Part D - Accounting rules
Although GFS is based on economic principles, the data that supports it are sourced from the accounting systems of Australian treasuries, the Department of Finance, directly from public sector units, and others. In Australia, the GFS is embedded into the Australian Accounting Standards via Australian Accounting Standards Board 1049: Whole of Government and General Government Sector Financial Reporting (AASB 1049). This standard applies to the Commonwealth Government, and each state and territory government.
As is the case with commercial accounting, all entries in GFS are recorded in monetary terms through the use of double entry recording which captures debit and credit entries. In GFS, flows are recorded as revenue, expenses, and transactions in assets and liabilities, and stock positions are recorded as assets and liabilities. Similarly to commercial accounting, GFS employs the accrual basis of recording which means that transactions are recorded whenever economic value is created, transformed, exchanged, transferred or extinguished. The GFS reporting period also matches that of the accounting financial year and financial quarters.
While there are many similarities between GFS and the accounting rules applied by businesses and governments in their financial reports, there are also some important differences. For example, commercial accounting systems do not always require assets and liabilities to be valued at market value as does the GFS system. Also, GFS values sales at gross value rather than the net of the cost of goods sold. Other differences in the GFS system include the identification of assets as either financial or non-financial in nature and all liabilities as financial in nature, whereas commercial accounting identifies assets and liabilities as current or non-current in nature.
Double-entry accounting in GFS
The GFS system uses double-entry accounting for the recording of flows. Under this system, every flow gives rise to a minimum of two entries of equal-value, referred to as debits and credits. This principle ensures that the total of all debit entries and that of all credit entries for all transactions are equal, thus permitting the accounts for a unit or sector to be checked for consistency.
By convention, debit entries are made for increases in assets and decreases in liabilities. Credit entries are made for decreases in assets and increases in liabilities. Changes to net worth arising from transactions are recorded as either revenues or expenses. Therefore, transaction entries that increase net worth (revenues) are credits, and transaction entries that decrease net worth (expenses) are debits. This can be demonstrated in Table 3.1 below:
|Increase in Assets||Debit (+)|
|Decrease in Assets||Credit (-)|
|Increase in Liabilities||Credit (-)|
|Decrease in Liabilities||Debit (+)|
|Increase in Revenue||Credit (-)|
|Decrease in Revenue||Debit (+)|
|Increase in Expenses||Debit (+)|
|Decrease in Expenses||Credit (-)|
Individual debit and credit entries are not usually made in Australian GFS, (as data are sourced from electronic downloads at an aggregated level), but are shown in Table 3.1 to demonstrate the double entry nature of the GFS system.
Other economic flows can increase or decrease stocks or values of assets and liabilities, with the counterpart entries recorded directly as changes in net worth. In the case of the reclassification of assets or liabilities, a change will occur in the stock position of two categories of assets or liabilities but there is no impact on net worth. This is because an increase in one category of assets or liabilities is paired with a decrease in another category of asset or liabilities.
The balance sheet
The GFS balance sheet is defined in paragraph 3.56 of the IMF GFSM 2014 as a statement of the values of the stock positions of assets owned and of the liabilities owed by an institutional unit or group of units, drawn up in respect of a particular point in time. A fundamental rule of the GFS balance sheet is that the total value of the assets always equals the total value of the liabilities plus net worth. Use of the doubleentry recording in GFS ensures that this relationship is correctly maintained.
Time of recording flows
The time of recording of flows plays a very important role in GFS compilation. All flows are recorded on an accrual basis in GFS. This means that economic events are recorded at the time when they occur, irrespective of whether cash was received or paid (or was due to be received or paid), and flows are recorded whenever economic value is created, transformed, exchanged, transferred or extinguished. The recording of flows on an accruals basis also ensures that non-cash transactions, such as depreciation and transfers in kind, are included in GFS.
