13. Treatment of selected items
Part A - Introduction
This chapter examines specific treatments for certain items that appear in the GFS statement of operations and the GFS balance sheet. The treatment of the following items are described in this chapter:
- Part B - The treatment of debt in Australian GFS;
- Part C - The treatment of contingent liabilities;
- Part D - The treatment of insurance and standardised guarantees;
- Part E - The treatment of public-private partnerships (PPPs);
- Part F - The treatment of major improvements to assets versus maintenance and repairs;
- Part G - The treatment of research and development;
- Part H - The treatment of contracts, leases and licences in GFS;
- Part I - The treatment of superannuation in GFS;
- Part J - The difference between government taxes and government fees for services;
- Part K - The treatment of expenditure versus expense in GFS;
- Part L - The treatment of tax refunds and tax credits in GFS;
- Part M - The treatment of taxes that share characteristics with taxes on property (ETF 111, TC 3) but should be classified elsewhere;
- Part N - The treatment of rent in GFS;
- Part O - The treatment of government payments to NPIs and public corporations;
- Part P - The boundary between use of goods and services and transfers;
- Part Q - The boundary between use of goods and services and employee expenses;
- Part R - The boundary between use of goods and services and the acquisition of non-financial assets; and
- Part S - Recording the production of non-financial produced assets over two or more accounting periods.
Part B - The treatment of debt in Australian GFS
Debt is defined as liabilities payable to creditors within the life of the accounting entity. The non-debt liabilities (under this definition) can therefore be described as equity. Paragraph 7.165 of the IMF GFSM 2014 describes equity as consisting of all instruments and records that acknowledge claims on the residual value of a corporation or quasi-corporation, after the claims of all creditors have been met. Therefore, all liabilities that rank before equity upon liquidation are payable, and are therefore considered to be debt.
Public sector debt is defined as the level of debt liabilities owed by a government to its creditors. Gross public sector debt consists of all liabilities that are debt instruments. It is described as the stock position in financial claims that require payment(s) of interest and / or principal by the debtor to the creditor at a date (or dates) in the future. Net public sector debt is described as gross debt minus the stock position in financial assets corresponding to debt instruments.
Valuation of debt
The Australian GFS records all financial instruments on a gross basis at their market value using the creditor approach - see Chapter 8 of this manual for the definitions. This is because the market value and creditor approach is considered to be the best reflection of the market reality in terms of valuing a financial instrument and the interest that accrues over its life. The valuation of debt is also consistent with the commercial accounting principle of fair valuation.
The Australian GFS method for the valuation of debt deviates from the international approach, which is to record the nominal value of debt. The three valuation principles produce different results when used for valuation purposes, and are defined as follows:
- Market value is conceptually equal to the required future payments of principal and contractual interest discounted at the existing market yield interest rate.
- Nominal value is conceptually equal to the required future payments of principal and interest discounted at the contractual interest rate.
- Face value is the undiscounted amount of principal to be repaid.
The essential difference between market and nominal valuation is the use of current yield instead of contractual interest rate(s) as the discount rate(s) applicable. The use of historical (contractual) interest rates under the nominal value to determine current valuation is not supported by the ABS. The ABS applies the market valuation principle under the creditor approach in all circumstances in macroeconomic statistics. It should be noted that for consistency, valuation of debt at current market values requires measurement of interest payments and receipts at current market yield, not contractual rates. This is a departure from the international standards, but provides a more realistic measure of debt for Australia and promotes coherence within the Australian national accounts. Debt data will be sought at market value, but if it is only available on a nominal value basis the ABS will work with providers to find a suitable solution which may entail modelling to estimate the market value using the data which is available.
Both the IMF GFSM 2014 and the 2008 SNA use a common definition and classification of financial instruments. Note that monetary gold is a contract restricted to central banks and for which asset positions exist without a counterpart liability, and SDRs are contracts between the IMF and national governments. Table 13.1 below shows financial instruments as they are presented in Australian GFS (AGFS15).
|Financial Instruments IMF GFSM 2014||Financial Instruments AGFS15|
Currency and deposits
|Monetary gold (bullion) (ETF 8413, SDC)|
Monetary gold (allocated and unallocated) (ETF 8414, SDC)
Cash and deposits (ETF 8511, SDC)
|Special Drawing Rights (SDRs)||Special Drawing Rights (ETF 8412, SDC) (ETF 8512, SDC)|
|Currency and deposits||Cash and deposits (ETF 8411, SDC) (ETF 8511, SDC)|
|Debt securities||Debt securities (ETF 8421, SDC) (ETF 8521, SDC)|
|Financial derivatives||Financial derivatives (ETF 8422, SDC) (ETF 8522, SDC)|
|Employee stock options||Employee stock options (ETF 8423, SDC) (ETF 8523, SDC)|
|Equity||Equity including contributed capital (ETF 8424, SDC) (ETF 8524, SDC)|
|Investment fund shares or units||Investment fund shares or units (ETF 8425, SDC) (ETF 8525, SDC)|
|Loans||Financial leases (ETF 8431, SDC) (ETF 8531, SDC)|
|Loans||Advances - concessional loans (ETF 8432, SDC) (ETF 8532, SDC)|
Advances other than concessional loans (ETF 8433, SDC) (ETF 8533, SDC)
|Loans||Other loans and placements not elsewhere classified (ETF 8439, SDC (ETF 8539, SDC)|
|Non-life insurance technical reserves||Non-life insurance technical reserves (ETF 8441, SDC) (ETF 8541, SDC)|
|Life insurance and annuities and entitlements||Life insurance and annuities and entitlements (ETF 8442, SDC) (ETF 8542, SDC)|
|Pension entitlements||Provisions for defined benefit superannuation (ETF 8443, SDC) (ETF 8543, SDC)|
|Claims of pension funds on pension manager||Claims of superannuation funds on superannuation manager (ETF 8444, SDC) (ETF 8544, SDC)|
|Provisions for calls under standardised guarantee schemes||Provisions for calls under standardised guarantee schemes (ETF 8445, SDC (ETF 8545, SDC)|
|Miscellaneous other accounts receivable|
Miscellaneous other accounts payable
|Provisions for employee entitlements other than superannuation (ETF 8451, SDC) (ETF 8551, SDC)|
|Other accounts receivable|
Other accounts payable
|Accounts receivable (ETF 8452, SDC)|
Accounts payable (ETF 8552, SDC)
|Miscellaneous other accounts receivable|
Miscellaneous other accounts payable
|Other financial assets not elsewhere classified (ETF 8459, SDC)|
Other liabilities not elsewhere classified (ETF 8559, SDC)
In Australian GFS, both gross public sector debt and other liabilities and net public sector debt and other liabilities are derived from the data supplied by state and territory treasuries, the Department of Finance, local government units and universities.
Gross public sector debt
Gross public sector debt (often referred to as 'total debt' or 'total debt liabilities') consists of all liabilities that are debt instruments and is an economic measure that is recorded as a memorandum item to the balance sheet in GFS. It is described as the stock position in financial claims that require payment(s) of interest and / or principal by the debtor to the creditor at a date (or dates) in the future. All liabilities in the GFS balance sheet are considered to be debt instruments, except for equity including contributed capital (ETF 8524) and investment fund shares or units (ETF 8525) because they entitle the holders to dividends and a claim on the residual value of the unit. In GFS, gross debt is recorded at the current market value basis.
The Australian GFS includes financial derivatives as part of the concept of debt. The Australian GFS differs from the international standard and recognises financial derivatives as regular financial instruments, and therefore as liabilities. In the IMF GFSM 2014, financial derivatives are excluded from the concept of debt because interest does not accrue on them.
A financial derivative is a financial instrument that is linked to another specific financial instrument, or indicator, or commodity, and through which specific financial risks (such as interest rate risk, foreign exchange risk, equity and commodity price risks, credit risk, and so on) can be traded in their own right in financial markets. Paragraph 7.204 of the IMF GFSM 2014 describes financial derivatives as financial instruments where the underlying contracts involve the transfer of risk.
There are two broad types of financial derivatives: options and forward-type contracts. Paragraphs 7.209 and 7.212 of the IMF GFSM 2014 state that in an option contract, the purchaser acquires from the seller a right to buy or sell (depending on whether the option is a call (buy) or a put (sell)) a specified underlying item at a strike price on or before a specified date. A forward-type contract is an unconditional contract by which two counter-parties agree to exchange a specified quantity of an underlying item (real or financial) at an agreed-on contract price (the strike price) on a specified date.
Equity and investment fund shares issued by corporations and similar legal forms of organisation are treated as liabilities of the issuing units even though the holders of the claims do not have a fixed or predetermined monetary claim on the corporation. Equity and investment fund shares entitle their owners to benefits in the form of dividends and other ownership distributions, and they often are held with the expectation of receiving holding gains. In the event that the issuing unit is liquidated, shares and other equities become claims on the residual value of the unit after the claims of all creditors have been met. If a public corporation has formally issued shares or another form of equity, then the shares are a liability of that corporation and an asset of the government or other unit that owns them. If a public corporation has not issued any type of shares, then the existence of other equity is imputed.
Presentation of debt and other liabilities in Australian GFS
To provide reliable and comprehensive statistical data on public sector debt and other liabilities for fiscal policy makers, debt and other liabilities are presented on a gross basis, by type of financial instrument and level of government subsector in GFS. The Australian GFS is based on the presentation of gross debt based on the IMF staff discussion note What Lies Beneath: The Statistical Definition of Public Sector Debt , IMF Staff Discussion Note. IMF July 27, 2012. This shows debt reported as a matrix, with widening debt instrument coverage on one axis (D1 to D5 and beyond), and widening institutional coverage on the other axis (GL2 to GL5). Note that the GL2 level of government is used as the starting point for Australia's level of government in the IMF debt grid. This is because in the IMF staff discussion note, the GL1 level of government represents the budgetary central government only, while the GL2 level of government incorporates the budgetary central government, the extra-budgetary central government and the social security fund levels of government. For the purpose of the IMF debt grid, the level of government that best represents Australia's central government is the GL2 level (bearing in mind that there is no separate social security fund sector in Australia). Australia has expanded the concept set out in that paper to show the total level of government liabilities including debt and equity - see Diagram 13.1 below. The Australian GFS has also adopted the internationally comparable public sector debt ‘headline’ measure for gross debt of the consolidated general government as GL3 / L4 on the grid – see shaded area in Diagram 13.1 below.
Diagram 13.1 - Presentation of gross public sector debt and other liabilities by type of debt or equity instrument and by level of government subsector
Source: Adapted from What Lies Beneath: The Statistical Definition of Public Sector Debt , IMF Staff Discussion Note. IMF July 27, 2012. http://www.imf.org/external/pubs/ft/sdn/2012/sdn1209.pdf
The types of debt and other liabilities instruments recognised as part of the presentation of gross public sector debt and other liabilities in Australian GFS are defined in Table 13.2 below.
Table 13.2 - Presentation of gross public sector debt and other liabilities by type of debt or equity instrument
Source: Based on 'What Lies Beneath: The Statistical Definition of Public Sector Debt ', IMF Staff Discussion Note. July 27, 2012
The levels of government subsector recognised as part of the presentation of gross public sector debt and other liabilities in Australian GFS are defined in Table 13.3 below.
Table 13.3 - Presentation of gross public sector debt and other liabilities by level of government subsector
Note: Universities and multi-jurisdictional units are not shown in the above table.
Source: Based on 'What Lies Beneath: The Statistical Definition of Public Sector Debt ', IMF Staff Discussion Note. July 27, 2012.
Other aspects of debt in GFS
The rest of this section discusses other aspects of debt in GFS including:
- Non-performing loans;
- Concessional loans;
- Debt reorganisation in the context of debt forgiveness, debt rescheduling, debt conversion, and debt assumption;
- Bailout operations; and
- Capital injections.
The current market value of non-performing loans is recorded as part of memorandum items balance sheet (ETF 71) and is classified as non-performing loans at current market value (ETF 7131). Memorandum items in GFS differ to those of commercial accounting in that they are compulsory in GFS rather than optional. In order to facilitate and enhance good decision making, it is beneficial to record information on non-performing loans as well as loans whose principal and interest payments are being met. Paragraph 7.262 of the IMF GFSM 2014 defines non-performing loans as those for which:
- Payments of principal and interest are past due by three months (90 days) or more; or
- Interest payments equal to three months (90 days) interest or more have been capitalised (reinvested to the principal amount) or payment has been delayed by agreement; or
- Evidence exists to reclassify a loan as non-performing even in the absence of a 90 day past-due payment, such as when the debtor files for bankruptcy.
Concessional loans occur when units lend to other units and the contractual interest rate or some other condition is intentionally set below the market interest rate or with a less onerous condition than would otherwise apply. Paragraph 3.123 of the IMF GFSM 2014 notes that while there is no precise definition of concessional loans in macroeconomic statistics, it is generally accepted that they are loans that occur when public sector units lend to other units and the contractual interest rate is intentionally set below the market interest rate that would otherwise apply. The degree of concessionality can also be enhanced with grace periods and frequencies of payments and maturity periods favourable to the debtor.
Government units may acquire or dispose of financial assets on a non-market basis as an element of their fiscal policy rather than as a part of their liquidity management. For example, they may lend money at a below-market (also known as concessional) interest rate, or purchase shares of a corporation at an inflated price. The current market value of stocks of concessional loans are recorded as part of financial assets and liabilities in the GFS balance sheet under advances - concessional loans (ETF 8432 and ETF 8532).
The nature of concessional loans means that they effectively include an implied transfer made up of the difference between the market (concessional) value of the loan and the current market value of similar loans without the concessionality. Paragraph 7.246 of the IMF GFSM 2014 recommends that the value of the implied transfer is recorded as a memorandum item. In GFS, the implied transfer is recorded under implicit transfers receivable from concessional loans (ETF 7111) or implicit transfers payable due to concessional loans (ETF 7112) in the supporting information (ETF 7).
Debt reorganisation (also referred to as debt restructuring in GFS) is defined as an arrangement involving both the creditor and the debtor (and sometimes third parties) that alters the terms established for servicing an existing debt. Paragraph A3.3 of the IMF GFSM 2014 indicates that debt reorganisation usually relieves the debtor from the original terms and conditions of their debt obligations. Debtors of the government seek debt reorganisation in response to liquidity constraints where the debtor does not have the cash to meet debt service payments due, or sustainability issues where the debtor is unlikely to be able to meet its debt obligations in the medium term. Government can be involved in debt reorganisation as either debtor, creditor, or guarantor.
Paragraph A3.4 of the IMF GFSM 2014 warns that a simple failure by a debtor to honour its debt obligations (e.g., default) does not constitute debt reorganisation because it does not involve an arrangement between the creditor and the debtor. Similarly, a creditor can reduce the value of its debt claims on the debtor in its own accounts through debt write-off. These are unilateral actions that arise (for example) when the creditor regards a claim as unrecoverable (perhaps because of bankruptcy of the debtor), and as a result no longer carries the claim on its balance sheet. Again, this is not considered debt reorganisation in GFS.
There are four main types of debt reorganisation recognised in GFS. A debt reorganisation agreement between a debtor and creditor may include elements of more than one of the types mentioned below. Paragraph A3.5 of the IMF GFSM 2014 lists the types of debt reorganisation as:
- Debt forgiveness - this is a reduction in the amount of a debt obligation, or the extinguishing of a debt by a creditor via a contractual agreement with the debtor.
- Debt rescheduling (also known as refinancing or debt exchange) - this is a change in the terms and conditions of the amount owed, which may result in a reduction in debt burden in present value terms.
