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2.101. The framework for presentation of information about flows and stocks is designed to show the balance between opening stocks, flows during the accounting period and closing stocks, and to enable the derivation of key balances of importance in fiscal analysis. Thus, the framework requires that, for each category of stocks, the values at the beginning of an accounting period, plus the value of transactions and other economic flows during the accounting period, are equal to the values of the stocks at the end of the accounting period. The key analytical balances that can be derived from the framework are the net operating balance, net lending(+)/borrowing(-), net worth and change in net worth. Change in net worth can be broken down into change in net worth arising from transactions, revaluations, and other changes in the volume of assets. Table 2.1 below shows the broad structure of the framework and the relationships between items contained therein. Explanation of the items and relationships is provided in the following paragraphs.
2.1. ANALYTICAL FRAMEWORK FOR PRESENTATION OF FLOWS AND STOCKS
2.102. Table 2.1 is intended to illustrate how the opening values of stocks plus economic flows during the accounting period equals the closing values of stocks. The lightly shaded cells in the ‘transactions’ column show the items covered by the primary financial statement in the system, the operating statement. The operating statement records revenues and expenses, and net acquisition of non-financial assets. Net acquisition of non-financial assets also appears in the statement of stocks and flows, which covers all cells in the table except the cell relating to revenues and expenses. The difference between revenues and expenses, the net operating balance, is equal to the change in net worth arising from transactions, which appears in the last cell of the ‘transactions’ column. These relationships are explained further in later paragraphs.
2.103. In the table cells, analytical balances are shown in bold. The balances that embrace all public sector activities are shown in the bottom row of the table. They are net worth (defined as assets minus liabilities, shares and other contributed capital) and change in net worth (defined as the closing value of net worth minus the opening value of net worth). As illustrated in the table, change in net worth can be broken down into a change in net worth due to transactions, change in net worth due to revaluations, and change in net worth due to other changes in the volume of assets.
2.104. The operating statement includes two balancing items. The first of these is the previously mentioned net operating balance, which is derived as total revenues less total expenses. Revenues and expenses are, respectively, inflows and outflows of economic value arising from operational transactions, and usually result in a change to net worth. Certain exchange transactions, such as acquisition of fixed assets for cash, do not change net worth but simply change the composition of assets, liabilities or equity (such transactions cannot be revenues or expenses). As noted, the net operating balance is equal to the change in net worth due to transactions. This is because all changes to net worth arising from transactions are recorded as either revenues or expenses. All other transaction-induced changes to assets, liabilities and equity cancel out and do not affect net worth. For example, acquisition of a financial asset increases one financial asset at the expense of another (cash).
2.105. The second analytical balance in the operating statement, GFS net lending(+)/borrowing(-), is derived as the net operating balance less net acquisition of non-financial assets. GFS net lending(+)/borrowing(-) is also equal to the net change in financial assets, liabilities and equity arising from transactions. Using other relationships shown in Table 2.1, this equality can be demonstrated arithmetically as follows:
The relationship is useful inasmuch that GFS net lending(+)/borrowing(-) measures the public sector’s financing requirement which, using the relationship, can be related to transaction-induced changes to public sector financial assets, liabilities and equity. Users are thereby able to see how the financing requirement was financed.
2.106. Revenues are defined in the system as transactions that increase net worth. Proceeds of sales of non-financial assets other than inventories are excluded from revenues because receipt of the proceeds is offset by the value of the asset relinquished. Any profit or loss on the sale is treated as a revaluation rather than a transaction and any change to net worth arising from the sale is attributed to the revaluation and not to the transaction. Proceeds from sales of goods from inventories are included as revenues because such sales are recorded on a gross basis (i.e. the cost of the goods sold is treated separately as an expense and not offset against or netted off the related revenue). Thus, even though such sales in the general government sector may be made at cost or less than cost, the sale proceeds are treated as a revenue and the withdrawal of the goods from inventories is treated as an expense. Revenues exclude all receipts (e.g. proceeds of borrowing, repayments of loans) resulting from transactions in financial assets, liabilities and equity because such transactions always create offsetting changes of equal value to other financial assets, liabilities or equity and there is no change in net worth. For example, revenues exclude contributions of capital by the owners of public corporations because such contributions create an equal financial claim on the corporation that is deducted from its assets in the derivation of its net worth.
2.107. Expenses are defined in the system as transactions that reduce net worth. Expenses exclude purchases of goods and other assets because the monetary outflow is matched by an equally valued inflow of goods and the transaction therefore does not change net worth. Goods purchased for resale or use in production do not enter expenses until they are withdrawn from inventories for sale or use in production. Purchases of services (other than those that are capitalised) are expenses because the services are consumed when provided and net worth is reduced by the cost of the services. Purchases of capital assets are excluded from expenses because use of the assets (depreciation) is the appropriate expense measure.
2.108. Assets are defined in the system as instruments or entities over which ownership rights are enforced by institutional units and from which economic benefits may be derived by holding them, or using them, over a period of time. Financial assets are assets that are in the form of financial claims on other economic units. They are the counterparts of liabilities of the units on which the claims are held. All other assets are described as non-financial assets and include fixed assets, inventories, valuables (e.g. works of art) and non-produced assets (e.g. natural forests, mineral reserves). Each of these classes of assets is described more fully in the section ahead on classification of flows and stocks.
2.109. Liabilities are defined in the system as obligations to provide economic value to another economic unit. Liabilities are the counterparts of financial assets held by the claimant economic units.
