Chapter 1: Introduction

A. What is the System of National Accounts?

1.1 The System of National Accounts (SNA) is the internationally agreed standard set of recommendations on how to compile measures of economic activity in accordance with strict accounting conventions based on economic principles.
The recommendations are expressed in terms of a set of concepts, definitions, classifications and accounting rules that comprise the internationally agreed standard for measuring such items as gross domestic product (GDP), the most frequently quoted indicator of economic performance.
The accounting framework of the SNA allows economic data to be compiled and presented in a format that is designed for purposes of economic analysis, decision-taking and policymaking.
The accounts themselves present in a condensed way a great mass of detailed information, organized according to economic principles and perceptions, about the working of an economy.
They provide a comprehensive and detailed record of the complex economic activities taking place within an economy and of the interaction between the different economic agents, and groups of agents, that takes place on markets or elsewhere.
The framework of the SNA provides accounts that are:

a. comprehensive, in that all designated activities and the consequences for all agents in an economy are covered;

b. consistent, because identical values are used to establish the consequences of a single action on all parties concerned using the same accounting rules;

c. integrated, in that all the consequences of a single action by one agent are necessarily reflected in the resulting accounts, including the impact on measurement of wealth captured in balance sheets.

1.2 The accounts of the SNA provide more than a snapshot of the economy at a point in time, since in practice the accounts are compiled for a succession of time periods, thus providing a continuing flow of information that is indispensable for the monitoring, analysis and evaluation of the performance of an economy over time.
The SNA provides information not only about economic activities taking place within a period but also about the levels of an economy's assets and liabilities, and thus the wealth of its inhabitants, at particular points of time.
In addition, the SNA includes an external account that displays the links between an economy and the rest of the world.

1.3 Certain key aggregate statistics, such as GDP, that are widely used as indicators of economic activity at the level of the total economy, are defined within the SNA, but the calculation of such aggregates has long ceased to be the primary purpose for compiling the accounts.
In order to understand the workings of the economy, it is essential to be able to observe and analyse the economic interactions taking place between different sectors of the economy.
The SNA is designed to be implemented at different levels of aggregation: at the level of individual economic agents, or institutional units as they are called in the SNA; for groups of such units, or institutional sectors; or at the level of the total economy.

1.4 The SNA is designed for economic analysis, decision-taking and peacemaking, whatever the industrial structure or stage of economic development reached by a country.
The basic concepts and definitions of the SNA depend upon economic reasoning and principles which should be universally valid and invariant to the particular economic circumstances in which they are applied.
Similarly, the classifications and accounting rules are meant to be universally applicable.
There is no justification, for example, for seeking to define parts of the SNA differently in less developed than in more developed economies, or in large relatively closed economies than in small open economies, or in high-inflation economies than in low-inflation economies.
Certain definitions, or accounting rules, specified in the SNA might become superfluous in certain circumstances (for example, if there were no inflation), but it is nevertheless necessary for a general system to include definitions and rules covering as wide a range of circumstances as possible.

1.5 Some countries may be able, at least initially, to calculate only a small number of accounts and tables for the total economy with little or no disaggregation into sectors, but a reduced set of accounts or tables does not constitute an alternative system.
It is not appropriate to try to lay down general priorities for data collection when economic circumstances may vary considerably from one country to another.
In practice, priorities can only be established country by country by economic analysts or policymakers familiar with the particular economic situation, needs and problems of the individual countries in question.
It is not useful, for example, to try to specify general priorities for developing countries when they constitute a very heterogeneous group of countries at a world level.
Data priorities may vary as much between one developing country and another as between a developing and a developed country or indeed between two developed countries.

B. The conceptual elements of the SNA

1.6 The SNA measures what takes place in the economy, between which agents, and for what purpose.
At the heart of the SNA is the production of goods and services.
These may be used for consumption in the period to which the accounts relate or may be accumulated for use in a later period.
In simple terms, the amount of value added generated by production represents GDP.
The income corresponding to GDP is distributed to the various agents or groups of agents as income and it is the process of distributing and redistributing income that allows one agent to consume the goods and services produced by another agent or to acquire goods and services for later consumption.
The way in which the SNA captures this pattern of economic flows is to identify the activities concerned by recognizing the institutional units in the economy and by specifying the structure of accounts capturing the transactions relevant to one stage or another of the process by which goods and services are produced and ultimately consumed.
These concepts are sketched below and developed further in chapter 2 and later chapters.

1. Activities and transactions

1.7 The SNA is designed to provide information about the behaviour of institutional units and the activities in which they engage, namely production, consumption and the accumulation of assets, in an analytically useful form.
This is achieved by recording the exchange of goods, services and assets between institutional units in the form of transactions.
At the same time, other transactions are recorded that represent the form of payment for the exchange which may be a good, service or asset of similar value but is often some form of financial claim including notes and coins.

1.8 Data on transactions provide the basic source material from which the values of the various elements in the accounts are built up or derived.
The use of transactions data has important advantages.
The first of these is that the prices at which goods and services are exchanged in transactions between buyers and sellers on markets provide the information needed for valuing, directly or indirectly, all the items in the accounts.
Secondly, a transaction that takes place between two different institutional units has to be recorded for both parties to the transaction and therefore generally appears twice in a system of macroeconomic accounts.
This enables important linkages to be established in the SNA.
For example, output is obtained by summing the amounts sold, bartered or transferred to other units plus the amounts entered into, less the amounts withdrawn from, inventories.
In effect, the value of output is obtained by recording the various uses of that output by means of data on transactions.
In this way, flows of goods and services can be traced through the economic system from their producers to their eventual users.
Some transactions are only internal bookkeeping transactions that are needed when a single unit engages in two activities, such as the production and consumption of the same good or service, but the great majority of transactions takes place between different units on markets.