- Debt conversion and debt prepayment (also known as debt buybacks for cash) - this is where a creditor exchanges a debt claim on a debtor for something of economic value other than another debt claim. Examples of debt conversion are debt-for-equity swaps, debt-for-real-estate swaps, or debt-for-development swaps.
- Debt assumption - this is when a third party is also involved.
Debt forgiveness (or debt cancellation) is defined as the voluntary cancellation of all or part of a debt obligation within a contractual arrangement between a creditor and a debtor. Paragraph A3.7 of the IMF GFSM 2014 states that with debt forgiveness, there is a mutual agreement between the parties involved to cancel the debt, and an intention to convey a benefit. In contrast, with debt write-off there is no such agreement or intention, but rather a unilateral recognition by the creditor that the amount is unlikely to be collected.
Paragraph A3.7 of the IMF GFSM 2014 further states that debt forgiven may include all or part of the principal outstanding, inclusive of any accrued interest. Debt forgiveness includes forgiveness of some (or all) of the principal amount of a credit-linked note arising from an event affecting the entity on which the embedded credit derivative was written. Also included is forgiveness of principal that arises when the debt contract stipulates that the debt will be forgiven if a specified event occurs, such as forgiveness in the case of a type of catastrophe. Debt forgiveness does not arise from the cancellation of future interest that has not yet accrued. In such a case the revised contract would be treated as outlined in 13.30 to 13.39 below.
In GFS, debt forgiveness is recorded as a capital grant or transfer from the creditor to the debtor, which extinguishes the financial claim and the corresponding debt liability. Paragraph A3.8 of the IMF GFSM 2014 states that a government or public sector unit may be involved in debt forgiveness as either a creditor or a debtor. Current market prices are the basis for valuing debt forgiveness.
Bad debts written off (not previously allowed for)
Bad debts written off (not previously allowed for) describes bad debts that have been directly written off without previous provision. Ideally, bad debts written off need to be distinguished between those which are written off by some form of mutual agreement (as a type of debt forgiveness) between debtor and creditor, and those written off unilaterally since their treatment in the macroeconomic accounts differ. In the macroeconomic accounts, bad debts written off by mutual agreement are treated as revenue from capital grants (ETF 1151) or capital grant expenses (ETF 1261), whereas those written off unilaterally are treated as other changes in the volume of financial assets (ETF 5211, TALC 439) or other changes in the volume of liabilities (ETF 5213, TALC 539) (for further information, see paragraph 11.137 of this manual). The distinction between bad debts written off by mutual agreement or unilaterally has not been made in GFS, as data sourced from financial statements cannot be readily split in this manner. Government entities operating on a non-commercial basis (such as government aid agencies), may not provide for bad debts and may directly write them off by mutual agreement.
Provisions for doubtful debts
In GFS, provisions are not recognised other than those relating to employee expenses. In the AGFSM 2015, provisions for doubtful debts (ETF 73) are recorded as part of the supporting information (ETF 7) to enable the ABS to derive the face value of financial assets and liabilities for international statistical reporting. This is because the ABS values financial assets and liabilities at the current market value in macroeconomic statistics, while the IMF GFSM 2014 requires these to be reported at the nominal value. The Australian GFS diverges from the IMF GFSM 2014 in the valuation of all government assets and liabilities at the current market value using the creditor approach.
Allowances for doubtful debts
Allowances for doubtful debts are not recognised in macroeconomic statistics and are excluded from GFS output. Accounts receivable in the GFS balance sheet are recorded net of such allowances. Bad debts written off by mutual agreement are classified as revenue from capital grants (ETF 1151) or capital grant expenses (ETF 1261), whereas those written off on a unilateral basis are treated as other changes in the volume of financial assets (ETF 5211, TALC 439) or other changes in the volume of liabilities (ETF 5213, TALC 539) (for further information, see Chapter 11 of this manual).
Debt rescheduling and refinancing
Debt rescheduling and refinancing involve a change in an existing debt contract and its replacement by a new debt contract, generally with extended debt service payments. Paragraph A3.10 of the IMF GFSM 2014 states that debt rescheduling involves re-arrangements on the same type of instrument, with the same principal value and the same creditor as with the old debt, while debt refinancing involves a different debt instrument, generally at a different value, and possibly with a different creditor. If the original terms of a debt contract state that the maturity or interest rate terms (or both) change as a result of (for example) a default or decline in credit rating, then this involves a rescheduling of the debt. In contrast, if the original terms of a debt contract are changed through renegotiation by the parties, then this is treated as a transaction in the repayment of the original debt and the creation of a new debt liability.
Debt rescheduling is defined as a bilateral arrangement between the debtor and the creditor that constitutes a formal postponement of debt service payments and the application of new and generally extended debt maturities. Paragraph A3.11 of the IMF GFSM 2014 indicates that the new terms normally include one or more of the following elements: extending repayment periods, reductions in the contracted interest rate, adding or extending grace periods for payments fixing the exchange rate at favourable levels for foreign currency debt, and rescheduling the payment of arrears, if any.
With debt rescheduling, the applicable existing debt is recorded as being repaid and a new debt instrument (or instruments) created with new terms and conditions.
A debt rescheduling transaction should be recorded at the time agreed to by both parties (the contractually agreed time), and at the value of the new debt (which, under a debt rescheduling, is the same value as that of the old debt maybe of a different value, which implies amendment of debt forgiveness). Paragraph A3.13 of the IMF GFSM 2014 indicates that if no date is set, the time at which the creditor records the change of terms is decisive. If the rescheduling of obligations due beyond the current period is linked to the fulfilment of certain conditions, entries are recorded only in the period when the specified conditions are met.
In the specific case of zero coupon securities, a reduction in the principal amount to be paid at redemption to an amount that still exceeds the principal amount outstanding at the time the arrangement becomes effective, could be classified as either an effective change in the contractual rate of interest, or a reduction in principal with the contractual rate unchanged. Paragraph A3.11 of the IMF GFSM 2014 states that such a reduction in the principal payment to be made at maturity should be recorded as debt forgiveness, or debt rescheduling if the bilateral agreement explicitly acknowledges a change in the contractual rate of interest.
Debt refinancing involves the replacement of an existing debt instrument or instruments (including any arrears) with a new debt instrument or instruments. Paragraph A3.14 of the IMF GFSM 2014 states that debt refinancing can involve the exchange of the same type of debt instrument (such as a loan for a loan), or different types of debt instruments (such as a loan for a bond). For example, a public sector unit may convert various export credit debts into a single loan, or exchange existing bonds for new bonds through exchange offers given by its creditor (rather than a change in terms and conditions).
The treatment of debt refinancing transactions is similar to that of debt rescheduling. This is because the debt being refinanced is extinguished and replaced with a new financial instrument (or instruments). Paragraph A3.15 of the IMF GFSM 2014 indicates that under this arrangement, the old debt is extinguished at the value of the new debt instrument owed to official creditors.
If the refinancing involves a direct debt exchange, such as a loan-for-bond swap, then the debtor should record a reduction in liabilities under the appropriate debt instrument and an increase in liabilities to show the creation of the new obligation. Paragraph A3.16 of the IMF GFSM 2014 recommends that the transaction be recorded at the value of the new debt (reflecting the current market value of the debt), and the difference between the value of the old and new debt instruments is recorded as debt forgiveness.
However, if the debt is owed to official creditors and is non-marketable (for example a loan), then the old debt is extinguished at its market value with the difference in market value with the new instrument recorded as debt forgiveness. Paragraph A3.16 of the IMF GFSM 2014 states that where there is no established market price for the new bond, an appropriate proxy should be used. For example, if the bond is similar to other bonds being traded, then the market price of a traded bond would be an appropriate proxy for the value of the new bond. If the debt being swapped was recently acquired by the creditor, then the acquisition price would be an appropriate proxy. Alternatively, if the interest rate on the new bond is below the prevailing interest rate, then the discounted value of the bond (using the prevailing interest rate) may serve as a proxy.
In GFS, the balance sheet records any changes in the stock position of assets and liabilities resulting from extinguishing old debt instruments and creating new debt instruments, and any subsequent valuation changes. Paragraphs A3.17 to A3.19 of the IMF GFSM 2014 recommend that if the proceeds from the new debt are used to partially pay off the old (existing) debt, then the remaining old debt should be recorded as being extinguished. A new debt instrument is then created that is equal to the value of the remaining old debt extinguished. If the terms of any new borrowings are concessional, then the creditor is seen as providing a transfer to the debtor that is equal to the difference between the concessional rate and the current market value.
Debt conversion or swap
Debt conversion (also known as a debt swap) is defined as an exchange of debt (typically at a discount) for a non-debt claim (such as equity), or for counterpart funds that can be used to finance a particular project or policy. Under this arrangement, paragraph A3.20 of the IMF GFSM 2014 states that public sector debt is extinguished and a non-debt liability is created.
A common example of debt conversion is a debt-for-equity swap. Paragraph A3.21 of the IMF GFSM 2014 indicates that often, a third party is involved in a debt-for-equity swap where they buy the claims from the creditor and receive equity in a public corporation (the debtor). Under such an arrangement, determining the value of the equity can be difficult if the equity is not actively traded on a market. If the equity is not publicly traded, then its valuation may be based on the current market value of similar publicly traded equity.
Paragraph A3.22 of the IMF GFSM 2014 describes other examples of debt conversions (or swaps) such as external debt obligations for exports (also known as 'debt-for-exports') or debt obligations for counterpart assets that are provided by a debtor to a creditor for the creditor to use for a specified purpose, such as wildlife protection, health, education, and environmental conservation (also known as 'debt-forsustainable-development).
Debt prepayment is defined as a repurchase or early payment of debt at conditions that are agreed between the debtor and the creditor. Paragraph A3.24 of the IMF GFSM 2014 states that the debt is extinguished in return for a cash payment agreed between the debtor and the creditor. The transaction is recorded at the value of the debt prepaid. In the AGFSM 2014, the transaction will be recorded at the current market value using the creditor method.
If the debt is owed to official creditors and is non-marketable, then paragraph A3.25 of the IMF GFSM 2014 indicates that debt forgiveness may be involved if the prepayment occurs within an agreement between the parties with an intention to convey a benefit. In this situation, a capital transfer (or capital grant) from the creditor to the debtor is recorded for debt forgiveness, which reduces the value of the outstanding liability/claim.
Debt assumption is defined as a trilateral agreement between a creditor, a former debtor, and a new debtor (typically a government unit), under which the new debtor assumes the former debtor’s outstanding liability to the creditor and is liable for repayment of debt. Paragraph A3.26 of the IMF GFSM 2014 states that calling a guarantee is an example of debt assumption. If the original debtor defaults on its debt obligations, then the creditor may invoke the contract conditions permitting the guarantee from the guarantor to be called. The guarantor unit must either repay the debt or assume responsibility for the debt as the primary debtor (i.e., the liability of the original debtor is extinguished). A public sector unit can be the debtor that is defaulting or the guarantor. A government can also, through agreement, offer to provide funds to pay off the debt obligation of another government unit or a private sector unit owed to a third party.
Paragraph A3.27 of the IMF GFSM 2014 indicates that the statistical treatment of debt assumption depends on (i) whether the new debtor acquires an effective financial claim on the original debtor, and (ii) if there is no effective financial claim, the relationship between the new debtor and the original debtor and whether the original debtor is bankrupt or no longer a going concern. An 'effective financial claim' is a claim that is supported by a contract between the new debtor and the original debtor, or (especially in the case of government) an agreement, with a reasonable expectation that it be honoured, for the original debtor to reimburse the new debtor. A 'going concern' is an entity in business that is operating for the foreseeable future.
Paragraph A3.27 of the IMF GFSM 2014 states that this implies three possibilities:
- The debt assumer (new debtor) acquires an effective financial claim on the original debtor. The debt assumer records an increase in debt liabilities to the original creditor, and an increase in financial assets, such as in the form of loans, with the original debtor as the counterparty. The original debtor records a decrease in the original debt liability to the creditor and an increase in liabilities (such as in the form of a loan) to the debt assumer. The value of the debt assumer’s claim on the original debtor is the present value of the amount expected to be received by the assumer. If this amount is equal to the liability assumed, no further entries are required. If the amount expected to be recovered is less than the liability assumed, the debt assumer records an expense in the form of capital transfer/grant to the original debtor for the difference between the liability incurred and the financial asset acquired in the form of loans. For the debt assumer, gross debt increases by the amount of debt assumed.
- The debt assumer (new debtor) does not acquire an effective financial claim on the original debtor. This may be the case when the original debtor is bankrupt or no longer a going concern, or when the debt assumer seeks to convey a benefit to the original debtor. The debt assumer records an expense in the form of a capital transfer / capital grant to the original debtor, and an increase in debt liabilities to the original creditor. The original debtor records revenue in the form of a capital transfer / capital grant, which extinguishes the debt liability on its balance sheet. The exception to this case is when the original debtor is a public corporation that continues to be a going concern, which is discussed next.
- The debt assumer (new debtor) does not acquire an effective financial claim and the original debtor is a public corporation that continues to be a going concern. The debt assumption amounts to an increase in the equity owned by the debt assumer in the public corporation (original debtor). The debt assumer records an increase in debt liabilities to the original creditor, and an increase in financial assets in the form of equity and investment fund shares. The public corporation records a decrease in the debt liability to the original creditor, and an increase in non-debt liabilities in the form of equity and investment funds shares.
Diagram 13.2 - Decision tree for the statistical treatment of debt assumption
Source: Figure A3.1, International Monetary Fund Government Finance Statistics Manual, 2014
Paragraph A3.28 of the IMF GFSM 2014 mentions a special case where debt assumption involves the transfer of non-financial assets (such as non-financial produced assets or land) from a public corporation (original debtor) to the debt assumer (new debtor). In this case, the debt assumer records an increase in debt liabilities to the original creditor and the acquisition of a non-financial asset(s). If the current market value of the non-financial asset(s) is equal to the value of the liability assumed, then no further entries are recorded. However, if there is any difference between the value of the liability assumed and the current market value of the non-financial asset(s), then a capital transfer / capital grant between the debt assumer and original debtor is recorded.
Debt payments on behalf of others
Rather than assuming a debt, a public sector unit may decide to repay that debt or make a specific payment on behalf of another institutional unit (original debtor) without a guarantee being called, or the debt being taken over. In this case, paragraph A3.30 of the IMF GFSM 2014 states that the debt should stay recorded solely on the balance sheet of the other institutional unit, which is the only legal debtor. While this activity is similar to debt assumption (because the existing debt remains with unaltered terms), debt payment on behalf of others is not considered debt reorganisation.
The treatment of debt payments on behalf of others depends on whether the public sector unit paying the debt acquires an effective financial claim on the debtor or not. Paragraph A3.31 of the IMF GFSM 2014 states:
- If the paying unit obtains an effective financial claim on the original debtor, the paying unit records an increase in financial assets (e.g., loans) and a decrease in currency and deposits. The recipient (debtor) records a decrease in the original debt liability and an increase in another liability to the paying unit. If the claim of the paying unit on the debtor is in the form of a debt instrument, the gross and net debt of the paying unit and recipient (debtor) do not change. However, if the claim of the paying unit on the debtor is in the form of a non-debt instrument (for example equity), then:
- for the paying unit, gross debt remains unchanged, but net debt increases (due to the reduction in its financial assets in the form of currency and deposits); and
- for the recipient (debtor), gross and net debt decrease (due to the reduction in the debt liability).
- If the paying unit does not obtain an effective financial claim on the original debtor, the paying unit records an expense in the form of a capital transfer / capital grant and a decrease in financial assets in the form of currency and deposits. The receiving unit (debtor) records revenue in the form of a capital transfer / capital grant and a decrease in the original debt liability.