2.110. Shares and other contributed capital of public corporations and quasi-corporations are viewed as financial claims on the corporations and quasi-corporations and the counterpart of financial assets of the owners of the corporations (i.e. the proprietor governments and minority shareholders).
2.111. As previously discussed, the GFS net operating balance (NOB) is equal to change in net worth due to transactions. All changes to net worth arising from transactions are recorded as either revenues or expenses. All transactions other than revenues and expenses do not change net worth. For example, acquisitions of capital assets in exchange for cash to the same value do not change net worth. The NOB is equal in concept to the national accounting balance of net saving plus capital transfers but, in Australia, is not the same in value because of measurement differences between the GFS system and the ASNA, as discussed in chapter 7. When the NOB is positive, it indicates that surplus funds have been generated from current operations and are available to finance capital acquisitions. When the NOB is negative, it indicates that a shortfall has been incurred on current operations and that it has been necessary to liquidate assets, incur liabilities or increase equity in order to finance the operations.
2.112. GFS net lending(+)/borrowing(-) represents the balance remaining after current operations and the net acquisition of non-financial assets. It is equivalent in concept to the national accounting balance of the same name, but may be different in value due to measurement differences. When net lending(+)/borrowing(-) is positive it indicates that, on a net basis, the subject unit or sector had to purchase financial assets and/or repay liabilities in order to defray surplus funds. When net lending(+)/borrowing(-) is negative it indicates that, on a net basis, the subject unit or sector had to liquidate financial assets, incur liabilities and/or increase equity in order to finance current operations and capital acquisition.
2.113. GFS net worth represents the value of an entity’s assets at a point in time less the value of financial claims on the entity by other units, including shareholders and owners. Net worth may be positive or negative. For public corporations, for example, net worth will be negative if the market value of the corporation’s shares exceeds the value of its net assets (i.e. asset less liabilities) and positive only if the market value of the shares is less than net assets. For this reason, net assets may be used in preference to net worth in some presentations involving public non-financial and financial corporations. It should be noted that, for general government, net assets and net worth are identical. Change in net worth is a measure of the extent to which the current period’s operations, revaluations and other volume changes have added to or subtracted from net worth during the accounting period. It therefore includes the assessed changes in the market value of assets, liabilities and shareholders’ funds during the accounting period, which is measured by change in net worth due to revaluations.
THE MAIN FINANCIAL STATEMENTS IN THE SYSTEM
2.114. Three main statements are employed in the GFS system to present information about public sector flows and stocks:
The first two of the statements can be derived directly from the analytical framework. The cash flow statement cannot be derived directly from the analytical framework because the framework is accrual based whereas the cash flow statement reflects flows of cash at a detailed level. However, cash flows are integral to the analytical framework inasmuch that they are part of transactions that result in changes to holdings of cash and deposits, which are included with financial assets in the accrual framework.
THE GFS OPERATING STATEMENT
2.115. A broad outline of the GFS operating statement is given in table 2.2.
2.2. GFS OPERATING STATEMENT
The GFS operating statement covers only transactions and therefore excludes revaluations and other changes to the volume of assets, which are recorded in the statement of stocks and flows. It therefore covers all items in the second column of the analytical statement shown in table 2.1 except net acquisition of financial assets, net incurrence of liabilities and contributions of capital, which are recorded in the statement of stocks and flows. Revenues, expenses and net acquisition of non-financial assets can be recorded in the statement at whatever degree of classification detail is required. The classifications of revenues, expenses and net acquisition of non-financial assets are explained in the next major section dealing with classification of stocks of flows. Two analytical balances are recorded in the statement: the GFS net operating balance and GFS net lending(+)/borrowing(-).
THE STATEMENT OF STOCKS AND FLOWS
2.116. A broad outline of the statement of stocks and flows is given in table 2.3.
2.3. STATEMENT OF STOCKS AND FLOWS
2.117. The statement of stocks and flows covers all opening and closing stocks, and the results of all transactions and other economic flows. Shares and other contributed capital apply only to public non-financial and financial corporations (because, by definition, general government units cannot issue shares or acquire other forms of equity). The opening value of stocks in each category, plus the value of transactions and other economic flows relating to each category must equal the closing value of stocks in each category. Assets, liabilities, and shares and other contributed capital can be recorded in the statement at whatever degree of classification detail is required. The analytical balances shown in the statement are GFS net worth, change in net worth due to transactions, change in net worth due to revaluations and change in net worth due to other changes in the volume of assets. The latter three balances are the derived entries in the second, third and fourth cells of the bottom row of the table.
THE CASH FLOW STATEMENT
2.118. A broad outline of the cash flow statement is given in table 2.4.
2.4. CASH FLOW STATEMENT
2.119. All items in the cash flow statement are recorded on a net basis (i.e. cash payments are netted from cash receipts). The net cash flow from operating activities represents cash receipts arising from operating activities (the activities recorded in the operating statement) less cash payments for operating activities. Net cash flow from investments in non-financial assets represents cash received from sale of non-financial assets less cash paid for the acquisition of such assets. The distinction between investments in financial assets for policy and liquidity management purposes is based on the government’s motivation for acquiring the assets. Where the assets are acquired for the purpose of implementing or promoting government policy (e.g. loans to assist industry development), the acquisition of assets is treated as being for policy purposes. Where the assets are acquired for the purposes of managing the government’s cash reserves (e.g. investment in shares with the aim of maximising returns), the acquisition is treated as being for liquidity management purposes. Net cash flows from acquisition of financial assets for both these purposes represents cash received from liquidation of such assets, including repayments by debtors, less cash outlaid for acquisition of the assets. Net cash flows from financing represents cash receipts from borrowing, share issues and capital injections (public corporations only) less cash repayments of borrowing, and cash payments of dividends and other distributions.
