Chapter 16 The other changes in the volume of assets account
Revaluations and other changes in the volume of assets account - Introduction
16.1 In the ASNA, accumulation entries for revaluations and other changes in the volume of assets are recorded in the balance sheets, reconciling these entries with the opening balance sheet; transactions during the accounting period; and the closing balance sheet. That is, they are not presented as separate accounts but integrated with the opening and closing balance sheets as well as the capital and financial accounts to obtain net worth.
16.2 These accounts record the changes in the values of assets and liabilities that result from flows that are not transactions. These are referred to as other flows. They record significant changes in the value and composition of items between the opening and closing balance sheets due to factors other than transactions (the 2008 SNA defines a transaction as “an economic flow that is an exchange of value between institutional units by mutual agreement”).
16.3 Other flows (revaluations and other volume changes) are useful for analysing changes in wealth not explained by transactions in assets or liabilities. An example of such analysis from the ASNA is Table 12. Analytical measures of national income, saving and wealth. This table includes changes in wealth due to asset prices and other gains/losses; an example being changes in wealth resulting from discoveries of natural resources, or destruction of property by natural disasters.
Revaluations and other changes in the volume of assets account
16.4 Revaluations are holding gains or losses arising from changes in the market prices of assets and liabilities during the accounting period. Holding gains and losses (also referred to as nominal holding gains and losses) are assets and liabilities that remain qualitatively and quantitatively unchanged during the accounting period. Therefore, changes in the value of physical assets attributable to some physical or economic transformation, whether improvement or deterioration, are not recorded as holding gains or losses. In particular, the decline in the value of fixed assets arising from physical deterioration, obsolescence or accidental damage is not a holding loss but is recorded in consumption of fixed capital or other changes in the volume of assets. Increases in value from growth of natural assets are recorded with other changes in the volume of assets.
16.5 Nominal holding gains and losses can be decomposed into neutral holding gains and losses, which are in line with the change in the general level of prices, and real holding gains and losses, which are changes that are above or below the change in the general level of prices.
Other changes in the volume of assets account
16.6 Other changes in the volume of assets are changes in the value of assets and liabilities over the accounting period arising from events other than transactions and revaluations. One important function of the other changes in the volume of assets account is to allow certain assets to enter and leave the system other than by transactions. The acts of entering and exiting from the balance sheet are referred to as economic appearances and disappearances. Some examples of entrances and exits are:
- when naturally occurring assets, such as mineral and energy resources, gain economic value or become worthless;
- as a result of interactions between institutional units and nature (as opposed to a transaction which is the interaction between two institutional units); and
- assets created by human activity, such as valuables and purchased goodwill.
16.7 The second function is to record the effects of exceptional, unanticipated events that affect the economic benefits derivable from assets and is referred to as the effect of external events. These events include those that destroy assets such as natural disasters and war as well as when an institutional unit removes an asset from its owner without consent.
16.8 A third function is to record changes in classifications of institutional units and assets and in the structure of institutional units.
16.9 Holding gains and losses arise from changes in assets, liabilities and net worth over time in the level and structure of prices. Holding gains accrue purely as a result of holding assets over time without transforming them in any way. Holding gains include not only gains on capital such as fixed assets, land and financial assets but also gains on inventories of all kinds of goods held by producers.
16.10 A holding gain (loss) is realised when an asset that has increased (decreased) in value due to holding gains (losses) since the beginning of the accounting period is sold, redeemed, used or otherwise disposed of, or a liability incorporating a holding gain or loss is repaid. An unrealised holding gain is one accruing on an asset that is still owned or a liability that is still outstanding at the end of the accounting period.
16.11 The nominal holding gain on a non-financial asset is the value of the benefit accruing to the owner of that asset as a result of a change in its price over a period of time. The nominal holding gain on a financial asset is the increase in value of the asset, other than transactions in the assets (including the accrual of interest over a period of time) and other changes in the volume of assets. The nominal holding gain on a liability is the decrease in value of the liability, other than by transactions or by other volume changes. Nominal holding gains (losses) are decomposed into neutral holding gains and real holding gains.
16.12 A neutral holding gain (loss) over a period is the increase (decrease) in the value of an asset that would be required, in the absence of transactions and other changes in the volume of assets, to maintain command over the same amount of goods and services as at the beginning of the period. It is the increase in the value of the asset required to preserve exactly the same volume of goods and services).
16.13 A real holding gain (loss) is the amount by which the value of an asset increases (decreases) over the neutral holding gain for the period, in the absence of transactions and other changes in the volume of assets. It is the difference between the nominal holding gain (loss) and the neutral holding gain (loss) for the same asset over the same time period).
Holding gains on fixed assets
16.14 Nominal holding gains may occur on existing fixed assets either because of general inflation or because the price of the asset itself changes over time. When assets of the same kind are still being produced and sold on the market, an existing asset should be valued in the opening or closing balance sheet at the current purchaser’s price of a newly produced asset less the accumulated consumption of fixed capital up to that time also calculated on the basis of the prices prevailing at the time the balance sheet is drawn up. When new assets of the same type are no longer being produced, the valuation of existing assets may pose difficult conceptual and practical problems. If broadly similar kinds of assets are still being produced, even though their characteristics may differ significantly from those of existing assets (for example, new models of vehicles or aircraft), it may be reasonable to assume that, if the existing assets were still being produced, their prices would have moved in the same way as those of new assets. However, such an assumption becomes questionable when the characteristics of new assets are much improved by technical progress.