2. The institutional sectors of the economy

1.9 Two main kinds of institutional units, or transactors, are distinguished in the SNA; households and legal entities.
Legal entities are either entities created for purposes of production, mainly corporations and non-profit institutions (NPIs), or entities created by political processes, specifically government units.
The defining characteristic of an institutional unit is that it is capable of owning goods and assets, incurring liabilities and engaging in economic activities and transactions with other units in its own right.

1.10 For the purposes of the SNA, institutional units that are resident in the economy are grouped together into five mutually exclusive sectors composed of the following types of units:

a. Non-financial corporations;

b. Financial corporations;

c. Government units, including social security funds;

d. NPIs serving households (NPISHs);

e. Households.

The five sectors together make up the total economy.
Each sector may be further divided into subsectors; for example, the non-financial and financial corporations sectors are divided to distinguish corporations subject to control by governments or foreign units from other corporations.
The SNA makes provision for a complete set of flow accounts and balance sheets to be compiled for each sector, and subsector if desired, as well as for the total economy.
The total number of accounts that may be compiled is therefore potentially quite large, depending upon the level of disaggregation that is required and feasible.
Only by disaggregation into sectors and subsectors is it possible to observe the interactions between the different parts of the economy that need to be measured and analysed for purposes of policymaking.

1.11 Institutional units that are resident abroad form the rest of the world.
The SNA does not require accounts to be compiled in respect of economic activities taking place in the rest of the world, but all transactions between resident and non-resident units have to be recorded in order to obtain a complete accounting for the economic behaviour of resident units.
Transactions between residents and nonresidents are grouped together in a single account, the rest of the world account

3. Accounts and their corresponding economic activities

1.12 This section gives a very brief summary of the accounts of the SNA.
It is impossible to do justice to the wealth of information contained in the SNA in a short section of this kind, and reference should be made to chapter 2 for a comprehensive overview.

The goods and services account

1.13 Fundamental to the SNA is the identity that goods and services produced in the economy must be consumed, used for capital formation or exported while all goods and services used within the economy must be produced in the economy or imported.
From this, once suitable allowance is made for the effect on prices of taxes and subsidies on products, the goods and services account is derived and thence GDP.

The sequence of accounts

1.14 This basic identity is elaborated within the SNA into a sequence of interconnected flow accounts linked to different types of economic activity taking place within a given period of time, together with balance sheets that record the values of the stocks of assets and liabilities held by institutional units or sectors at the beginning and end of the period.
Each flow relates to a particular kind of activity such as production, or the generation, distribution, redistribution or use of income.
Each account shows the resources available to the institutional units and the uses made of these resources.
An account is balanced by introducing a balancing item defined residually as the difference between the total resources recorded on one side of the account and the total uses recorded on the other side.
The balancing item from one account is carried forward as the first item in the following account, on the opposite side, thereby making the set of accounts an articulated whole.
The balancing items typically encapsulate the net result of the activities covered by the account in question and are therefore economic constructs of considerable interest and analytical significance.
Examples of balancing items include value added, disposable income and saving.
There is also a strong link between the flow accounts and the balance sheets, as all the changes occurring over time that affect the assets or liabilities held by institutional units or sectors are systematically recorded in one or another of the flow accounts.

1.15 The set of accounts just described is referred to as the “sequence of accounts” but it should be noted that, although it is necessary to present the accounts in a particular order, the activities they describe should not be interpreted as taking place sequentially in time.
For example, incomes are generated continuously by processes of production, while expenditures on the outputs produced may also be taking place more or less simultaneously.
An economy is a general equilibrium system in which interdependent economic activities involving countless transactions between different institutional units are carried out simultaneously.
Feedbacks are continually taking place from one type of economic activity to another.

Current accounts

1.16 The current accounts record the production of goods and services, the generation of incomes by production, the subsequent distribution and redistribution of incomes among institutional units, and the use of incomes for purposes of consumption or saving.

1.17 The production account records the activity of producing goods and services as defined within the SNA.
Its balancing item, gross value added, is defined as the value of output less the value of intermediate consumption and is a measure of the contribution to GDP made by an individual producer, industry or sector.
Gross value added is the source from which the primary incomes of the SNA are generated and is therefore carried forward into the primary distribution of income account.
Value added and GDP may also be measured net by deducting consumption of fixed capital, a figure representing the decline in value during the period of the fixed capital used in a production process.

1.18 A set of articulated accounts shows how incomes are:

a. Generated by production;

b. Distributed to institutional units with claims on the value added created by production;

c. Redistributed among institutional units, mainly by government units through social security contributions and benefits and taxes;

d. Used by households, government units or non-profit institutions serving households (NPISHs) for purposes of final consumption or saving;

e. Available as saving for accumulating wealth.

The income accounts have considerable intrinsic economic interest in themselves.
In particular, they are needed to explain the behaviour of institutional units as final consumers, that is, as users of the goods and services for the satisfaction of the individual and collective needs and wants of households and the community.
The balancing item emerging from the complete set of income accounts is saving.

1.19 As the balancing item, saving is carried forward into the capital account, the first in the sequence of accumulation accounts.

Accumulation accounts

1.20 The accumulation accounts are those that record flows that affect the entries in the balance sheets at the start and end of the accounting period.
There are four accumulation accounts; the capital account, the financial account, the other change in the volume of assets account and the revaluation account.

a. The capital account records acquisitions and disposals of non-financial assets as a result of transactions with other units, internal bookkeeping transactions linked to production (such as changes in inventories and consumption of fixed capital) and the redistribution of wealth by means of capital transfers.

b. The financial account records acquisitions and disposals of financial assets and liabilities, also through transactions.

c. The other changes in the volume of assets account records changes in the amounts of the assets and liabilities held by institutional units or sectors as a result of factors other than transactions; for example, destruction of fixed assets by natural disasters.

d. The revaluation account records those changes in the values of assets and liabilities that result from changes in their prices.

1.21 The link between the accumulation accounts and the current accounts is provided by the fact that saving must be used to acquire financial or non-financial assets of one kind or another, including cash.
When saving is negative, the excess of consumption over disposable income must be financed by disposing of assets or incurring liabilities.
The financial account shows the way in which funds are channelled from one group of units to another, especially through financial intermediaries.
Access to finance is a prerequisite for engaging in many types of economic activities.