2.120. A close approximation of the surplus/deficit concept that was used in the former (cash) version of the GFS system can be derived using the identity shown below. However, methodological differences between the present and former systems prevent a precise reconciliation between items in the cash flow statement and the surplus/deficit.
Net cash flows from operating activities
Net cash flows from acquisition and disposal of non-financial assets
Value of assets acquired under finance leases and similar arrangements
The cash surplus/deficit is a measure of a sector's cash flow requirements and if positive (ie a surplus), it reflects cash available to governments to either increase financial assets or decrease liabilities. When this measure is negative (ie a deficit), it identifies the extent to which a government's needs to run down its financial assets in order to finance the cash shortfall. Distributions paid are dividends and other returns to owners and shareholders made by public corporations. In the cash flow statement these distributions are included in the net cash flows from financing activities. However, such payments impact on the cash surplus/deficit so must be included in the surplus/deficit formula. Assets acquired under finance leases are not included in the cash flow statement but, like distributions, these payments are considered to be cash outlays and as such, must form part of the surplus/deficit calculation.
CLASSIFICATION OF FLOWS AND STOCKS
2.121. Flows and stocks classifications are applied to all flows and stocks of in-scope enterprise units. Certain classifications apply exclusively to general government units and others apply exclusively to non-financial and financial corporations but most are common to both types of units.
2.122. The main classification, the economic type classification (ETF), is used to classify flows and stocks according to their economic nature (e.g. revenues, expenses, asset, liabilities). The government purpose classification (GPC) is used to classify expense transactions according to the government purpose (e.g. health, education, defence) of the expenditure.
2.123. Flows and stocks classifications can be viewed from two perspectives, an input perspective and an output perspective. The input perspective takes into account the nature and structure of the data that enter the system. The main sources of GFS data are government accounts and they provide accounting data that have to be reclassified and reorganised on an economic basis to be suitable for conversion to statistical output. As well, the input perspective identifies flows and stocks (e.g. those subject to elimination in consolidated aggregates) that do not enter final output as such. The output perspective views the classifications almost entirely as the lists of items that appear in published statistics. The classifications which are set out in appendix 3 are input classifications and are designed for use in classifying data from government accounts. In this chapter, an output perspective of the classifications is used as a basis for discussion of the concepts underlying published government finance statistics.
ECONOMIC TYPE CLASSIFICATION
2.124. The economic type classification of stocks and flows is organised in sections that, in part, reflect the financial statements discussed in the previous section. However, the statement of stocks and flows is not reflected directly as a separate statement because the relevant items appear in different statements. The structure and broad content of the classification from an output perspective is set out in table 2.5 below. The table indicates (with ‘xx’) whether the listed items apply to general government and public corporations.
2.5. ECONOMIC TRANSACTIONS FRAMEWORK: OUTPUT ITEMS AT BROAD LEVEL
Each of the classification categories in table 2.5 is discussed in the following paragraphs. The discussion of the balance sheet items includes, where appropriate, discussion of transactions and other economic flows relating to the balance sheet items.
Operating statement items
2.125. As previously noted, revenues are defined as inflows of economic value arising from operational transactions.
2.126. Taxation revenue is revenue arising from compulsory levies imposed by government. There is usually no clear and direct link between payment of taxes and the provision of goods and services. Taxes are levied, inter alia, on incomes, wealth, production, sale and use of goods and services, and the performance of activities. The amount of tax revenue accruing in a period is the amount generated when the underlying transactions or events which give rise to the government’s right to collect the taxes occur in that period.
2.127. Governments may regulate certain activities by issuing licences for which fees are payable. If the issue of such licences involves little or no work by the government then the revenues raised are deemed to be taxation revenue. However, if the government uses the issue of licences to exercise some regulatory function, such as checking the competency or qualifications of a would-be licensee, then the revenues raised are deemed to be revenues from the sale of services by government unless it is clearly out of all proportion to the costs of providing the services.
2.128. Taxes that are levied on a regular or periodic basis are deemed to be current taxes. Taxes that are levied infrequently and at irregular intervals or under exceptional circumstances are deemed to be capital taxes.
2.129. The different types of taxes are included in a separate taxes classification, which is included in appendix 3. Taxes are broken down into the following broad categories:
2.130. Sales of goods and services refers to revenues from the direct provision of goods and services by general government and public corporations, excluding GST. The item includes:
2.131. As previously noted, fees from regulatory services are treated as revenues from sales if the government exercises some proper regulatory function, such as checking the competency or qualifications of a would-be licensee. If there is little or no work involved or if the revenues raised are clearly out of all proportion to the cost of providing the service then the fees are treated as taxation revenue.
2.132. Operating leases are leases in which most of the risks and benefits of ownership rest with the lessor. Rental income recorded under sales of goods and services is confined to income from leases of produced assets such as buildings, ships, aircraft, vehicles, buildings, copyrights, patents, trademarks, etc. Income from leases of land and other non-produced assets is recorded as property income.
2.133. Property income refers to income accrued from the ownership of financial assets or tangible non-produced assets (mainly land and sub-soil assets). Property incomes accrue when the owners of such assets put them at the disposal of other entities. Property income on financial assets is in the form of interest, dividends, etc. Property income on land and sub-soil assets is in the form of land rent.
