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Introduction

7.1 A system of national accounts records two basic kinds of information: flows and stocks. Flows refer to actions and to the effects of events that take place within a given period of time, while stocks refer to positions at a given point in time. This chapter defines the nature of flows and stocks and outlines the rules of accounting that underlie the valuation and recording of flows and stocks. Unless indicated, the definitions and rules described are recommended in SNA93 and are applied without variation in the ASNA.


Flows and stocks

7.2 In the national accounts, flows are recorded in the current accounts, which deal with production, income and the use of income, and in the accumulation accounts, which record capital formation, financial flows, revaluations and other changes in the volume of assets. Stocks, which represent the value of the stock of assets and liabilities at the beginning and end of the accounting period, appear in the balance sheet accounts.


Flows

7.3 Economic flows reflect the creation, transformation, exchange, transfer or extinction of economic value; they involve changes in the volume, composition or value of an institutional unit's assets and liabilities. Economic flows are of two kinds: transactions, and other flows. Most flows are transactions which appear in all accounts where flows appear (the current accounts and accumulation accounts noted in paragraph 7.2), except the revaluation account and the other changes in volume of assets account. Other flows appear in the latter two accounts.

Transactions

7.4 A transaction is defined in SNA93 (paragraph 3.12) as:

"an economic flow that is an interaction between institutional units by mutual agreement or an action within an institutional unit that it is analytically useful to treat like a transaction."

Monetary transactions

7.5 Most transactions recorded in the national accounts are monetary transactions, where the institutional units involved make or receive payments, or incur liabilities or receive assets denominated in units of currency. All monetary transactions are two-party transactions between institutional units. Common monetary transactions included in the ASNA are expenditure on consumption of goods and services, expenditure on capital formation, acquisition of a security, wages and salaries, interest, dividends, rent, taxes, and social assistance benefits in cash.

7.6 Expenditures on consumption of goods and services, capital formation, acquisition of a security, payment or receipt of wages and salaries, and payment or receipt of interest, dividends and rent, are two-party transactions involving the provision of a good, service or asset in exchange for a monetary counterpart. These kinds of transactions can be termed 'something for something' transactions, or transactions with a quid pro quo. Two-party transactions where goods, services or assets are supplied without a direct counterpart can be termed 'something for nothing' transactions, or transactions without a quid pro quo. Transactions without a quid pro quo are called transfers in the national accounts. Examples of transfers are taxes, social assistance, gifts and international cooperation (foreign aid). Transactions such as the payment of premiums for non-life insurance, where receipt of benefits is contingent upon some future event, are also classified as transfers. (Strictly speaking, insurance premiums are divided into two components in the national accounts: an imputed service charge; and net premiums, which are equal to premiums less the imputed service charge. Net premiums are a transfer payment while the imputed service charge is included in household or intermediate consumption.)

7.7 A distinction is made between capital and current transfers in the national accounts. Capital transfers involve the transfer of ownership of an asset or oblige one or both parties to acquire or dispose of an asset. Investment grants are examples of capital transfers. Capital transfers redistribute saving or wealth. Current transfers, on the other hand, redistribute income in the form of, for example, income taxes or social benefits.

7.8 Most transactions are treated in the national accounts in a straightforward way; that is, the transactions are recorded in the same way as they appear to the institutional units involved. However, some transactions are rearranged in order to bring out the underlying economic relationships more clearly. Transactions can be rearranged in three ways: rerouting, partitioning and recognising the principal party to a transaction.

Rerouted transactions

7.9 A transaction that appears to the units involved as taking place directly between units A and C may be recorded as taking place indirectly through a third unit B. Thus, the single transaction between A and C is recorded as two transactions: one between A and B, and one between B and C. In this case the transaction is rerouted.

7.10 Rerouting of three types of transactions occurs in the national accounts: employers' social contributions, retained earnings of foreign direct investment enterprises and certain property income flows of insurance corporations.