Balance sheets

1.22 The balance sheets show the values of the stocks of assets and liabilities held by institutional units or sectors at the beginning and end of an accounting period.
As already noted, the values of the assets and liabilities held at any moment in time vary whenever any transactions, price changes or other changes affecting the volume of assets or liabilities held take place.
These are all recorded in one or another of the accumulation accounts so that the difference between the values in the opening and closing balance sheets is entirely accounted for within the SNA, provided that the assets and liabilities recorded in the balance sheets are valued consistently with the transactions and other changes.

Other accounts of the SNA

1.23 The SNA is a rich and detailed economic accounting system that extends well beyond the sequence of accounts to encompass other accounts or tables that either contain information that cannot be included in the main accounts or present information in alternative ways, such as matrices, that may be more appropriate for certain types of analysis.
It is not proposed to list all these various elements at this point, as they are described in chapter 2, but it is useful to draw attention to two specific elements which play a major role in the SNA.

Supply and use tables

1.24 In addition to the flow accounts and balance sheets described earlier, the central framework of the SNA also contains detailed supply and use tables in the form of matrices that record how supplies of different kinds of goods and services originate from domestic industries and imports and how those supplies are allocated between various intermediate or final uses, including exports.
These tables involve the compilation of a set of integrated production and generation of income accounts for industries by drawing upon detailed data from industrial censuses or surveys.
The supply and use tables provide an accounting framework within which the product flow method of compiling national accounts, whereby the total supplies and uses of individual types of goods and services have to be balanced with each other, can be systematically exploited.
The supply and use tables also provide the basic information for the derivation of detailed input-output tables that may be used for purposes of economic analysis and projections.

Accounts in volume terms

1.25 The SNA also provides specific guidance about the methodology to be used to compile an integrated set of price and volume indices for flows of goods and services, gross and net value added and GDP that are consistent with the concepts and accounting principles of the SNA.
It is recommended that annual chain indices should be used where possible.

1.26 Rates of inflation and economic growth appropriately measured by price and volume indices for the main aggregates of the SNA are key variables both for the evaluation of past economic performance and as targets for the formulation of economic policymaking.
They are an essential part of the SNA when any amount of inflation appears and become increasingly important as inflation increases.
The SNA also recognizes that the growth in the volume of GDP and the growth of an economy's real income are not the same because of trading gains or losses resulting from changes in international terms of trade.

C. Uses of the SNA

1.27 The main objective of the SNA is to provide a comprehensive conceptual and accounting framework that can be used to create a macroeconomic database suitable for analysing and evaluating the performance of an economy.
The existence of such a database is a prerequisite for informed, rational policymaking and decision-taking.
Some of the more specific uses of the SNA are described in the following sections.

1. Monitoring the behaviour of the economy

1.28 Certain key aggregates of the SNA, such as GDP and GDP per head of population, have acquired an identity of their own and are widely used by analysts, politicians, the press, the business community and the public at large as summary, global indicators of economic activity and welfare.
Movements of such aggregates, and their associated price and volume measures, are used to evaluate the overall performance of the economy and hence to judge the relative success or failure of economic policies pursued by governments.

1.29 National accounts data provide information covering both different types of economic activities and the different sectors of the economy.
It is possible to monitor the movements of major economic flows such as production, household consumption, government consumption, capital formation, exports, imports, etc., in both value and volume terms.
Moreover, information is provided about certain key balancing items and ratios which can only be defined and measured within an accounting framework, for example, the budget surplus or deficit, the share of income that is saved or invested by individual sectors of the economy or the economy as a whole, the trade balance, etc.
The SNA also provides the background against which movements of short-term indicators, such as monthly indices of industrial production, consumer or producer prices can be interpreted and evaluated.
The monitoring of the behaviour of the economy may be significantly improved if at least some of the main aggregates of the SNA are compiled quarterly as well as annually, although many of the accounts, tables or balance sheets of the SNA are not usually compiled more frequently than once a year.

2. Macroeconomic analysis

1.30 National accounts are also used to investigate the causal mechanisms at work within an economy.
Such analysis usually takes the form of the estimation of the parameters of functional relationships between different economic variables by applying econometric methods to time series of data in both value and volume terms compiled within a national accounting framework.
The types of macroeconomic models used for such investigations may vary according to the school of economic thought of the investigator as well as the objectives of the analysis, but the SNA is sufficiently flexible to accommodate the requirements of different economic theories or models, provided only that they accept the basic concepts of production, consumption, income, etc. on which the SNA is based.

1.31 Economic policy in the short term is formulated on the basis of an assessment of the recent behaviour and current state of the economy and a view, or precise forecast, about likely future developments.
Short-term forecasts are typically made using econometric models of the type just described.
Over the medium- or long-term, economic policy has to be formulated in the context of a broad economic strategy.

1.32 Economic policymaking and decision-taking take place at all levels of government and also within public and private corporations.
Large corporations such as multinationals have the ability to build their own macroeconomic models tailored to their own requirements, for which they need national accounts data.
The investment programmes of major corporations must be based on long-term expectations about future economic developments that require national accounts data.
There are also specialist agencies that provide forecasts for individual clients in return for fees.
Such agencies typically require very detailed national accounts data.

3. International comparisons

1.33 The SNA is used for international reporting of national accounts data that conform to standard, internationally accepted concepts, definitions and classifications.
The resulting data are widely used for international comparisons of the volumes of major aggregates, such as GDP or GDP per head, and also for comparisons of structural statistics, such as ratios of investment, taxes or government expenditures to GDP.
Such comparisons are used by economists, journalists or other analysts to evaluate the performance of one economy against that of other similar economies.
They can influence popular and political judgements about the relative success of economic programmes in the same way as developments over time within a single country.
Databases consisting of sets of national accounts for groups of countries can also be used for econometric analyses in which time-series and cross-section data are pooled to provide a broader range of observations for the estimation of functional relationships.

