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Chapter 5. The capital account and other changes in stocks accounts
Overview
5.1. The components of the ICW framework defined in Chapter 4 all comprise the transactional flows that take place regularly and on a recurring basis. They describe the day to day running of a household with income being received on a regular basis, consumption taking place on a daily basis and consequent saving, or dissaving, depending on the levels of the first two flows. While the current account deals with the day to day 'living well' flows of the household, the capital account and other changes in stocks account deal with the 'getting rich' flows - i.e. changes in the value of the household's assets and liabilities or net worth. The capital account deals with changes in net worth that result from transactions that take place during the reference period. The other changes in stocks account deals with other volume changes and revaluations.
5.2. The transactions dealt with in the capital account are as follows:
- capital transfers received and outlaid
- acquisition and disposal of non-financial assets
- acquisition and disposal of financial assets
- incurrence and repayment of liabilities.
5.3. It also deals with the depreciation allowance on capital stocks used in production. Depreciation appears in this account as a source of funds for investment.
5.4. The other changes in stocks account deals with flows that do not involve transactions:
- other changes in the volume of stocks
- nominal holding gains and losses.
5.5. It should be noted, however, that while some transactional flows in the capital account result in an increase or decrease in the value of assets and liabilities (e.g. capital transfer), some may involve only a change in their nature - for example where one asset is sold (e.g. a car) and another asset of the same value is acquired (e.g. cash). Alternatively, a capital account transaction may result in an offsetting capital account transaction (e.g. purchase of a house offset by incurring a mortgage as a liability). At an operational level, it will often be necessary, however, to account for all of these flows as it may not be clear until the end of the reference period which flows deal with an increase or decrease in the value of assets and liabilities and which deal only with a change in their nature. In other words, to balance the household books in the accounting system adopted, it would be necessary to collect data on all flows of economic resources and all household transactions.
Measuring change in net worth
5.6. An understanding of capital flows and their effect on the household's net worth is necessary for the formulation of a complete measure of economic well-being. Change in net worth can be measured in two ways - using either a stocks model or a flows model. Although in concept these two approaches give the same measure of change in net worth, combining both approaches provides a more comprehensive measure of economic well-being.
Stocks model
5.7. The stocks model is concerned with the value of the household's stock of assets and liabilities at the beginning (Si) and end (Sii) of the reference period and the resulting change in net worth. This change can be expressed as:
change in net worth = Sii - Si.
5.8. This stocks model for calculating change in net worth has the advantage of conceptual simplicity. It also has the advantage that it takes into account not only the effect of transactions but also of other changes in volume of stocks and revaluations. However, it does not, by itself, give any information on the household financial activities that lead to the change in net worth. If net worth has increased, it does not tell us whether this increase resulted from saving during the period or the receipt of capital transfers. A knowledge of these and other factors contributing to a change in net worth can be very useful in gauging the overall economic well-being of a family or household.
5.9. The stocks model currently poses problems at an operational level. The ABS does not conduct a wealth survey and there is little other data available on wealth holdings of individual households in Australia.
5.10. Because of this lack of information on the value of assets and liabilities, and because of the importance of information on the nature of transactions that result in the change of net worth, more emphasis is placed on an alternative method of measuring change in net worth that involves the dynamics of a flows model.
Flows model
Capital account transactions
5.11. The flows model of the capital account adopts a similar accounting system to that used in the current account, i.e. it adopts a receipts and a disbursements book-keeping system to keep track of the numerous flows involved in a household's saving and investment activities.
5.12. The receipts side of the capital account deals with net receipts of investment funds during the reference period. The first of these net receipts is the saving or dissaving during the reference period that links the household's current and capital accounts. If a household saves during the reference period then that money moves into the capital account for investment. Saving is, therefore, an internal source of finance for household investment. If the household dissaves, then either assets are sold or liabilities are incurred in the capital account and the money moved to the current account as an internal source of finance for household consumption or taxes.
5.13. The second set of net receipts into the capital account are capital transactions that take place between the household and outside entities. These transactions take the form of capital transfers received by the household and capital transfers outlaid by the household. Net capital transfers received therefore constitute an external source of financing investment.
5.14. An additional source of capital receipts is that provided in the form of depreciation allowances set aside for the replacement of fixed capital used up in the process of production. These are allowances that have been deducted from current receipts before recording income earned by unincorporated enterprises, rental property, and income imputed from household durables.