• Employers' social contributions - workers' compensation premiums, and contributions made by employers on behalf of their employees to superannuation funds, are recorded as two transactions: employers are deemed to pay the contributions to their employees and the employees are then deemed to pay the same contributions to social insurance funds. Although the contributions are paid directly by employers to the funds, this treatment makes it clear that such contributions are part of the compensation of employees, and are recorded as a part of labour costs.
  
• Retained earnings of foreign direct investment enterprises - the retention of some or all of the earnings of a foreign direct investment enterprise within that enterprise can be regarded as a deliberate investment decision by the foreign owners. Accordingly, the retained earnings are rerouted in the national accounts by showing them as first remitted to the foreign owners as property income and then reinvested in the equity of the direct investment enterprise (see Chapter 4 (the section 'Property incomes') for an explanation of foreign direct investment enterprises).
  
• Property income of insurance funds - in the national accounts, the property income earned on the reserves of certain insurance funds is deemed to be earned on assets owned by policyholders. The property income is therefore recorded as being paid out to policyholders and then paid back again as premium supplements even though the property income is retained by the insurance enterprises.
  

7.11 When a transaction appearing to the parties involved as a single transaction is recorded as two or more differently classified transactions, the transaction is partitioned. Partitioning does not usually imply the involvement of additional institutional units in the transactions.

7.12 Payments and receipts of interest by financial intermediaries, and non-life insurance premiums, are typical partitioned transactions. In the case of interest, the payments are considered to comprise a pure interest component and a charge for the financial service rendered by the financial institution. Similarly, non-life insurance premiums are considered to constitute a payment to cover the insurance risk and a service charge for arranging the insurance. The individual components are recorded separately in the national accounts. (See Chapter 4 (the section 'Output of particular industries') for a more detailed explanation of these charges.)

7.13 A further example of partitioning is the recording of transactions for wholesalers and retailers. Wholesalers and retailers are viewed in SNA93 as selling the service of storing and displaying goods rather than the sale of the goods themselves. As a result, the output of wholesalers and retailers is measured by the value of the trade margins on the goods they purchase for resale, not the total value of the sales.

Recognising the principal party to a transaction

7.14 When a unit carries out a transaction on behalf of another unit, the transaction should be recorded exclusively in the accounts of the principal, although some service output by the intermediary may be recognised. For example, if a commercial agent makes purchases under the order and at the expense of another party, the purchases are attributed to the latter. The accounts relevant to the agent should only show the fee charged to the principal for the services rendered by the agent.

Non-monetary transactions

7.15 Transactions that do not involve the exchange of cash, or assets or liabilities denominated in units of currency, are non-monetary transactions. As the national accounts record all transactions in monetary values, the values recorded for non-monetary transactions must be estimated. Non-monetary transactions can be either two-party transactions or actions within an institutional unit (internal transactions).

Two-party non-monetary transactions

7.16 Two-party non-monetary transactions consist of the following:

• Barter transactions, which involve one party providing a good, service or asset other than cash to the other party in return for a good, service or financial asset with a clear market value.

• Remuneration in kind, which occurs when an employee accepts payment from an employer in the form of goods and services instead of money (or some other financial asset). Some of the most common types of remuneration in kind are meals and drinks; accommodation; vehicles for personal use of employees; and goods and services produced as outputs from the employer's own production processes.

• Payments in kind other than remuneration in kind, which occur when payments are made in the form of goods and services, rather than money or some other financial asset (e.g. landlords accepting produce in lieu of land rent).

• Transfers in kind, which occur when one party provides a good, service or asset to the other without receiving a counterpart in return. Parallel to the transfers in cash discussed in paragraphs 7.6 and 7.7, these can also be called 'something for nothing' transactions, or transactions without a quid pro quo. The most common types of transfers in kind are international aid in the form of goods or services; gifts and charitable contributions in the form goods or services; and social assistance benefits or social security in forms such as the provision of education, health, housing and other services provided to households by government or non-profit institutions.