Debt write-offs and write-downs
Debt write-offs or write-downs are defined as unilateral reductions by a creditor of the amount owed to it. The financial asset is removed from the balance sheet of the creditor but the liability remains on the balance sheet of the debtor through an other changes in the volume of assets and liabilities entry in the accounts. Unlike debt forgiveness (which is a mutual agreement and therefore considered to be a transaction), paragraph A3.33 of the IMF GFSM 2014 states that a debt write-off or write-down is a unilateral action, and is subsequently recorded as other changes in the volume of assets and liabilities. With debt forgiveness, the financial asset is removed from the balance sheet of the creditor and the corresponding liability is removed from the balance sheet of the debtor, and also through an other changes in the volume of assets and liabilities entry in the accounts.
Debt is commonly written off because the debtor goes bankrupt or is forced into liquidation. However, paragraph 10.57 of the IMF GFSM 2014 states that debt may sometimes be written off for other reasons, such as a court order. The write-off may be full or partial; partial write-offs may arise under a court order, or if the liquidation of the debtor’s assets allows some of the debt to be settled. Court orders though are regarded as involving mutual agreement as outlined in paragraph 3.8 of this manual. They are analogous to tax or court imposed fines. Debt write downs as a result of a court order are treated as debt rescheduling as described in paragraph 13.31 of this manual.
New money facilities
To assist a debtor to overcome temporary financing difficulties, new money facilities may be agreed with the creditor to repay maturing debt obligations. Paragraphs A3.35 and A3.36 of the IMF GFSM 2014 indicate that the two debt instruments involved (the maturing debt obligation and the new money facility) are treated separately in GFS. Under this arrangement, the creditor records a reduction in the original claim on the debtor and an increase in a new claim on the debtor. Similarly, the debtor records a reduction in the original liability to the creditor and an increase in a new liability to the creditor. If the terms of the new borrowings are concessional, the creditor is seen as providing a transfer to the debtor that is equal to the difference between the concessional rate and the current market value.
Under debt defeasance, a debtor unit removes liabilities from its balance sheet by pairing them with financial assets, the income and value of which are sufficient to ensure that all debt-service payments are met. Paragraph A3.37 of the IMF GFSM 2014 states that defeasance may be carried out by placing the assets and liabilities in a separate account within the institutional unit concerned, or by transferring them to another unit. In either case, GFS does not recognise defeasance as affecting the outstanding debt of the debtor. Thus, no transactions with respect to defeasance are recorded in the GFS framework, as long as there has been no change in the legal obligations of the debtor. When the assets and liabilities are transferred to a separate account within the unit, both assets and liabilities should be reported on a gross basis. If a separate entity resident in the same economy is created to hold the assets and liabilities, that new unit should be treated as an ancillary entity and consolidated with the defeasing unit.
Debt arising from bailout operations
The term 'bailout' is used to describe a situation where a government unit provides either short-term financial assistance to a corporation in financial distress to help it survive a temporary period of financial difficulty, or a more permanent injection of financial resources to help recapitalise a corporation. Paragraph A3.42 of the IMF GFSM 2014 notes that a bailout may result in the reclassification of the assisted corporation into the public sector if the government acquires control of the corporation it is bailing out. Bailouts frequently involve highly publicised, one-time transactions and large amounts, and so they can be easily identified in the accounts.
The term 'capital injection' refers to situations where significant financial support is provided by a government unit to capitalise or recapitalise a corporation in financial distress. Paragraph A3.43 of the IMF GFSM 2014 uses the term capital injection to reflect a direct intervention that is recorded in macroeconomic statistics either as a capital transfer, a loan, an acquisition of equity, or a combination of these. Direct intervention by general government units may take various forms, for example:
- Providing recapitalisation through an injection of financial resources (capital injection) or the assumption of a failed corporation’s liabilities;
- Providing loans and / or acquiring equity in the corporations in distress (i.e., requited recapitalisation) on favourable terms, or not; or
- Purchasing assets from the financially distressed corporation at prices greater than their true market value.
There are two main issues that need to be examined when recording the effects of bailout operations for GFS purposes. The first issue relates to the correct sectorisation of the entity or unit that finances or manages the sales of assets and / or liabilities of the distressed corporation. The second issue relates to the correct statistical treatment of capital injections.
Sectorisation of units involved in a bailout operation
Assessing the sector of the units involved in a bailout operation is important for determining whether transactions, other economic flows, and stock positions (debt liabilities and other assets and liabilities) are within the general government sector or public corporations sector.
A government may create a restructuring agency (also known as a defeasance structure) in the form of a Special Purpose Entity (or other type of public body), to finance or to manage the defeasance of impaired assets or repayment of liabilities of the distressed corporation. Paragraph A3.46 of the IMF GFSM 2014 states that the sector of the restructuring agency should correctly reflect the underlying economic nature of the entity. Therefore, the sectorisation rules (as outlined in Chapter 2 of this manual) should be applied to determine whether such an entity or unit belongs as part of the general government sector or public financial corporations sector:
- If a public institutional unit is created by government solely to assume management of the assets or liabilities of the distressed corporation and is not a market producer, the unit should be classified in the general government sector because it is not involved in financial intermediation.
- If the new unit has other functions and the management of the assets or liabilities of the distressed corporation is a temporary task, then its classification as a general government unit or a public financial corporation needs to made according to the rules described in Chapter 2 of this manual.
Statistical treatment of capital injections
As mentioned in paragraph 6.86 of this manual, a capital injection refers to a situation where significant financial support is provided by a government unit to capitalise or recapitalise a corporation in financial distress. This significant financial support is recorded as a loan, a capital transfer, an acquisition of equity, or a combination of these.
When a public sector unit (as the investor unit) intervenes by means of a capital injection that is legally in the form of a loan to the corporation in distress, paragraph A3.48 of the IMF GFSM 2014 indicates that the statistical treatment depends on whether the investor unit obtains an effective financial claim on the corporation. An effective financial claim is a claim that is supported by a contract between the new debtor and the original debtor, or (especially in the case of government) an agreement, with a reasonable expectation to be honoured, that the original debtor will reimburse the new debtor.
When a public sector unit intervenes by means of a capital injection other than a loan to the corporation in distress, the statistical treatment depends on whether a realistic return can be expected on this investment or not. Paragraph A3.49 of the IMF GFSM 2014 notes that a realistic rate of return on funds is indicated by the intention to earn a rate of return that is sufficient to generate dividends or holding gains at a later date and that there is a claim on the residual value of the corporation. Under this method:
- If the public sector unit (investor unit) can expect a realistic return on the investment, the investor unit records an increase in financial assets in the form of equity and investment fund shares, and a decrease in financial assets (e.g., currency and deposits) or an increase in liabilities, depending on how the acquisition of equity is financed. The corporation in financial distress records an increase in financial assets (e.g., currency and deposits), and an increase in non-debt liabilities in the form of equity and investment fund shares.
- The portion of the investment on which no realistic return can be expected (which may be the entire investment) is treated as a capital transfer / capital grant.
Paragraph A3.50 of the IMF GFSM 2014 states that a capital injection in the form of a capital transfer / capital grant (full or partial) is recorded when the funds are provided:
- Without receiving anything of equal value in exchange; or
- Without a reasonable expectation of a realistic rate of return; or
- To compensate for the impairment of assets or capital as a result of large operating deficits accumulated over two or more years, and exceptional losses due to factors outside the control of the enterprise.
Under this arrangement, the unit providing the assistance records an expense in the form of a capital transfer / capital grant and a decrease in financial assets (e.g., currency and deposits) or an increase in liabilities, depending how this capital transfer is financed. Paragraph A3.51 of the IMF GFSM 2014 recommends that the recipient records revenue in the form of a capital transfer / capital grant and an increase in financial assets in the form of currency and deposits.
If the government buys assets from a corporation being assisted through a capital injection, paragraph A3.52 of the IMF GFSM 2014 states that the amount paid may be more than the true market price of the assets. The purchase of assets should be recorded at the current market price, and a capital transfer / capital grant should be recorded for the difference between the market price and the actual amount paid. If government extends a guarantee as part of a bailout, the guarantees should be recorded according to whether this is a one-off guarantee or part of a standardised guarantee scheme. Diagram 13.3 below provides a decision tree for the statistical treatment of capital injections.
Diagram 13.3 - Decision tree for the statistical treatment of capital injections
¹An effective claim is understood to be a claim that is supported by a contract between the new debtor and the original debtor, or (especially in the case of governments) an agreement with a reasonable expectation to be honoured, that the original debtor will reimburse.
²A realistic rate of return on funds is indicated by the intention to earn a rate of return that is sufficient to generate dividends or holding gains at a later date, and includes a claim on the residual value of the corporation.
Source: Based on Figure A3.2, International Monetary Fund Government Finance Statistics Manual, 2014.
Paragraph A3.53 of the IMF GFSM 2014 provides further guidance for borderline cases relating to capital injections:
- If the capital injection is covering large operating deficits accumulated over two or more years or exceptional losses due to factors outside the control of the enterprise, the capital injection is recorded as a capital transfer / capital grant;
- If capital injection is made to a quasi-corporation (for the definition, see Chapter 2 of this manual) that has negative equity, the capital injection is always recorded as a capital transfer / capital grant;
- If the capital injection is undertaken for specific purposes relating to public policy in order to compensate a bank in financial distress for anticipated defaults / bad assets / losses within its balance sheet, the capital injection is recorded as a capital transfer / capital grant; unless a realistic rate of return and / or a claim on the residual assets can be expected which results in an equity investment being recorded;
- If there are private shareholders providing a significant share (in proportion to their existing share holding) of equity during the capital injection, then the capital injection by the public entity is also recorded as an equity investment since the assumption is that private investors would be seeking a return on their investment.
Debt of special purpose entities
Governments may establish artificial subsidiaries as Special Purpose Entities (SPEs) in the form of public corporations that sell goods or services exclusively to government, without tendering for a government contract in competition with the private sector. Paragraph A3.55 of the IMF GFSM 2014 recommends that such public corporations be classified as part of the general government sector (its parent unit).
If a government conducts fiscal activities through an entity that is resident abroad, paragraph A3.56 of the IMF GFSM 2014 states that such entities are not treated in the same way as embassies and other territorial enclaves because they operate under the laws of the host economy. When an SPE resident in one economy borrows on behalf of the government of another economy and the borrowing is for fiscal purposes, paragraph A3.57 of the IMF GFSM 2014 recommends the following statistical treatment in the accounts of that government:
- At the time of borrowing, a transaction creating a debt liability of the government to the borrowing entity is imputed equal to the amount borrowed. The counterpart entry is an increase in the government’s equity in the borrowing entity.
- At the time funds (or assets acquired with the funds) are transferred to the government, a transaction for the flow of funds or assets is recorded, matched by a reduction of the government’s equity in the borrowing entity by the same amount.
- At the time expenses are incurred, or assets are transferred by the borrowing entity to a third party (i.e., are not transferred to the government), a current or capital transfer between the government and the entity is imputed, with the matching entry of a reduction in the value of the government’s equity.
Debt arising from securitisation
Securitisation occurs when a unit (named the originator) conveys ownership rights over financial or nonfinancial assets, or the right to receive specific future flows to another unit (named the securitisation unit). Paragraph A3.59 of the IMF GFSM 2014 states that in return, the securitisation unit pays an amount to the originator from its own source of financing. The securitisation unit obtains its own financing by issuing debt securities using the assets or rights to future flows transferred by the originator as collateral. When asset-backed securities are issued by a public sector unit, they form part of public sector debt.
Debt arising from off-market swaps
An off-market swap is defined as a swap contract that has a non-zero value at inception as a result of having a reference rate priced differently to current market values (that is, 'off-the-market'). Paragraph A3.68 of the IMF GFSM 20414 states that such a swap results in a lump sum being paid (usually at inception) by one party to the other. The economic nature of an off-market swap is a combination of borrowing (the lump sum) in the form of a loan, and an on-market swap (a financial derivative). Examples of swaps contracts that may involve off-market reference rates include interest rate and currency swaps.
Because the economic nature of an off-market swap is equivalent to a combination of a loan and a financial derivative, paragraph A3.69 of the IMF GFSM 2014 recommends that two stock positions are recorded in the GFS balance sheet:
- A loan which is equal to the non-zero value of the swap at inception and with a maturity date equivalent to the expiration date of the swap (the loan position is a liability of the party that receives the lump sum); and
- A financial derivative (swap) component which has a market value of zero at inception (the derivative position may appear either on the financial asset or liability side, depending on market prices on the balance sheet date).
On-lending of borrowed funds
Paragraph A3.72 of the IMF GFSM 2014 describes the on-lending of borrowed funds as occurring when a resident institutional unit (known in this case as 'A') borrowing from another institutional unit(s) (known in this case as 'B'), and then on-lending the proceeds from this borrowing to a third institutional unit(s) (known in this case as 'C'). The on-lending of borrowed funds is motivated by several factors, for example:
- Institutional unit A may be able to borrow from unit B at more favourable terms than unit C could borrow from unit B; or
- Institutional unit C’s borrowing powers are limited by factors such as foreign exchange regulations; only unit A can borrow from non-residents.
The classification of the debt liability of institutional unit A to unit(s) B depends on the type of instrument(s) involved: typically, such borrowing is in the form of loans and / or debt securities. In such cases, paragraph A3.75 of the IMF GFSM 2014 recommends that institutional unit A’s debt liabilities in the form of loans and/or debt securities increase (credit) as a result of the borrowing from unit(s) B, with a corresponding increase (debit) in unit A’s financial assets in the form of currency and deposits. These events result in an increase in the gross debt position of unit A, but no change in its net debt position.
Part C - The treatment of contingent liabilities in GFS
Paragraph 7.251 of the IMF GFSM 2014 defines contingent liabilities as obligations that do not arise unless a particular, discrete event(s) occurs in the future. The key difference between contingent liabilities and actual liabilities is one or more conditions must be fulfilled before a financial transaction is recorded. With contingent liabilities, there is uncertainty whether a liability will need to be recognised and the size of the payment involved. With actual liabilities, the debt is owned by the borrower and repayment is contractually certain. To manage liquidity the government needs to keep track of contingent liabilities to ensure that there are adequate reserves of funds prepared in case a guarantee is called or other event occurs. The value of explicit contingent liabilities is not included on the GFS balance sheet, but is recorded as a memorandum item in GFS. Memorandum items in GFS differ to those of commercial accounting in that they are compulsory rather than optional.
Common types of contingent liabilities are guarantees of payment by a third party, such as when a general government unit guarantees the repayment of a loan by another borrower. In this case, the liability is contingent because the guarantor (the general government unit) is only required to repay the loan if the borrower defaults. Therefore for GFS purposes, the contingent liability will not appear in the accounts of the general government unit unless, and until the guarantee is called.
Explicit contingent liabilities and implicit contingent liabilities
In GFS, a distinction is made between explicit contingent liabilities and implicit contingent liabilities. Paragraph 7.252 of the IMF GFSM 2014 defines these as:
- Explicit contingent liabilities are defined as legal or contractual financial arrangements that give rise to conditional requirements to make payments of economic value. The requirements become effective if one or more stipulated conditions arise. Explicit contingent liabilities may take a variety of forms, but guarantees are the most common type.
- Implicit contingent liabilities are defined as not arising from a legal or contractual source but are recognised after a condition or event is realised. The most common form of implicit contingent liability for government is the assumption of provisions for future benefits such as age or disability pensions for a population. Another example is the expectation for the provision of funds for disaster recovery for events that have not yet occurred. Implicit contingent liabilities are not recorded in GFS unless the conditions associated with these are met (e.g. a person reaches an age where they are eligible to claim the age pension). Then the implicit contingent liability transforms into an actual liability and enters the GFS balance sheet. The remainder of this section will deal exclusively with explicit contingent liabilities.
