Part C - Other changes in the volume of assets and liabilities
Other changes in the volume of assets and liabilities (also referred to as other volume changes in GFS) are defined in paragraph 10.1 of the IMF GFSM 2014 as any change in the volume of an asset or liability that does not result from a transaction or a holding gain. Therefore, other changes in the volume of assets and liabilities result from events that change the quality and quantity of existing assets or liabilities.
Other changes in the volume of assets include events that bring about an addition of stocks of assets or liabilities to the balance sheet, or a removal (or part-removal) of stocks of assets or liabilities from the balance sheet, resulting in a change to net worth. Examples of events that result in additions to net worth include increases in the stock of non-financial non-produced assets through mineral discoveries, or the recognition of assets not previously included in the balance sheet. Examples of events that result in reductions of net worth include the unilateral writing off of bad debts by creditors, destruction of assets by fire (or other catastrophic events), or the depletion of natural assets (e.g. forest, fisheries) as a result of physical removal or use. Also included in other volume changes are changes to net worth resulting from reclassifications of pre-existing assets or liabilities.
Paragraph 10.46 of the IMF GFSM 2014 describes other changes in the volume of assets and liabilities as falling into three main categories:
- The entrance and exit of assets and liabilities on the balance sheet as a result of normal events other than transactions - these involve the appearance or disappearance of existing resources as economic assets, such as naturally occurring assets (e.g. discovery of mineral deposits), or assets created by human activity (e.g. recognition of valuables or other assets not previously recognised).
- The effects of exceptional, unanticipated external events (such as natural disasters and war) affecting the quality of assets and corresponding liabilities.
- Changes to assets and liabilities that reflect changes in the classification of the sector or structure of institutional units or in the classification of assets or liabilities.
Entrance or exit of assets and liabilities on the GFS balance sheet
The appearance or disappearance of assets and liabilities on the GFS balance sheet are recorded through an other change in the volume of assets and liabilities entry in the GFS accounts. Paragraph 10.48 of the IMF GFSM 2014 states that events such as this, include the addition of resources on the GFS balance sheet that were previously not recognised as economic assets but have become so due to an event that gives the resources the capability to provide economic benefits and enforceable ownership rights over them. Such a situation may come about as a result of changes in the relative price of a particular resource, improvements in technology, changes to laws or restrictions relating to the resource, or other changes that transform the resource into an economic asset (for the definition, see paragraphs 8.4 to 8.7 of this manual). Conversely, an economic asset may need to be removed from the balance sheet because it is no longer capable of supplying economic benefits, or because the owner is no longer willing or capable of exercising ownership rights over the asset. In each of these cases, the addition or removal of economic assets from the balance sheet are recorded through an other change in the volume of assets and liabilities entry in the GFS accounts.
In GFS, financial assets and liabilities may appear or disappear from the balance sheet in several ways. Paragraph 10.57 of the IMF GFSM 2014 gives two examples as:
- Debt write off: a creditor may determine that a financial claim can no longer be collected because of the debtor’s bankruptcy, or other factors such as a court order. If so, the creditor writes off the debt and removes the claim from their balance sheet by means of an entry in other changes in the volume of assets. The write off may be full or partial. Debt write off is further discussed in Chapter 13 Part B of this manual.
- Debt assumption: a general government unit may assume a liability from a public sector unit or corporation as part of a bailout operation. Note that in Australian GFS, debt assumption is recorded as transactions in financial assets (net) (ETF 3111, TALC 452, SDC) or (ETF 3211, TALC 552, SDC) rather than reclassifications of financial assets / liabilities through other changes in the volume of assets and liabilities as is suggested in the IMF GFSM 2014. Debt assumption is further discussed in Chapter 13 Part B of this manual.
Common appearances and disappearances of assets and liabilities on the GFS balance sheet also relate to non-produced assets. Paragraph 10.52 of the IMF GFSM 2014 explains the balance sheet effects of the entrance and exit of naturally occurring assets. Some of this information has been reproduced in Box 11.1 below:
Box 11.1 - Other changes in the volume of assets - naturally occurring assets
The entrance and exit of naturally occurring assets on the balance sheet that must be recorded through an other change in the volume of assets and liabilities entry in the GFS accounts include:
Discoveries or extractions and upwards / downward reappraisals of subsoil resources - the volume of subsoil resources may increase in the balance sheet by the discovery of new exploitable deposits, whether as a result of systematic scientific explorations or surveys, or by chance. An economic asset may also be added to the balance sheet because a deposit of subsoil minerals may become economically exploitable as a result of technological progress or relative price changes. Conversely, these resources may decrease in the balance sheet by the depletion of deposits of subsoil assets as a result of the physical extraction and using up of the assets, or from downward reappraisals that reduce their exploitability because of changes in technology or relative prices.