7.17 While most transactions recorded in the national accounts are interactions between institutional units, some actions that occur within institutional units are also recorded as transactions. These are known as internal, or intra-unit transactions, which are recorded to give a more analytically useful picture of output, final uses and costs.

7.18 Consumption of fixed capital is an important example of an intra-unit transaction which is recorded in the national accounts. The estimation of consumption of fixed capital ensures that the decline in the value of a fixed asset used in production is included as a cost of production.

7.19 Estimates of the value of intra-unit transactions are also made to account for output which is produced and used within the same institutional unit. These transactions include the value of fixed assets produced for own use and the value of goods produced and consumed within households (such as agricultural produce and other 'backyard' production). The supply of output produced within an enterprise for use as intermediate input in the same enterprise is also regarded as an intra-unit transaction, although estimates of the value of such transactions are only recorded in national accounts if the supplying and receiving establishments are geographically separated.

Externalities and illegal actions

7.20 Externalities are unsolicited services, or 'disservices', delivered by one unit to another without mutual agreement. A typical example is a producer's pollution of air or water which is used by other units. Externalities are not market transactions into which institutional units enter of their own accord, and there is no mechanism to ensure that the positive or negative values attached to them by the various parties involved would be mutually consistent. For this reason, SNA93 recommends against recording the values of externalities in the national accounts.

7.21 SNA93 treats illegal actions that fit the characteristics of transactions (notably the characteristic that there is mutual agreement between the parties) in the same way as legal actions. Thus, although the production or consumption of certain goods such as narcotics may be illegal, market transactions in such goods should, in principle, be recorded in the national accounts. Due to the difficulty in identifying and valuing illegal transactions, no explicit estimates for such activities are made in the ASNA. However, some illegal transactions are likely to be included in the national accounts if they are reported as part of legal activities or as income for taxation purposes.

7.22 As illegal actions which constitute crimes against persons or property (for example theft or violence) do not meet the criterion of transactions by mutual agreement they are not recorded as transactions.

Other flows

7.23 Other flows are changes in the value of assets and liabilities that do not take place through transactions. They are either other changes in the volume of assets or liabilities, or holding gains and losses. Entries classified as other flows all appear in the other changes in volume of assets account or the revaluation account. Both of these accounts are components of the balance sheet accounts in the ASNA.

Other changes in the volume of assets

7.24 Other changes in the volume of assets may be divided into three main categories:

• normal appearance and disappearance of assets other than by transactions, such as discovery and depletion of subsoil assets, and growth and depletion of native forests; or the creation of intangible non-produced assets such as patents, broadcast licences and taxi plates;
  
• changes in assets and liabilities due to exceptional, unanticipated events, such as changes (normally losses) in assets due to natural disasters (such as bush fires, floods and earthquakes, war or severe acts of crime, and uncompensated seizures of assets; and
  
• changes in classification and structure: in the event that the activities of an institutional unit change to the extent that the unit is reclassified from one institutional sector to another (for example, from the non-financial corporations sector to the financial corporations sector), the movements of assets and liabilities between the sectors is recorded as part of other flows in this category.

Holding gains and losses

7.25 Holding gains and losses result from changes in the prices of financial and non-financial assets and liabilities. Holding gains and losses accrue to the owners of assets and liabilities purely as a result of holding the assets or liabilities over time, without transforming them in any way. Holding gains and losses include not only gains/losses on 'capital' goods such as fixed assets, land and other natural resources, and financial assets and liabilities, but also inventories, including work-in-progress. Holding gains and losses are recorded in the revaluation account.

7.26 Holding gains and losses measured on the basis of current prices are called nominal holding gains and losses. SNA93 notes that these nominal gains and losses can be further decomposed into neutral holding gains and losses, reflecting changes in the general price level, and real holding gains and losses, reflecting changes in the relative prices of assets. This decomposition is currently not carried out in the compilation of the Australian national accounts.


