Second Intermediate-Level e-learning Course on the System of National Accounts (2008 SNA)

Statistical Institute for Asia and the Pacific Economic and Social Commission of Asia and the Pacific United Nations An Introduction to System of National Accounts Integrated Transaction Accounts Lesson VII - Main entries & data needs Reading Materials Second Intermediate-Level e-learning Course on the System of National Accounts (2008 SNA) October - December 2013

Lesson VII - Main entries & data needs An Introduction Main features KTA and Transaction Accounts Asset boundary Main extensions in 2008 SNA Research and Development Weapons system Borderline issues Asset classification [as in 1993 & 2008 SNA] Valuation of Assets Net worth Capital account Capital formation Gross fixed capital formation Changes in inventories Valuables Consumption of fixed capital Acquisition less disposal of non-produced non-financial assets Capital transfers Changes in net worth Financial accounts Financial assets Financial transactions Valuation Time of recording Data Needs An Introduction Capital account and financial account are the last two among the transaction accounts. We have discussed all the other current transaction accounts in the earlier Lessons IV and VI. In this lesson, we will attempt the following: Intermediate-Level 2 Reading material

Explain how the capital and financial accounts are related to each other as well as their links with the other transaction accounts in the SNA. Their places in the system of accounts are indicated in Box 3.4 of Reading Material for Lesson III. We have seen that these accounts the same balancing item net lending / net borrowing. We will see why. Have a closer look at the asset boundary and discuss the changes in assets classification made in the 2008 SNA. Discuss in detail the main entries of these two accounts and the purposes they usually serve in understanding the functioning of an economy. Most of the main entries in these accounts have already been introduced in earlier lessons. Here we will focus on boundary problems between various categories of transactions recorded in these two accounts. Main Features As discussed in the basic level course as well as reviewed in Lesson I, the balance sheets and accumulation accounts are the main expression of the stock-flow consistency in the SNA. These links between the balance sheets and the accumulation accounts reflect the widely varying economic processes and net worth (stock of assets less liabilities) of the economy and its sectors, which help in understanding their economic behaviour. What is more important for a compiler of national accounts is that these links are the main tools for checking the validity of estimates, which are usually based on very diverse source material. The are the accumulation accounts of the system and record transactions in balance sheet items, i.e., in both financial and non-financial assets and liabilities. The other economic flows that bring about changes in the balance sheet items are captured in Other changes in assets account and Revaluation account. The present course does not cover these accounts. Here, we will focus on only the accumulation transaction accounts, i.e. capital account and financial account. Opening Balance Sheet + Accumulation = Accounts Opening Balance Sheet What is important to note is that accumulation accounts and balance sheets are concerned with ownership. While the balance sheets specify the ownership of assets and liabilities to other units at given points in time, the accumulation accounts show the changes in assets and liabilities during an accounting period. Intermediate-Level 3 Reading material

Thus, the two sides of the capital and financial accounts are labelled changes in assets, and changes in liabilities and net worth, instead of uses and resources as in the production account and distribution and use of income accounts. Summraised versions of the capital and financial accounts are shown in Table 7.1 below. This table is an expanded form of these two accounts contained in Table 3.5 (Lesson III), with additional columns for external transactions and two additional items on the right-hand side of the Capital accounts. The additional items are: Current external balance: this is the balancing item corresponding to savings for the RoW. [refer Box 3.1 of Reading Material of Lesson III] Changes in net worth due to savings & capital transfers: this is the total of the right-hand side of the capital account, and NOT a balancing item. These are discussed in some more detail later in this lesson. Table 7.1: Basic Structure of Capital Account and Financial Account [An expanded form of those contained in Table 3.5, Reading Material of Lesson III] RoW Changes in assets Total economy Capital Account x 23-19 19 Financial Account 32 203 Transaction / balancing item Gross Capital formation - 10 CFC B.9 Net lending / borrowing Net acquisition of financial assets Changes in liability & net worth Transaction / balancing item / total Total economy Note that since there is nothing called non-financial liabilities, the net incurrence of liabilities appear only in the financial account. Also note that the balance of (or difference between) net acquisition of financial assets and net incurrence of liabilities in the financial account is equal to net lending / borrowing. This, as we can see from the table, is true for RoW as well as total economy. This holds good for an individual institutional unit or an institutional sector as well. RoW B.8 Net savings 33 B.12 current external balance 19 Capital transfers receivable 1 0 Capital transfers payable -2 0 Changes in net worth due to savings & capital transfers 32 19 B.9 Net lending / borrowing 19-19 Net incurrence of liabilities 184 51 Intermediate-Level 4 Reading material