Diagram 13.4 below shows the separation between actual liabilities and contingent liabilities in macroeconomic statistics. The line down the middle delineates the border between the types of liabilities considered actual liabilities and contingent liabilities in GFS.
Diagram 13.4 - Actual and contingent liabilities in macroeconomic statistics
¹Includes liabilities for non-autonomous unfunded employer superannuation schemes
²Excludes liabilities for non-autonomous unfunded employer superannuation schemes
Source: Adapted from Figure 7.2, International Monetary Fund Government Finance Statistics manual, 2014.
Explicit contingent liabilities
Although guarantees are the most common type of explicit contingent liabilities, not all guarantees are contingent liabilities. Paragraph 7.253 of the IMF GFSM 2014 notes that guarantees in the form of derivatives and provisions for calls under standardised guarantee schemes are treated as actual liabilities and are recorded on the GFS balance sheet. Paragraph 7.254 of the IMF GFSM 2014 states that explicit contingent liabilities in GFS comprise:
- Publicly guaranteed debt;
- Other one-off guarantees; and
- Explicit contingent liabilities not elsewhere classified.
Publicly guaranteed debt
Publicly guaranteed debt are one-off guarantees in the form of loan and other debt instrument guarantees. Paragraph 7.256 of the IMF GFSM 2014 defines one-off guarantees as individual agreements whose associated monetary risk cannot be determined accurately. Often, one-off guarantees involve very large values, and carry a high risk of the guarantee being called. Paragraph 7.257 of the IMF GFSM 2014 notes that one-off guarantees are considered to be a contingent liability of the guarantor. The liabilities under a one-off guarantee continue to be attributed to the debtor unless and until the guarantee is called.
Some very high risk one-off guarantees are treated as if they are called at inception. Paragraph 7.258 of the IMF GFSM 2014 gives the example of a one-off guarantee granted by government to a corporation which is experiencing severe financial distress. In this type of case, the liability of the debtor (the corporation in financial distress) is assumed instantly by the guarantor (the government). Paragraph 7.258 of the IMF GFSM 2014 warns against the double counting of one-off guarantees called at inception because although the liability is created by the debtor, it is not owned by them. In this situation, the liability is instantly recorded by the guarantor at the inception of the one-off guarantee.
Paragraph 7.259 of the IMF GFSM 2014 groups one-off guarantees into:
- Loan and other debt instrument guarantees in the form of publicly guaranteed debt - these constitute the debt liabilities of public and private sector units, the servicing of which is contractually guaranteed by public sector units. Under this arrangement, one party agrees to bear the risk of non-payment of a financial commitment by another party under a guarantee arrangement. The guarantor is only required to make a payment if the debtor defaults; and
- Other one-off guarantees - these include credit guarantees such as lines of credit and loan commitments, contingent 'credit availability' guarantees, and contingent credit facilities. Lines of credit and loan commitments are one-off guarantee arrangements generally offered by financial institutions (such as banks) which provide a guarantee that undrawn funds will be available in the future, but no liability or financial asset will exist until such funds are actually provided.
Paragraph 7.260 of the IMF GFSM 2014 notes that publicly guaranteed debt differs from other types of one-off guarantee because the guarantor guarantees the servicing of the existing debt of other public and private sector units. With other one off guarantees, no liability / financial asset exists until funds are provided or advanced.
Other one-off guarantees
Other one-off guarantees form a part of explicit contingent liabilities and are defined in paragraph 7.254 of the IMF GFSM 2014 as comprising one-off guarantees other than publicly guaranteed debt.
Explicit contingent liabilities not elsewhere classified
Explicit contingent liabilities not elsewhere classified also form a part of explicit contingent liabilities and are defined in paragraph 7.254 of the IMF GFSM 2014 as explicit contingent liabilities that are not in the form of guarantees. They comprise:
- Potential legal claims stemming from pending court cases;
- Indemnities, which are commitments to accept the risk of loss or damage another party might suffer (for example, indemnities arising in government contracts with other units);
- Uncalled capital, which is an obligation to provide additional capital on demand, to an entity of which it is a shareholder (such as an international financial institution); and
- Potential payments remitting from PPP arrangements.
Part D - The treatment of insurance and standardised guarantees
An insurance policy is defined as an agreement between an insurer and another institutional unit (known as the policyholder). Paragraph A4.66 of the IMF GFSM 2014 states that under the insurance policy agreement, the policyholder makes payments (known as premiums) to the insurance corporation. If (or when) a specified event occurs for which the policyholder is covered by the insurance policy agreement, the insurance corporation makes a payment (known as a claim) to the policyholder. Under an insurance policy, the policyholder protects itself against certain forms of risk. By pooling these risks, the insurer aims to receive more from the receipt of premiums than it has to pay out as claims to the insured. Insurance liabilities are treated as actual liabilities rather than contingent liabilities in GFS - see Diagram 13.4 of this manual.
The most common form of insurance is called direct insurance whereby the policy is issued by an insurer to another type of institutional unit. Paragraph A4.68 of the IMF GFSM 2014 indicates that there are two types of direct insurance, known as life insurance and non-life insurance. Both types of insurance involve pooling risks. Under direct insurance, insurers receive many (relatively) small regular payments of premiums from policyholders and pay much larger sums to claimants when the contingencies covered by the policy occur. During the interval between the receipt of premiums and the payment of claims, the insurance corporation earns income from investing the premiums received. This investment income affects the levels of premiums and benefits set by the insurer. Paragraphs A4.69 and A4.70 of the IMF GFSM 2014 provide the following definitions:
- Life insurance - is an activity whereby a policyholder makes regular payments to an insurer in return for which the insurer guarantees to provide the policyholder (or in some cases another nominated person) with an agreed sum, or an annuity, at a given date or earlier if the policyholder dies beforehand. For life insurance, an important relationship exists between premiums and benefits during the policy period. For policyholders the benefits receivable are expected to be at least as great as the premiums payable, and this type of insurance can be seen as a form of saving. The insurer combines this aspect of a single policy with the actuarial calculations about the insured population concerning life expectancy (including the risks of fatal accidents) when determining the relationship between the levels of premiums and benefits. Life insurance mainly redistributes premiums payable over a period of time as benefits payable later to the policyholders or his/her beneficiaries. Essentially, life insurance premiums and benefits are transactions in financial assets and liabilities and not transactions in revenue and expense. Public sector units’ involvement in life insurance is most often provided in the form of employment-related superannuation schemes.
- Non-life insurance - is an activity similar to life insurance except that it covers all other risks such as accidents, damage from fire, etc. For non-life insurance, the risks are spread over all policyholders, and the number of claimants is typically much smaller than the number of policyholders. Non-life insurance includes policies that provide a benefit in the case of death within a given period but in no other circumstances, usually called term insurance. With non-life insurance, a claim is payable only if a specified contingency occurs and not otherwise. This type of insurance consists of redistribution in the current period between all policyholders and a few claimants. While public corporations may be involved in various types of insurance schemes, general government units are usually not involved in non-life insurance other than social insurance.
Standardised guarantees are defined as many guarantees that are similar in nature, and are issued in large numbers to many individuals or entities, often for smaller values. Paragraphs 7.201 and A4.71 of the IMF GFSM 2014 note that common types of standardised government guarantees include various types of insurance such as natural disaster insurance, student loans, and loans to small to medium enterprises. Standardised guarantees differ from one-off guarantees in that they are treated as actual liabilities rather than contingent liabilities in GFS, even though they contain an element of contingency by their very nature (see Diagram 13.4 of this manual).
Under a standardised guarantee there are three parties involved, the borrower (which is the debtor), the lender (which is the creditor), and the guarantor. Paragraph A4.71 of the IMF GFSM 2014 states that either the borrower or the lender may contract with the guarantor to repay the creditor if the debtor defaults. Similar to non-life insurance, it is not possible to determine the likelihood of any particular debtor defaulting. However, because the guarantees are very similar in nature and numerous in number, it is possible to estimate the general likelihood of defaults that the guarantor will have to cover. It is standard practice to estimate the default rate for a pool of similar guarantees. This default rate establishes an actual debt liability for an operator of a standardised guarantee scheme rather than a contingent liability, and is recorded through a transaction under provisions for calls under standardised guarantee schemes (ETF 3211, TALC 545).
Standardised guarantees are often provided by financial institutions, however, government units also take the role of guarantor in standardised guarantee schemes. Paragraph A4.72 of the IMF GFSM 2014 notes that the most common examples of government involvement in standardised guarantee schemes are in the cases of export credit guarantees, deposit insurance schemes, and student loan guarantees. When a government unit provides standardised guarantees without fees, or at such low rates that the fees are significantly less than the calls and administrative costs, the unit should be treated as a non-market producer within the general government sector. If a standardised guarantee scheme is operated by a general government unit, any transfers to cover recurrent losses are classified as revenue from current grants and subsidies (ETF 1141, SDC) for the recipient, and subsidies on products (ETF 1252, COFOG-A, SDC) or other subsidies on production (ETF 1253, COFOG-A, SDC) for the provider of the transfer. In addition, any transfers from the general government to cover large operating deficits of units accumulating over two or more years, or for exceptional losses due to factors outside the control of the unit are recorded as revenue from capital grants (ETF 1151, SDC) for the recipient, and capital grant expenses (ETF 1261, COFOG-A, SDC) for the provider of the transfer. Further information on subsidies and capital grants can be found in Chapter 6 and Chapter 7 of this manual.
The following flows and stock positions recorded by public sector units acting as either (i) non-life insurers or guarantors; or (ii) non-life insurance policy holders and holders of standardised guarantees appear in paragraph A4.79 of the IMF GFSM 2014. These flow and stock positions have been reproduced in Box 13.1 below:
Box 13.1 - Flows and stock positions recorded by public sector units acting as (i) non-life insurers or guarantors; or (ii) non-life insurance policy holders and holders of standardised guarantees
(i) For general government or public sector institutional units acting as an insurer or guarantor of standardised guarantees, recording these events would require recording the following entries in GFS:
- Actual premiums (fees) receivable: The amount of actual premiums (fees) receivable represents premiums earned and prepayment of premiums. The portion of actual premiums (fees) receivable representing premiums (fees) earned for the reporting period represents revenue and is recorded as premiums, fees and claims related to non-life insurance and standardised guarantee schemes (ETF 1143, SDC). Prepaid premiums (fees) represent transactions in financial assets (net), non-life insurance technical reserves (ETF 3111, TALC 441) with a counterpart entry as a transaction in liabilities for non-life insurance technical reserves -(ETF 3211, TALC 541).
- Property income earned on the investment of reserves: Usually, the reserves related to insurance or standardised guarantees are invested in financial assets and the revenue generated by these investments is generally in the form of interest income (ETF 1131, SDC) or dividend income (including tax equivalents) (ETF 1132, SDC). Sometimes, however, the reserves may be used to generate net operating surpluses either in a separate establishment or as a secondary activity.
- Property income attributed to policyholders: An additional set of transactions are needed where property income is generated by the investment of technical reserves as it is deemed to be an implicit premium supplement. Therefore, the insurer (guarantor) should attribute the property income to the policy holders by recording an expense, property expense for investment income disbursements (ETF 1286, COFOG-A, SDC). The counterpart to this expense is an increase in liabilities in non-life insurance technical reserves (ETF 3211, TALC 541, SDC). Further, when the liability is extinguished, the insurer (guarantor) should record the premium supplement. This supplement reduces the cash payment that would otherwise be required from the policy holder, and is recorded as revenue classified as premiums, fees and current claims related to non-life insurance and standardised guarantee schemes (ETF 1143, SDC). The counterpart to this revenue item is a decrease in either financial liabilities for non-life insurance technical reserves (ETF 3211, TALC 541, SDC) or provisions for calls under standardised guarantee schemes (ETF 3211, TALC 545, SDC).
- Claims (calls) payable: An expense for expected claims (calls, ie. the event has occurred) should be recognised in premiums, fees and current claims related to non-life insurance and standardised guarantees (ETF 1256, COFOG-A, SDC), and with a counterpart entry as an increase in the liability related to non-life insurance technical reserves (ETF 3211, TALC 541, SDC) or provisions for calls under standardised guarantee schemes (ETF 3211, TALC 545, SDC). For standardised guarantee schemes, the expense recorded is the expected level of calls (less any expected asset recoveries) on the standardised guarantees provided in the recording period. When claims (calls) are paid, transactions are recorded reducing liabilities related to non-life insurance technical reserves or provisions for calls under standardised guarantees with a corresponding reduction in assets or an increase in other liabilities.
- Holdings gains and losses: In some exceptions, if an amount for a claim outstanding has been agreed upon and it has been agreed that it will be indexed pending payment, there may be a holding gain or loss recorded for it.
- Other changes in volume of assets and liabilities: Changes to provisions for calls under standardised guarantee schemes not resulting from transactions and holding gains and losses, are shown as other changes in volume of assets; for example, whenever a significant change to the expected level of calls is recognised, beyond any asset recovery.
(ii) For general government or public sector institutional units acting as non-life insurance policyholders and holders of standardised guarantees, recording these events would require recording the following entries in GFS
- Actual premiums (fees) payable: The amount of actual premiums payable represents premiums incurred, prepayment of premiums, and an implicit services charge payable. Because the implicit service charge can only be calculated in the context of an analysis of the whole of the economy, it is not recognised in GFS as an expense. The portion of actual premiums payable representing premiums incurred for the reporting period is an expense, classified as premiums, fees and current claims related to non-life insurance and standardised guarantees (ETF 1256, COFOG-A, SDC). Prepaid premiums represent a transaction in financial assets in GFS, and is recorded as an increase in financial assets in the form of accounts receivable (ETF 3111, TALC 452, SDC).
- Property income attributed to policyholders: An additional set of transactions are needed where property income is generated by insurers (guarantors) on the investment of technical reserves as it is deemed to be an implicit premium supplement, attributed to the policyholders. Conceptually, general government or public sector institutional units as policyholders might record property income revenue, classified as revenue from investment funds (ETF 1136, SDC). The counterpart to this revenue item an increase in non-life insurance technical reserves (ETF 3111, TALC 441, SDC). Further, when premiums are due the government unit / policy holder should record an expense to recognise the application of the premium supplement which is classified as premiums, fees and current claims related to non-life insurance and standardised guarantee schemes (ETF 1256, SDC). The counterpart to this expense is a reduction in non-life insurance technical reserves (ETF 3111, TALC 441, SDC).
- In practice no money exchanges between the insurer and the government unit / policy holder and the revenue related to this item is not always known to GFS compilers. Therefore, this revenue and expense may not be recorded in GFS and may require and an adjustment to GFS.
- Claims receivable: Claims become due when the event that gives rise to a valid claim occurs, whether or not paid, settled, or reported during the reporting period. The policyholder recognises revenue for the claim at the time an event giving rise to a claim occurred, or in the case of a standardised guarantee at the time a call can be made in terms of the contract. These claims receivable should be recognised as revenue classified as premiums, fees and claims related to non-life insurance and standardised guarantees (ETF 1143, SDC) and with a counterpart entry as an increase in a financial asset in the form of provisions for calls under standardised guarantees (ETF 3111, TALC 445, SDC) or technical reserves for non-life insurance. Upon actual payment of the claims, a decrease is recorded in the relevant insurance reserve with a corresponding increase in other financial assets not elsewhere classified (ETF 3111, TALC 459, SDC).