Natural growth / harvesting of uncultivated biological resources - when governments own uncultivated biological resources such as natural forests and fish stocks, their natural growth may take various forms: a stand of natural timber may grow taller, or fish in the estuaries may become more numerous. The depletion of natural forests, fish stocks in the open seas, and other uncultivated biological resources included in the asset boundary of general government as a result of harvesting, forest clearance, or other use beyond sustainable levels of extraction are economic disappearances of assets and should be recorded as negative other changes in the volume of assets and liabilities.
Transfers of other natural resources to / out of economic activity - not all land included in the geographic surface area of a country is necessarily within the asset boundary of GFS. Land may make its economic appearance on the GFS balance sheet when, for example, general economic development in nearby areas transform the land from a wild or waste state to a state in which ownership rights can be enforced and the land can be put to economic use. It may also acquire value because of activity in the vicinity, for example, land that becomes more desirable because a new development is established nearby or the creation of an access road. Any excess in the increase in value of the land over the value of land improvements or any increase due to adjacent capital activity is recorded through an other change in the volume of assets and liabilities entry in the accounts. For virgin forests, gathering firewood is not commercial exploitation, but large-scale harvesting of a virgin forest for timber is and brings the forest into the asset boundary. Similarly, drawing water from a natural spring does not bring an aquifer into the asset boundary of GFS, but a significant diversion of ground water does. A move to charge for regular extraction from a body of surface water may also bring a water resource into the balance sheet. A government unit can create an economic asset by exerting ownership rights over a naturally occurring asset that had not previously been recognised as an asset, such as the electromagnetic spectrum or fish stocks in exclusive economic zones. When it does so, the asset enters the balance sheet through other changes in the volume of assets. It is possible that some natural resources cease to be deployed in economic activity because of changing technology, reduced demand for the resulting product, or for legislative reasons.
Quality changes in natural resources due to changes in economic uses - in this case, the asset is already within the asset boundary, and it is the change in quality of the asset due to changes in its economic use that is regarded as the appearance of additional volumes of the asset. For example, the reclassification of cultivated land to land underlying buildings may also result in a change in the balance sheet value that is effected through other change in the volume of the asset. All degradation of land, water resources, and other natural assets caused by economic activity is recorded as negative other changes in the volume of assets. The degradation may be an anticipated result from regular economic activity or less predictable erosion and other damage to land from deforestation or improper agricultural practices. The difference between a quality change and a price change is a matter of degree, and it may not always be clear whether other changes in the volume of assets or a holding gain is most appropriate.
Source: Based on paragraph 10.52, International Monetary Fund Government Finance Statistics Manual, 2014.
The effects of exceptional, unanticipated external events on assets and corresponding liabilities.
Other changes in the volume of assets and liabilities also record the balance sheet effects of a reduction in the value of an asset (or even its total disappearance) that is not related to the nature of the asset, but to conditions prevailing in the economy that impact either the value or the ownership of assets. These types of events may be the result of catastrophic losses, or the seizure of assets by government units:
- Catastrophic losses - these are defined as the partial or complete destruction of a significantly large number of assets within any of the asset categories resulting from a large-scale, discrete, and recognisable event. Paragraph 10.60 of the IMF GFSM 2014 describes these types of events as including major earthquakes, volcanic eruptions, tidal waves, exceptionally severe cyclones, droughts, and other natural disasters; acts of war, riots, and other political events; and technological accidents such as major toxic spills or release of radioactive particles into the air. Included here are such major losses as deterioration in the quality of land caused by abnormal flooding or wind damage; destruction of cultivated assets by drought or outbreaks of disease; destruction of buildings, equipment, or valuables in forest fires or earthquakes. An entry in other changes in the volume of assets and liabilities is recorded to reduce or eliminate the value of any asset damaged or destroyed through catastrophic losses
- Paragraph 10.61 of the IMF GFSM 2014 states that although produced assets are the most likely candidates to be damaged or destroyed by a catastrophic loss, non-produced assets and financial assets are also subject to damage or destruction. For example, major decreases in the value of land and other natural assets caused by abnormal flooding or wind damage, or the accidental destruction of currency or bearer securities as a result of natural catastrophes or abnormal political events would be included.