The balancing item savings is the net result of all current transactions and represents the accumulation of wealth of an institutional unit / sector / economy. For the RoW account, the corresponding balancing item is called the current external balance. Capital account starts with these on the right-hand side, i.e. changes in liabilities & net worth. All transactions of goods and services of non-financial assets and capital transfers are recorded in this account. The financial account records all transactions of financial assets. In the SNA framework, the balance of transactions in financial assets is by definition equal to the balancing item of the capital account, i.e. net lending / borrowing. Let us see why? KTA and Transaction Accounts Recall the simplest form of KTA. While discussing the correspondence between the KTA and current accounts, we restricted the transactions in goods & services to just the products, i.e. those falling in the category of produced resources. Now, we will extend it to cover transactions in nonproduced economic resources 1 as well. Box 7.1: KTA & Transaction Accounts A relook Recall that the difference between the uses- and resources-side of the sub-total of non-financial transactions is the balancing item net lending/borrowing in the capital account. This is because Sub-totals in the KTA are the sum of all non-financial transactions (including sale and purchases of non-produced assets) Net lending / borrowing is the balance of all non-financial transactions Kitchen Table Account (simplest form) Changes in liability & Changes in assets Uses Resources net worth 1. Use of goods & services 1. sale of goods & services Capital Account B.8 Net savings 2. Paid income 2. Received income B.12 net capital transfer receivable 3. Paid transfers 3. Received transfers Capital transfers receivable Sub-total: non-financial Sub-total: non-financial Gross Capital formation Capital transfers payable Changes in net worth due to CFC 4. Change in financial assets 4. Change in liabilities savings & capital transfers B.9 Net lending / borrowing Total (= sub-total + item 4) Total (= sub-total + item 4) Financial Account Also recall that B.9 Net lending / borrowing Totals on the two sides of KTA are equal Net acquisition of financial assets Net incurrence of liabilities The difference between change in financial assets and that of liabilities is equal to difference of the sub-totals. Financial account of the SNA corresponds to the financial transactions of the KTA. Recall (from Lesson III) that the totals of non-balancing-item entries on the two sides of the non-financial transaction accounts are same as those of all entries (including the balancing items), 1 Unlike produced assets, non-produced resources are those on which ownership rights can be established but which need not be for productive purposes. Intermediate-Level 5 Reading material

since the balancing items (except the last net lending / borrowing) on the uses- and resources-sides cancel out. What remains is the net lending / borrowing the balancing item of the capital account. The balancing item net lending / borrowing appears again in the financial account shown on the right-hand side of the accounts, i.e. under changes in liabilities & net worth. The equivalence of the two sides of the KTA establishes that the balance of all financial transactions has to be net lending / borrowing. Thus, the two sides of the financial account is balanced. [Box 7.1] As a result, the outcome of the real transactions (that is, saving plus net capital transfers received minus capital formation) must be equal to the balance of the financial accounts (that is, the net acquisition of financial assets less net incurrence of liabilities). The accumulation transaction accounts bring the sequence of transaction accounts to an end, completing the description of transactions taking place between the actors in the system. These show the consistency between the real economy and the financial economy. These two accounts reflect four basic types of flow relating to acquisition and disposal of assets, namely: additions to assets, reductions in assets, additions to liabilities, and reductions in liabilities. However, only two net categories are shown: net additions to assets on the left-hand side of the account and net additions to liabilities on the right-hand side of the account. Points to note: Capital and financial accounts can be compiled only for institutional units / sectors and the entire economy. They cannot be compiled for establishments of multi-establishment enterprises. The record transactions in balance sheet items, i.e., in both financial and non-financial assets and liabilities. Both these accounts are concerned with changes in ownership of assets financial and nonfinancial. The labels of the two sides of these accounts are changes in assets, and changes in liabilities and net worth Intermediate-Level 6 Reading material

In the capital account for the RoW the opening item is Current external balance, which is the balancing item corresponding to savings for the Row. Changes in net worth due to savings & capital transfers is the total of the right-hand side of the capital account, and NOT a balancing item. All changes in non-financial assets are recorded in the capital account, while all changes in financial assets are recorded in the financial account. The balance of transactions in financial assets is by definition equal to the balancing item of the capital account, i.e. net lending / borrowing. Net lending / borrowing is equal sub-total of uses-side minus sub-total of resources side of the KTA. The balance of real transactions is equal to net acquisition of financial assets less net incurrence of liabilities. Intermediate-Level 7 Reading material