2.134. Interest income refers to income accrued by owners of financial assets such as deposits, securities other than shares, loans and accounts receivable in return for providing funds to other entities. Interest income can accrue on advances to the private sector, public corporations, building societies and foreign governments, and on bank account balances, fixed deposits held with banks, government securities, intra-sector deposits and short term money market balances. Interest excludes cash settlements of interest swap contracts, which are treated as financial transactions in keeping with the revised SNA93 treatment (see SNA93, paragraph 2.76).
2.135. Property income includes general government returns on their equity in public corporations in the form of dividends and other transfers of income, and dividends received by public corporations from subsidiaries. Dividends are a form of property income to which shareholders are entitled as a result of their ownership of equity in other entities. Also included as property income are dividends from shares held as investments in private and public corporations and income from the IMF (except revenues from the IMF’s gold disbursements). Dividend income is distinguished from sale or other divestment of equity holdings, which are sales of financial assets and not revenues.
2.136. Property income also includes general government income received from public corporations as income tax and wholesale sales tax equivalents. These revenues are treated as property income rather than tax revenue in the GFS system because it is a levy by State and Territory governments (which do not levy income taxes) on their public corporations rather than a levy by the Commonwealth Government on all corporations under income tax legislation.
2.137. Land rent is a form of property income that refers to rent for the use of land and other non-produced assets. It includes rent on leasehold land in the Territories and other leasing of crown lands. Rentals on buildings or other produced assets are not land rent and are recorded with sales of goods and services.
2.138. Royalties are included as property income. They are a form of land rent relating to the use of non-produced assets such as deposits of minerals or fossil fuels. Royalties are mainly paid for off-shore petroleum, minerals and timber that is not from plantation and regrowth forests.
2.139. Seigniorage is the profit earned by the Commonwealth Treasury and the Reserve Bank of Australia (RBA) on the issue of coins and notes (i.e. the difference between the face value of coins and notes and the costs of their production). Because notes and coin on issue are liabilities of the issuer, the face value of note and coin issues, including any seigniorage, is recorded as a financial transaction (i.e. incurring a liability). The costs of minting coin and printing notes are treated as expenses. However, the difference between the face and sale value of commemorative coins sold at greater than face value is recorded as sales of goods and services.
2.140. Other current revenues refers to current revenue other than current revenue from taxes, sales of goods and services, and property income. It includes grants and subsidies received for current (rather than capital) purposes. Other current revenue also includes revenue from fines, which are defined as civil and criminal penalties imposed on law breakers other than penalties imposed by tax authorities. Penalties imposed by tax authorities are classified as tax revenue. This item also includes all revenue received by local governments in lieu of municipal rates, items such as gifts and conscience moneys, and unclaimed moneys such as unclaimed lottery prizes, unclaimed Totalisater Agency Board (TAB) dividends and unclaimed moneys in bank accounts.
2.141. Capital revenues refers to revenues from grants and other unrequited transfers for capital purposes, including in-kind receipts of non-financial assets. The item includes grants received from other (including foreign) governments or international organisations with the requirement that they be used for capital purposes. Acquisitions of non-financial assets free or at a price below fair value are recorded as capital revenues when they are of an economic nature and where valuations are realistically obtainable. Such transfers are valued at the value of equivalent money transactions. Also included as capital revenues are transfers to sinking funds, capital levies from local government, and transfers from private bodies to government for capital works, e.g. donations for road construction.
2.142. As previously noted expenses are defined as outflows of economic value arising from operational transactions. Expenses are recorded net of recoverable GST.
2.143. Employee expenses relate to uncapitalised compensation of employees for services provided in the current period. They include the costs of wages and salaries, and the accrued costs of annual leave, long service leave and superannuation.
2.144. Employee expenses include amounts payable by employers to superannuation schemes, in respect of services provided by employees in the current period, to finance future superannuation benefits. Superannuation schemes to which employers pay contributions are described as ‘funded’ schemes. A funded scheme is usually a separately constituted legal entity into which an employer contributes, on a regular basis, an amount actuarially determined to fully fund future superannuation liabilities. Except for relatively small amounts which may be in the nature of working balances, the employer therefore does not carry the superannuation liability on its balance sheet. Technically, a funded scheme may include a defined benefit plan or an accumulation plan or both as its components.
2.145. Also included as employee expenses are unfunded superannuation expenses, which are superannuation expenses accrued under an unfunded scheme for services provided by employees in the current period. In an unfunded scheme the employer does not make contributions to a separately constituted legal entity and pays benefits to employees as payment of the benefits falls due. In the GFS system, the accruing cost of the future benefits payments rather than the cash payment of benefits has to be recorded as expenses. The employer is therefore regarded as compulsorily borrowing from employees the increase in superannuation liability each period. The amount of the liability accruing during the accounting period is split between employee expenses and the interest cost of the notional borrowing, which is classified as property expense. Pensions and lump sums paid to former employees are recorded as financial transactions in the statement of stocks and flows (i.e. repayment of the money ‘borrowed’ from employees).
2.146. Amounts payable or accrued as a result of actuarial reviews and reassessments of funded and unfunded superannuation schemes will generally not relate to services provided by employees in the current period. Such amounts are either treated as revaluations if they are due to price changes or reallocated to appropriate time periods.