Source: Based on paragraphs A4.79 and A4.80 of the International Monetary Fund Government Finance Statistics Manual, 2014
Part E - The treatment of public-private partnerships (PPPS)
Public-private partnerships (PPPs) are defined in paragraph A4.58 of the IMF GFSM 2014 as long term contracts between two units whereby one unit acquires or builds an asset (or set of assets), operates it for a period, and then hands the asset over to a second unit. PPP arrangements commonly involve a government unit and a private corporation. However, other combinations of parties in a PPP arrangement are possible, such as a public corporation as both parties in the arrangement, or a private non-profit institution as the second unit. Governments engage in PPPs for a variety of reasons, including the expectation that private management may lead to more efficient production, or that access to a broader range of financial sources can be obtained.
In GFS, PPP arrangements are sometimes referred to by different names depending on the type of contract that is in place. The examples listed in paragraph A4.58 of the IMF GFSM 2014 include private finance initiatives (PFIs); design, built, operate, and transfer schemes (DBOT); build, own, and transfer schemes (BOTs); or build, own, operate, and transfer schemes (BOOTs).
The types of activities that involve PPP arrangements can vary greatly. Paragraph A4.59 of the IMF GFSM 2014 states that generally under a PPP arrangement, private corporations are engaged to construct and operate assets of a kind that are usually the responsibility of the general government or public corporations. These types of assets commonly include infrastructure such as bridges, water supply and sewerage treatment works and pipelines, and facilities such as hospitals, prisons, stadia and electricity generation and distribution facilities.
PPP arrangements are attractive for both the government and for private corporations (or other parties to the arrangement). Paragraph A4.60 of the IMF GFSM 2014 indicates that under a PPP arrangement, the private corporation (or other party) can expect to recover its costs and to earn an adequate rate of return on its investment. The government often makes periodic payments during the contract period, or alternatively the private corporation may sell the services to the public (e.g., a toll road), or a combination of the two. The prices involved are often regulated by the government and set at a level that will allow the private corporation to recover its costs and earn a return on its investment (benchmark price). If the regulated price is set at a level below such a benchmark price, the government will usually need to compensate the private partner, often through subsidies or other transfers. There can be many variations in PPP contracts regarding aspects such as the disposition of the assets at the end of the contract, the required operation and maintenance of the assets during the contract, and the price, quality, and volume of services produced. At the end of the contract period, the government may gain legal and economic ownership of the assets, possibly without payment.
Determining economic ownership of PPP related assets
Determining the economic ownership of an asset and whether to record PPP-related assets and liabilities in the government’s or the private corporation’s balance sheet is not always straightforward. Paragraph A4.61 of the IMF GFSM 2014 states that under a PPP arrangement, the private corporation is responsible for acquiring or constructing the non-financial produced assets, although the acquisition or construction is often supported by the backing of the government. The contract often allows government to specify the design, quality, capacity, use, and maintenance of the asset in accordance with government standards. Typically, the assets have service lives much longer than the contract period so that the government will control the asset, bear the risks, and receive the rewards for a major portion of the assets’ service life. It can be difficult to determine whether the private corporation or the government controls the assets over their service lives or which party bears the majority of the risks and benefits from the majority of the rewards. In GFS, it is prudent to examine PPP arrangements on a case by case basis to determine economic ownership of the related asset.
Because a distinction is made in GFS between legal ownership and economic ownership of assets based on risks and benefits, paragraph A4.62 of the IMF GFSM 2014 indicates that the legal owner and economic owner of the asset being acquired or constructed may be two different parties under a PPP arrangement. Box 13.2 below examines the factors that need to be taken into consideration when determining the economic ownership of PPP-related assets.
Box 13.2 - Determining the economic ownership of PPP-related assets
The economic owner of the assets related to a PPP is determined by assessing which unit bears the majority of the risks and which unit is expected to receive a majority of the rewards of the asset. The factors that need to be considered in assessing economic ownership of PPP-related assets include those associated with acquiring the asset and those associated with using the asset.
Some of the risks associated with acquiring the asset are:
- The degree to which the government controls the design, quality, size, and maintenance of the assets; and
- Construction risk, which includes the possibility of additional costs resulting from late delivery, not meeting specifications, or building codes, and environmental and other risks requiring payments to third parties.
Some of the risks associated with operating the asset are:
- Supply risk - covers the degree to which the government is able to control the services produced, the units to which the services are provided, and the prices of the services produced;
- Demand risk - includes the possibility that the demand for the services, either from government or from the public at large in the case of a paying service, is higher or lower than expected;
- Residual value and obsolescence risk - includes the risk that the value of the asset will differ from any price agreed for the transfer of the asset to government at the end of the contract period; and
- Availability risk - includes the possibility of additional costs or the incurrence of penalties because the volume and/or quality of the services do not meet the standards specified in the contract.
PPP arrangements need to be examined on a case by case basis to determine economic ownership over the associated assets. The relative importance of each factor listed above is likely to vary with each PPP. It is not possible to state prescriptive rules that will be applicable to every situation.
Source: Adapted from Box A4.4, International Monetary Fund Government Finance Statistics Manual, 2014.
If the government is identified as the economic owner of the asset(s) during the contract period but does not make any explicit payment at the beginning of the contract, paragraph A4.64 of the IMF GFSM 2014 states that a transaction must be imputed to cover the acquisition of the asset(s) for GFS purposes. The recording of this depends on the specific contract provisions, how they are interpreted, and possibly other factors. Most frequently, these contracts will be recorded as the acquisition of the asset through an imputed financial lease because of the similarity with actual financial leases.
If the private corporation is considered to be the economic owner of the asset(s) during the contract period, paragraph A4.65 of the IMF GFSM 2014 states that any debt associated with the acquisition of the asset(s) should be attributed to the private corporation. Normally, the government obtains legal and economic ownership of the assets at the end of the contract without any significant payment. However, two approaches are possible to account for the acquisition of the asset(s) by the government:
- Over the contract period, the government gradually builds up a financial claim (e.g., accounts receivable) and the private corporation gradually accrues a corresponding liability (e.g., accounts payable), such that both values are equal to the residual value of the assets at the end of the contract period. At the end of the contract period, government records the acquisition of the asset, with a reduction in the financial claim (accounts receivable) as the counterpart entry. The other unit records the disposal of the asset, with a reduction in the liability (accounts payable) as the counterpart entry. Implementing this approach may be difficult because it requires new transactions to be constructed using assumptions about expected asset values and interest rates.
- An alternative approach is to record the change of legal and economic ownership from the private unit to government as a capital transfer at the end of the contract period. At the end of the contract period, government records revenue in the form of a capital transfer which finances the acquisition of the asset and the private unit records an expense in the form of a capital transfer payable to government, financed by the disposal of the asset. The capital transfer approach does not reflect the underlying economic reality as well as the first alternative, but data limitations, uncertainty about the expected residual value of the assets, and contract provisions allowing various options to be exercised by either party makes recording a capital transfer in GFS acceptable on pragmatic grounds.
Part F - The treatment of major improvements to assets versus maintenance and repairs of assets
Paragraphs 8.25 to 8.27 of the IMF GFSM 2014 provides guidance to help to distinguish between major improvements to assets and the maintenance or repair of assets. Major improvements to existing assets (such as renovations, reconstructions, and enlargements) increase the productive capacity of the asset, extend its service life, or both. In GFS, major improvements are classified as transactions for the acquisition of non-financial produced assets during the reporting period, and the value of the improvement is then added to the existing value of the underlying asset at the end of the reporting period. The exception is in the case of land where major improvements are identified separately under land improvements (ETF 4114, TALC 113, SDC).
The maintenance and repair of non-financial produced assets constitute an expense that is classified as the use of goods and services (ETF 1233, COFOG-A, SDC) in the GFS system. Paragraph 8.26 of the IMF GFSM 2014 distinguishes major improvements from maintenance and repairs by the following features:
- The decision to renovate, reconstruct, or enlarge an asset is a deliberate investment decision that may be undertaken at any time and is not dictated by the condition of the asset. Major renovations of ships, buildings, or other structures are frequently undertaken well before the end of their normal service lives; and
- The major renovations, reconstructions, or enlargements increase the performance or capacity of existing assets or significantly extend their previously expected service lives. Enlarging or extending an existing road, building, or structure constitutes a major change in this sense, but a complete refitting or restructuring of the interior of a building also qualifies.
Paragraph 8.27 of the IMF GFSM 2014 further distinguishes maintenance and repairs by the following two features:
- They are activities that owners or users of assets are obliged to undertake periodically in order to be able to utilise such assets over their expected service lives. They are current costs that cannot be avoided if the non-financial produced assets are to continue to be used. The owner or user cannot afford to neglect maintenance and repairs as the expected service life may be drastically shortened otherwise; and
- They do not change the non-financial produced asset or its performance, but simply maintain it in good working order or restore it to its previous condition in the event of a breakdown. Defective parts are replaced by new parts of the same kind without changing the basic nature of the nonfinancial produced asset.
Part G - The treatment of research and development
In the GFS system, research and development may take the form of expenditures made by a resident unit in producing knowledge for use within the unit, or expenditures made by a unit in acquiring research and development produced by another unit. This includes the cost of any grants provided to other units for performing research and development. In Australian GFS, the Organisation for Economic Co-operation and Development (OECD) Handbook on Deriving Capital Measures of Intellectual Property Products, 2010 is used to provide practical guidance on the asset boundary of research and development and other intellectual property products.
The Frascati Manual: Proposed Standard Practice for Surveys on Research and Experimental Development, 6th Edition (the Frascati Manual), is also used in the Australian GFS to provide guidance on the concept of research and development. This publication separates research and development into three types of activities: basic research, applied research and experimental development. They are defined as follows:
- Basic research - this is experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundation of phenomena and observable facts, without any particular application or use in view.
- Applied research - this is original investigation undertaken in order to acquire new knowledge. It is, however, directed primarily towards a specific practical aim or objective.
- Experimental development - this is systematic work, drawing on existing knowledge gained from research and/or practical experience, which is directed to producing new materials, products or devices, to installing new processes, systems and services or to improving substantially those already produced or installed.
While the Frascati Manual recognises the types of activities relating to research and development as either basic research, applied research or experimental development, paragraph 6.207 of the 2008 SNA (the overarching framework for macroeconomic statistics) does not consider pure basic research of general government and private non-profit institutions to constitute produced assets. This is because the results of pure basic research benefits the general population and is usually freely available, and so provides no future economic benefit to the developer. Therefore, the costs of pure basic research of general government and private non-profit institutions are not capitalised, but expensed under non-employee expenses not elsewhere classified (ETF 1239, COFOG-A, SDC) in the period to which they relate.
Only applied research and experimental development of general government units and private non-profit institutions are considered to constitute non-financial assets. However, pure basic research conducted by corporations is considered to be non-financial assets because in macroeconomic statistics, it is believed that a corporation would not undertake research and development if it did not provide them with future economic benefits. In the Australian national accounts, the cost of pure basic research is excluded from produced assets, except in the case of research and development expenditure by businesses.
The value of research and development is determined in terms of the economic benefits it is expected to provide in the future. This value includes the provision of public services in the case of research and development acquired by government. Paragraph 7.64 of the IMF GFSM 2014 notes that intellectual property products are the result of research, development, investigation, or innovation leading to knowledge that the developers can market or use to their own benefit in production because use of the knowledge is restricted by means of legal or other protection. This knowledge may be embodied in a freestanding product or may be embodied in another product. When the latter is the case, the product embodying the knowledge has an increased price relative to a similar product without this embodied knowledge. The knowledge remains an asset as long as its use can create some form of monopoly profits for its owner. When it is no longer protected or becomes outdated by later developments, it ceases to be an asset or is still an asset but of significantly lower value. Paragraph 7.67 of the IMF GFSM 2014 indicates that if it is not feasible for research and development to be valued at current market prices, then research and development may be valued as the sum of costs (including the cost of unsuccessful research and development). Research and development carried out on contract is valued at the contract price.
The cost of research and development also includes the costs associated with mineral exploration and evaluation. Paragraph 8.39 of the IMF GFSM 2014 states that mineral exploration and evaluation consists of the value of expenditures on exploration for petroleum and natural gas and for non-petroleum deposits and subsequent evaluation of the discoveries made. In addition to the costs of actual test drilling and boring, mineral exploration includes any pre-licence, licence, acquisition, and appraisal costs, the costs of aerial and other surveys, and transportation and other costs incurred to make the exploration possible are included.
Part H - The treatment of contracts, leases and licences in GFS
Contracts, leases, and licences are treated as non-financial non-produced assets in GFS, and form part of the concept of intangible non-produced assets (ETF 832) in the GFS balance sheet.
The basic function of a contract is to record the terms of agreement for one unit to provide another unit with a good, service, or asset at an agreed price within an agreed time frame. Paragraph A4.2 of the IMF GFSM 2014 states that contracts may take the form of written, legally binding agreements, or they may be informal or even implicit in nature. Whatever form they take, contracts serve as evidence of a change in the ownership of an asset and the point at which a transaction takes place.
The term 'leasing' refers to a contractual arrangement where the owner of an asset (the lessor) allows a second party (the lessee) to use the asset for a specified time in return for payment. There are three types of leases relating to the use of non-financial assets that are recognised in macroeconomic statistics. Paragraphs A4.6 to A4.17 of the IMF GFSM 2014 name these as:
- Operating leases;
- Financial leases; and
- Resource leases.
In GFS, there is a distinction between legal and economic ownership of assets. The legal owner of an asset is defined as the institutional unit entitled by law and sustainable under the law to claim the benefits associated with the asset. By contrast, the economic owner of an asset is entitled to claim the benefits associated with the use of the asset in the course of an economic activity by virtue of accepting the associated risks. The legal owner is often the economic owner as well. When they are different, the legal owner of an asset is said to have divested themselves of the risks in return for agreed payments from the economic owner. When determining the ownership of leased assets, paragraph A4.4 of the IMF GFSM 2014 states:
- In the case of operating leases and resource leases, there is no change of economic ownership of the asset and the legal owner continues to be the economic owner. Resource leases are agreements for the use of natural resources, such as land and radio spectrum. Operating leases are agreements for the use of all other non-financial assets.
- In the case of financial leases, there is a change of economic ownership of the asset: the legal owner of the asset conveys economic ownership to another institutional unit. Financial leases can apply to all non-financial assets, including natural resources under some circumstances.
An operating lease is defined in paragraph A4.6 of the IMF GFSM 2014 as a contract for the renting out of produced assets under arrangements that provide the use of the asset to the lessee, but does not involve the transfer of the bulk of the risks and rewards of ownership to the lessee. The legal and economic owner of assets under an operating lease is called the lessor. One indicator of whether an operating lease exists is that it is the responsibility of the legal owner to provide any necessary repair and maintenance of the asset. Under an operating lease the asset remains on the balance sheet of the lessor. Amounts payable under an operating lease for the use of the asset are referred to as rentals and are recorded as use of goods and services (ETF 1233, COFOG-A, SDC).
Paragraph A4.7 of the IMF GFSM 2014 indicates that operating leases are most commonly used for nonfinancial assets such as motor vehicles, office equipment (e.g. photocopiers), construction equipment, buildings, etc. Under an operating lease arrangement, the lessor takes responsibility for the repair and maintenance and security of the asset. The lessor may also be required to replace the asset if it is seriously damaged. Depreciation on the asset under an operating lease arrangement is recorded in the accounts of the lessor.