Holding gains on inventories
16.15 The estimation of nominal holding gains on inventories is difficult because of lack of data on transactions or other volume changes in inventories. Goods entering inventories can be regarded as being acquired by the owner of an enterprise from itself as producer, while goods leaving inventories can be regarded as being disposed of by the owner to the producer for use in production or for sale. These internal transactions should be valued at the prices prevailing at the times they take place. The value of withdrawals thus includes any holding gains on the inventories when stored and this ensures that the value of the holding gain is not included in output. However, when the storage of goods is essentially an extension of the process of production, the increase in the value of the goods that is due to this production is not to be counted as a nominal holding gain. In the case of goods for resale, the value of the goods when withdrawn from inventory should include the value of any holding gain or loss that has occurred while they were in store but not the value of any margin to be realised by the wholesaler or retailer.
16.16 Other volume changes are likely to consist of inventories of goods destroyed as a result of exceptional events such as natural disasters (floods, earthquakes, etc.) or major fires. Recurrent losses of goods from inventories, such as losses due to regular wastage or pilfering, are treated in the same way as deliberate withdrawals. Nominal holding gains on inventories thus relate only to the level of inventories once both exceptional and recurrent losses on inventories have been taken into account.
Financial assets and liabilities
16.17 It is not always appropriate to describe financial assets and liabilities as having a price. Holding gains and losses appear to be treated differently for different categories, though the same basic principles apply to all categories:
- Monetary gold is subject to nominal and real holding gains and losses because of changes in the exchange rate as well as in the price of gold itself.
- The value of Special Drawing Rights (SDRs) is always subject to nominal and real holding gains and losses since the value of the SDR is based on a basket of four key currencies.
- Domestic currency, deposits and loans, and other accounts receivable and payable are not subject to any nominal holding gains or losses as they are denominated in domestic currency. However, although the nominal holding gains are zero, the neutral holding gains on currency are not. Under inflation, neutral holding gains are positive and so the associated real holding gains are negative and of an equal size.
- Bond price changes that are attributable to changes in market rates of interest constitute price and not volume changes. Therefore, they generate nominal holding gains or losses for both the issuers and the holders of the bonds. An increase in interest rates generates a nominal holding gain for the issuer of the bond and an equal nominal holding loss for the holder of the bond, and vice versa in the case of a fall in interest rates.
- Nominal holding gains or losses may accrue on bills in the same way as for bonds. As bills are short-term securities with much shorter times to maturity, the holding gains generated by interest rate changes are generally much smaller than on bonds with the same face values.
- For listed shares and investment fund shares and units, and derivatives, market prices exist and therefore holding gains and losses exist similar to inventories with no storage component.
- For other forms of equity, holding gains are calculated as the sum of holding gains on assets less the holding gains on liabilities.
Other changes in the volume of assets
16.18 The entries in the other changes in assets accounts cover many different kinds of changes in assets, liabilities and net worth. Some of these are particular to the type of asset concerned, while others may apply to all types of assets.
16.19 Other changes in the volume of assets are categorised as follows:
- Economic appearance of non-produced non-financial assets – includes natural resources; contracts, leases and licences; and goodwill and marketing assets.
- Economic appearance of produced non-financial assets – includes valuables and historic monuments which, for various reasons (e.g. not thought previously to be of value), have been excluded from the balance sheets.
- Economic disappearance of non-produced non-financial assets – includes depletion of natural economic assets such as forests and mineral and energy resources as a result of physical removal and use, reassessment of mineral and energy resources as no longer exploitable; negative quality changes arising from changes in use; degradation due to use in economic activity; cancellation of contracts, leases and licences; and write-offs or write-downs of patents and goodwill.
- Catastrophic losses – losses of produced and non-produced assets from (i) earthquakes, volcanic eruptions, tidal waves, hurricanes, drought and other natural disasters; (ii) acts of war, riots, other political events; and (iii) technological accidents such as toxic spills and inadvertent release of radioactive materials.
- Uncompensated seizures – includes seizures of assets by governments or other institutional units; such seizures may be in contravention of national or international law (excludes foreclosures and repossessions by creditors, which are recorded as financial transactions).
- Other volume changes in non-financial assets n.e.c. – includes unforeseen obsolescence, degradation and damage not allowed for in consumption of fixed capital, abandonment of production facilities before they are brought into use, and exceptional losses in inventories (e.g. from fire, robbery or infestation).
- Other volume changes in financial assets and liabilities n.e.c – includes allocation and cancellation of SDRs, write-offs or write-downs of bad debts by creditors, and changes in the actuarially-determined value of defined-benefit pension schemes.
- Changes in classification and structure – includes changes in the sector classification of units, monetisation and demonetisation of gold and other changes in the classification of assets and liabilities.
16.20 In the ASNA it has not been possible to cover all of the types of other volume changes described above and the value of other changes in the volume of assets sometimes is estimated as a residual.