Gross fixed capital formation

10.85     Gross capital formation refers to the gross additions to national wealth that result from three categories of investment:

1. gross fixed capital formation, measured by the total value of a producer's acquisitions, less disposals, of fixed assets during the accounting period;
2. changes in inventories, equal to the value of inventories acquired by an enterprise less the value of inventories disposed of during the accounting period; and
3. acquisitions less disposals of valuables.

10.86    Valuables are assets that are not used primarily for production or consumption, that do not deteriorate over time under normal conditions and that are acquired and held primarily as a store of value. Valuables consist of precious stones and metals (provided that they are not intended to be used as intermediate inputs into processes of production); paintings, sculptures, etc. recognised as works of art; antiques; and other valuables such as jewellery fashioned from precious stones and metals. At present, estimates of gross capital formation flowing from acquisitions less disposals of valuables are not included in Australia's national accounts.

10.87    Amounts paid for non-produced, non-financial assets such as land, mineral and energy resources, and contracts, leases and licenses, represent a transfer of wealth, not an addition to it. They are not included in gross fixed capital formation, although such expenditures are classified as being of a capital nature and are included in the relevant capital accounts. Costs associated with the transfer of ownership of such assets are included in GFCF.

10.88    Fixed capital formation estimates are shown on a 'gross' basis; that is, deductions have not been made for the consumption of existing assets during the production process. The estimates, however, are net of the sale of second-hand capital assets at the total level (only to non-residents and sales of used motor vehicles to households for non-business use). However, the net sale of second-hand capital assets can be significant between sectors, such as government and private corporations, in the domestic economy.

10.89    Gross fixed capital formation is equal to the total value of a producer's acquisitions, less disposals, of fixed assets plus capital work done on own account during the accounting period plus certain additions to the value of non-produced assets realised by the productive activity of institutional units (e.g. land improvements). The latter include reclamation of land from the sea, clearance of forests to bring land into use for the first time, draining of marshes or irrigation of deserts, and prevention of flooding by erection of breakwaters, sea walls or flood barriers. These activities may result in the creation of new structures such as seawalls, flood barriers, dams, etc., that are not used directly in production but are constructed to make additional land available.

10.90    It is necessary to define what constitutes a fixed asset and what does not. All goods and services supplied to the economy by means of production, imports, or the disposal of produced assets must be used for exports, consumption (intermediate or final) or as part of capital formation. The boundary line between those products that are retained in the economy and are used for consumption and those products that are used for capital formation is known as the asset boundary. The asset boundary for produced assets consists of assets that have come into existence as outputs from processes of production, and that are themselves used repeatedly or continuously in other processes of production over periods of time longer than one year. Produced assets include intellectual property products which were previously termed “intangible fixed assets”.

10.91    The fundamental point of distinction between intermediate consumption and gross fixed capital formation is whether products are used up during the course of a particular period or whether they yield benefits beyond that period. In the case of households as consumers, all expenditure except the purchase of dwellings is treated as final consumption expenditure, whether or not it yields future benefits. Therefore, a purchase of a motor vehicle by a household (but not by an associated unincorporated enterprise) is treated as final consumption expenditure, whereas the same purchase by a business would be classified to GFCF.

10.92    The acquisition of non-produced non-financial natural resource assets such as land, mineral and energy resources, and natural timber tracts are not included in GFCF. Capital costs associated with the extension or development of these assets are included, as are outlays on land reclamation and improvement. Expenditure associated with the improvement and alteration of durable assets which significantly extend their productive life is also included, but ordinary repairs and maintenance expenses are not.

10.93    GFCF is not recorded until the ownership of the fixed assets is transferred to the unit that intends to use them in production. For example, new machinery and equipment that has not yet been sold forms part of additions to inventories of finished goods held by the producers of the assets. Similarly, imported machinery and equipment is not recorded as GFCF until it is acquired by the unit that intends to use it. Assets which are purchased under a financial lease arrangement are treated as involving an effective change of ownership, and are therefore recorded as GFCF by the lessee, not the lessor. In contrast operating leases are treated as output for the lessor and a purchase of a service by the lessee, as economic ownership of the underlying asset does not change.