Asset Boundary Recall from Lesson I that the SNA defines an economic asset as an entity functioning as a store of value over which ownership rights are enforced by institutional units, individually or collectively; and from which economic benefits may be derived by its owner by holding it, or using it, over a period of time. The economic benefits may be derived from use of an asset in the production process, or generation of property income by letting others use (interest, dividends, rent). Economic benefits are also derived from assets held as store of value including possible holding gains/losses, that could be realized by disposing of the asset or terminating it. The first restriction in this definition serves to limit the concept of assets to items that are effectively claimed by an economic agent, excluding, for instance, international waters or wild birds; the second restriction says that only items with an economic value are taken into account. Main extensions of Assets boundary in 2008 SNA The asset boundary has undergone a few significant changes in the 2008 SNA. These are briefly discussed below: Asset boundary extended to include R&D: The output of the research and development activities (R&D) is capitalized as intellectual property products (IPP). However, in cases where it is clear that the activity does not entail any economic benefit to its producer (and hence owner), it is treated as intermediate consumption. R&D consists of the value of expenditure on creative work undertaken on a systematic basis in order to increase the stock of gathered knowledge, including knowledge of man, culture and society, and use of this knowledge to devise new applications. In the 1993 SNA, patented entities were treated as separate asset category. With the inclusion of output of R&D in the asset boundary, it is no longer identified as a separate asset category. In the 2008 SNA, they form a part of the IPP. Treatment of R&D giving rise to produced assets has removed the 1993 SNA inconsistency of treating the patented entities as non-produced asset giving rise to property income. Government GCF to include expenditure on weapon systems: Military weapon systems are seen to be used continuously in the production of defence services, even if their peacetime use is simply to provide ongoing services of deterrence against aggressors. The 2008 SNA, therefore, recommends that military weapon systems should be classified as fixed assets. Single-use items, such as ammunition, missiles, rockets, bombs, etc., delivered by weapons or weapons systems are treated as military inventories. The 1993 SNA treated as gross fixed capital Intermediate-Level 8 Reading material

formation all expenditures by the military on fixed assets of a kind that could be used for civilian purposes of production. Box 7.2: Intellectual property products a few examples In the 1993 SNA, these were called intangible produced assets. These represent establishment of property rights over knowledge in one form or another. The institutional unit creating knowledge may chose to retain the right to use or sell the right to use to others or give users right to others for a specified period against a payment (service charges). These are classified i the 2008 SNA as follows: Research and development, such as development of engineering designs for use in production process whether for own use or sale or operating lease (i.e. letting others use the design under developer s patent). Mineral exploration and evaluation - Expenditure incurred on mineral exploration is treated as expenditures on the acquisition of an intellectual property product and included in the enterprise s gross fixed capital formation. Computer software and databases Computer software, such as development of software whether for own use or for sale of its copies. Databases Entertainment, literary or artistic originals, such as original films, sound recordings, manuscripts, tapes, models, etc., radio and television programming, musical performances, sporting events, literary and artistic output, etc., are recorded or embodied Other intellectual property products. Borderline issues There are a few borderline issues. Particularly, there is no clear boundary line between Intermediate Consumption (IC) and Gross Fixed Capital Formation (GFCF). The guiding principles for determination are based on practical considerations of using information coming from various sources. In concept, IC measures the value of goods and services that are transformed or entirely used up in production, the GFCF measures the acquisition of fixed assets for use repeatedly in the production process. Some examples of borderline issues are as under. Small tools: Small tools are to be treated as intermediate consumption when expenditures are made regularly and are small when compared to machinery and equipment. Intermediate-Level 9 Reading material

Maintenance and repairs: Regular maintenance and repair to keep the fixed assets in good working order constitutes the intermediate consumption. However, major overhaul and renovation that enhances the efficiency or capacity, or prolongs the expected working life of assets is GFCF. Mineral exploration: All expenditures on mineral exploration, whether successful or not, are shown as GFCF. Military equipment: As per 1993 SNA, the military weapons and delivery equipment, such as ships and aircraft are treated as IC. Only those military equipments (assets) that could have a civilian use, such as buildings, roads, airfields, trucks are to be treated as Gross fixed capital formation. As per 2008 SNA, however most single use weapons such as ammunition, missiles, rockets, bombs, etc are treated as military inventories but certain types of ballistic missile with a highly destructive capability, may provide an on going service of deterrence against aggressors and therefore meet the general criterion for classification as fixed assets. Weapons acquired by police are also considered as fixed assets. Points to note: The output of the own-account research and development activities (R&D) is capitalized as intellectual property products (IPP). Acquisition of IPP, such as computer software, databases, Entertainment, literary or artistic originals is treated as fixed capital formation. Expenditure on mineral exploration is treated as expenditures on the acquisition of an intellectual property product. Military weapon systems are classified as fixed assets. However, the one-time use ammunitions are treated as military inventories. Small tools are to be treated as intermediate consumption. Intermediate-Level 10 Reading material