Stocks

7.27 Stocks are holdings of assets and liabilities at a point in time. Stocks are recorded at the beginning and end of each accounting period. The values of stocks of assets and liabilities are shown in the balance sheets of the system. Stocks are connected with the flows in that changes in their levels result from the accumulation of transactions and other flows over the accounting period in question. In the ASNA, closing balance sheet levels could be viewed as being obtained by the addition to the opening level of net capital formation, financial transactions, other changes in the volume of assets, and revaluations of assets and liabilities. However, in practice the balance sheet values for many components of the financial assets and liabilities are obtained directly from survey data.

7.28 Values are recorded for non-financial assets, both produced and non-produced, and for financial assets and liabilities (see Chapter 4 for descriptions of the various kinds of assets). The coverage of assets is limited to those assets used in economic activity and that are subject to ownership rights. Thus, stocks are not recorded for assets such as human capital and natural resources over which ownership rights cannot be enforced.


Accounting rules

7.29 The system's accounting rules cover the valuation, time of recording and grouping by aggregation, netting and consolidation of individual stocks and flows.

Valuation

General rules

7.30 The underlying principle of valuation in the system of national accounts is that all entries are recorded, in money terms, at the exchange value current during the accounting period, i.e. the value at which flows and stocks are, or could be, exchanged for cash (including transferable deposits). The system does not attempt to determine the utility of the flows and stocks within its scope.

7.31 When goods and services are exchanged for cash or its equivalent, the required values are directly available. In addition, values are directly observable for flows and stocks that concern financial instruments, such as cash holdings or liabilities. The majority of flows and stocks in the national accounts fall into these categories.

7.32 In other cases, where no actual exchange values are available, the preferred method of valuation is by reference to the market value of similar goods, services or assets. This method is used to estimate the value of the services of owner-occupied dwellings, and of 'backyard' production by households for their own use (see Chapter 4).

7.33 When no prices for similar products exist, it may be necessary to value goods or services by the amount that it costs to produce them. This is the case for most non-market goods and services produced by general government units and non-profit institutions serving households.

7.34 For some assets, it is necessary to estimate a value by writing down (depreciating) the initial acquisition costs. The value of such assets at a given point in their life is equal to their acquisition cost less the accumulated value of these write-downs. Typically, the current value of fixed assets is estimated by writing down current market prices for the accumulated consumption of fixed capital.

7.35 Where none of the above valuation methods is feasible, flows and stocks can be recorded at the net present value of expected future returns. This method is not generally recommended, as it involves a number of assumptions and the possibility of substantial future revisions to estimates. However, SNA93 recognises that it is the most appropriate method of valuation in circumstances where returns from assets are either delayed (as is the case with timber plantations) or spread over a lengthy period (as for subsoil assets).

7.36 Flows and stocks concerning foreign currency are converted to their value in national currency at the exchange rate prevailing when the transaction or flow takes place, or in the case of balance sheet items, the date to which the balance sheet applies. The exchange rate used for conversion to national currency is the midpoint between the buying and selling rate, so as to exclude any implicit foreign exchange service charge.

7.37 Valuations contained in business accounts, tax returns and other administrative records, which are widely used sources of data for national accounts purposes, often do not conform to the national accounting valuation standard. This is especially so in the case of depreciation, where rates of depreciation for tax purposes normally deviate from the national accounting concept of the consumption of fixed capital.

7.38 In some cases, invoice values may not accord with prices paid in the market for similar items. Where transactions are between affiliated enterprises under common management, the prices adopted for bookkeeping purposes - referred to as transfer prices - may not correspond to prices that would be charged to independent parties. By using artificially high or low prices, transfer pricing could be used as a device for shifting profits among enterprises within a group for taxation (or other) purposes. In principle, such transactions should be identified and revalued if they are likely to affect significantly the interpretation of the accounts. Instances of transfer pricing are difficult to identify, and subsequently adjust for. In the ASNA, transactions prices are used for all but large and clearly identified examples of transfer pricing.