1.34 Levels of GDP or, alternatively, gross national income (GNI) per head in different countries are also used by international organizations to determine eligibility for loans, aid or other funds or to determine the terms or conditions on which such loans, aid or funds are made available.
When the objective is to compare the volumes of goods or services produced or consumed per head, data in national currencies must be converted into a common currency by means of purchasing power parities and not exchange rates.
It is well known that, in general, neither market nor fixed exchange rates reflect the relative internal purchasing powers of different currencies.
When exchange rates are used to convert GDP, or other statistics, into a common currency the prices at which goods and services in high-income countries are valued tend to be higher than in low-income countries, thus exaggerating the differences in real incomes between them.
Exchange rate converted data must not, therefore, be interpreted as measures of the relative volumes of goods and services concerned.
Levels of GDP, or GDP per head, in different countries are also used to determine, in whole or in part, the size of the contributions which the member countries of an international organization make to finance the operations of the organization.

1.35 Although international organizations use the SNA in order to be able to collect internationally comparable national accounts data, the SNA has not been created for this purpose.
It has become the standard, or universal, system used with little or no modification by most countries in the world for their own national purposes.
National statistical offices and government agencies have a strong vested interest in ensuring that the SNA meets their own analytic and policy requirements and have taken an active part in the development of the SNA for this reason.

D. The boundaries of the SNA

1. Non-monetary transactions

1.36 When goods and services produced within the economy are sold in monetary transactions, their values are automatically included in the accounts of the SNA.
Many goods or services are not actually sold but are nevertheless supplied to other units: for example, they may be bartered for other goods or services or provided free as transfers in kind.
Such goods and services must be included in the accounts even though their values have to be estimated.
The goods or services involved are produced by activities that are no different from those used to produce goods or services for sale.
Moreover, the transactions in which the goods and services are supplied to other units are also proper transactions even though the producers do not receive money in exchange.
It is misleading to describe such output as “imputed”. For example, the services of financial intermediaries which are measured indirectly in the SNA do actually take place; but their values have to be measured indirectly.
It is the value, not the transaction that is “imputed”.

1.37 When goods or services are retained for own use, no transactions with other units take place.
In such cases, in order to be able to record the goods or services in the accounts, internal transactions have to be recorded whereby producers allocate the goods or services for their own consumption or capital formation and values also have to be estimated for them.

1.38 Thus, estimates and imputations are needed in order to be able to record in the accounts productive activities whose outputs are not disposed of in monetary transactions with other units.
Such estimates and imputations should not be interpreted as introducing hypothetical activities or flows of goods and services into the SNA.
Their purpose is the opposite, namely, to capture in the accounts major flows of goods and services actually taking place in the economy that would otherwise be omitted.
In order to obtain comprehensive measures, values have to be estimated for all outputs of goods and services that are not sold but disposed of in other ways.

1.39 In practice the SNA does not record all outputs, however, because domestic and personal services produced and consumed by members of the same household are omitted.
Subject to this one major exception, GDP is intended to be a comprehensive measure of the total gross value added produced by all resident institutional units.
GDP is confined to outputs produced by economic activities that are capable of being provided by one unit to another.
Not all activities that require the expenditure of time and effort by persons are productive in an economic sense, for example, activities such as eating, drinking or sleeping cannot be produced by one person for the benefit of another.

2. The production boundary

1.40 The activity of production is fundamental.
In the SNA, production is understood to be a physical process, carried out under the responsibility, control and management of an institutional unit, in which labour and assets are used to transform inputs of goods and services into outputs of other goods and services.
All goods and services produced as outputs must be such that they can be sold on markets or at least be capable of being provided by one unit to another, with or without charge.
The SNA includes within the production boundary all production actually destined for the market, whether for sale or barter.
It also includes all goods or services provided free to individual households or collectively to the community by government units or NPISHs.

Household production

1.41 The main problem for defining the range of activities recorded in the production accounts of the SNA is to decide upon the treatment of activities that produce goods or services that could have been supplied to others on the market but are actually retained by their producers for their own use.
These cover a very wide range of productive activities, in particular:

a. The production of agricultural goods by household enterprises for own final consumption;

b. The production of other goods for own final use by households: the construction of dwellings, the production of foodstuffs and clothing, etc.;

c. The production of housing services for own final consumption by owner occupiers;

d. The production of domestic and personal services for consumption within the same household: the preparation of meals, care and training of children, cleaning, repairs, etc.

All of these activities are productive in an economic sense.
However, inclusion in the SNA is not simply a matter of estimating monetary values for the outputs of these activities.
If values are assigned to the outputs, values have also to be assigned to the incomes generated by their production and to the consumption of the output.
It is clear that the economic significance of these flows is very different from that of monetary flows.
For example, the incomes generated are automatically tied to the consumption of the goods and services produced; they have little relevance for the analysis of inflation or deflation or other disequilibria within the economy.
The inclusion of large non-monetary flows of this kind in the accounts together with monetary flows can obscure what is happening on markets and reduce the analytic usefulness of the data.

1.42 The SNA is designed to meet a wide range of analytical and policy needs.
A balance has to be struck between the desire for the accounts to be as comprehensive as possible and the need to prevent flows used for the analysis of market behaviour and disequilibria from being swamped by non-monetary values.
The SNA therefore includes all production of goods for own use within its production boundary, as the decision whether goods are to be sold or retained for own use can be made even after they have been produced, but it excludes all production of services for own final consumption within households (except for the services produced by employing paid domestic staff and the own-account production of housing services by owner-occupiers).
The services are excluded because the decision to consume them within the household is made even before the service is provided.
The location of the production boundary in the SNA is a compromise, but a deliberate one that takes account of the needs of most users.
In this context it may be noted that in labour force statistics economically active persons are defined as those engaged in productive activities as defined in the SNA.
If the production boundary were extended to include the production of personal and domestic services by members of households for their own final consumption, all persons engaged in such activities would become self-employed, making unemployment virtually impossible by definition.
This illustrates the need to confine the production boundary in the SNA and other related statistical systems to market activities or fairly close substitutes for market activities.