Asset classification [as in 1993 & 2008 SNA] In the 2008 SNA, the assets classification have undergone quite a few changes. The broad groups of classification have also been changed. The broad groups of assets classification in the 2008 SNA is as follows: Produced non-financial assets Fixed assets Inventories Valuables Non-produced non-financial assets Natural resources Contracts, leases and licenses Goodwill & marketing assets The main changes are in the fixed assets category. Only one sub-category Military inventories is introduced under Inventories in the 20008 SNA. In the 1993 SNA, the groups fixed assets and non-produced non-financial assets were further divided into tangible and intangible. What is natural assets in the 2008 SNA was called tangible non-produced assets in the 1993 SNA. The group intangible non-produced assets in the 1993 SNA is now divided into two groups: contracts, leases & licenses and goodwill & marketing assets. In the 2008 SNA, fixed assets are classified as follows: Dwellings Other buildings and structures [land improvements is included in this category] Machinery and equipment [ICT equipment introduced in 2008 SNA] Weapons systems [new category in 2008 SNA] Cultivated biological resources [ this is called cultivated assets in 1993 SNA] Animal resources yielding repeat products Tree, crop and plant resources yielding repeat products Intellectual property products [new category introduced in 2008 SNA] The acquisition less disposal of these is included in gross fixed capital formation (GFCF) Costs of ownership transfer on non-produced assets [new category introduced in 2008 SNA] is also included in GFCF. Intermediate-Level 11 Reading material

Valuation of Assets As elsewhere in the System, items in the accumulation accounts are recorded at current market values. In the case of produced assets used as fixed capital, this implies that allowance should be made for consumption of fixed capital. Exceptionally, consumption of fixed capital may also apply to non-produced assets, namely in so far the value of these assets incorporate produced goods and services (for instance, improvements made to land). The liability associated with shares in corporations is valued at the market value of the shares, even if there is no formal obligation of the corporation to make any payments. In enterprise accounting, shares are recorded at nominal value or issue value instead of current market value. Current market value is at the prices at which a particular asset or liability should be valued as if it were being acquired on the date to which the balance sheet relates plus any associated costs of ownership transfer (for non-financial assets). Major methods for valuation of assets are observable prices; such as for dwellings, land, equipment, livestock, marketable securities, inventories; current value of cumulative capital formation, such as for major construction, cultivated assets, mineral exploration; present value of future income, such as for intangible assets, subsoil assets; and insurance value, such as for valuables. Net worth Net worth is defined to be equal to the value of a unit s assets less the value of its liabilities. For quasi corporations, net worth must be zero because their equity liability is derived as a residual. For other units, the net worth can be either positive or negative depending on the relative size of their assets and liabilities. This is because the current market value of their equity liability is used in the calculation of total liabilities, and need not be the same as shareholders funds. Intermediate-Level 12 Reading material

Capital account The purpose of the Capital account is to record the values of the non-financial assets that are acquired or disposed of by institutional units by engaging in transactions, and to show the change in net worth due to saving and capital transfers. The latter is a measure of the funds available for capital formation with institutional units. Further, it makes it possible to determine the extent to which acquisitions less disposals of non-financial assets have been financed out of saving and by capital transfers. Finally, it shows a net lending corresponding to the amount available to a unit or a sector or the economy for financing, or a net borrowing corresponding to the amount which a unit or a sector or the economy is obliged to borrow from other units or sectors. This is founded on the identity: Net lending/ borrowing Gross Savings + (net) Capital transfer receivable minus (GFCF + CII + acquisition less disposal of valuables) - acquisition less disposal of non-produced non-financial assets The two sides of the capital account show changes in net worth due to saving and capital transfers and acquisition of non-financial assets account. [The figures presented here are those for the total economy. These are taken from 2008 SNA, pages 570-572] Changes in assets Changes in liabilities & net worth Capital Account B.8g Savings (net) 205 376 Gross fixed capital formation Capital transfers receivable 62 359 Acquisition less disposal of fixed assets Capital transfers payable -65 17 Costs of ownership transfers on non-produced assets 28 Changes in Inventories 10 Acquisition less disposal of valuables -222 CFC 0 Acquisition less disposal of nonproduced assets Changes in net worth due to savings & capital transfers 202 10 B.9 net lending/borrowing Intermediate-Level 13 Reading material

It opens with net saving (for the total economy) and the current external balance (for the RoW account). The capital transfers (such as capital taxes, investment grants and the like) are recorded on the change in liabilities side. The sum of these items gives the total change in liabilities regarding change in net worth due to saving and capital transfers. Note that change in net worth is only relevant for the national economy, so, for the ROW the resulting balancing item on this account has no specific analytical value. On the change in assets side, the details of actual investments are recorded. These consist of fixed capital formation, change in inventories, acquisitions less disposals of valuables and acquisitions less disposals of non-produced non-financial assets. The last two items are recorded on a net basis. A negative value represents, on balance, a net export of the involved commodities. Capital formation Five categories of changes in non-financial assets are distinguished in the Capital Account: (i) Gross fixed capital formation, (ii) Consumption of fixed capital, (iii) Changes in inventories, (iv) Acquisition less disposals of valuables, and (v) Acquisition less disposals of non-produced nonfinancial assets. Gross fixed capital formation: Gross Fixed Capital Formation (GFCF) is measured by the value of resident producers acquisitions, less disposals, of fixed assets during a given period plus certain additions to the value of non-produced assets realized by the productive activity of producer or institutional units. Fixed assets are tangible or intangible assets produced as outputs from processes of production that are themselves used repeatedly, or continuously, in processes of production for more than one year. GFCF can be positive or negative depending upon the value of acquisition and disposition of assets by the resident producer. Broadly there are three types of GFCF a. Acquisitions, less disposals, of (tangible) fixed assets: Examples: dwellings, other buildings and structures, machinery and equipment, cultivated assets, e.g. trees and livestock. In the 2008 SNA, i. a sub-category for land improvements has been added within building & structures. This replaces the 1993 SNA term "major improvements to non-produced nonfinancial assets". The costs of ownership transfer on all land are included with land improvements; ii. iii. the information, computer and telecommunications (ICT) equipment has been included as a new category under machinery and equipment; weapon systems are recognized as produced assts and classified separately Intermediate-Level 14 Reading material