A financial lease is defined as a contract under which the lessor (as the legal owner of an asset), conveys all the risks and rewards of ownership of the asset to the lessee. Under this arrangement, the lessor provides an imputed loan which allows the lessee to acquire the risks and the rewards of the asset, but the lessor retains the legal title (ownership) of the asset. The lessor will record a loan (corresponding to the market value of the leased asset) to the lessee on their balance sheet (classified as transactions in financial assets (net) (ETF 3111), finance leases (TALC 431, SDC)), and the lessee will record both the market value of the leased asset and an equivalent loan liability on their balance sheet when the lease is signed, or economic control of the asset changes hands (classified as transactions in liabilities (net) (ETF 3211), finance leases (TALC 531, SDC)).
Paragraph 9.45 of the IMF GFSM 2014 states that when goods are acquired under a financial lease, a change of economic ownership from the lessor to the lessee is deemed to take place, even though the leased goods remain legally the property of the lessor. This change in economic ownership is financed by a loan transaction: the lessor and lessee record a loan equal to the market value of the asset, this loan being gradually paid off over the period of the lease. The implication of treating a financial lease as a loan is that interest accrues on the loan. At the time the lease is initiated, the market value of the imputed loan is, by definition, equal to the market value of the asset (or principal). The rate of interest is the discount rate, which when applied to the future lease payments, matches their present value with the principal. Therefore the lease payments equate to instalments that cover the interest accrued during the period as well as repayment of the principal.
At the end of the lease term, paragraph A4.15 of the IMF GFSM 2014 states that the asset may be returned to the lessor to cancel the loan, or a new arrangement (including the outright purchase of the asset) may be reached between the lessor and lessee. If the lease is for less than the expected economic life of the asset, the lease usually specifies the value to the lessor at the end of the lease or the terms under which the lease can be renewed. Any variation in the price of the asset from the value specified in the lease agreement is borne by the lessee.
There are a number of indicators which may help to distinguish if a contract is in fact a finance lease. These indicators are listed in Box 13.3 below.
Box 13.3 - Evidence that a contract may be a financial lease
Under a financial lease, the lessee becomes the economic owner of the associated non-financial produced asset. Under an operating lease, the lessor remains the economic owner of the non-financial produced asset and payments by the lessee are recorded as payments for a service. Evidence that a contract may be a financial lease includes:
- The lease contract transfers legal ownership of the asset to the lessee at the end of the lease term; or
- The lease contract gives the lessee the option to acquire legal ownership of the asset at the end of the lease term at a price that is sufficiently low that the exercise of the option is reasonably certain; or
- The lease term is for the major part of the economic life of the asset; or
- At inception, the present value of the lease payment amounts to substantially all of the value of the asset; or
- If the lessee can cancel the lease, the losses of the lessor are borne by the lessee; or
- Gains or losses in the residual value of the residual asset accrue to the lessee; or
- The lessee has the ability to continue the lease for a secondary period for a payment substantially lower than market value.
Source: Appendix 4.11, International Monetary Fund Government Finance Statistics Manual, 2014
A resource lease is defined in paragraph A4.16 of the IMF GFSM 2014 as an agreement whereby the legal owner of a natural resource (that macroeconomic statistics treat as having an infinite life) makes it available to a lessee in return for a regular payment. Under a resource lease, there is no change in economic ownership so the resource continues to be recorded on the balance sheet of the lessor, even though it is used by the lessee. The lessee is allowed the use of the natural resource in exchange for regular payments (which are called rents), the receipt of which are recorded as property income by the lessor. By convention, no depreciation is applied to natural resources. The use or depletion of a natural resource is instead recorded as an other change in the volume of assets (see Chapter 11 for more information other change in the volume of assets).
Australian natural resources (including petroleum and gas reserves) are owned by the Commonwealth, state and territory governments. The right to use natural resources may be granted to other parties but the Commonwealth, state and territory governments retain ownership of these assets.
In Australia, one of the most common types of resource lease concerns the leasing of mineral resources. There are three broad types of mining licences and leases issued in Australia. Each corresponds with a certain stage of the mining process and confers particular rights to the licence or lease holder:
- Initial access for exploration and evaluation purposes is granted through prospecting or exploration licences. These licences confer the right to explore and evaluate a specified area of land (both above and below the surface) to determine the existence, quality and quantity of minerals present. In addition, a prospecting licence may grant the right to hand-mine for minerals.
- In the event that exploration is successful but for one reason or another, mining cannot commence, the right to postpone extractive activities is granted through a retention lease.
- In the event that exploration is successful and mining can commence, the right to engage in extractive activities is granted through a mining lease. This right is conferred with respect to discoveries within a defined area and over a specified term. Mining leases in Australia are generally granted for maximum terms of between 20 and 25 years, but it is common for shorter terms to be renewable.
In GFS, licences exist to provide a regulatory function for common activities undertaken by the general population. If the issue of such licences involves little or no work for the government, then the revenues raised are recorded as taxation revenue (ETF 111). However, if the government uses the issue of licences to exercise some sort of regulatory function, such as checking the competency or qualifications of a would-be licensee, then the revenues raised are recorded as administrative fees (ETF 1122) as part of sales of goods and services by government unless they are clearly disproportionate to the costs of providing the services. Examples of licences issued by government include fishing licences, marriage licences, drivers licences, and dog owners licences. Further information on the classification of tax versus payment for services can be found in Box 13.5 of this manual.
The difference between a lease and a licence is that governments issue licences in order to regulate certain activities that are common to the general population, whereas government leases often involve a specialised activity, such as mineral extraction.
Permits to undertake a specific activity
In addition to leases and licences, governments may issue permits that give individuals or entities permission to engage in a particular activity in exchange for a fee. Permits are designed to limit the number of individual units entitled to engage in an activity. Often the government is required to check the competency and / or qualifications of permit holders. If the government performs this type of regulatory function, then the fees that are associated through the issue of permits will be recorded as administrative fees (ETF 1122) as part of sales of goods and services (ETF 112). Examples of permits issued by governments include gambling permits, food and beverage permits, and taxi-plate permits.
Determining whether a licence represents the sale of an asset or rent from natural resources
Sometimes it can be difficult to determine whether payments received under certain licensing arrangements actually constitute the sale of an asset, or whether they represent rents received from natural resources under Box A4.1 of the IMF GFSM 2014 lists a number of criteria designed to determine whether payments received under a licence represent an asset sale or rent from natural resources. These criteria have been reproduced in Box 13.4 below:
Box 13.4 - Criteria used to determine whether a licence represents an asset sale or rent from natural resources
- Costs and benefits assumed by licensee: the greater the extent of the risks and benefits associated with the right to use an asset incurred by the licensee, the more likely the classification of a transaction as the sale of an asset as opposed to rent. Pre-agreement on the value of payments (whether by lump sum or by instalments) effectively transfers all economic risks and benefits to the licensee and points therefore, to the sale of an asset. If, on the other hand, the value of payment is contingent on the results from using the licence, risks and benefits are only partially transferred to the licensee and the situation is more readily characterised as payment of rent. In the case of mobile phone licences, the total amount payable is often pre-agreed. An additional indication of the degree to which commercial risks have been passed to the licensee is to examine the hypothetical case where a licensee goes bankrupt. If, in such a case, the licensor reimburses none of the up-front payment made by the licensee, this would constitute a strong case against a characterisation of the transaction as rent, as apparently the licensee has incurred all the risks involved.
- Up-front payment or instalment: as with other indicators, the mode of payment is in itself not conclusive for a characterisation as a transaction in assets or rent payment. Generally, the means of paying for a licence is a financial issue and not a relevant factor in determining whether or not it is an asset. However, business practice shows that up-front payments of rent for long periods (15-25 years in the case of mobile phone licences) are unusual and this favours an interpretation as sale of an asset.
- Length of the licence: licences granted for long periods suggest the transaction should be treated as the sale of an asset, for shorter periods a treatment as payments for rent. The time frame involved in mobile phone licensing (15-25 years) is considered rather unusual as a period for which to conclude a fixed payment of rent and therefore a further indication favouring an interpretation as sale of an asset.
- Actual or de facto transferability: the possibility to sell the licence is a strong indication of ownership and if transferability exists, this is considered a strong condition to characterise the licensing act as the sale of third-party property rights. In practice, mobile phone licences are often transferable either directly (by the corporation selling the licence to another corporation) or indirectly (through the corporation being acquired through a takeover).
- Cancellation possibility: the stronger the restrictions on the issuer’s capacity to cancel the licence at its discretion, the stronger the case for treatment as a sale of an asset. Conversely, when licences can easily be cancelled at the discretion of the issuer, ownership over benefits and risks has not been fully transferred to the licensee and the transaction qualifies more readily as rent.
- Conception in the business world and international accounting standards: businesses, in accordance with international accounting standards, often treat a licence to use the spectrum as an asset. Again, in itself this does not lead to treatment as an asset in the national accounts, and there are other areas where companies choose to present figures in their accounts in ways that are not consistent with the national accounts. But the treatment of the acquisition of mobile phone licences as capital investment in company accounts provides an added incentive to treat them in a similar way in the national accounts.
Note that not all, or the majority of these considerations have to be satisfied to characterise the licence as a sale of an asset. However, to qualify as rent of a natural resource asset (rather than the sale of an asset), at least some of the following conditions should hold:
- The contract is of short-term duration, or renegotiable at short-term intervals. Such contracts do not provide the lessee with a benefit when market prices for the leased asset go up in the way that a fixed, long-term contract would. Such benefits are holding gains that typically accrue to owners of assets.
- The contract is non-transferable. Non-transferability is a strong but not a sufficient criterion for the treatment of licence payments as rent, because, although it precludes the lessee from cashing in on holding gains, it does not preclude the lessee from reaping comparable economic benefits (e.g., using the licence in their business).
- The contract contains detailed stipulations on how the lessee should make use of the asset. Such stipulations are often seen in cases of rent of land, in which the owner wishes to retain control over the usage of the land. In the case of licences, examples of such stipulations would be that the contract states what regions or types of customers should be served, or that it sets limits on the prices that the lessee may charge.
- The contract includes conditions that give the lessor the unilateral right to terminate the lease without compensation, for instance for under-use of the underlying asset by the lessee.
Source: Box A4.1, International Monetary Fund Government Finance Statistics Manual, 2014.
Part I - The treatment of superannuation in GFS
In GFS employment related superannuation schemes are classified to the public sector. Employment related superannuation schemes are a type of social insurance scheme that provides post-retirement entitlements for employees as part of their conditions of employment. For GFS purposes, it is only the financial obligations of public sector employers for superannuation that are recorded. By definition, public sector superannuation schemes are contributory and serve to provide post-employment benefits to government employees and their dependants. The provision of superannuation entitlements by government is considered to be part of an actual or implicit contract between the government (as employer) and their employees to compensate them for the provision of labour services.
Public sector superannuation schemes in Australia are structured into defined contribution schemes, defined benefit schemes and hybrid schemes (which include elements of both defined contribution and defined benefit schemes). The following entities are usually associated with the operation of a general government superannuation scheme in Australia:
- General government employer unit(s) - the unit who establishes a superannuation scheme on behalf of their employees and retains responsibility for pension liabilities.
- Superannuation scheme administrative unit - the unit involved in providing administrative services to superannuation scheme members for their participation in the scheme, including their choice of contribution and investment options and arrangements for the payment of superannuation benefits. In some Australian jurisdictions, the administrative unit is financed by the employer (the general government sector) and is contained within the general government sector, either as a separate government unit or as part of another (i.e. the parent). In others, it is financed by the members through cost recoveries and set up as an integral part of the superannuation fund which is not deemed to be under government control.
- Board of trustees (or equivalent) for the scheme - a separate legal body that is created responsible for administering the superannuation scheme on behalf of the superannuation scheme members in an autonomous superannuation fund.
- Superannuation fund under the management of the board of trustees - a separate legal entity responsible for administering the superannuation scheme on behalf of the superannuation scheme members that is managed by a board of trustees.
Autonomous and non-autonomous superannuation funds
Some Australian jurisdictions have established superannuation funds for the benefit of their employees that are separate institutional units from the government employer. Legislation places responsibility for the day-to-day operation of the superannuation funds with a board of trustees that is created as a separate legal entity. These superannuation funds are referred to as autonomous superannuation funds, and they have the characteristics of an institutional unit in the corporate sector (i.e. it must be able to operate independently of its owners, and be able to acquire assets and incur liabilities in its own right, have a separate set of accounts, and provide its services at economic significant prices). These entities are considered to provide financial services (i.e. superannuation benefits) to the household sector, and are therefore classified to the financial corporations sector. They are viewed as non-profit institutions (NPIs) and hence out of the scope of GFS, and because the costs of the funds' operations are recovered from the pool of contributions the funds are treated as market NPIs and are included in the private financial corporations institutional sector.
There are two types of autonomous superannuation funds:
- where the employer retains responsibility for pension liabilities, and the funds are operated by a pension administrator in the private financial sector; and
- where the pension fund itself is responsible for the liabilities and these are generally multi-employer funds.
Some Australian jurisdictions establish special accounts or notional funds within the general government sector, rather than establishing a separate institutional unit that is responsible and accountable for the decisions and actions regarding the return on superannuation fund assets. These types of superannuation funds are called non-autonomous superannuation funds.
A non-autonomous pension fund for employees in the public sector does not meet the criteria to be considered an institutional unit. These funds are classified within the unit that controls them, and they accumulate assets to cover outstanding unfunded superannuation liabilities. The economic flows and stock positions of non-autonomous superannuation funds are integrated with those of the controlling employer. All of the assets, liabilities, transactions, and other economic events of the fund are combined with the corresponding items of the employer operating the scheme, which may be a general government unit or a public corporation. The treatment of the assets, liabilities, transactions, and other economic events related to the non-autonomous superannuation fund is similar to that of an autonomous superannuation fund.
Defined contribution superannuation schemes
A defined contribution superannuation scheme is one where the benefits payable to the employee on retirement are determined by the funds that have accumulated from employer and employee contributions over the working life of the employee, together with income and capital gains / losses arising from the investment of the accumulated funds. The funds are accumulated in a separate superannuation fund managed by a board of trustees or guardians of the scheme (autonomous fund). The public sector employer has a responsibility to make the regular agreed contributions to the fund, but then has no further superannuation liability towards their employees.
Defined benefit superannuation schemes
A defined benefit superannuation scheme is one where the benefits payable to the employee on retirement are determined by a formula, usually based on a combination of final salary (or final average salary), age at retirement and the number of years of membership in the scheme. For defined benefit schemes, the employer (or an autonomous pension fund) has a liability to ensure that the superannuation entitlements of its employees are fully met on their retirement. Defined benefit schemes may be funded in a variety of ways. In the past, the most common method in the Australian public sector was for the employer to meet the funding requirements on an emerging cost basis, with a separate fund established to accumulate and invest any member contributions. Most public sector employers only operate defined contribution pension schemes for new employees, and have closed new membership to defined benefit schemes. Many public sector employers have also established special accounts or funds within the general government sector to progressively cover their unfunded liabilities or are making additional payments to autonomous funds to reduce their outstanding liabilities to those defined benefit schemes.
When accounting for defined benefit superannuation schemes, the public sector employer is required to record the value of the benefits accruing to employees for employment services provided by them in the current period, and also the total level of the outstanding liability to be shown on the balance sheet. This process can be complex because the benefits to the employee are determined in terms of the anticipated level of the benefits that will ultimately be received by the employee on retirement or resignation. While the formula for calculating the benefits is known, the future benefits payable cannot be specified precisely until the retirement or exit of the employee from the scheme.