3. The consumption boundary

1.45 The coverage of production in the SNA has ramifications that extend considerably beyond the production account itself.
The boundary of production determines the amount of value added recorded and hence the total amount of income generated by production.
The range of goods and services that are included in household final consumption expenditures, and actual consumption, is similarly governed by the production boundary.
For example, these expenditures include the estimated values of the agricultural products consumed by households that they have produced themselves and also the values of the housing services consumed by owner occupiers, but not the values of “do-it-yourself” repairs and maintenance to vehicles or household durables, the cleaning of dwellings, the care and training of children, or similar domestic or personal services produced for own final consumption.
Only the expenditures on goods utilized for these purposes, such as cleaning materials, are included in household final consumption expenditures.

4. The asset boundary

1.46 Balance sheets are compiled for institutional units, or sectors, and record the values of the assets they own or the liabilities they have incurred.
Assets as defined in the SNA are entities that must be owned by some unit, or units, and from which economic benefits are derived by their owner(s) by holding or using them over a period of time.
Financial assets and fixed assets, such as machinery, equipment and structures which have themselves been produced as outputs in the past, are clearly covered by this definition.
However, the ownership criterion is important for determining which natural resources are treated as assets in the SNA.
Natural resources such as land, mineral deposits, fuel reserves, uncultivated forests or other vegetation and wild animals are included in the balance sheets provided that institutional units are exercising effective ownership rights over them, that is, are actually in a position to be able to benefit from them.
Assets need not be privately owned and could be owned by government units exercising ownership rights on behalf of entire communities.
Thus, many environmental assets are included within the SNA.
Resources such as the atmosphere or high seas, over which no ownership rights can be exercised, or mineral or fuel deposits that have not been discovered or that are unworkable, are not included as they are not capable of bringing any benefits to their owners, given the technology and relative prices existing at the time.

1.47 Changes in the values of natural resources owned by institutional units between one balance sheet and the next are recorded in the accumulation accounts of the SNA.
For example, the depletion of a natural resource as a result of its use in production is recorded in the other changes in volume of assets account, together with losses of fixed assets due to their destruction by natural disasters (floods, earthquakes, etc.).
Conversely, when deposits or reserves of minerals or fuels are discovered or previously unworkable deposits become workable, their appearance is recorded in this account and they enter the balance sheets in this way.

5. National boundaries

1.48 The accounts of the SNA are compiled for resident institutional units grouped into institutional sectors and subsectors.
The concept of residence is the same as that used in the Balance of Payments and International Investment Position Manual, Sixth Edition (International Monetary Fund (IMF), 2008), known as BPM6.
An institutional unit is said to be resident within the economic territory of a country when it maintains a centre of predominant economic interest in that territory, that is, when it engages, or intends to engage, in economic activities or transactions on a significant scale either indefinitely or over a long period of time, usually interpreted as one year.

1.49 The GDP of a country, viewed as an aggregate measure of production, is equal to the sum of the gross value added of all resident institutional units engaged in production (plus any taxes, and minus any subsidies, on products not included in the value of their outputs).
This is not exactly the same as the sum of the gross value added of all productive activities taking place within the geographical boundaries of the national economy.
Some of the production of a resident institutional unit may take place abroad, for example, the installation of some exported machinery or equipment or a consultancy project undertaken by a team of expert advisers working temporarily abroad.
Conversely, some of the production taking place within a country may be attributable to nonresident institutional units.

1.50 When GDP is derived from the expenditure side, allowance has also to be made for goods and services produced by non-residents but consumed by residents as well as for goods and services produced by residents but consumed abroad.
For the SNA to be comprehensive in coverage, all transactions with the rest of the world have to be identified so their impact on measures relating to the resident economy is properly accounted for.
The complete set of transactions with the rest of the world in the SNA matches exactly the set of transactions captured in the balance of payments.

6. Final consumption, intermediate consumption and gross fixed capital formation

1.51 The contents of the accounts are determined not only by the conceptual framework, definitions and classifications of the SNA but also by the ways in which they are interpreted and implemented in practice.
No matter how simple and precise concepts and classifications may appear in principle, there are inevitably difficult borderline cases which cannot easily be fitted into predetermined categories.
These points may be illustrated by considering a fundamental distinction in economics and in the SNA, namely, the distinction between consumption and gross fixed capital formation (or gross fixed investment, as it is often described in other contexts).

1.52 Before considering the difference between consumption and investment, though, it is necessary to look more closely at the nature of consumption.
Consumption is an activity in which institutional units use up goods or services, but there are two quite different kinds of consumption.
Intermediate consumption consists of goods and services used up in the course of production within the accounting period.
Final consumption consists of goods and services used by individual households or the community to satisfy their individual or collective needs or wants.
The activity of gross fixed capital formation, like intermediate consumption, is restricted to institutional units in their capacity as producers, being defined as the value of their acquisitions less disposals of fixed assets.
Fixed assets are produced assets (such as machinery, equipment, buildings or other structures) that are used repeatedly or continuously in production over several accounting periods (more than one year).
The distinction between intermediate consumption and gross capital formation depends on whether the goods and services involved are completely used up in the accounting period or not.
If they are, the use of them is a current transaction recorded as intermediate consumption; if not it is an accumulation transaction recorded in the capital account.

1.53 The general nature and purpose of the distinction between gross fixed capital formation and consumption, whether intermediate or final, is clear.
The distinction is fundamental for economic analysis and policymaking.
Nevertheless, the borderline between consumption and gross fixed capital formation is not always easy to determine in practice.
Certain activities contain some elements that appear to be consumption and at the same time others that appear to be capital formation.
In order to try to ensure that the SNA is implemented in a uniform way, decisions have to be taken about the ways in which certain difficult, even controversial, items are to be classified.
Two examples are given below.