Box 7.3: Fixed Capital Formation Main changes in 2008 SNA Costs of ownership transfer: As in the 1993 SNA, the 2008 SNA continues to treat the costs of ownership transfer (COT) as fixed capital formation. The COT on acquisition of an asset should be written off over the period the asset is expected to be held by the purchaser. The 1993 SNA recommended to write off COT over the whole life of the asset. The COT on disposal of an asset should also be written off over the period the asset is held but recorded when they are actually incurred. Recognising the difficulty in implementation of this recommendation for lack of adequate data, the 2008 SNA recommends that these costs should still be recorded as gross fixed capital formation but written off as CFC in the year of acquisition. Mineral exploration and evaluation: A Further specification of capital formation in the 2008 SNA relates to mineral exploration and evaluation. The 2008 SNA maintains the distinction between the act of exploring for mineral resources (treated as a produced asset) and the mineral resources themselves (treated as non-produced assets). The term mineral exploration has been renamed as mineral exploration and evaluation to match the term used in the International Accounting Standards. The 2008 SNA gives guidance that mineral exploration and evaluation should be valued at market prices if purchased or at the sum of costs plus an appropriate mark-up if undertaken on own account. Land improvements: As in the 1993 SNA, land improvements continue to be treated as gross fixed capital formation. The 2008 SNA recommends treating land improvements as a category of fixed assets distinct from the non-produced land asset as it existed before improvement. In cases where it is not possible to separate the value of the land before improvement and the value of those improvements, the land should be allocated to the category that represents the greater part of the value. The costs of ownership transfer on all land are to be included in the land improvements. b. Acquisitions, less disposals, of intellectual property products: Examples: mineral exploration, entertainment, literary or artistic originals. Note that, in the 2008 SNA i. the term "intangible fixed assets" has been renamed as "intellectual property products". The word "products" is included to make clear that it does not include third party rights which are non-produced assets in the SNA ii. iii. R&D products are included within intellectual property products the item "mineral exploration" of 1993 SNA has been renamed as "mineral exploration and evaluation" to emphasise that the coverage conforms to the international accounting standards Intermediate-Level 15 Reading material

iv. other intangible fixed assets of 1993 SNA is replaced by the term "other intellectual property products". c. Cost of ownership transfer of non-produced assets. Changes in inventories: Changes in inventories are measured as the value of the entries into inventories less the value of withdrawals and the value of any recurrent losses of goods held in inventories. Types of inventories involved are materials and supplies, work-in-progress, finished goods, and goods for resale. The only change made in the 2008 SNA to inventories is to show military inventories separately. For valuation of changes in inventories, the output of finished goods is valued as if they were sold at the moment of entering into inventories at current basic prices; additions to work-in-progress - in proportion to the estimated current basic price of the finished product; reductions in work-in-progress as withdrawn from inventories when production is finished - valued at current basic prices of the unfinished product; goods for resale - at actual or estimated purchasers prices of the trader; and goods for resale withdrawn - at the purchasers prices at which they can be replaced at the time they are withdrawn. Valuables: Valuables are goods that are not used primarily for production or consumption, do not deteriorate (physically) over time under normal conditions and that are acquired and held primarily as stores of value. Types of valuables are precious stones and metals such as diamonds, nonmonetary gold, platinum, silver; antiques and other art objects, such as paintings, sculptures, etc.; and other valuables, such as jewellery fashioned out of precious stones and metals and collectors items. Valuation of valuables for acquisition is done at the purchasers prices paid for them, including any agents fees or commissions and trade margins when bought from dealers; and for disposals - at the prices received by sellers, after deducting any fees or commissions paid to agents or other intermediaries. Consumption of fixed capital (CFC) CFC is recorded as a change in assets on the left side of the capital account. It represents the amount of fixed assets used up, during the accounting period, as a result of normal wear and tear and foreseeable obsolescence, including a provision for losses of fixed assets as a result of accidental damage. CFC should be distinguished from the depreciation allowed for tax purposes or the depreciation shown in business accounts and should be estimated on the basis of the stock of fixed Intermediate-Level 16 Reading material