A number of factors can affect an employer's defined benefit superannuation liability. These include:
- Current service cost (current service increase) - the increase in entitlements associated with the employment services provided by employees in the current period;
- Interest cost (past service increase) - the increase in the liability due to the fact that, for all participants in the scheme, retirement (and death) is one year nearer, and so one fewer discount factors must be used to calculate the present value of the benefits for each future year;
- Benefit payments on retirement or exit - the decrease in entitlements due to the payment of benefits during the period; and
- Changes arising because of changes to the discount rate, other actuarial assumptions and/or the rules governing entitlements under the scheme.
The Projected Unit Credit Method (which is equivalent to the Projected Benefit Obligation (PBO) method referenced in Chapter 17 of the 2008 SNA) is the actuarial method recommended by the Australian Accounting Standards (AASB 119) for calculating the present value of defined benefit obligations. This method considers each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation.
Present value calculations require the use of discount rates that represent the time value of money. Ideally the discount rate should be a weighted average reflecting the timing of future benefit payments; market rates of the appropriate term should be used to discount shorter term payments; and estimates made of the discount rates for longer term maturities by extrapolating current market rates along the yield curve. However, for practical reasons many Australian jurisdictions use the 10-year Commonwealth Government bond rate or the government bond rate with the longest available maturity as a proxy for the discount rate. Paragraph 6.117 of the IMF GFSM 2014 states that over time, the total liability of a defined benefit pension scheme will change because of the receipt of additional contributions and property income, the payment of benefits, changes in the actuarial assumptions, and the passage of time. The property expense attributed to members is equal to the increase in the liability resulting from the property income accruing on the pension fund’s assets held on behalf of the beneficiaries and the passage of time, which occurs because the future benefits are discounted over fewer reporting periods.
For those defined benefit schemes where an autonomous superannuation fund has been established to hold employee and / or employer contributions, the fund has a liability to the household sector equal to the discounted value of the defined benefit obligations. If the fund has insufficient assets to meet this liability, the public sector employer has a liability towards the fund that is equal to the shortfall. Conversely, if the fund has more than sufficient assets to meet this liability, the public sector employer has an asset with the fund that is equal to the difference between fund assets and the current value of the defined benefit obligations. Therefore, where an autonomous superannuation fund exists, the provisions for unfunded superannuation for a public sector employer are equal to the present value of defined benefit obligations less the market value of fund assets.
The increase in superannuation liability that results from employment services provided in the current period is calculated using the Projected Unit Credit Method. This method views each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation. For most defined benefit superannuation schemes in the public sector, employees are required to make a regular contribution towards their own superannuation entitlements. This contribution reduces the current cost of the scheme to the employer.
Part J - The difference between government taxes and government fees for services
It is important to know the differences between government taxes and fees for services rendered so that the correct classification of government revenue may be derived. Box 13.5 below describes the differences between a government tax and a government fee for services:
Box 13.5 - Taxes vs Fees for Service in GFS
One of the regulatory functions of governments is to prohibit the ownership or use of certain goods or the pursuit of certain activities, unless specific permission is granted by issuing a licence or other certificate for which a fee is demanded. To decide whether such a fee constitutes taxation revenue (ETF 1111) or a component within the category of sales of goods and services (ETF 112) the following recommendations apply:
Fee payments are recorded as taxation revenue when:
The government unit performs little or no work in return for payment (such as performing a check of the legal capacity of an applicant of a permit to confirm the applicant has not been convicted of a crime). Examples of this are:
- A licence or a permit is automatically granted by the government as a mandatory condition to perform an activity or acquire an asset.
- The payer of the levy is not the receiver of the benefit, such as a fee collected from slaughterhouses to finance a service provided to farmers.
- The government is not providing a specific service commensurate with the levy (even though a licence may be issued to the payer), such as a hunting, fishing, or shooting licence that is not accompanied by the right to use specific government owned natural resources. Other examples include dog registration, marriage licences, payments by persons or households for licences to own or use vehicles (such as the renewal of a drivers' licence), boats or aircraft;
- The benefits are received only by those paying the fee but the benefits received by each individual may vary in proportion to the payments, such as a milk marketing levy paid by dairy farmers and used to promote the consumption of milk;
- If beneficiaries cannot opt out of a compulsory scheme (such as fees paid to government for deposit insurance and other guarantee schemes if they are compulsory), if the payment is clearly out of proportion to the service provided, if the payment is not set aside in a fund, or if it can be used for other purposes.
- In certain circumstances it may be conceptually justifiable to split the payment into a revenue generation and a full cost recovery component, therefore treating a portion of the payment as the sale of goods and services and the remaining portion as a tax. It may be appropriate to adopt this treatment in situations where a product of measurable benefit is provided to the payer and the case is economically significant.
Fee payments are recorded as the sale of goods and services when:
- The issuing of a licence or permit involves a proper regulatory function of the government by exercising control on the activity, checking the competence or qualifications of the persons concerned, etc. Examples include the assessment process involved with the application of a drivers' licence, pilot’s licence, television broadcast licences, radio licences, firearm licences, and payments for airport fees, court fees, etc.
Source: Based on paragraphs 5.73 and 5.74 International Monetary Fund Government Finance Statistics Manual , 2014
Part K - The treatment of expenditure versus expense in GFS
In the IMF GFSM 2014, the term expenditure is used primarily in the context of the statement of operations and the statement of sources and uses of cash. The term expenditure has been reintroduced to GFS by the IMF after being omitted in the IMF GFSM 2001, and is a concept that should not be confused with the term expense. Expenditure is calculated as the sum of GFS expenses and the net acquisition of non-financial assets whereas expenses are defined as decreases in net worth resulting from a transaction. In Australian GFS, the term expenditure is not used in the context of the statement of operations or the statement of sources and uses of cash. The conceptual difference between expenditure and expense is highlighted in Diagram 13.5 below.
|GFS Expenses||GFS Expenditure|
|Decreases in net worth resulting from transactions||GFS Expenses|
Net acquisition of non-financial assets
Part L - The treatment of tax refunds and tax credits in GFS
In GFS, it is important to understand the difference in the treatment of tax refunds and tax credits. Box 13.6 below describes the differences between the treatment of tax refunds and tax credits in GFS:
Box 13.6 - The treatment of tax refunds and tax credits in GFS
- Tax refunds are defined as adjustments for overestimation of taxes payable, or the return of excess amounts to taxpayers due to overpayments of tax paid. Tax refunds are attributed to the period in which the event occurred that generated the over assessments or overpayments and are recorded as a reduction in the appropriate tax category. However, a timing adjustment is made in cases where it is not possible to identify the over-assessment or overpayment of tax, and is recorded at the time when the need for the adjustment is identified. In the case of value-added taxes such as GST, taxpayers other than final consumers are allowed a refund of taxes paid on purchases. Even if this refund exceeds the taxes payable by an individual taxpayer, the net refund is recorded as a reduction in that category of tax.
Tax relief measures
- Tax relief measures are defined as incentives that reduce the amount of tax owed by an institutional unit. Tax relief measures can take the form of tax allowances, tax exemptions, tax deductions, or tax credits. Under the Australian taxation structure, tax allowances, tax exemptions and tax deductions are recorded on a net basis, i.e. are subtracted from taxable income before the tax liability is calculated and are therefore not recorded for GFS purposes. However, tax credits differ in that they reduce the actual amount of tax owed. Tax relief measures reduce the taxes receivable from the taxpayer and therefore reduces government tax revenue. Tax relief measures should be recorded as a reduction in the relevant tax category.
- Tax credits are defined as amounts subtracted directly from the tax liability due for payment by the beneficiary household or corporation after the tax liability has been computed. Tax credits may be granted by governments to assist low income earners or disadvantaged taxpayers, or to promote a specific behaviour such as the use of bio diesel or ethanol rather than leaded petrol for heavy vehicles in the transport industry.
- Tax credits may be payable or non-payable in nature. Where a tax credit is limited to the size of the tax liability of the individual or entity, it is said to be non-payable. Non-payable tax credits have the same effect on government accounts as tax allowances, deductions and exemptions in that they reduce the revenue of the government by reducing the tax liability of the taxpayer. Non-payable tax credits should be recorded on a net basis, i.e. as a reduction in the appropriate tax category in the same way that tax allowances, tax exemptions and tax deductions are recorded.
- Where a tax credit is not limited to the size of the tax liability, it is said to be a payable tax credit. Payable tax credits result in an expense to the government as they are required to pay out the excess amount of tax credit over the tax liability of a taxpayer.
- In GFS, payable tax credits are recorded on the gross basis, with the total amount of tax receivable recorded as taxation revenue (ETF 111) and the total amounts due as payable tax credits recorded as a current transfer expense. Payable tax credits are often not connected with the assessment of the taxable event and should be shown as a current transfer classified according to the purpose of the credit and the nature of the recipient. The current transfer should be treated as:
- Other subsidies on production (ETF 1253) - if the payable tax credit is paid to a producer unit on the basis of their level of production activities or quantities, or values of the goods and services they produce, sell, export or import;
- Current monetary transfers to households (ETF 1254) - where a payable tax credit is paid to households with the intention to provide for the needs that arise from certain events or circumstances; or
- Current transfer expenses not elsewhere classified (ETF 1259) - if a payable tax credit is such that it could not be included in the other current transfer expense categories.
- Tax credits differ to franking credits on dividends earned via franked or partially franked shares held by shareholders of a corporation. Under imputation systems of corporate income tax, shareholders holding franked or partially franked shares are wholly or partially relieved of their liability for an income tax on dividends paid by the corporation out of income or profits liable to corporate income tax. This is because the income tax has already been paid at the corporate level for holders of franked or partially franked shares. Under Australia's imputation system, income tax is not paid again on franked dividends at the individual level since it has already been paid at the corporate level. Tax relief in the form of franking credits are attributed to holders of franked or partially franked shares. If the franking credit on franked dividends exceeds a shareholder’s total tax liability, then the excess may be payable by the government to the shareholder and is recorded on a net basis as a negative tax rather than expense.
Source: Based on paragraphs 5.27, 5.28, 5.31, 5.44, International Monetary Fund Government Finance Statistics Manual, 2014
Part M - The treatment of taxes that share characteristics with taxes on property (ETF 1111, TC 3)
Paragraph 5.54 of the IMF GFSM 2014 states that while sharing certain characteristics with taxes on property (ETF 1111, TC 3), certain taxes should be classified elsewhere. Box 13.7 below gives guidance on where these taxes should be classified:
Box 13.7 - Taxes that share characteristics with taxes on property (ETF 1111, TC 3) but should be classified elsewhere
- Taxes on immovable property that are levied on the basis of a presumed net income should be recorded as taxation revenue under the appropriate category within taxes on income, profits, and capital gains (ETF 1111, TC 1).
- Taxes on the use of property for residence, where the tax is payable by either proprietor or tenant and the amount payable is a function of the user’s personal circumstances (such as net income or the number of dependents), should be recorded as taxation revenue under the appropriate category within taxes on income, profits, and capital gains (ETF 1111, TC 1).
- Taxes on construction, enlargement, or alteration of all buildings, or those whose value or use density exceeds a certain threshold, should be recorded in taxation revenue as other taxes on the use of goods and performance of activities not elsewhere classified (ETF 1111, TC 539).
- Taxes on use of one’s own property for special trading purposes (such as selling alcohol, tobacco or meat), should be recorded in taxation revenue as other taxes on the use of goods and performance of activities not elsewhere classified (ETF 1111, TC 539).
- Taxes on exploitation of natural resources such as land and subsoil assets not owned by government units (including taxes on extraction and exploitation of minerals and other resources), should be recorded in goods and services tax (GST) (ETF 1111, TC 412). Payments to a government unit as the owner of land and subsoil assets for the exploitation of such natural resources (often referred to as royalties), should be recorded in land rent income (ETF 1134) or royalty income (ETF 1135). Payments for licences that allow the beneficiary to carry out the business of exploitation of land and subsoil assets are classified in other taxes on use of goods and performance of activities not elsewhere classified (ETF 1111, TC 539).
- Taxes on capital gains resulting from the sale of property are recorded as capital gains tax on individuals (ETF 1111, TC 114, SDC) or capital gains taxes on enterprises (ETF 1111, TC 123, SDC).
Source: Based on paragraph 5.54, International Monetary Fund Government Finance Statistics Manual, 2014.
Part N - The treatment of rent in GFS
Rent is defined as the revenue receivable by the owners of a natural resource (the lessor or landlord) for putting the natural resource at the disposal of another institutional unit (a lessee or tenant) for use of the natural resource in production. Paragraph 5.122 of the IMF GFSM 2014 states that rent receivable is typically related to a resource lease on land, subsoil resources and on other natural resources where the legal owner of a natural resource that is considered to have an infinite life makes it available to a lessee in return for a regular payment recorded as property income and described as rent.
The term rent income should not be confused with the term rental income which is the income earned from the leasing of produced assets such as buildings or equipment. Paragraph 5.131 of the IMF GFSM 2014 indicates that rentals are payments made under an operating lease for the use of a non-financial produced asset belonging to a unit where the owner maintains and makes the non-financial produced asset available to lessees. Rentals on buildings or other produced (or fixed) assets are recorded as sales by market establishments (ETF 1121, COFOG-A, SDC) for PNFC and PFCs, and as incidental sales by nonmarket establishments (ETF 1123, COFOG-A, SDC) for others. In contrast, rent is revenue receivable by owners of natural resources for placing these assets at the disposal of other units. Paragraph 5.124 of the IMF GFSM 2014 notes that rent income excludes payments receivable when the owner of the natural resource (except subsoil assets) permits the resource to be used to extinction, or if they allow the resource to be used for an extended period of time in such a way that the control over the use of the resource changes from the owner to the user. If the control over the natural resource changes, then an asset should be recorded by the user of the resource under intangible non-produced assets not elsewhere classified (ETF 4114, TALC 329, COFOG-A). In GFS, two types of rent income are recorded: land rent income (ETF 1134, SDC) and royalty income (ETF 1135, SDC).
Part O - The treatment of government payments to NPIS and public corporations
Because of the number of payments that a government makes to non-profit institutions (NPIs) and public corporations as part of the ordinary function of government, it can sometimes be difficult for compilers of GFS to establish whether a government payment should be classified as an unrequited transfer under current grant expenses (ETF 1251, COFOG-A, SDC) or capital grant expenses (ETF 1261, COFOG-A, SDC), or as the purchase of a good or service on behalf of households under social benefits to households in goods and services (ETF 1232, COFOG-A, SDC). The following indicators have been established to assist in the correct classification of government payments to NPIs and public corporations.
Evidence of an exchange of value
To determine whether a payment by government should be classified as a government purchase, there needs to be reciprocity as part of the transaction entered into, that is, there needs to be an exchange of value as part of the transaction. If there is no exchange of value, then this may be an indicator that the government payment may be an unrequited transfer of funds, and may be classified under the appropriate category in current grant expenses (ETF 1251, COFOG-A, SDC); or capital grant expenses (ETF 1261, COFOG-A, SDC). If the government receives something of value in exchange for the provision of an asset (usually cash), then this may be an indicator that the transaction is the purchase of a good or service and may be classified under social benefits to households in goods and services (ETF 1232, COFOG-A, SDC). Evidence of an exchange of value may be demonstrated by the following:
- The payment is based on a government contract that:
- Specifies prices, production quantities or other performance criteria; and
- Has a pre-specified acquittal process.
- The government contracts are contestable (eg. providers compete to win the contract).
- A tax invoice was issued to the government.
- The government agency making the payment is accountable to government for the outcomes of the expenditure.
Not all elements of the criteria above need to exist to establish evidence of the exchange of value and no single element is sufficient evidence (for example, there are many supply contracts that are not contestable). The classification of some government payments may require judgement, and may be made on balance to determine whether an exchange of value has taken place or if an unrequited transfer exists.