Human capital

1.54 It is often proposed that expenditures on staff training and education should be classified as gross fixed capital formation as a form of investment in human capital.
The acquisition of knowledge, skills and qualifications increases the productive potential of the individuals concerned and is a source of future economic benefit to them.
However, while knowledge, skills and qualifications are clearly assets in a broad sense of the term, they cannot be equated with fixed assets as understood in the SNA.
They are acquired through learning, studying and practising, activities that cannot be undertaken by anyone else on behalf of the student and thus the acquisition of knowledge is not a process of production even though the instruction conveyed by education services is. The education services produced by schools, colleges, universities, etc. are thus treated as being consumed by students in the process of their acquiring knowledge and skills.
This type of education is treated as final consumption.
When training is given by an employer to enhance the effectiveness of staff, the costs are treated as intermediate consumption.

1.55 This treatment of education costs is consistent with the production and asset boundaries of the SNA but not all users of the SNA find it satisfactory in all instances.
However, as explained below, the SNA is such that users are encouraged to explore alternative conventions in the form of satellite accounts, described in chapter 29.
An alternative treatment for the recording of human capital is one such application.

Repairs, maintenance and gross fixed capital formation

1.56 Another, less familiar, example of the intrinsic difficulty of trying to draw a dichotomy between consumption and gross fixed capital formation is provided by repairs and maintenance.
Ordinary maintenance and repairs undertaken by enterprises to keep fixed assets in good working order are treated as intermediate consumption.
However, major improvements, additions or extensions to fixed assets, both machinery and structures, which improve their performance, increase their capacity or prolong their expected working lives count as gross fixed capital formation.
In practice it is not easy to draw the line between ordinary repairs and major improvements, although the SNA provides certain recommendations for this purpose.
Some analysts, however, consider that the distinction between ordinary repairs and maintenance and major improvements and additions is neither operational nor defensible and would favour a more “gross” method of recording in which all such activities are treated as gross fixed capital formation.

E. The SNA as a coordinating framework for statistics

1. Harmonization between different statistical systems

1.57 The SNA has a very important statistical function by serving as a coordinating framework for economic statistics in two different senses.
In the first place, the SNA is seen as the conceptual framework for ensuring the consistency of the definitions and classifications used in different, but related, fields of statistics.
Secondly, the SNA acts as an accounting framework to ensure the numerical consistency of data drawn from different sources, such as industrial inquiries, household surveys, merchandise trade statistics, VAT returns and other administrative sources.

1.58 Consistency between different statistical systems enhances the analytical usefulness of all the statistics involved.
The SNA has always occupied a central position in economic statistics because the data from more specialized systems, such as balance of payments or labour force statistics, typically have to be used in conjunction with national accounts data.
The need for harmonization of the SNA and related statistical systems, such as financial statistics or balance of payments statistics, leads to the practice of revising other statistical systems in parallel with, and in close collaboration with, that of the SNA.
This coordination eliminates conceptual differences between them other than a few exceptions that can be specifically justified in terms of the special characteristics of different kinds of data, or the special requirements of different kinds of users.
Harmonization between the SNA and other major systems has proved to be largely successful and has been achieved by making changes to the SNA as well as to the other systems.

2. The use of microdata for macroeconomic accounting

1.59 The sequence of accounts and balance sheets of the SNA could, in principle, be compiled at any level of aggregation, even that of an individual institutional unit.
It might therefore appear desirable if the macroeconomic accounts for sectors or the total economy could be obtained directly by aggregating corresponding data for individual units.
There would be considerable analytical advantages in having microdatabases that are fully compatible with the corresponding macroeconomic accounts for sectors or the total economy.
Data in the form of aggregates, or averages, often conceal a great deal of useful information about changes occurring within the populations to which they relate.
For example, economic theory indicates that changes in the pattern of the distribution of income may be expected to have an impact on aggregate consumption over and above that due to changes in the aggregate level of income.
Information relating to individual units may be needed not only to obtain a better understanding of the working of the economy but also to monitor the impact of government policies, or other events, on selected types of units about which there may be special concern, such as households with very low incomes.
Microdata sets also make it possible to follow the behaviour of individual units over time.
Given the continuing improvements in computers and communications, the management and analysis of very large microdatabases is becoming progressively easier.
Data can be derived from a variety of different sources, such as administrative and business records, as well as specially conducted censuses and surveys.

1.60 In practice, however, macroeconomic accounts can seldom be built up by simply aggregating the relevant microdata.
Even when individual institutional units keep accounts or records, the concepts that are needed or appropriate at a micro level may not be suitable at a macro level.
Individual units may be obliged to use concepts designed for other purposes, such as taxation.
The accounting conventions and valuation methods used at a micro level typically differ from those required by the SNA.
For example, the widespread use of historic cost accounting means that the accounts of individual enterprises may differ significantly from those used in the SNA.
Depreciation as calculated for tax purposes may be quite arbitrary and unacceptable from an economic viewpoint as a measure of consumption of fixed capital.
In such situations, it is impractical to try to adjust the individual accounts of thousands of enterprises before aggregating them.
Instead the data are adjusted after they have been aggregated to some extent.
Of course, the data do not have to be aggregated to the level of the total economy, or even complete sectors or industries, before being adjusted and it is likely to be more efficient to make the adjustments for smaller and more homogenous groups of units.
This may involve compiling so-called intermediate systems of accounts.
At whatever level of aggregation the adjustments are made, the inevitable consequence is to make the resulting macrodata no longer equivalent to simple aggregations of the microdata from which they are derived.
When the microdata are not derived from business accounts or administrative records but from censuses or surveys designed for statistical purposes, the concepts used should be closer to those required, but the results may still require adjustment at a macro level because of incomplete coverage (the surveys being confined to enterprises above a certain size, for example) and bias from response errors.

