasmuch as taxpayers expect provision of government services in return for the taxes they pay. However, there is usually no direct link between taxes paid by an individual taxpayer and the government services consumed by that taxpayer. The value of government services consumed by a taxpayer may bear no relation to the amount of taxes paid by the taxpayer.
2.63. The system includes transactions in kind as well as transactions in which the final consideration is cash. Thus, the system includes transfers in which one unit provides goods and/or services free of charge to another unit, and barter transactions in which two units exchange goods and/or services. Examples of transactions in kind include grants of machinery and equipment, provision of services free of charge and provision of vehicles to employees as part of salary packages.
ATTRIBUTION OF TAX REVENUE TO LEVEL OF GOVERNMENT
2.64. In relation to the attribution of tax revenues to levels of government, paragraphs 5.24 to 5.28 of the International Monetary Fund's Government Finance Statistics Manual (2001) deal with the attribution of a tax where it is collected by one government unit and is then passed on to a second government unit. Depending on the arrangement, the taxes passed onto the second government unit may be reassigned as tax revenue of that unit, or recorded as tax revenue of the collecting unit and a grant recorded from the collecting unit to the second government unit.
2.65. The IMF manual states in paragraph 5.25 that a tax is attributed to the government unit that (a) exercises the authority to impose the tax (either as principle or through the delegated authority of the principal), (b) has final discretion to set and vary the rate of the tax, and (c) has final discretion over the use of the funds.
2.66. In the case of the Goods and Services Tax (GST), which was introduced on 1 July 2000, the tax is levied under the authority of the Commonwealth, the Commonwealth has the final discretion to set and vary the rate of the tax and the Commonwealth has final discretion over the use of the funds. Therefore, in accordance with the IMF Manual, the GST is treated as a Commonwealth tax in GFS.
2.67. In ABS GFS releases, because GST is recorded as a Commonwealth tax, a grant is also recorded from the Commonwealth to the States and Territories, consistent with paras 5.24 & 5.25 of the IMF manual.
OTHER ECONOMIC FLOWS
2.68. Other economic flows are changes in the volume or value of assets, liabilities and equity that do not result from transactions. The distinction between transactions and other economic flows is made to align the GFS system with SNA93. In SNA93, other economic flows are not recorded in the production, distribution and capital accounts and are not a determinant of the key analytical balances of saving and net lending/borrowing. Other economic flows are recorded in the capital accumulation accounts of SNA93 and are regarded as determinants of net worth that are not the direct result of production, income distribution or consumption.
2.69. Two main types of other economic flows are recognised: revaluations and other changes in the volume of assets. Revaluations are changes in the value of assets, liabilities and equity arising from price changes, including exchange rate movements. As discussed ahead, the system’s basis for valuing flows and stocks is market value. Changes in the market values of stocks should therefore be recorded as revaluations, whether the holding gain or loss is realised or not. In practice it is not possible to always record stocks at market values, in which case there will also be under-recording of revaluations in any given accounting period. Capital gains and losses made on the sale of assets other than inventories are recorded as revaluations and not as revenues.
2.70. Other changes in the volume of assets are events, other than transactions and revaluations, that bring about an addition of a stock to the balance sheet or the removal or part-removal of a stock from the balance sheet, and thereby result in a change to net worth. Such events that add to net worth include mineral discoveries, and recognition of assets hitherto not included in the balance sheet. Events that result in reductions of net worth include the unilateral writing off of bad debts by creditors, destruction of assets by fire or some other catastrophe and depletion of natural assets (e.g. forest, fisheries) as a result of physical removal or use. Also included in other volume changes are changes to net worth resulting from reclassifications, such as the reclassification of central borrowing authorities that occurred in Australia’s GFS system. As a result, the CBAs were transferred from general government and classified as public financial corporations.
2.71. Accounting rules for recording flows and stocks assist compilation of the statistics on a uniform, standard basis. While there are many similarities between GFS accounting rules and the accounting rules applied by businesses and governments in their financial reports, there are important differences. For example, accounting systems do not always require valuation of assets and liabilities at market value as does the GFS system, and the GFS system values sales at gross value rather than net of the cost of goods sold. This section describes the various GFS accounting rules.
2.72. The system employs the standard conventions of double-entry accounting. Thus, each flow gives rise to two entries of equal value, a debit and a credit, that maintain the identity:
A = L + E + NW, where A = assets; L= liabilities; E = equity; and NW = net worth.
By convention, debit entries are made for increases in assets and decreases in liabilities, equity or net worth. Credits entries are made for decreases in assets and increases in liabilities, equity or net worth. Changes to net worth arising from transactions are recorded in the system as either revenues or expenses, which are discussed ahead in this chapter. Therefore, transaction entries that increase net worth (revenues) are credits, and transaction entries that decrease net worth (expenses) are debits.