- Seizure of assets - government units may take possession of the assets of other institutional units without full compensation. Paragraph 10.62 of the IMF GFSM 2014 indicates that such seizures of assets (whether legal or illegal) are not classified as capital transfers in GFS because they do not take place by mutual agreement of the units involved. The current market value of seized assets is recorded as an other change in the volume of assets and liabilities entry to add the seized assets to the government accounts. The difference between the market value of the assets seized and any compensation provided is recorded as other changes in the volume of assets and liabilities in the event of a compensated seizure. Foreclosures and repossessions of assets by creditors are treated as transactions rather than other changes in the volume of assets and liabilities because the contractual agreement between debtor and creditor provides this avenue of recourse.
Changes in the classification of assets and liabilities
A reclassification rearranges the classification of assets and liabilities without changing the net worth of the unit or sector involved. Paragraph 10.76 of the IMF GFSM 2014 indicates that the composition of the general government or public sector’s balance sheet may change because there has been a change in the sector or structure of an institutional unit, or category of assets or liabilities.
Changes in sector classification and structure
An entire unit may be reclassified from the general government sector to another sector, or to the general government sector from another sector without a change of ownership or control (for definition, see Chapter 2 Part G, and paragraph 8.3 of this manual). Paragraph 10.77 of the IMF GFSM 2014 states that this type of reclassification usually is needed when a unit begins (or ceases) to sell its output at economically significant prices (for definition, see paragraph 2.32 of this manual). When a unit is reclassified out of the general government sector, all of the unit’s assets and liabilities are removed from the general government sector through other changes in the volume of assets and liabilities account entries. The reverse applies if a unit is reclassified into the general government sector. When a public corporation is privatised, all of the unit’s assets, liabilities, and net worth are reclassified from the public corporations sector to the private corporations sector.
A change in the structure of units is also recorded as other changes in the volume of assets and liabilities. Paragraph 10.78 of the IMF GFSM 2014 gives an example of changes in the structure of units as occurring in cases where two general government units merge into a single unit, or a single general government unit may split into two units due to administrative re-arrangements (known as machinery of government changes). When two units are merged, all financial claims and liabilities that existed between them are eliminated in GFS. Symmetrically, when a unit is split into two or more units, new financial claims and liabilities may appear between the new units.
Reclassification of assets and liabilities
Sometimes it may be necessary to reclassify existing assets and liabilities from one category to another in GFS. Paragraph 10.80 of the IMF GFSM 2014 indicates that this usually occurs when there is a change in the use or purpose of an asset. The change in classification is recorded as other changes in the volume of assets and liabilities with the same value for both entries, and so there is no effect on net worth. If the change in the use or purpose of an asset also means a change in its value, then a second entry in other changes in the volume of assets and liabilities is recorded for the change in value rather than a holding gain or loss. The change in value is not recorded as a holding gain because the value increase is due to a change in the use or purpose of the asset, and not due to a price change in the value of the asset held.
Paragraph 10.84 of the IMF GFSM 2014 gives the following examples of changes in the classification of financial assets and liabilities:
- When monetary gold held in the form of gold bullion becomes a reserve asset, it enters the financial part of the balance sheet as a reclassification from valuables (TALC 221) to monetary gold (bullion) (TALC 413) via an other changes in the volume of assets entry in the accounts. When allocated gold accounts become reserve assets they are also reclassified from valuables (TALC 221) to monetary gold (allocated and unallocated) (TALC 414) via an other changes in the volume of assets in the accounts. When unallocated gold accounts become reserve assets they are reclassified from cash and deposits (TALC 411) to monetary gold (allocated and unallocated) (TALC 414), also through an other changes in the volume of assets entry in the accounts. Monetary gold is further discussed in paragraphs 8.156 to 8.158 of this manual.
- When loans become tradeable, a reclassification is recorded from advances other than concessional loans (TALC 433) to debt securities (TALC 421) through an other changes in the volume of assets entry. A similar reclassification will apply if concessional loans become tradeable (recorded as advances - concessional loans (TALC 432)).
- When government units acquire equity in a public corporation or quasi-corporation as a result of legislation or an administrative change, this event will amount to a reclassification of the existing assets and liabilities that results in an addition of shares and other equity to the balance sheets of both entities through an other changes in the volume of assets entry. Equity is further discussed in paragraphs 8.169 to 8.172 of this manual.