10.94    Conventions have been adopted in the SNA in areas where boundary problems arise. For example, work put in place on structures (including dwellings, roads, dams, ports and other forms of construction) is considered to be GFCF of the unit for which the construction is being carried out, at the time the work is put in place. On the other hand, work on uncompleted heavy machinery and equipment (such as shipbuilding) during an accounting period is included as part of inventories of work-in-progress of the producer of the goods.

10.95    GFCF is classified by type of asset. There is substantial diversity in the different types of GFCF that may take place. A brief description of asset types used in the ASNA are presented below.

10.96    Dwellings comprises houses and other dwellings such as flats, apartments, home units, villa units, duplexes, mobile homes, caravans, etc. used entirely as the principal residences of households. Dwellings can also include residential dwelling buildings for communities such as retirement homes, military personnel, etc. Expenditure on the construction of hostel-type accommodation, prisons and motels is included in non-dwelling construction as this is not the primary residence for households. Also included are capitalised services, such as design and architectural fees, etc. and alterations and additions which comprises construction activity carried out on existing dwellings. This includes adding to or diminishing floor area, altering the structural design of dwellings and affixing rigid components which are integral to the functioning of the dwelling.

10.97    Ownership transfer costs comprise the various fees which are incurred by either the buyer or seller of real estate, namely legal fees on transfer, real estate sales commissions, stamp duties on transfer and other government charges (e.g. Water boards, Land Tax Office, etc.). Costs associated with acquiring and disposing of assets may be described as costs of ownership transfer. The value of work performed 'in house' (e.g. conveyancing performed by an enterprise's own legal staff) is excluded. It should be noted that estimates of ownership transfer costs are not separately identified for the public sector. In any event, transfer expenses of public authorities are relatively insignificant because the majority of public authorities are exempt from stamp duty, they frequently use their own staff to undertake the associated legal work and they make only limited use of real estate agents.

10.98    Non-dwelling construction comprises such assets as industrial, commercial, and non-dwelling residential buildings; water and sewerage installations; lifts, heating, ventilating and similar equipment forming an integral part of buildings and structures; land development; roads; bridges; wharves; harbours; railway lines; pipelines; and power and telephone lines. The category also includes expenditures that lead to major improvements in the quantity, quality, or productivity of land, or prevent its deterioration. Also included are capitalised services, such as design and architectural fees, etc.

10.99    Machinery and equipment include vehicles; aircrafts; ships; electrical apparatus; office equipment; furniture, fixtures and fittings not forming an integral part of buildings or structures; durable containers; special tooling, etc.

10.100    Weapons systems includes expenditures on defence weapon delivery systems such as warships, submarines, fighter aircraft, bombers, and tanks. In the 2008 SNA these are now capitalised, however the weapons (i.e. ammunition, missiles, rockets, bombs, etc.) are still treated as military inventories. This treatment has been incorporated in ASNA.

10.101    Cultivated biological resources cover animal resources (livestock) that are used repeatedly or continuously to produce products such as milk, wool etc., or are used as breeding stock, for transportation, racing or entertainment and tree, crop and plant resources (orchard growth) yielding repeat products whose natural growth and regeneration are under the direct control, responsibility and management of institutional units. In the ASNA, livestock (cattle, pigs, horses, and sheep) is included in GFCF or work-in-progress (changes in inventories), depending on an animal's role in production. Breeding stock, dairy cattle and sheep raised for wool are capitalised; animals raised for food are treated as work-in-progress until slaughtered.

10.102    Intellectual property products are as a result of creative activity, research and development, investigation or innovations leading to knowledge that the developers can market or use for their own benefit. These are produced fixed assets. Acquisitions, less disposals, of new and existing intellectual property products are subdivided by type of asset:

• Research and development comprising the value of expenditures on creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and use of this stock of knowledge to devise new applications.
• Mineral and petroleum exploration consisting of the value of expenditures on exploration for petroleum and natural gas and for non-petroleum deposits and subsequent evaluation of the discoveries made.
• Computer software covering both purchased software and software developed in-house. Gross fixed capital formation also includes the purchase or development of databases that the enterprise expects to use in production over a period of more than one year. However, the ASNA does not separately identify databases from computer software as recommended by the 2008 SNA.
• Entertainment, literary and artistic originals comprising the originals of films, sound recordings, manuscripts, tapes, models, etc. on which drama performances, sporting events, literary and artistic output etc. are recorded or embodied.