The timing of specific flows
Applying the accrual basis of accounting to GFS is not always straight forward. For example, all taxes should be recorded when the activities, transactions, or other events occur that create the liabilities to pay taxes. In practice, information based on Australian Taxation Office tax assessments may be all that is readily available to government to serve as evidence that a taxable event took place, and these may have been submitted many months after the liability to pay the taxes had been created. Table 3.2 below provides some practical guidance for the timing of recording of specific flows, and is based on paragraphs 3.77 to 3.102 of the IMF GFSM 2014:
|GFS Flow||Recommended time of recording|
|Income taxes||Income taxes should be recorded in the period in which the income is earned, but in reality there may be a significant delay between the period that the income is earned and the time at which it is feasible to determine the actual liability. In practice, income taxes deducted at source (such as pay-as-you-earn taxes), are recorded in the period they are paid rather than earned. Other income taxes have to be recorded when there is documentary evidence of the amount of tax that has accrued.|
|Other taxes||Taxes on the ownership of specific types of property are often based on the value of the property at a particular point in time, but are deemed to accrue continuously over the entire year or the portion of the year that the property was owned (if less than the entire year). Similarly, taxes on the use of goods or the permission to use goods or perform activities usually relate to a specific time period, such as a license to operate a business during a specific period.|
|Fines, penalties and property forfeitures||Some compulsory transfers such as fines, penalties, and property forfeitures, are determined at a specific time. These transfers are recorded when the government has an unconditional legal claim to the funds or property, which usually is when a court renders judgment or an administrative ruling is published. If such judgment or ruling is subject to further appeal, then the time of recording is when the appeal is resolved.|
|Grants and other voluntary transfers||Grants and other voluntary transfers often have requirements or eligibility conditions attached to them. Examples are the prior incurrence of expenses for a specific purpose, the passage of legislation to authorise participation in a program, or the beginning of a period such as the start of a new financial year. Under an accruals basis, these transfers should be recorded when all requirements and conditions are satisfied. However in Australia, recipients of grants generally do not record them until they have control over the funds granted.|
|Dividends||Dividends are to be recorded as of the date that the associated share goes 'ex dividend'. The ex-dividend date is the date that the dividends are excluded from the market price of shares.|
|Withdrawal of income from quasi-corporations||Withdrawals from income of quasi-corporations and various voluntary transfers are recorded on the date that the payment occurs.|
|Transactions in goods and nonfinancial assets||Transactions in goods and non-financial assets (including by barter, payment in kind, or transfer in kind) should be recorded when legal ownership changes. If that time cannot be determined precisely, the time of recording may be when there is a change in physical ownership or control of the goods and non-financial assets. Change in ownership of goods acquired under finance lease are deemed to be acquired or disposed of when the lease is signed or economic control of the asset otherwise has changed hand.|
|Inventories||Inventory is often made up of materials and supplies held as input for producing goods and services, work-in-progress or finished goods held for resale or distribution. Additions to inventories are recorded when products are purchased, produced, or otherwise acquired. Withdrawals from inventories are recorded when products are sold, used up in production, or otherwise relinquished. Additions to work-in-progress inventory are recorded continuously as work proceeds. When production is completed, the production costs accumulated to that point are transferred to finished goods inventory.|
|Transactions in services||Transactions in services should be recorded when the services are provided. Some services and certain types of exchange transactions are supplied or take place on a continuous basis. For example, renting, insurance, and housing services are continuous flows and, in concept, should be recorded continuously for as long as they are being provided. Similarly, interest, compensation of employees, rent, some social benefits, and consumption of fixed capital occur on a continuous basis over a period. In practice, such activities are allocated to periods based on assumptions about the amount of the activities that occurs during each period.|
|Transactions in financial assets and liabilities|
Transactions in most types of financial assets, such as securities, loans, currency and deposits, should be recorded when legal ownership changes. This date may be specified according to a contract to ensure matching entries in the books of both parties. If no precise date is fixed, the date on which the creditor receives payment, or some other financial claim, is the determining factor. For example, loan drawings are entered in the accounts when actual disbursements are made and financial claims are established, not when an agreement is signed. On practical grounds, public sector liabilities may have to take account of the time of recording from the viewpoint of the public sector unit.