2.73. A few examples will illustrate the nature of the system. Receipt of a grant of cash by a unit would be recorded as a debit to an asset account (say, cash on hand) and a credit to a revenue account. Sale of goods for cash would result in two entry pairs: a debit to the asset account cash on hand and a credit to a revenue account, and a debit to an expenses account and a credit to the asset account for inventories. Some transactions affect only one side of the identity. For example, purchase of shares would be recorded as a debit to an asset account (say, investments) and a credit to another asset account (cash on hand).
TIME OF RECORDING FLOWS
2.74. Flows are recorded in the system on an accruals basis. Thus, flows are recorded when economic value is created, transformed, exchanged, transferred or extinguished. Economic events are therefore recorded when they occur, irrespective of whether cash was received or paid or was due to be received or paid. In the time between the moment a flow of cash becomes due for payment and the moment it is paid, an account payable is recorded by the debtor and an account receivable is recorded by the creditor. The use of accrual in lieu of cash recording also ensures that non-cash transactions, such as depreciation and transfers in kind, are included in the system.
2.75. Use of the accrual basis of recording in the GFS system brings the system into line with the basis of recording used in SNA93.
2.76. Application of the accrual basis is not always straight-forward. SNA93 provides guidance on the treatment of particular types of transactions. For example, all taxes should be recorded when the activities, transactions, or other events occur that create the liabilities to pay taxes. For example, a tax on the sale of goods and services should be recorded when a sale takes place. Some taxes are imposed on specific transactions or events. Examples include sales taxes, value-added taxes, import duties, and estate and gift taxes. Ideally, these taxes should be recorded at the times the underlying transactions or events occur, but in practice, data based on assessments is all that is readily available and accepted for GFS purposes.
2.77. Income taxes pose particular difficulties. They should be recorded in the period in which the income is earned, but there may be a significant delay between the end of the accounting period and the time at which it is feasible to determine the actual liability. In practice, income taxes deducted at source, such as pay-as-you-earn taxes, may be recorded in the period they are paid as this would approximate closely the period in which the underlying income is generated. Other income taxes have to be recorded when there is documentary evidence of the amount of tax that has accrued. In Australia, such evidence is generally not available until assessments have been made, either by the taxpayer (when self assessment applies) or by the Australian Taxation Office (ATO).
2.78. Grants and other voluntary transfers often have requirements or eligibility conditions attached to them. Examples are the prior incurrence of expenses for a specific purpose, the passage of legislation to authorise participation in a program, or the beginning of a time period. These transfers should be recorded when all requirements and conditions are satisfied. In Australia, recipients of grants generally do not record them until they have control over the funds granted.
2.79. Dividends and withdrawals from income of quasi-corporations should be recorded as of the date on which they are declared payable or, if no prior declaration occurs, on the date they are actually paid.
2.80. Transactions in goods and non-financial assets should be recorded when legal ownership changes. If that time cannot be determined precisely, recording may take place when there is a change in physical ownership or control. Change of ownership of goods acquired under finance leases is imputed to have taken place with the physical transfer of the goods.
2.81. Transactions in services should be recorded when the services are provided. Some services and certain types of exchange transactions are supplied or take place on a continuous basis. For example, renting, insurance, and housing services are continuous flows and, in concept, should be recorded continuously for as long as they are being provided. Similarly, interest, compensation of employees, rent, some social benefits, and consumption of fixed capital occur on a continuous basis over a time period. In practice, such activities are allocated to time periods based on assumptions about the amount of the activities that occurs during the period.
2.82. Transactions in most types of financial assets, such as securities, loans, currency and deposits should be recorded when legal ownership changes. In some cases, the parties to a transaction may perceive ownership to change on different dates because they acquire the documents evidencing the transaction at different times. For transactions between government units, the date on which the creditor records the transaction should be the date of record.
2.83. Various payables and receivables, such as accounts payable, interest payable, and wages payable result from a counterpart transaction, such as the purchase of a good on credit, interest expense, and compensation of employees expense. In these cases, the financial claim is deemed to arise when the counterpart occurs.
2.84. Other economic flows may take place at a point in time or continuously over a period of time and should be recorded accordingly. For example, the destruction of an asset by fire happens at a specific time and holding gains and losses occur continuously. Changes in structure and classification should be recorded at the moment a unit or an asset is classified into a different category.
2.85. As previously discussed, in Australia the sources of data for the GFS system are the accounting records of the public sector entities covered by the system. Accounting standards require these entities to prepare financial reports on an accrual basis. The standards specify a time for recording economic flows that is expressed differently but appears to be broadly consistent with the time of recording specified in SNA93. However, specific instances have arisen where the ABS has had to adjust the recorded data to reflect a time of recording that is closer to the SNA93 concept. The ABS adopts the approach that time of recording data in source records is accepted as consistent with the SNA93 accrual principles unless information is at hand that suggests otherwise. In that case, the matter is investigated and, if necessary, the source record data are adjusted to more closely reflect the SNA93 principle.
2.86. In keeping with SNA93 and IMF principles, all flows and stocks should be valued in the GFS system at current prices. Flows should be valued at the prices current on the dates for which they are recorded. Stocks should be valued at the prices current on the balance sheet date.