5.15. The disbursements side of the capital account also deals with two major sets of net flows: net acquisition of non-financial assets and net lending. Net lending is defined as the net acquisition of financial assets minus the net incurrence of liabilities.
5.16. Net acquisitions of non-financial assets describe the net effect of the household's acquisitions and disposals of non-financial assets. It therefore represents the manner in which some (or all) of the net receipts of the capital account are used for this type of investment.
5.17. Net acquisition of financial assets describes the net effect of the household's acquisition and disposal of financial assets whether these be, e.g. money deposited in the bank or the purchase of shares or superannuation.
5.18. Net incurrence of liabilities describes the net effect of the household's incurrence and repayment of loans.
5.19. The receipts and disbursements sides of the capital account therefore give alternative views of the household's change in net worth over the reference period: a view from the perspective of the net resources available for investment from saving, net capital transfers and depreciation allowance; and a view of the manner in which these net resources are invested.
Other changes in stocks
5.20. The flows model of the other changes in stocks account deals with two net flows:
- the net effect of changes in volume of assets caused by such things as catastrophic events, uncompensated seizures, and so on;
- the net effect of nominal holding gains and losses.
The latter relate to changes in stocks brought about by capital gains and losses.
Capital account dynamics
5.21. From the receipts side of the capital account, saving, depreciation allowance, capital transfers and change in net worth may be expressed by the equation:
5.22. The disbursement side of the capital account relates to flows that involve the acquisition and disposal of non-financial assets and net lending.
5.23. Formally, the disbursement side of the capital account in the transactions model may be expressed as:
Other changes in stocks account - dynamics
5.24. The Capital account dynamics model in the previous topic deals only with the transactional flows that lead to change in net worth. There are, however, other factors affecting changes in net worth that do not require any action on the part of the household. The other changes in stocks account gives two separate components of this change.
5.25. The first derives the net effect of other changes in the volume of stocks. The second derives the net effect of nominal holding gains and losses.
5.26. When the net effects of these flows are added to the measure, the complete change in net worth during the reference period will, from the resources side, be depicted as follows:
5.27. From the disbursements side, the full measure is shown as:
5.28. The strict accounting procedures used in the capital, and other changes in stocks, accounts ensure that the receipts and disbursements sides of the accounts balance, that is:
 |
saving + ü
net capital transfers received + î
depreciation allowance + ì
other changes in stocks þ
|
=
|
ì net acquisition of non-financial assets
í + net lending
î + other changes in stocks
| |
Net worth / wealth
5.29. As stated in the previous topic, the stocks of wealth held by households (and unincorporated enterprises owned by households) are formally labelled as the household's net worth. Net worth is defined as the difference between a household's stock of financial and non-financial assets and its stock of liabilities at a given point in time.
5.30. The value of a household's net worth plays an important part in its economic well-being. It may earn a return to the household in the form of income from interest, dividends, rent from properties, and so on. It also affects the broader economic power of the household. For example, those households with high levels of net worth may find it easier to gain credit whether that credit be to allow for further investment or to maximise the choice of timing for different types of consumption. High levels of net worth can also affect future living standards by the potential for dissaving for consumption at a later date. For these reasons it is important to ascertain, if possible, the value of the household's net worth to give a complete picture of a household's command over economic resources or economic well-being.
Change in net worth
5.31. The change in the value or level of a household's net worth during the reference period is also an important indicator of economic well-being. If the level of net worth has increased, then this increase will often have resulted from transactions flows i.e. either from saving or from the receipt of capital transfers. In other words, it is likely that the household has been able to save out of its income or has had access to other capital resources. Such a household may be better off than a household with a similar level of consumption that has financed this consumption by dissaving i.e. running down assets or incurring a liability.
5.32. It should be noted, however, that information on a household's change in net worth needs to be supplemented by data on level of net worth to be useful in assessing economic well-being. Some households may dissave and may have planned this dissaving by a continuous stream of saving in the past while for others the dissaving may have been involuntary. The value of the net assets backing this dissaving is therefore an important piece of information.
Net capital transfers
5.33. Net capital transfers are defined as the difference between the sum of capital transfers received by a household during the reference period and the sum of capital transfers outlaid during the reference period.