2.147. The major part of employee expenses is made up of wages, salaries and supplements. Allowances for overtime, shift-work, living away from home and travel are included, as are in-kind payments such as accommodation, vehicles and clothing provided by employers. Employee expenses also include accrued expenses for the period relating to accident compensation premiums, sick leave, annual leave, long service leave, retirement and redundancy.
2.148. Importantly, employee expenses charged to capital works (e.g. on own-account construction) are excluded from this category and are recorded directly as acquisition of non-financial assets. Taxes paid on employers’ payroll and labour force are not included as employee expenses but are recorded as current transfer expenses. Expenses relating to usage of labour hire agencies are classified as non-employee expenses.
2.149. Non-employee expenses are operating expenses that are not included elsewhere in the classification of expenses. They include expenditure by government on goods and services that are provided directly to households as social transfers in kind. Examples include medical and pharmaceutical benefits, telephone rental concessions, concessional railway fares, rental subsidies, reduced utility charges, etc. Non-employee expenses also includes usage or ‘intermediate consumption’ of goods and services by public sector units in the accounting period. Usage of goods can be derived as opening value of inventories plus purchases less the closing value of inventories. Also included as non-employee expenses are rentals for the use of buildings or the right to use copyrights, patents, trademarks, etc.
2.150. In keeping with national accounting concepts, non-employee expenses also include purchases of certain types of defence equipment that, in conventional accounting, would be regarded as purchases of capital assets. As well as treating expenditure on destructive weapons (e.g. missiles, rockets, bombs) as current expenditure, the SNA also treats expenditure on the platforms (e.g. warships, submarines, missile carriers and launchers, etc.) from which the weapons can be launched as current expenditure. Consequently, non-employee expenses includes expenditures on such weapon platforms, which are effectively treated as fully consumed during the accounting period in which they are acquired.
2.151. As is the case for employee expenses, non-employee expenses that are charged directly to capital works (e.g. own-account construction) are not included in this category but are recorded directly as acquisition of non-financial assets.
2.152. Depreciation refers to the estimated consumption of non-financial assets during the accounting period. In Australia’s GFS system, depreciation is recorded in lieu of the national accounting concept of consumption of fixed capital because only depreciation information is available from government accounts. The estimates of consumption of fixed capital in the ASNA are derived independently by the ABS and are in insufficient detail to be used in the GFS system. In keeping with the treatment of purchases of defence weapon platforms as current expenses, depreciation of such platforms is not recorded as an expense.
2.153. Current transfers are amounts payable for current purposes for which no economic benefits are receivable in return. The distinction between current and capital transfers is based on the nature of the activities or assets for which the transfers are made. If the activities or assets relate to the acquisition of assets, other than inventories, that will be used in production for one year or more, the transfers are treated as capital transfers. Otherwise they are treated as current transfers.
2.154. Current transfers include grants for current purposes to private non-profit organisations serving households, grants made to foreign governments and organisations including grants made for aid projects, and current grants from one level of government to another (e.g. Commonwealth to State). Current transfers also include subsidies, which are transfers made by general government to public and private corporations and unincorporated enterprises. Subsidies include transfers to public corporations to offset recurring losses that are a consequence of government policy to maintain the corporations’ prices at a level that does not cover the cost of production.
2.155. An important component of current transfers are monetary transfers (e.g. old age pensions and unemployment benefits) to individuals or households, who are not required to provide any significant amount of goods or services in return. ‘Work for the dole’ schemes are treated as transfers as the main purpose of such schemes is the transfer of monetary benefits and acquisition of employment skills.
2.156. Current transfers also include the direct tax expenses (taxes on income) of public corporations and general government units’ tax expenses such as State or Territory government payroll taxes and Commonwealth Government fringe benefits tax. Indirect tax expenses (taxes on production) of public corporations are treated as non-employee expenses.
2.157. Capital transfers are unrequited payments of a capital nature (i.e. they relate to the acquisition of assets, other than inventories, that will be used in production for one year or more). Capital transfers are usually non-recurrent and irregular for donor or recipient. Capital transfers include government grants for capital purposes to private non-profit organisations serving households, capital grants made to foreign governments and organisations (including grants made for aid projects), and capital grants from one level of government to another (e.g. Commonwealth to State). Included are transfers for the purpose of compensating the recipient for damage or destruction of capital assets, or to increase the financial capital of the recipient. Compensation to primary industry marketing authorities for losses on overseas debts resulting from devaluations is included. Home savings grants are included as are grants to science laboratories and libraries in private schools, university residential colleges, etc.
2.158. Donations of capital assets are included as capital transfers by imputing the value of the assets from equivalent transactions. Such transfers are also recorded as acquisition of non-financial assets.
2.159. Payments made to finance the debt redemption of other bodies are included in capital transfers. In the SNA and in GFS, bad debts written off by mutual agreement between debtor and creditor are treated as capital transfers and bad debts written off unilaterally are treated as other changes in the volume of assets. Such bad debts may be written off from provisions for bad and doubtful debt accounts or directly without prior provisioning.
2.160. Property expenses are requited current transfers involving payment for the use of property rights. Included in property expenses are interest payable, dividends and other income transfers payable by public corporations, land rent payable and royalties.
2.161. Interest included in property expenses includes interest on advances, loans, overdrafts, bonds and bills, deposits and the interest component of finance lease repayments. Also included is the nominal interest on unfunded superannuation liabilities (see discussion in paragraph 2.147). Interest excludes cash settlements of interest swap contracts, which are treated as financial transactions in keeping with the revised SNA93 treatment (see SNA93, paragraph 2.76).