7.39 To maximise concordance with SNA93 accounting rules, surveys of businesses conducted by the ABS request data, where possible on a national accounts basis Adjustments are made to source data that are not recorded on the required basis.

Special valuations concerning products

7.40 The producer and the user of a given product usually perceive its value differently, because of intervening transport costs, trade margins, taxes and subsidies on products. In order to keep as close as possible to the views of the transactors, SNA93 recommends that outputs of products be valued at basic prices, while inputs, or final purchases, should be valued at purchasers' prices.

7.41 The basic price is the amount receivable by the producer from the purchaser for a unit of a good or service, minus any tax payable (including deductible value added taxes), and plus any subsidy receivable, as a consequence of production or sale of the unit. Subsidies artificially reduce the sale price, so they are included in the basic price to obtain a measure of the true value of the goods or services produced. Taxes on products, if included, would artificially increase the price, and so are deducted. The basic price also excludes any transport charges invoiced separately by the producer. The basic price therefore measures the amount retained by the producer in respect of the good or service that is produced as output.

7.42 The major output of the wholesale and retail trade industries is the value of the service provided in selling goods (i.e. goods purchased and resold are not treated as part of intermediate consumption). The value of the service is equal to the trade margins realised on the goods sold. The measurement of this service at basic prices is analogous to that for goods producing industries: output at basic prices is the value of the trade margins, including the value of any subsidies received by the wholesaler or retailer, and excluding taxes on production of the service.

7.43 The purchaser's price is the amount paid by the purchaser in order to take delivery of good or services. Purchasers' prices include any taxes payable (less any subsidies receivable) on production and imports, and any transport charges paid separately by the purchaser to take delivery of goods. Value added taxes apply, such as the GST are included in purchasers' prices unless they are allowable as deductions from the purchaser's value-added tax liability. Purchasers' prices are also referred to as market prices.

7.44 Imports and exports of goods are valued free-on-board (f.o.b.), i.e. at the exporter's customs frontier.

7.45 The ASNA follows the SNA93 recommendations with respect to the valuation of products: in the input-output tables and the associated measures of value added by industry, gross output is measured at basic prices and intermediate inputs are measured at purchasers' prices. Expenditure items are recorded at purchasers' prices. Imports and exports of goods are valued f.o.b. Details of other aspects of the valuation of imports and exports are contained in Balance of Payments and International Investment Position, Australia: Concepts, Sources and Methods (Cat. no. 5331.0).

Time of recording

7.46 Flows in the national accounting system are ideally recorded on an accrual basis. Accrual accounting records flows at the time economic value is created, transformed, exchanged, transferred or extinguished. Accrual accounting enables the profitability of productive activities to be evaluated without the disturbing influences of leads and lags in cash flows, and net worth to be calculated correctly at any given point. In terms of entries in the national accounts this means that:

• flows which imply a change of ownership are entered when legal ownership changes (this applies to financial assets as well as goods);
  
• services are recorded when provided;
  
• distributive transactions, such as compensation of employees, interest, rent on land, and social contributions and benefits are recorded in the period during which the amounts payable are built up. Interest on debt is recorded in the accounting period in which it accrues, regardless of whether or not it is actually paid in that period;
  
• output is recorded at the time products are created (not when paid for by a purchaser); and
  
• intermediate consumption is recorded in the period when the materials are used.

Change of ownership

7.47 In transactions involving the purchase of goods, accrual accounting usually arises naturally from the nature of the transaction. When goods are exchanged for financial assets (e.g. cash), accounting entries reflecting the change of ownership will be recorded at the same time for both the seller and the purchaser. However, the identification of the time of change of ownership is not always straightforward where exports and imports are concerned, and in the absence of sources specifying the date of change of ownership, the time at which goods cross the frontiers of countries concerned (obtained from customs records) is usually taken as a proxy for this date. However, for certain exports and imports timing adjustments are made where supplementary information is available.