assets and the probable average economic life. The perpetual inventory method (PIM) is recommended for the calculation of the stock of fixed assets. The stock of fixed assets should be valued at the purchasers prices of the current period. Acquisition less disposal of non-produced non-financial assets Non-produced non-financial assets consists of land and other tangible non-produced (subsoil assets, non-cultivated biological resources and water resources) assets that may be used in the production of goods and services. Land does not include the following items: buildings or other structures on the land or through it (roads, tunnels), vineyards, orchards, or other plantations of trees, subsoil assets, non-cultivated biological resources, and water resources below the ground. Non-produced non-financial assets (2008 SNA) include the following three types: Natural resources - the "tangible non-produced assets" of the 1993 SNA are renamed as "natural resources", adding other natural resources such as the radio spectrum. [The "intangible non-produced assets" of the 1993 SNA has been spilt into two subcategories: contracts, leases and licences and goodwill and marketing assets] Contracts, leases and licences: these are the contracts, leases and licenses which provide price advantage to the holders and the holder is legally permitted to realize the advantage. This category of non-produced assets has four sub-categories: marketable operating leases, such as lease of a building that can be sublet at a higher rental permissions to use natural resources, such as rights to use radio spectra for mobile phones permissions to undertake specific activities, such as licenses for retail sales of liquor entitlement to future goods and services on an exclusive basis, such as publisher s exclusive rights to publish new works or television broadcasting rights to telecast sporting events. Goodwill and marketing assets: these are the contracts, leases and licenses which provide price advantage to the holders and the holder is legally permitted to realize the advantage. Goodwill: The premium offered (or might be offered) above the net value of the assets and liabilities. Marketing assets: Items like brand names, mastheads, trademarks, logos and domain names Intermediate-Level 17 Reading material

Goodwill and marketing assets are only recognized as assets in the SNA when they are evidenced by a sale, i.e. only when there is an actual sale and purchase. The value of goodwill and marketing assets, in case of sale of an ongoing unit, is defined as: the value paid for an enterprise as a going concern minus less the sum of its assets the sum of its liabilities of each item separately identified and valued. Capital transfers Capital transfers could be in the form of investment grants which are capital transfers in cash or in kind made by governments or by the RoW to other resident or non-resident institutional units to finance all or part of the costs of their acquiring fixed assets; or other capital transfers that do not themselves redistribute income but redistribute wealth among the different sectors or sub-sectors of the economy or the rest of the world. Capital taxes such as capital levies and taxes on capital transfers are also capital transfers. In contrast to current transfers the capital transfers do not affect the saving. The 2008 SNA clarifies that exceptional payments from government to public quasicorporations should be treated as capital transfers. Similarly, exceptional payments from public corporations should be recorded as withdrawals from equity. These should be recorded in the financial account accordingly. Changes in net worth The total of the resources, on the right side of the account, is explicitly shown and described as changes in net worth due to saving and net capital transfers. It is not a balancing item. It represents the positive or negative amount available to the unit or sector for the acquisition of nonfinancial and financial assets. Change in the net worth due to saving and capital transfers account appearing on the right hand side of the capital account determines the change in net worth due to saving and capital transfers, which corresponds to net saving plus capital transfers receivable, minus capital transfers payable. It is the total of the resources - changes in the net worth due to the saving and net capital transfers and is not a balancing item. It represents the positive or negative amount available to the unit or sector for the acquisition of non-financial and financial assets Intermediate-Level 18 Reading material

Net lending or borrowing Net lending or borrowing, the balancing item of capital account is defined as net saving plus capital transfers receivable minus capital transfers payable minus value of acquisitions less disposals of non-financial assets, less CFC. Points to note: The two broad classes of non-financial assets are: produced and non-produced non-financial assets. In 2008 SNA, there is no classification as intangible produced assets. Net worth is defined to be equal to the value of a unit s assets less the value of its liabilities. The change in assets consists of capital formation and acquisitions less disposals of nonproduced non-financial assets. The gross capital formation consists of fixed capital formation, change in inventories, acquisitions less disposals of valuables. GFCF is mainly of three types: acquisitions less disposals of fixed assets, acquisitions less disposals of intellectual property products and costs of ownership transfers on non-produced assets. Costs of ownership transfer and land improvements are included in GFCF. CII includes change in inventories of raw materials, finished goods, work-in-progress and goods for resale. There three main types of non-produced non-financial assets (2008 SNA): natural resources, contracts, leases and licences and Goodwill and marketing assets. Goodwill and marketing assets are only recognized as assets in the SNA when they are evidenced by a sale. Exceptional payments from government to public quasi-corporations should be treated as capital transfers. Intermediate-Level 19 Reading material