In some cases, the parties to a transaction may perceive ownership to change on different dates because they acquire the documents evidencing the transaction at different times. This variation usually is caused by the process of clearing funds. The amounts involved may be substantial, such as in the case of transferable deposits and other accounts receivable or payable. For transactions between government units, the date on which the creditor records the transaction should be the date of recording.
The transaction date of securities (the time of the change in ownership of the securities) may precede the settlement date (the time of the delivery of the securities). Under these circumstances, both parties should record the transaction at the time ownership changes, not when the underlying financial asset is delivered. Any significant difference between transaction and settlement dates gives rise to accounts payable or receivable. In practice, when the delay between the transaction and settlement is short, the time of settlement may be considered an acceptable proxy.
|Accounts payable and receivable||Some financial claims or liabilities, in particular the various types of accounts payable and receivable such as trade credits and advances, general accounts payable, and wages payable, are the result of a non-financial transaction and are not otherwise evidenced. In these cases, the financial claim is created when the counterpart transaction such as the purchase of a good on credit, and compensation of employees, occurs.|
|Holding gains and losses|
The calculation of holding gains and losses starts when economic ownership over the assets is acquired. The signing of the contract fixes the current market price for the transaction. A unit can only incur holding gains and losses on the assets or liabilities over which it has economic ownership.
Changes in price often have a continuous character, particularly in respect to assets for which an active market exists. In practice, holding gains and losses are computed between two points in time. The starting point in time for the recognition of holding gains and losses will be the moment at which:
Arrears are amounts that are both unpaid and past their due-for-payment date. If arrears occur, no transactions should be imputed, but the arrears should continue to be included in the same instrument until the liability is extinguished.
Repayments of debts are recorded when they are extinguished in accordance with the accrual principle of accounting.
Sometimes a debt contract can provide for a change in the characteristics of a financial instrument if repayments go into arrears. If this occurs, then the existing financial instrument should be reclassified to represent a new financial instrument through an other change in the volume of assets entry. This type of reclassification applies if the original debt contract remains, but the terms within it change. If a new contract is negotiated, or the nature of the instrument changes from one instrument category to another (for example, from bonds to equity), these events need to be recorded as new transactions.
|Reclassifications||Reclassifications should be recorded when the change in the nature of the asset, liability, or entity occurs. Keeping records of reclassifications as they occur makes it possible to reconstruct supplementary time series based on the situation before the reclassification, if needed.|
|Other changes in the volume of assets and liabilities||Other changes in volume are recorded as these changes occur. For reclassifications, because the GFS is an integrated stock-flow framework, this requires that both the removal of an existing asset or liability from the original category and its inclusion in the new category are recorded at the same time.|
Source: Based on paragraphs 3.77 to 3.102, International Monetary Fund Government Finance Statistics Manual, 2014
The recording of flows over extended periods
Several other transactions relate to flows that take place continuously, or over extended periods. For example, operating leases and depreciation accrue continuously over the entire period that a non-financial produced asset is used, and interest accrues continuously over the entire period that a financial claim exists. In GFS, these transactions should be recorded as if they are provided continuously over the whole period that the contract lasts, or the period that the asset is available for use. However in reality, as is the case for income taxes, the details of flows that take place continuously (or over extended periods) may not be available until the reporting date.
The cash basis of recording
Under the cash basis of accounting, flows are recorded when cash is received or disbursed. GFS in Australia is recorded under the accrual basis of accounting which also enables the derivation of a statement of cash flows (called the statement of sources and uses of cash) as an integral part of GFS records. Information on cash flows assists in the management of liquidity and is crucial to the operation of any unit. In GFS, the cash basis of recording provides analytically useful information on the liquidity positions of government, which allows for liquidity management. However, it is difficult to assess the true financial position of a unit without an accrual based system of accounting because information on non-monetary flows such as arrears, depreciation, accounts receivable / accounts payable, and trade credits is missing in a pure cash system of accounting. Although useful for liquidity management and other analytical purposes, the pure cash basis of accounting does not fully record all economic activity and resource flows required in macroeconomic statistics.