7.48 To accord with accrual accounting principles, transactions in financial assets should also be recorded on a change of ownership basis. Financial transactions are shown in the ASNA in the financial accounts. The methods used to measure transactions in the financial accounts are described in Chapter 25.

Services

7.49 Services are to be recorded when they are provided. While in most cases this is straightforward, there are types of services that require special treatment. The main types falling into this category are insurance, where the payments of premiums are made in advance, and housing, where the services provided by home ownership are continuous. In the ASNA, provisions are made to account for the services of insurance and housing in each accounting period. The methods used to value such services are described in Chapters 14 and 20.

Distributive transactions

7.50 Distributive transactions can be difficult to record on an accrual basis, as the accounting practices of the units involved are not always consistent with national accounting requirements. The most important item (in terms of size) affected in this way in the ASNA is wages and salaries, a component of compensation of employees. In addition, provisions for employee entitlements which qualify as liabilities should also be included, rather than the cash payments of these entitlements. Such liabilities include provisions for long service leave and annual leave, and contributions by employers to unfunded superannuation schemes. Interest on debt is recorded in the period during which the interest accrues. Dividend levels, however, are not unambiguously attributable to a particular earning period, and are therefore recorded when they are declared payable.

Output, intermediate input, changes in inventories, and consumption of fixed capital

7.51 The principle of recording on an accrual basis implies that output is recorded over the period in which the process of production takes place, and the intermediate consumption of goods or services is recorded at the time when the good or service enters the process of production. Additions to inventories are recorded when products are purchased, produced or otherwise acquired, and deductions from inventories are recorded when products are sold, used up as intermediate consumption or otherwise relinquished. In general, the collection methods used to support the ASNA result in estimates based on the accrual process, although the extent to which this is possible depends upon the information received from the respondents to ABS economic statistics collections. Consumption of fixed capital is a cost which accrues over the whole period the fixed asset is available for productive purposes. The proportioning to accounting periods depends on the rate of depreciation used to estimate the using up of the asset. The methods used to estimate consumption of fixed capital in the ASNA are described in Chapter 16.

Aggregation, netting and consolidation

Aggregation

7.52 The vast number of individual transactions, other flows and assets within scope of the national accounts have to be arranged in a manageable number of analytically useful groups. Such groups are formed by crossing two or more classifications. For example, the classification of institutional sectors or industries is crossed with the classification of transactions, other accumulation entries or assets. In addition, resources need to be distinguished from uses and assets from liabilities.

Netting

7.53 Individual units or sectors may have the same kind of transaction both as a receivable and as a payable (e.g. they both pay and receive interest) and the same kind of financial instrument as both an asset and a liability. Where all the items are shown for their full values, the recording is on a gross basis. Where the values of some items are offset against items on the other side of the account, or against items which have an opposite sign, the recording is on a net basis. Gross recording is applied in most cases, except where a degree of netting is inherent in the classifications themselves. Within the ASNA, an example of net recording is the aggregate for changes in inventories. Rather than record all individual additions to and withdrawals from inventories, the resulting overall changes are recorded in order to show the final effect on gross capital formation. Similarly, the financial accounts record increases in assets and liabilities on a net basis (i.e. acquisitions and disposals are offset), to bring out the final consequences of these types of flows at the end of the accounting period.

Consolidation

7.54 Consolidation refers to the elimination of transactions which occur between two transactors belonging to the same institutional sector or subsector. Consolidation within sectors or subsectors can be useful for the kinds of analysis which focus on the interactions between (sub)sectors of the economy and between resident sectors and the rest of the world, where the overall final position is more significant than the details of gross transactions within sectors. Consequently, in the sector income, capital and financial accounts, transfer flows are generally consolidated. Likewise, the national income, capital and financial accounts are prepared on a consolidated basis. However, in some parts of the national accounts, such as the input output tables, non-consolidation is the general rule.