2.162. As indicated, property expense includes income transferred by public corporations as dividends, transfer of profits or other transfers of income. The income transfers include those payable by public corporations to the parent governments, by subsidiary corporations to their parent corporation, and by parent and subsidiary corporations to minority shareholders. Also included are transfers, to their parent governments by State and Territory public corporations, of income tax and wholesale sales tax equivalents. These are amounts levied by parent governments on their corporations to place the corporations on an equivalent tax basis to private corporations. However, the transfers are recorded as property rather than tax expense, because the taxes to which the payments are equivalent are Commonwealth Government taxes whereas the payments are made to State and Territory governments.
2.163. Land rent and royalty expenses refer to the use of non-produced assets such as land and subsoil assets. Royalty payments are made for the right to exploit natural resources. Rentals on produced assets such buildings, copyrights, patents, trademarks, etc. are included with non-employee expenses.
Net acquisition of non-financial assets
2.164. Net acquisition of non-financial assets is defined as gross fixed capital formation less depreciation plus changes in inventories plus other transactions in non-financial assets. Any recoverable or deductible GST is excluded. As previously explained, GFS net operating balance plus net acquisition of non-financial assets is equal to GFS net lending(+)/borrowing(-).
2.165. Gross fixed capital formation is a national accounting concept and is defined as the value of acquisitions less disposals of new and existing produced assets that can be used in production, other than inventories. Acquisition and disposal of valuables are excluded because, although they may be produced assets, valuables are not used in production. Gross fixed capital formation also excludes the acquisition and disposal of non-produced assets such as land, sub-soil assets, virgin forests, etc. (see the discussion ahead under ‘Balance sheet items’ for further explanation of produced and non-produced assets). In practice, for transactions involving land and structures located on the land, separation of the value of land from the value of the structures may be difficult and the transactions are classified to the category (gross fixed capital formation or other transactions in non-financial assets) accounting for the major part of the value of the transaction. Acquisition of produced assets includes own-account capital works. Disposal of produced assets excludes their consumption through depreciation.
2.166. Depreciation is recorded as an expense and as a negative component of net acquisition of non-financial assets. This ensures its exclusion from GFS net lending(+)/borrowing(-), which is derived as the GFS net operating result plus net acquisition of non-financial assets. As a non-cash item, depreciation cannot determine net lending/borrowing, which measures the public sector’s net requirement for finance.
2.167. Changes in inventories refers to the change in the value of inventories arising from transactions over the accounting period. It is recorded as part of net acquisition of non-financial assets because it represents a change to the public sector’s assets during the accounting period. As previously discussed, usage rather than purchases of inventories is included as an expense and a component of the GFS net operating balance. Adding changes in inventories to net acquisition of non-financial assets therefore ensures that GFS net lending(+)/borrowing(-) reflects the net purchases (purchases less sales) of inventories in the accounting period.
Cash flow statement items
2.168. As shown in table 2.4, the cash flow statement identifies the cash flows from the operating, investing and financing activities of government. ‘Cash’ refers to cash on hand and cash equivalents. Cash on hand includes notes and coins held, and deposits held at call with a bank or financial institution. Cash equivalents are highly liquid investments which are readily convertible to cash on hand at the investor’s option.
2.169. Cash flows from operating activities is a net measure representing cash receipts arising from operating activities less cash payments arising from operating activities. ‘Operating activities’ are the types of activities recorded in the operating statement. Cash flows from operating activities include cash receipts from taxation, sales of goods and services, grants and subsidies, property income, and all other revenue earning activities recorded in the operating statement. The item also includes cash payments for employee expenses, including cash contributions to superannuation schemes, purchases of goods and services, and payment of subsidies and grants, current and capital transfers, property expenses and all other expense-incurring activities recorded in the operating statement. Cash flows related to acquisition and disposal of non-financial assets (other than inventories), financial assets, liabilities and equity, are excluded.
2.170. Cash flows from investments in non-financial assets is a net measure representing cash receipts from sales of non-financial assets less cash payments for acquisition of non-financial assets. Non-financial assets are defined in the section ahead relating to the balance sheet. Receipts from sales of non-financial assets include disposal of previously rented dwellings, non-residential buildings, used plant and equipment, and sales of land (including the sale of residential leases in the ACT). Payments for acquisition of non-financial assets includes payments for acquisition of new and second-hand assets, non-produced assets such as land, mineral deposits, timber tracts, and patents and copyrights. Included are capitalised payments for employee and non-employee expenses associated with capital works. The item includes reimbursements received by public authorities, for amounts spent on capital works, while acting as an agent for other government and private bodies.
2.171. Cash flows from investments in financial assets for policy purposes refers to cash receipts from repayment and liquidations of investments in financial assets for policy purposes less cash payments for acquiring financial assets for policy purposes. Acquisition of financial assets for policy purposes is distinguished from investments by the underlying government motivation for acquiring the assets. Acquisition of financial assets for policy purposes is motivated by government policies such as encouraging the development of certain industries or assisting citizens affected by natural disaster. On the other hand, investments are motivated by a desire to maximise returns on surplus funds.
2.172. Acquisitions of financial assets, other than equity, for policy purposes are called ‘advances’. Advances can be made by public authorities to persons, private schools, religious organisations, etc. (e.g. for housing, school building). They include loans for the purchase of homes (e.g. Commissioner for Housing loans in the ACT), war service land settlement and, occasionally, for the purchase of assets sold to persons and non-profit institutions. Advances are often made by public sector units to other public sector units, for example one level of government to another and between units at the same level of government (e.g. general government to public corporations). Included also is provision of funds to public financial corporations for re-lending. Advances can also be made to foreign governments and organisations, such as when subscriptions are made to the International Bank for Reconstruction and Development and the International Development Association.
