Chapter 3 Stocks, flows, and accounting rules

3.1    The 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 in, or holdings of, assets and liabilities at a given point in time. Unless otherwise indicated, the definitions and rules described are as recommended in 2008 SNA and are applied without variation in the ASNA.

3.2    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.

3.3    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 are recorded in the current accounts and accumulation accounts. Other flows, which are changes in the value of assets and liabilities that do not result from transactions, are recorded in the revaluation account and the other changes in volume of assets account.

3.4    A transaction is defined in 2008 SNA 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, often because the unit is operating in two different capacities.²⁸

3.5    The latter types of actions are internal transactions. Apart from these, transactions are interactions between institutional units. While the definition of a transaction stipulates that an interaction between institutional units must be by mutual agreement, this does not mean that both units necessarily enter a transaction voluntarily; some transactions, such as payments of taxes, fees or fines, are imposed by force of law. In these cases, there is collective acceptance by the community of the obligation to make the required payments, which are therefore regarded as transactions for national accounting purposes. The system of national accounts recognises and accounts for numerous types of transactions, both monetary and non-monetary, which are described in the following paragraphs.

3.6    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, deposits, loans, wages and salaries, interest, dividends, rent on natural assets, taxes, and social assistance benefits in cash.

3.7    Expenditures on consumption of goods and services, capital formation, deposits, loans, payment or receipt of wages and salaries, and payment or receipt of interest, dividends and rent on natural assets, 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.

3.8    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 benefits, 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.)

3.9    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 assistance benefits.

3.10    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 in the accounts of the institutional units involved. However, some transactions are rearranged 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

3.11    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 considered to be “rerouted”.

3.12    Rerouting of three types of transactions occurs in the national accounts:

1. 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 non-life insurance corporations or superannuation 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.
2. Retained earnings of foreign direct investment enterprises and resident and non-resident investment funds - the retention of some or all of the earnings of a foreign direct investment enterprise and investment funds within the enterprise or investment fund can be regarded as a deliberate investment decision by the foreign owners and fund investors. Accordingly, the retained earnings are rerouted in the national accounts by showing them as first remitted to the foreign owners and fund investors as property income and then reinvested in the equity of the direct investment enterprise and investment funds.
3. Property income of non-life insurance corporations or pension funds - in the national accounts, the property income earned on the reserves of certain insurance and pension funds is deemed to be earned on assets owned by policyholders. The property income is recorded as being paid out to policyholders and then paid back again as premium supplements even though the property income is retained by the corporation.

Partitioned transactions

3.13    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.

3.14    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.

3.15   A further example of partitioning is the recording of transactions for wholesalers and retailers. Wholesalers and retailers are viewed in 2008 SNA as selling the service of storing and displaying goods. 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 their sales.

Recognising the principal party to a transaction

3.16    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.

3.17    Transactions that do not involve the exchange of cash, or assets or liabilities that are not 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

3.18    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 another party in return for a good, service or asset other than cash.
• 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 rent).
• Transfers in kind, which occur when one party provides a good, service or asset to the other without receiving anything in return. 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 in forms such as the provision of education, health, housing and other services provided to households by government or non-profit institutions. Also included are social transfers in kind which consist of government final consumption expenditure (GFCE) which is undertaken (by government) on the behalf of households.

Internal transactions

3.19    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 and final use.

3.20    Consumption of fixed capital is an important example of an intra-unit transaction which is recorded in the ASNA. 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.

3.21    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.

3.22    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, 2008 SNA recommends against recording the values of externalities in the national accounts.

3.23    2008 SNA 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.

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

3.25    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 accounts are components of the balance sheet accounts in the ASNA.

3.26    Stocks are a position in, or holdings of, assets and liabilities at a point in time. Stocks are usually 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 balance sheet levels 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 financial assets and liabilities are obtained directly from survey data.

3.27    Values are recorded for non-financial assets, both produced and non-produced, and for financial assets and liabilities. 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.

3.28    In order to discuss stocks, it is necessary to define assets and liabilities and these definitions depend crucially on the concepts of benefits and ownership. This is described as the asset boundary.

3.29    An economic benefit is defined as denoting a gain or positive utility arising from an action. It implies a comparison between two states. Sometimes the immediate benefit is in terms of goods and services directly, for example own account production or wages and salaries in kind. More often a benefit is in the form of the medium of exchange (money), for example as wages and salaries. Consumption is an activity that takes place in the current period only but may be financed from past benefits. Production and accumulation also involve benefits postponed to future periods. Thus, means of allowing benefits to be moved from one accounting period to another must be recognised. These take the form of assets and liabilities where a benefit in one period is converted to a benefit in one or more future periods. Similarly, goods and services, or current benefits, may be acquired by committing future benefits in the form of financial liabilities.

3.30    Two types of ownership can be distinguished, legal ownership and economic ownership. The legal owner of entities such as goods and services, natural resources, financial assets and liabilities is the institutional unit entitled in law and sustainable under the law to claim the benefits associated with the entities. The economic owner of entities such as goods and services, natural resources, financial assets and liabilities is the institutional unit entitled to claim the benefits associated with the use of the entity in question in the course of an economic activity by virtue of accepting the associated risks.

3.31    Every enterprise has both a legal owner and an economic owner, though in many cases the economic owner and the legal owner of an entity are the same. Where they are not, the legal owner has handed responsibility for the risk involved in using the entity in an economic activity to the economic owner along with associated benefits. In return the legal owner accepts another package of risks and benefits from the economic owner. In general, within the SNA, when the expression “ownership” or “owner” is used and the legal and economic owners are different, the reference should be understood to be to the economic owner.