5.34. Capital transfers are defined as transactions where ownership of assets is transferred between two households or between a household and government/ private sector institution. Capital transfers result in an addition to the stock of net worth of the recipient unit and a depletion in the stock of net worth of the donor unit. Capital transfers may be in cash or in-kind.
5.35. There are considerable practical problems in operationalising the concept of capital transfers and it may sometimes be difficult to decide whether to classify a receipt as a capital receipt or as income. Similarly, it may be difficult to distinguish a transfer outlaid as a current (consumption) transfer from a capital transfer.
5.36. This difficulty arises because data will often not be available to indicate whether the recipient household sees the receipt as a source of income or as a gaining of an asset. Data will be even less likely to be available on whether the donor unit paid the transfer out of its income or out of its assets. For this reason, more practical operational definitions of capital transfers are adopted.
5.37. It should be noted, however, that misclassification of capital transfers and current transfers will affect the measure of saving. When capital transfers received are misclassified as income then the measure of household saving will be overestimated. Similarly, misclassification of capital transfers outlaid as current (consumption) outlays will underestimate household saving.
Capital transfers received
5.38. Capital transfers received are defined as the transfer of ownership of an asset to the household by another household (e.g. inheritance), by government (e.g. home purchase grant) or by a private institution (e.g. damages insurance receipt).
5.39. The capital transfers received may, however, be subsequently drawn upon by the recipient for consumption. If this withdrawal takes place during the same reference period, then the capital transfer is used for consumption and will not result in a change in net worth during the reference period for that household. (The measure of economic well-being will, however, reflect these extra resources as they will show up as higher consumption.)
5.40. To distinguish capital transfers from income receipts, the transfers are operationally defined as irregular, usually non-recurring receipts. Capital transfers usually entail the receipt of a large amount of cash or a large asset. They would not normally be viewed by the recipient household as an on-going source of receipts that would allow consumption to continue at an increased level over time. Large in the definition of capital receipts is therefore defined as being large in terms of the normal regular income of the recipient household.
5.41. Where there is difficulty distinguishing whether the receipt is an income receipt or a capital transfer, the receipt should be classified as income.
Capital transfers outlaid
5.42. Capital transfers outlaid are defined as the transfer of ownership of an asset by the household to another household (e.g. lump sum alimony payment), to a private institution (e.g. large donation to charity) or, less frequently, to government.
5.43. Capital transfers outlaid may be distinguished from current transfers outlaid if they are too large to have been financed from the donor household's income during the reference period. The capital transfer outlaid will not, therefore, be a regular or recurring outlay.
5.44. Where there is difficulty in distinguishing whether an outlay is a current or capital outlay, it should be classified as a current (consumption) transfer.
Net acquisition of non-financial assets
5.45. Net acquisition of non-financial assets is defined as the additions of all new or existing non-financial assets to the household's stocks, less the disposal of non-financial assets held by the household and by unincorporated enterprises owned by the household. Household non-financial assets include durable goods such as cars and refrigerators, and intangible assets such as patented entities.
Net lending
5.46. Net lending describes the net effect on a household's wealth brought about by its dealings in financial assets and liabilities. It is the excess of net acquisition of financial assets over the net incurrence of financial liabilities.
Other changes in stocks
5.47. Other changes in stocks comprise two components that both cover non-transactional changes in the value of assets and liabilities. The first of these is the change in the volume, and therefore value, of stocks brought about by such occurrences as catastrophic events or uncompensated seizures. For example, a house may be lost in a cyclone and not be covered by insurance. An uninsured asset may be stolen. Similarly, a liability may be 'lost' or cancelled by, for example, the death of the lender.
5.48. The second component is that which relates to nominal holding gains or losses ( i.e. capital gains and losses). Nominal holding gains and losses derive from an increase or decrease in the value of the assets over the purchase price, resulting from an increase or decrease in prices, changes in the desirability of the goods on the market, and so on.
5.49. Nominal holding gains and losses may be realised or unrealised during the reference period. Net realised capital gains represent a positive or negative flow of funds to the household. Net unrealised capital gains represent a notional flow - i.e. the flow is there to be taken if the household decides to sell the assets.
5.50. At an operational level, neither realised nor unrealised capital gains can be measured in the flows model because the value of goods purchased before the beginning of the reference period will not be known.
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