2.173. In addition to advances, net acquisition of financial assets for policy purposes includes acquisition and disposal by government of shares and other equity in public and private enterprises. Disposal of financial assets acquired for policy purposes includes proceeds from sales of equity in public and private corporations, including privatisations and sale of subsidiaries by public corporations.
2.174. Cash flows from investments in financial assets for liquidity management purposes refers to cash receipts from liquidation or repayment of investments in financial assets for liquidity management purposes less cash payments for such investments. Investment for liquidity management purposes means making funds available to others with no policy intent and with the aim of earning a commercial rate of return.
2.175. Cash flows from financing activities refers to cash receipts from borrowing by public sector units less cash repayments or redemption of such borrowing in the past. Borrowing is the creation of liabilities through, for example, sale of bonds and bills in the capital market, raising loans through direct agreements with lenders or issuing shares and other equities (public corporations only). Borrowing includes the receipt of advances from other government units and receipt of deposits. Also included are borrowing from the International Bank for Reconstruction and Development, borrowing under credit arrangements with foreign governments and authorities, and the issue of stocks and bonds abroad.
2.176. Borrowing also includes receipt of deposits. Deposits include cash held in public accounts by Treasuries on behalf of other government units (e.g. public non-financial corporations) that operate through a trust account held in the public accounts. Deposits lodged by public non-financial corporations and other public sector units with Central Borrowing Authorities are included, as are deposits lodged by private sector entities with public financial corporations.
2.177. This item does not include the increase in liability or borrowing related to the initial entry into a finance lease or similar arrangement since, at that point, no cash flows have actually occurred. When cash flows associated with a finance lease or similar arrangement do occur they are reflected in the cash flow statement for that period. Reduction in liability from subsequent lease repayments is split into a principal and an interest component. Repayments of lease principal are included here. Interest repayments in cash are classified as cash flows from operating activities.
Balance sheet items (including items in the statement of stocks and flows)
2.178. The discussion in this section refers to the classification of balance sheet items and includes discussion, where appropriate, of transactions and other economic flows that relate to the balance sheet items and are recorded in the statement of stocks and flows.
2.179. As previously noted, assets are defined as instruments or entities over which ownership rights are enforced by institutional units and from which economic benefits may be derived by holding them, or using them, over a period of time.
2.180. Financial assets are assets that are in the form of financial claims on other economic units. In the system, financial assets are classified to the following instrument categories:
2.181. The statement of stocks and flows records the results of transactions, revaluations and other volume changes on the value of each of the categories of financial assets described above at the end of the accounting period. Transactions in financial assets represent acquisitions of financial assets less liquidation of such assets (e.g. debtors’ repayment of the financial claims represented by the assets). Acquisition of financial assets includes making deposits of cash with financial institutions, making advances to other units of the public sector or to private sector entities, making investments in other units, and purchasing shares or making other forms of capital contribution to public and private sector corporations for policy or liquidity management purposes. Revaluations occur most often for financial assets, such as shares and securities, that are traded on financial markets or are subject to exchange rate fluctuations. Other volume changes that may have an effect on financial assets include the writing off of bad debts by a creditor. Only write-offs that are not made by mutual agreement between creditor and debtor are treated as other volume changes (those made with mutual agreement are treated as capital transfer expenses).
2.182. Non-financial assets, which are all assets other than financial assets, are classified in the following categories:
2.183. The statement of stocks and flows records the results of transactions, revaluations, and other volume changes on the value of each of the categories of non-financial assets described above at the end of the accounting period. Transactions that change the stock of non-financial assets are also recorded in the operating statement and have already been discussed above under the sub-heading ‘Net acquisition of non-financial assets’. Revaluations of non-financial assets reflect changes in the market price of the assets over the accounting period. In practice, revaluation of assets at market prices may only occur when the assets are sold. In that case, any profit or loss from the sale is recorded as a revaluation and only the book value of the asset is recorded as the transaction value. Other volume changes that can affect non-financial assets include additions to the stock of such assets resulting from mineral discoveries or addition of previously unrecorded assets, and destruction or depletion of assets through natural disasters, degradation or exploitation (of natural assets).
2.184. As previously noted, liabilities are obligations to provide economic value to another economic unit and are the counterparts of financial assets held by the claimant economic units. Liabilities are classified to the following categories:
2.185. The statement of stocks and flows records the results of transactions, revaluations and other volume changes on the value of each of the categories of liabilities described above at the end of the accounting period. Transactions in liabilities include contracting of new liabilities and repayment of past liabilities. Contracting of liabilities includes acceptance of deposits, receipt of advances from other government units, borrowing on financial markets and issuing securities such as bonds and notes. Revaluations of liabilities occur most often for instruments, such as securities, that are traded on financial markets or are subject to exchange rate fluctuations. Changes to liabilities from events other than transactions and revaluations are rare. It should be noted that cancellation of debt by mutual agreement between creditor and debtor is treated as a capital transfer between creditor and debtor and is not recorded as an other volume change in liabilities.