1.61 Most households are unlikely to keep accounts of the kind needed by the SNA.
Microdata for households are typically derived from sample surveys that may be subject to significant response and reporting errors.
It may be particularly difficult to obtain reliable and meaningful data about the activities of small unincorporated enterprises owned by households.
Aggregates based on household surveys have to be adjusted for certain typical biases, such as the underreporting of certain types of expenditure (on tobacco, alcoholic drink, gambling, etc.) and also to make them consistent with macrodata from other sources, such as imports.
The systematic exploitation of microdata may also be restricted by the increasing concerns about confidentiality and possible misuse of such databases.

1.62 It may be concluded therefore that, for various reasons, it may be difficult, if not impossible, to achieve microdatabases and macroeconomic accounts that are fully compatible with each other in practice.
Nevertheless, as a general objective, the concepts, definitions and classifications used in economic accounting should, so far as possible, be the same at both a micro and macro level to facilitate the interface between the two kinds of data.

F. Links with business accounting

1.63 The accounting rules and procedures used in the SNA are based on those long used in business accounting.
The traditional double-entry bookkeeping principle, whereby a transaction gives rise to a pair of matching debit and credit entries within the accounts of each of the two parties to the transaction, is a basic axiom of economic or national accounting.
For example, recording the sale of output requires not only an entry in the production account of the seller but also an entry of equal value, often described as the counterpart, in the seller's financial account to record the cash, or short-term financial credit, received in exchange for the output sold.
As two matching entries are also needed for the buyer, the transaction must give rise to four simultaneous entries of equal value in a system of macroeconomic accounts covering both the seller and the buyer.
In general, a transaction between two different institutional units always requires four equal, simultaneous entries in the accounts of the SNA (that is, quadruple entry accounting) even if the transaction is a transfer and not an exchange and even if no money changes hands.
These multiple entries enable the economic interactions between different institutional units and sectors to be recorded and analysed.
However, transactions within a single unit (such as the consumption of output by the same unit that produced it) require only two entries whose values have to be estimated.

1.64 The design and structure of the SNA draws heavily on economic theory and principles as well as business accounting practices.
Basic concepts such as production, consumption and capital formation are meant to be rooted in economic theory.
When business accounting practices conflict with economic principles, priority is given to the latter, as the SNA is designed primarily for purposes of economic analysis and policymaking.
The difference between business accounting and economic theory can be illustrated by the concept of cost of production used in the SNA.

1.65 Business accounts commonly (but not invariably) record costs on an historic basis, partly to ensure that they are completely objective.
Historic cost accounting requires goods or assets used in production to be valued by the expenditures actually incurred to acquire those goods or assets, however far back in the past those expenditures took place.
In the SNA, however, the concept of opportunity cost as defined in economics is employed.
In other words, the cost of using, or using up, some existing asset or good in one particular process of production is measured by the amount of the benefits that could have been secured by using the asset or good in alternative ways.
Opportunity cost is calculated with reference to the opportunities foregone at the time the asset or resource is used, as distinct from the costs incurred at some time in the past to acquire the asset.
The best practical approximation to opportunity cost accounting is current cost accounting, whereby assets and goods used in production are valued at their actual or estimated current market prices at the time the production takes place.
Current cost accounting is sometimes described as replacement cost accounting, although there may be no intention of actually replacing the asset in question after it has been used

1.66 When there is persistent inflation, even at moderate levels, the use of historic costs tends to underestimate the opportunity costs of production in an economic sense so that historic cost profit may be much greater than the operating surplus as defined in the SNA.
Profits at historic costs are liable to give very misleading signals as to the profitability of the production processes to which they relate by systematically undervaluing inputs compared with outputs.
They can lead to mistaken decisions at both a microeconomic and macroeconomic level.

1.67 Current cost accounting has ramifications that permeate the entire SNA.
It affects all the accounts and balance sheets and their balancing items.
A fundamental principle underlying the measurement of gross value added, and hence GDP, is that output and intermediate consumption must be valued at the prices current at the time the production takes place.
This implies that goods withdrawn from inventories must be valued at the prices prevailing at the times the goods are withdrawn and not at the prices at which they entered inventories.
This method of recording changes in inventories is not commonly used in business accounting, however, and may sometimes give very different results, especially when inventory levels fluctuate while prices are rising.
Similarly, consumption of fixed capital in the SNA is calculated on the basis of the estimated opportunity costs of using the assets at the time they are used, as distinct from the prices at which the assets were acquired.
Even when the fixed assets used up are not actually replaced, the amount of consumption of fixed capital charged as a cost of production should be sufficient to enable the assets to be replaced, if desired.
When there is persistent inflation, the value of consumption of fixed capital is liable to be much greater than depreciation at historic costs, even if the same assumptions are made in the SNA and in business accounts about the service lives of the assets and their rates of wear and tear and obsolescence.
To avoid confusion, the term “consumption of fixed capital” is used in the SNA to distinguish it from “depreciation” as typically measured in business accounts.

1.68 A difference between the SNA and commercial accounting is that the term “profits” is not used to describe a balancing item in the SNA.
The item entrepreneurial income is a close approximation to before tax profits and disposable income to after tax profits.
The use of the term disposable income comes from the fact that the corresponding item for the household sector represents the maximum amount available to a household for purposes of consumption after maintaining its net worth intact, that is the current value of its assets minus the current value of its liabilities.
For corporations, since they do not have final consumption, this is the amount available for investment.

1.69 Unlike commercial accounting, the SNA excludes from the calculation of income any assets received or disposed of as a result of capital transfers that merely redistribute wealth between different units, and also any assets received or disposed of as a result of events not connected with production, such as earthquakes or other natural disasters, or acts of war.
Real holding gains or losses on assets or liabilities due to changes in their relative prices are also excluded from income generated by production.

1. International accounting standards

1.70 A feature of the 2008 update of the SNA is recognition of the increasing use of international accounting standards by corporations and in the public sector.
Subsequent chapters make reference to International Accounting Standards Board (IASB) and the International Public Sector Accounting Standards Board (IPSASB) norms.
In several cases, notably on pension liabilities and intangible assets, the feasibility of including certain items in the SNA is dependent on the application of the international accounting standards.