Financial accounts Financial transactions describe changes in ownership of financial assets and the creation and liquidation of financial claims. Financial Account records by type of financial instrument the changes in the financial assets and liabilities. The classification of assets and liabilities used in the financial account is identical to that used in the balance sheets. Left side of the account records acquisitions less disposals of financial assets, while the right side records incurrence of liabilities less their repayment. Net incurrence of liabilities less net acquisition of financial assets is equal in value, with the opposite sign, to net lending/borrowing, the balancing item in the capital account. [The figures presented here are those for the total economy. These are taken from 2008 SNA, pages 572-573] Changes in assets Changes in liabilities & net worth Financial Account B.9 net lending/borrowing 10 436 Net acquisition of financial assets Net acquisition of liabilities 426-1 F.1 Monetary gold and special drawing rights (SDRs) F.1 Monetary gold and special drawing rights (SDRs) 89 F.2 Currency and deposits F.2 Currency and deposits 102 86 F.3 Debt securities F.3 Debt securities 74 78 F.4 Loans F.4 Loans 47 107 F.5 Equity & investment fund shares F.5 Equity & investment fund shares 105 48 F.6 Insurance, pension and standardised guarantee scheme F.6 Insurance, pension and standardised guarantee scheme 48 14 F.7 Financial derivatives and employees stock options F.7 Financial derivatives and employees stock options 11 15 F.8 Other accounts receivable/ payable F.8 Other accounts receivable/ payable 39 Financial assets Most financial assets are financial claims. Financial claims and obligations arise out of contractual relationship entered into when one institutional unit provides funds to the other. A financial claim is defined as an asset that entitles its owner, the creditor, to receive a payment, or series of payments, from the other unit, the debtor, in certain circumstances specified in the contract between them. The claim is extinguished when the liability is discharged by the debtor Intermediate-Level 20 Reading material

paying a sum agreed in the contract. Such claims include not only claims on financial intermediaries in the form of cash and deposits but also loans, advances and other credits and securities such as bills and bonds. In the 2008 SNA, financial assets are classified under eight major categories: F.1 Monetary gold and special drawing rights (SDRs) [The 2008 SNA recommends to treat special drawing rights (SDRs) issued by the IMF as being a liability of countries receiving the allocations and to record allocation and cancellation of SDRs as transactions.] F.2 Currency and deposits F.3 Debt securities [This was called Securities other than shares in the 1993 SNA.] F.4 Loans F.5 Equity & investment fund shares [called Shares and other equity in the 1993 SNA] F.6 Insurance, pension and standardised guarantee scheme [called Insurance technical reserves in the 1993 SNA]. These are classified as Non-life insurance technical provisions Life insurance and annuity entitlements Pension entitlements F.7 Financial derivatives and employees stock options [simply Financial derivatives in 1993 SNA] F.8 Other accounts receivable/payable. Financial transactions Financial transactions always have counterpart transactions in the system either other financial transactions or non-financial transactions. Most transactions involving transfer of ownership of a good or non-financial asset, or the provision of a service or labour, entail a counterpart entry in the financial account. In the SNA, many transactions take place entirely within the financial account. For example, when one financial asset is exchanged for another, such as purchase of shares of a company using cash in hand or bank deposit, only the entries of financial account is affected. Again, when a liability is repaid with a financial asset entries are made only in the financial account. When the counterpart transaction of a financial transaction is not a financial transaction, net lending/net borrowing changes. Intermediate-Level 21 Reading material

Conventions adopted in the SNA result in the ownership of some non-financial assets being construed as the ownership of financial assets. Specific cases include: (a) Immovable assets, such as land and structures, are construed as being owned by residents of the economy where they are located, except when those structures are owned by foreign government entities and are thus located out of the economic territory of the country. When the owner of such assets is a non-resident, therefore, he is considered to have a financial claim on a notional resident unit that is construed to be the owner; (b) An unincorporated enterprise that operates in a different economy from the one in which its owner resides is considered to be a quasi-corporation. That entity is a resident of the economy where it operates, rather than a resident of the economy of its owner. The owner of the enterprise is deemed to own foreign financial assets equal in value to all the assets, nonfinancial as well as financial, belonging to the quasi-corporation. (c) Reinvestment earnings from FDI: Reinvestment of earnings of FDI enterprises is shown as reinvested earnings in the resources-side of the distribution of primary income account of the parent corporation. Because it is not actually withdrawn, it adds to the value of the equity of the enterprise by a recording as reinvestment of earnings in the financial account of the parent corporation. (d) Relating to non-life insurance: Change in Technical Reserves of the insurance corporation (unearned premiums plus outstanding claims) is recorded in financial account as i. change in liabilities of Insurance corporations and ii. change in assets of domestic & RoW policy holders. (e) Relating to life insurance: Life insurance and annuities entitlements (net premiums and benefits) of the insurance corporation is recorded in financial account as i. change in liabilities of Insurance corporations and ii. change in assets of domestic & RoW policy holders. (f) Change in pension and non-pension entitlements are recorded in financial account as i. change in liabilities of pension / non-pension fund and ii. change in assets of households. Valuation Transactions in financial assets are recorded at the prices at which the assets are acquired or disposed of. These prices should exclude service charges, fees, commissions, and similar payments for services provided in carrying out the transactions. Such payments should be recorded as payments for services. When a financial transaction involves a new issue of liabilities, the transaction should be recorded by both creditor and debtor at the amount of the liability incurred, i.e., exclusive of any fees, Intermediate-Level 22 Reading material