Shares and other contributed capital
2.186. This item is relevant only for public corporations because general government units are not owned by other units and cannot have any form of equity. The item represents the market value of shares and other contributed capital and is grouped with liabilities in the analytical framework because it represents a financial claim on the assets of public corporations. Together with the value of liabilities, it is deducted from assets in the derivation of net worth. The statement of stocks and flows records changes in shares and other contributed capital arising from transactions, revaluations, and other volume changes. Transactions that increase shares and other capital include share issues and other receipts of capital contributions from owners. Transactions that decrease shares and other contributed capital include share redemptions in which a corporation buys back shares from shareholders (payments of dividends and other income transfers are recorded as expenses). The main instances of revaluations that affect shares and other contributed capital are changes in the market value of listed public corporation’s shares on the share market. Other volume changes that affect shares and other contributed capital are rare and are likely to be restricted to reclassifications.
GOVERNMENT PURPOSE CLASSIFICATION
2.187. The government purpose classification (GPC) is used to classify revenues, expenses, and net acquisition of non-financial assets of the public sector in terms of the purposes for which the transactions are made. The GPC is based on the SNA93 classification of the functions of government (COFOG), which is also applied in the IMF GFS system.
2.188. The structure of the GPC is hierarchical and consists of a 2-digit level (major group), a 3-digit level (group) and a 4-digit level (subgroup). The major groups reflect the broad objectives of government and the groups and subgroups detail the means by which these broad objectives are achieved.
2.189. The GPC is grouped according to type of government function or purpose. General services are those government activities that cannot be associated with services to persons or to business. They are collective services that cannot be allocated to particular groups of beneficiaries. They include general public services, defence, and public order and safety.
2.190. Community and social services are services supplied directly to the community, and to households and persons. They include education, health, social security and welfare, housing and community amenities, and recreation and culture.
2.191. Economic services are government activities associated with the regulation and more efficient operation of business. These services include fuel and energy, agriculture, forestry, fishing, hunting, mining and mineral resources, manufacturing, construction, transport, and communications.
2.192. Other functions included in the classification relate to public debt transactions, general purpose transactions and natural disaster relief
2.193. In principle, the unit of classification for the GPC is the individual transaction. However, it is often difficult to identify individual transactions with the headings in the GPC. In these circumstances classifications are assigned to departments, agencies, programs, and similar units within government that can be more readily identified with items in the GPC. When units have more than one function, transactions are classified to the dominant purpose category.
2.194. Some government transactions are not related to current activities and are not regarded as being in respect of a particular type of service. Interest payments reflect the fact that past expenses were financed by borrowing rather than by taxation. This type of expense is not related to current activities. Interest payments are included under public debt transactions in the GPC.
2.195. Administrative expenses are included in the functional grouping of the activities being administered. Research is distinguished in the GPC only where it is considered to be of particular significance. Otherwise it is included with the function to which it relates.
2.196. The major groups of the GPC are shown in table 2.6 below. The full classification is presented in appendix 3.
2.6. GOVERNMENT PURPOSE CLASSIFICATION: MAJOR GROUPS
2.197. General public services (GPC 21) include legislative and executive affairs, financial and fiscal affairs, external affairs, foreign economic aid, general research, general economic and social services, general statistical services, and government superannuation benefits.
2.198. Defence (GPC 22) includes military and civil defence affairs, foreign military aid and defence research.
2.199. Public order and safety (GPC 23) includes police and fire protection services, law courts and legal services, prisons and corrective services, and control of domestic animals and livestock.
2.200. Education (GPC 24) includes primary and secondary education, university and other higher education, technical and further education, preschool and special education, and transportation of students.
2.201. Health (GPC 25) includes general hospitals, repatriation hospitals, mental health institutions, nursing homes, special hospitals, hospital benefits, medical clinics and practitioners, dental clinics and practitioners, maternal and infant health, ambulance services, medical benefits, school and other public health services, pharmaceuticals, medical aids and appliances, and health research.
2.202. Social security and welfare (GPC 26) includes sickness benefits; benefits to ex-servicemen and their dependants; invalid and other permanent disablement benefits; old age benefits, widows, deserted wives, divorcees and orphans benefits; unemployment benefits; family and child benefits; sole parents benefits; family and child welfare; and aged and handicapped welfare.
2.203. Housing and community amenities (GPC 27) includes housing and community development, water supply, household garbage and other sanitation, sewerage, urban stormwater drainage, protection of the environment, and street lighting.
2.204. Recreation and culture (GPC 28) includes public halls and civic centres, swimming pools and beaches, national parks and wildlife, libraries, creative and performing arts, museums, art galleries, broadcasting, and film production
2.205. Fuel and energy (GPC 29) includes coal, petroleum, gas, nuclear affairs, and electricity.
2.206. Agriculture, forestry, fishing and hunting (GPC 30) includes agricultural land management, agricultural water resources management, agricultural support schemes, agricultural research and extension services, forestry, fishing, and hunting.
2.207. Mining and mineral resources, other than fuels; manufacturing; and construction (GPC 31) includes activities relating to prospecting, mining and mineral resources development; manufacturing activities and research into manufacturing methods, materials and industrial management; and activities associated with the building and construction industry.
2.208. Transport and communications (GPC 32) includes road construction, road maintenance, parking, water transport, rail transport, air transport, pipelines, multi-mode urban transit systems, and communications.
2.209. Other economic affairs (GPC 33) includes storage, saleyards, markets, tourism and area promotion, and labour and employment affairs.
2.210. Other purposes (GPC 34) includes public debt transactions, general purpose inter-government transactions, and natural disaster relief.