Application of the market / non-market test to recipients of government payments
To determine whether a government payment should be treated as the payment of a transfer under current grant expenses (ETF 1251, COFOG-A, SDC); or capital grant expenses (ETF 1261, COFOG-A, SDC), or social benefits to households in goods and services (ETF 1232, COFOG-A, SDC), please refer to the discussion on market / non-market operators in paragraphs 2.34 to 2.42 of this manual.
Economically significant prices
To be considered a market producer, a unit must provide all or most of its output to others at prices that are economically significant. Economically significant prices are prices that have a significant effect on the amounts that producers are willing to supply and on the amounts purchasers wish to buy. These prices normally result when:
- The producer has an incentive to adjust supply either with the goal of making a profit in the long run or, at a minimum, covering capital and other costs; and
- Consumers have the freedom to purchase or not purchase and make the choice on the basis of the prices charged.
To determine whether the unit is a market or non-market producer, it is necessary to examine the recoverability of a unit's production costs as a percentage of their sales. This will reveal whether the unit can only cover the majority of their production costs through the receipt of government transfer payments in the form of grants or subsidies (indicating the unit may be a non-market operator), or whether the level of sales and prices charged is sufficient to meet the majority of its production costs (indicating the unit may be a market producer).
Paragraph 2.74 of the IMF GFSM 2014 defines production costs as the sum of intermediate consumption, compensation of employees, consumption of fixed capital and [other] taxes on production. Further, if the unit is to be treated as a market producer, a return on capital is included in the production costs. Subsidies on production are not deducted.
The Australian GFS follows the definitions of market and non-market operators contained in the Standard Economic Sector Classifications of Australia (SESCA) 2008 ( Version 1.1) (ABS cat. no. 1218.0). The SESCA further indicates that the economic behaviour of non-market operators is influenced by the receipt of material financial support in the form of transfers such as grants and donations.
ABS determines the recipients of government payments to be market or non-market operators on a case by case basis. Cost recovery is one of the indicators used by the ABS to determine whether a unit is a market or non-market operator, and is often (but not always) the primary indicator. For further discussion on the market / non-market operators, see paragraph 2.34 to 2.42 of this manual.
Assessment of the nature of all government payments
To determine whether a government payment should be treated as the payment of a transfer as current grant expenses (ETF 1251, COFOG-A, SDC); or capital grant expenses (ETF 1261, COFOG-A, SDC), or social benefits to households in goods and services (ETF 1232, COFOG-A, SDC), it is necessary to examine the nature of all payments commonly referred to by Australian state and territory treasuries and the Department of Finance as community service obligations by government.
Community service obligations are payments made by governments to deliver specific community services at below cost or no cost to final consumers or industry regardless of variations in the cost of supply. By examining the nature of these payments, evidence of an exchange of value may be determined and the payment can be correctly classified as either current grant expenses (ETF 1251, COFOG-A, SDC); capital grant expenses (ETF 1261, COFOG-A, SDC); or as the purchase of a good or service under social benefits to households in goods and services (ETF 1232, COFOG-A, SDC).
Any payment by a general government unit to an non-profit institution (NPI) or to another government unit needs to be examined using the guidance set out in this chapter to determine if the payment is a purchase of goods or services on behalf of households, or an unrequited transfer. In the case of NPIs, if the payments received from government are considered to be government purchases, and these payments account for a considerable proportion of the unit's revenue, then the unit should be classified as a private market producer.
Part P - The boundary between use of goods and services and transfers
In GFS, all transfers to other institutional units are recorded as either current transfers or capital transfers. This relates to goods and services provided to other institutional units by a donor government unit other than goods and services produced by the donor government unit. Paragraph 6.37 of the IMF GFSM 2014 indicates that such transfers may consist of the transfer of public sector owned non-financial produced assets, the transfer of goods held in inventories, the construction of non-financial produced assets, or the purchase and subsequent transfer of either non-financial produced assets or goods and services for current consumption. Examples include transfers of food, clothing, blankets, and medicines as emergency aid after natural disasters; transfers of machinery and other equipment; the direct provision of the construction of buildings or other structures; and transfers of military equipment of all types.
However, paragraph 6.38 of the IMF GFSM 2014 states that goods and services used by a donor public sector unit to produce non-market goods and services consumed by other units are included in use of goods and services (ETF 1233). An example of this is the goods and services acquired so that government employees can conduct relief operations in a foreign country after a natural disaster. Paragraph 6.39 of the IMF GFSM 2014 further indicates that the concept of use of goods and services also includes all goods and services consumed by a public sector unit to produce non-market goods and services that are distributed to households in particular circumstances, such as following a domestic natural disaster. However, goods and services that were not produced by the donor public sector unit, but are distributed to households in particular circumstances, are classified as social benefits to households in goods and services (ETF 1232, COFOG-A, SDC) rather than use of goods and services (ETF 1233, COFOG-A, SDC). Paragraph 6.40 of the IMF GFSM 2014 states that such distributions include transfers of goods held in inventories, the purchase and simultaneous transfer of goods and services from market producers, and the reimbursement by a general government unit for purchases by households of specified goods or services.
Paragraph 6.42 of the IMF GFSM 2014 indicates that payments made by public sector units for membership dues and subscription fees should be recorded as an expense in use of goods and services (ETF 1233, COFOG-A, SDC) if there is an exchange of a payment for some form of a service. This includes payments of membership dues or subscriptions to market non-profit institutions (NPIs) serving businesses, such as chambers of commerce or trade associations, since these are payments for services rendered and are not transfers. However, the following membership dues and subscription fees are not included in use of goods and services:
- In cases when there is a possibility (even if unlikely) of repayment of the residual value of the international organisation after the claims of all creditors have been met, membership dues and subscription fees are recorded as transactions in financial assets (equity including contributed capital (ETF 3111, TALC 424), (SDC).
- If the payment is unrequited, membership dues and subscription fees are recorded as current grant expenses (ETF 1251, COFOG-A, SDC) or capital grant expenses (ETF 1261, COFOG-A, SDC).
Part Q - The boundary between use of goods and services and employee expenses
In GFS, employee expenses exclude amounts payable to contractors, self-employed outworkers, and other workers who are not employees of general government or public sector units. Paragraph 6.33 of the IMF GFSM 2014 states that any such amounts should be recorded under use of goods and services (ETF 1233, COFOG-A, SDC). An employer / employee relationship exists when there is a written or oral agreement (which may be formal or informal), between an entity and an individual. This type of relationship is usually entered into on a voluntary basis by both parties, whereby the person works for the enterprise in return for remuneration in cash or in kind. The remuneration is based on either the time spent at work or an other objective indicator of the amount of work performed. If an individual is contracted to produce a single specific task, it suggests that no employer / employee relationship exists, but that a service contract relationship exists between the entity and a self-employed individual.
The primary indicator of whether an employer / employee relationship exists is the presence of control in the relationship. Paragraph 6.34 of the IMF GFSM 2014 indicates that the right to control, or to direct, work performed and how it shall be performed, is a strong indication of an employer / employee relationship. The method of measuring or arranging for the payment is not important as long as the employer has effective control over both the method and the result of the work undertaken by the individual. However, certain control of the work being undertaken may also exist for the purchase of a service, for example when subcontracts are entered into. Therefore, other criteria should also be used to define more clearly the employer / employee relationship. The fact that the individual is solely responsible for social contributions would suggest that the individual is a self-employed service provider. By contrast, payments for employment related superannuation by the employer is an indication of an employer / employee relationship. Entitlement by the individual to the same kind of benefits generally provided to an entity’s employees (e.g., allowances, annual leave, and sick leave) would also indicate an employer / employee relationship. Payment of taxes on the provision of services (such as GST) by the individual is an indication that the individual is a self-employed service provider.
Certain goods and services used by governments do not enter directly into the process of production itself but are consumed by employees working on that process. Paragraph 6.35 of the IMF GFSM 2014 states that when the goods or services are used by employees on their own time and at their own discretion for the direct satisfaction of their needs or wants, they constitute wages and salaries in kind (ETF 1222, COFOGA, SDC). However, when such use is mandatory in order to enable employees to carry out their work, it should be recorded as use of goods and services (ETF 1233, COFOG-A, SDC). Examples of this are:
- Small tools or equipment (generally inexpensive in nature) used exclusively (or mainly) at work;
- Clothing or footwear of a kind that ordinary consumers do not choose to purchase or wear and which are worn exclusively (or mainly) at work; for example, protective clothing, overalls, or uniforms;
- Accommodation services at the place of work of a kind that cannot be used by the households to which the employees belong: barracks, cabins, dormitories, huts, etc.;
- Special meals or drinks necessitated by exceptional working conditions, while travelling for business reasons, or meals or drinks provided to employees while on active duty;
- Changing facilities, washrooms, showers, baths, etc., necessitated by the nature of the work; or
- First aid facilities, medical examinations, or other health checks required because of the nature of the work.
If employees are responsible for purchasing the kinds of goods or services listed above and are subsequently reimbursed by the employer, paragraph 6.36 of the IMF GFSM 2014 states that such reimbursements should be recorded as use of goods and services (ETF 1233, COFOG-A, SDC) rather than as wages and salaries.
Part R - The boundary between use of goods and services and the acquisition of non-financial assets
In GFS, the cost of inexpensive durable goods (such as small / hand tools), are recorded as use of goods and services (ETF 1233) when purchased regularly, and are small in value when compared with the costs incurred for the acquisition of machinery and equipment in general. Paragraph 6.43 of the IMF GFSM 2014 states that this exclusion of small / hand tools is pragmatic rather than conceptual. Some goods may be used repeatedly (or continuously), in production over many years but may nevertheless be small, inexpensive, and used to perform relatively simple operations. Hand tools such as saws, spades, knives, axes, hammers, screwdrivers, and spanners or wrenches are examples. If expense on such tools take place at a fairly steady rate and if their value is small compared with amounts payable on more complex machinery and equipment, it may be appropriate to treat the tools as materials or supplies under use of goods and services (ETF 1233). Goods acquired for use in own-account capital formation are classified as transactions in own-account capital formation (ETF 4113) as part of acquisitions of non-financial assets, with a further break down as part of supporting information (ETF 7) as own-account use of goods and services (ETF 7631). Further information on own-account capital formation can be found in Appendix 2 of this manual.
Paragraphs 6.44 to 6.49 of the IMF GFSM 2014 list the following treatments for goods and services in GFS:
- Goods and services acquired to increase inventories of materials and supplies, work in progress, finished goods, and goods for resale, are classified as inventories rather than use of goods and services (ETF 1233, COFOG-A, SDC). For more information on inventories, see Chapter 8 and Chapter 9 of this manual.
- Goods and services consumed in the ordinary maintenance and repair of non-financial produced assets are classified as use of goods and services (ETF 1233, COFOG-A, SDC). However, major renovations, reconstructions, or enlargements of existing non-financial produced assets are recorded as acquisitions of non-financial produced assets in the balance sheet. For more information on distinguishing repairs from improvements, see Chapter 8 of this manual.
- Goods and services used in research and development are recorded as transactions in non-financial assets under acquisitions of other new non-financial assets (ETF 4114, TALC 141, COFOG-A, SDC). The exception is in cases where it is clear that the research and development activity does not create any future economic benefit for its owner, in which case it is recorded as an expense under use of goods and services (ETF 1233, COFOG-A, SDC). For information on the recognition criteria for intellectual property products, see Chapter 8 and Chapter 9 of this manual.
- Goods and services used in mineral exploration and evaluation are not recorded as use of goods and services (ETF 1233, COFOG-A, SDC). Whether successful or not, they are needed to acquire new reserves and so are all classified as transactions in non-financial assets under acquisitions of other new non-financial assets (ETF 4114, TALC 142, COFOG-A, SDC).
- Materials to produce coins or notes of the national currency or amounts payable to contractors to produce the currency are included in use of goods and services (ETF 1233, COFOG-A, SDC). The issuance of the coins or notes is a financial transaction that does not involve revenue or expense. Commemorative coins that are not actually in circulation as legal tender are classified as transactions in inventories. For more information, on currency see Chapter 8 and Chapter 10 of this manual).
- Expenditures on military equipment, including large military weapons systems and armoured vehicles acquired by the police and security services, are recorded as the acquisition of the respective categories of non-financial produced assets (weapons systems or machinery and equipment). Expenditure on military goods such as single-use weapons (ammunition, missiles, rockets, bombs, torpedoes) and spare parts should be recorded as inventories until used when they are recorded as use of goods and services (ETF 1233, COFOG-A, SDC) and are withdrawn from inventories. For more information, see Chapter 8 and Chapter 9 of this manual.
Other boundary cases related to use of goods and services
Paragraph 6.50 of the IMF GFSM 2014 indicates that there is a significant conceptual difference between rentals of non-financial produced assets under an operating lease and the acquisition of an asset under a financial lease. Under an operating lease (for definition, see Chapter 8 and Chapter 9 of this manual), the lessor remains the economic owner of the non-financial produced asset and payments by the lessee are recorded as payments for a service, and therefore recorded as use of goods and services (ETF 1233, COFOG-A, SDC). Under a financial lease (for definition, see Chapter 8 and Chapter 10 of this manual), the lessee becomes the economic owner of the non-financial produced asset and payments are recorded as payments against a loan by the lessee to the lessor, and thus do not affect the use of goods and services.
Paragraph 6.51 of the IMF GFSM 2014 notes that amounts payable for the use of non-produced naturally occurring assets (such as land) are classified as land rent and royalty expenses (ETF 1283, COFOG-A, SDC) and not as use of goods and services (ETF 1233, COFOG-A, SDC). For the definition of land rent and royalties, see Chapter 7 of this manual.
Explicit fees for financial services are classified as use of goods and services (ETF 1233, COFOG-A, SDC) in GFS. However, paragraph 6.52 of the IMF GFSM 2014 indicates that some transactions include an implicit fee for financial services that is not recorded separately in GFS. These implicit fees can only be calculated in the context of an analysis of the whole of the economy or industry. As indicated in Chapter 7 of this manual, financial intermediation services indirectly measured (FISIM), are estimated indirectly by compilers of the national accounts.
Part S - Recording the production of non-financial produced assets over two or more accounting periods
The production of some non-financial produced assets, such as buildings and structures, often spans two or more accounting periods. Paragraph 7.37 of the IMF GFSM 2014 indicates that when a contract of sale is agreed in advance for the construction of buildings or structures over a number of accounting periods, the incomplete buildings or structures are progressively acquired in each accounting period through progress payments. The buildings or structures are classified as non-financial produced assets on the purchaser's balance sheet, with the associated total value of the building or structure recorded progressively as completion takes place. In other words, the building or structure is being sold by the construction contractor to the purchaser in stages, as the latter takes legal possession of the structure.
If the progress payments exceed the value of the incomplete asset, the excess should be recorded as advances other than concessional loans (ETF 8433, SDC) that will be exhausted as work proceeds. In the absence of a contract of sale, incomplete structures are recorded as transactions in the form of inventories - work in progress (ETF 4114, TALC 212, COFOG-A, SDC), and completed structures are recorded as a transaction in the form of inventories - finished goods (ETF 4114, TALC 213, COFOG-A, SDC) in the accounts of the construction contractor until ownership of the asset changes to the public sector unit. Non-financial produced assets being constructed on own-account are treated as a transaction for the acquisition of non-financial assets in the form of own-account capital formation (ETF 4113, TALC, COFOG-A) with a further cost breakdown recorded as part of own-account capital formation (ETF 76) in the supporting information(ETF 7), rather than inventories of work in progress.