2.87. In practice, the valuation of stocks and flows in Australia’s GFS system is heavily dependent on valuations applied in the source data used to compile the statistics. The source data are obtained from the public accounts and the accounts of public sector entities that are not included in the public accounts. These data are valued in accordance with requirements specified in accounting standards, which generally do not require universal or continual application of current values.
2.88. For transactions involving money, SNA93 recommends valuation at the price agreed by the transactors, which is also the valuation to be expected in source documents. Thus, for a high proportion of transactions, valuation will be in accordance with SNA93 principles. However, for transactions in kind, valuation should be made by reference to prices for analogous goods and services. In practice, consistent application of such a valuation method is unlikely to occur in source documents.
2.89. Consistent valuation of stocks at current prices is most unlikely to occur in source documents. At best, accounting standards recommend regular revaluation of assets, but not at intervals sufficiently frequent to guarantee valuation at current prices in every compilation of government finance statistics. Valuation at current prices is most likely for financial assets and liabilities that are traded on financial markets. At the other extreme, current price valuation of public sector assets for which there is no identifiable market is unlikely to ever be possible. In between these two extremes, a mixture of valuations is likely to be present in any particular set of source data. ABS adjustment of the source data to a current value basis is generally not feasible.
2.90. According to SNA93, flows expressed in a foreign currency should be converted to their value in the national currency at the rate prevailing at their time of recording, and stocks should be converted at the rate prevailing on the balance sheet date. In general, this principle of converting foreign values for flows and stocks is applied in source data.
2.91. Derived measures are obtained by performing arithmetic operations on values recorded for the flows or stocks of individual units. Derived measures are included in the GFS system because of their utility for fiscal analysis. There are two types of derived measures: aggregates and analytical balances.
2.92. Aggregates are summations of individual units’ data relating to a class of flows or stocks. For example, tax revenues are the sum of all units’ flows that are classified as taxes. Aggregates and classifications are closely linked inasmuch as classifications are designed to produce the aggregates considered to be most useful to users of government finance statistics. In the GFS system, aggregates are produced after consolidation, which eliminates flows and stocks that occur between units contributing to the same aggregate. Consolidation is discussed later in this section.
2.93. Analytical balances are economic constructs that are obtained by differencing aggregates and are of particular utility in fiscal analysis. For example, the GFS net operating balance is an analytical balance obtained by subtracting the expenses aggregate from the revenues aggregate. The various analytical balances in the GFS system are described later in this chapter.
GROSS AND NET RECORDING OF FLOWS AND STOCKS
2.94. Flows and stocks can be presented on a gross or a net basis. The following practices are adopted in the GFS system:
AGENCY AND TRUSTEE TRANSACTIONS
2.95. Agency transactions are transactions undertaken by one government on behalf of or as an agent for another. Such transactions are excluded from the transactions of the agent government and are attributed to the government deemed to be the principal in the transaction.
2.96. Governments sometimes operate trust funds as trustees. The governments do not own the assets of such funds but they are sometimes able to use money from the funds to finance government operations. Such government use of trust fund money is recorded as government borrowing from the funds, which are regarded as separate units outside of the public sector.
2.97. Consolidation is the process of eliminating intra-group flows and stocks from aggregates for a group of units for which statistics are to be presented. In the GFS system, data are consolidated whenever presented for a group of units. In the Australian system, data have to be consolidated for many different groups of units, covering the nation as a whole and each jurisdiction individually. For example, each of the cells in the table below represents a grouping for which consolidated data must be produced whenever units fall within the groupings. In addition, separate consolidations represented by the cells in the table below must be done for each of the nine jurisdictions (including multi-jurisdictional units) in the system.
GFS CONSOLIDATION GROUPINGS
2.98. Consolidation can be thought of as a particular type of netting that should be considered separately from the gross and net recording described in an earlier section. Consolidation involves the elimination of all transactions and debtor-creditor relationships that occur between two units being consolidated. In other words, a transaction or stock holding of one unit is paired with the corresponding transaction or stock holding recorded for the second unit, and then the paired transactions or stock holdings are eliminated from the aggregates for the group.
2.99. For example, in a compilation for the public sector, if a general government unit owns a bond issued by a public financial corporation, then the stocks of the bond held as assets of the general government unit and the counterpart bond liability of the public financial corporation are eliminated from the aggregates for bond assets and liabilities of the public sector. Similarly, interest revenues and interest expenses related to the bond are also eliminated from the relevant public sector aggregates.
2.100. Full consolidation at all levels in a classification hierarchy is rather demanding in terms of data requirements and processing complexities. Practical considerations often limit the extent to which transactions within groupings can be eliminated through consolidation. Where extensive resources are required to eliminate intra-group transactions and stock holdings of small magnitudes, cost-effectiveness considerations dictate that the aggregates be left on a gross basis. In practice, the consolidation process can therefore produce aggregates that lack absolute precision as a record of a grouping's transactions and debtor-creditor relationships with units outside the grouping.