commissions, etc., and also exclusive of any prepaid interest that may be included in the price. When a security is issued at a discount, the proceeds to the issuer at the time of sale, and not the face value, are recorded in the financial account. The difference between the issue price and the face value is treated as interest that is accrued over the life of the instrument Time of recording In principle, the two parties to a financial transaction should record the transaction at the same point in time. When the counterpart to an entry in the financial account is non-financial - for example, when sales of goods or services give rise to a trade credit, the entries in the financial accounts should take place when the entries are made in the relevant non-financial account, i.e., when ownership of the goods is transferred or when the service is provided. When all entries relating to a transaction pertain only to the financial account, they should be recorded when the ownership of the asset is transferred. Intermediate-Level 23 Reading material

Points to note: Net incurrence of liabilities less net acquisition of financial assets is equal in value, with the opposite sign, to net lending/borrowing, the balancing item in the capital account. Most financial assets are financial claims. All financial transactions have counterpart transactions - other financial or non-financial transactions. Many transactions (those NOT involving non-financial transactions) take place entirely within the financial account. Net lending/net borrowing is NOT affected by exchange of one financial asset for another or when a liability is repaid with an asset. All transactions financial assets are recorded at the actual prices at which the assets are acquired or disposed of. Payment of interest on loans is NOT considered as financial transaction, since it does not change the assets and liability position of the units involved. Fees and commissions, whether explicitly charged or implicit are treated as service charges. Intermediate-Level 24 Reading material

Data needs Recall the correspondence between the KTA and SNA accounts [Lesson III ] that a component of capital formation own-account capital formation - represents non-monetary transactions. This involves production for own use, for which market prices, if available, should be used for valuation; otherwise are to be valued at cost. The valuation of these goods & services are invariably done at the stage of compiling production account and are transferred to capital account. All the entries of financial account represent monetary transactions. In spite of representing monetary transactions, many entries of financial account are not directly observable. Mostly these relate to assets and liabilities of Insurance, pension and standardised guarantee scheme category. As we have seen in Lesson VI, the value of such transactions are derived from observed actual transactions and are often imputed by partitioning, rerouting and reallocation. Here, we will indicate the data needs separately for the entries (other than the balancing items) of only the capital account. As the data needs for this account (that are not obtained from the production account) relate to monetary transactions, national accountants rely on data available from the administrative records, business accounts and statistical surveys. We will try to identify the data required for estimating aggregates relating to these in the following table. Also note that since all these accounts are relevant only for institutional units and sectors, the records of transactions maintained by businesses at the corporate level are sufficient for compilation of these accounts. Thus, the main sources of data are the business records, administrative records of the government and the Central bank and statistical surveys (and censuses). The last source is important for covering the transactions of the households and unincorporated enterprises. Note that for compilation of annual accounts from the results of periodic surveys on households and unincorporated units are usually based on other indices and indicators. The following table indicates the main data needs (that are not already covered under data needs for production account) under all the stated circumstances: Intermediate-Level 25 Reading material

Main Data Needs for Capital Account SNA Aggregate 1. Fixed capital formation 2. Change in Inventories Segment of economy All sectors All sectors mainly market producers Main Data Needs Purchase and sale of dwellings, other buildings and structures, machinery and equipment, cultivated assets, e.g. trees and livestock. Purchase and sale of weapons systems. Purchase of intellectual property products. Expenditures on land improvement. [from production account] Expenditure on R&D and other IPP, such as mineral exploration, film making, music recording etc. [from production account] Costs of ownership transfers. Opening & closing stock of finished goods [also required are corresponding basic price to eliminate the effects of holding gains / losses not covered in this course] Additions and reductions to work-in-progress Opening & closing stock of goods for resale. Opening and closing stocks of raw materials for intermediate consumption, including military ammunitions. 3. Valuables All sectors Purchase and sale of precious stones and metals; antiques and other art objects, and other valuables. The sale figures are required for those not producing the valuables. 4. CFC All sectors Opening & closing stocks of all fixed assets by detailed category and age, in current market value. Average life of each category of fixed assets. Intermediate-Level 26 Reading material