G. Expanding the scope of the SNA

1.71 The SNA is designed to be sufficiently comprehensive that individual countries, whatever their economic structures, institutional arrangements or level of development, can select from within it those parts of the SNA that are considered to be most relevant and useful to implement in the light of their own needs and capabilities.
The SNA is meant to be implemented in a flexible manner and the accounts and tables, classifications and sectoring presented in this volume should not be regarded as fixed.
For example, classifications of institutional units, transactions and assets may be implemented flexibly by introducing further aggregation or disaggregation in order to adapt them to the data availability and special circumstances of different countries.
The flexible use of classifications does not change the basic concepts and definitions of the SNA.

1.72 In some cases, the SNA explicitly insists on flexibility.
For example, two alternative methods of subsectoring the general government sector are proposed in chapter 4 without either being assigned priority.
Similarly, although the SNA suggests subsectoring the households sector on the basis of the household's principal source of income, it stresses that this is only one possible criterion for subsectoring.
In some cases, it may be more appropriate to subsector on the basis of socio-economic criteria or the type of area in which the household is located or, indeed, to carry the disaggregation of the households sector further by using two or more criteria together in a hierarchical manner.

1.73 Ways in which the SNA may be adapted to meet differing circumstances and needs are addressed in chapters 18 to 29. Chapter 29 shows how flexibility may be taken a stage further by developing satellite accounts that are closely linked to the main SNA but are not bound to employ exactly the same concepts or restricted to data expressed in monetary terms.
Satellite accounts are intended for special purposes such as monitoring the community's health or the state of environment.
They may also be used to explore new methodologies and to work out new accounting procedures that, when fully developed and accepted, may become absorbed into the main SNA in the course of time, in the way that input-output analysis, for example, has been integrated into the SNA.

1.74 Another way in which the SNA may be implemented flexibly is by rearranging the data in the accounts in the form of a social accounting matrix in order better to serve particular analytical and policy needs.
Such matrices should not be construed as constituting different systems but as alternative ways of presenting the mass of information contained in the SNA which some users and analysts find more informative and powerful for both monitoring and modelling social and economic development.

H. The SNA and measures of welfare

1.75 GDP is often taken as a measure of welfare, but the SNA makes no claim that this is so and indeed there are several conventions in the SNA that argue against the welfare interpretation of the accounts.
The implications of some of these conventions are outlined briefly in this section.

1. Qualifications to treating expenditure as a welfare measure

1.76 In a market economy, the prices used to value different goods and services should reflect not only their relative costs of production but also the relative benefits or utilities to be derived from using them for production or consumption.
This establishes the link between changes in aggregate production and consumption and changes in welfare.
However, changes in the volume of consumption, for example, are not the same as changes in welfare.
It is widely accepted that, other things being equal, increased expenditure on goods and services leads to increased welfare.
The increase in welfare may not, however, be proportionate to the increase in expenditure.
Nor is the unit incurring the expenditure necessarily the one that benefits from an increase in welfare.
The SNA makes a distinction between actual consumption, showing the amount of goods and services actually consumed, and consumption expenditure.
Household actual consumption is greater than consumption expenditure because it includes expenditures incurred by general government and NPISHs on behalf of individual households.

1.77 An increase in consumption of food by someone living in extreme poverty is likely to lead to a greater increase in welfare than a similar increase in consumption by someone already well-fed.
The SNA however, cannot distinguish this because although the rules allow distinguishing which unit incurs the expenditure as opposed to which unit consumes the food, the valuation basis in the SNA is the price paid for the food with no adjustment for the qualitative benefits derived from its consumption.
The most that can be claimed for treating expenditure as a measure of welfare is that it may be a reasonable lower bound on the level of welfare engendered by the expenditure.

2. Unpaid services and welfare

1.78 The production boundary of the SNA is such that the services produced and consumed by households are not included except for the imputed rental of owner-occupied dwellings and the payments made to domestic staff.
Similarly, no estimate is included in the SNA for the labour services of individuals provided without cost to non-profit institutions.
In both these cases, the contribution of time increases the welfare of other individuals in the community.
The exclusion of these services from the production boundary is not a denial of the welfare properties of the services but a recognition that their inclusion would detract from rather than add to the usefulness of the SNA for the primary purposes for which it is designed, that is economic analysis, decision-taking and policymaking.

3. The impact of external events on welfare

1.79 The level of an individual's and a nation's welfare may be affected by a wide range of factors that are not economic in origin.
Consider the effects of an exceptionally severe winter combined with an influenza epidemic.
Other things being equal, the production and consumption of a number of goods and services may be expected to rise in response to extra demands created by the cold and the epidemic; the production and consumption of fuels, clothing and medical services will tend to increase.
As compared with the previous year, people may consider themselves to be worse off overall because of the exceptionally bad weather and the epidemic, notwithstanding the fact that production and consumption may have increased in response to the additional demand for heating and health services.
Total welfare could fall even though GDP could increase in volume terms.

1.80 This kind of situation does not mean that welfare cannot be expected to increase as GDP increases, other things being equal.
Given the occurrence of the cold and the epidemic, the community presumably finds itself much better off with the extra production and consumption of heating and health services than without them.
There may even be a general tendency for production to rise to remedy the harmful effects of events that reduce people's welfare in a broad sense.
For example, production may be expected to increase in order to repair the damage caused by such natural disasters as earthquakes, hurricanes and floods.
Given that the disaster has occurred, the extra production presumably increases welfare.
However the question remains how changes in welfare should be measured over time; a community that has suffered a natural disaster will have a higher level of welfare if damage is repaired than if it is not, but how does this new level of welfare compare to the situation in the absence of the disaster?

4. The impact of externalities on welfare

1.81 Some production activities cause a loss in welfare that is not captured in the SNA.
A factory, for example, may generate noise and emit pollutants into the air or nearby water systems to the extent of causing a loss of amenity and thus a loss of welfare to individuals living nearby.
As long as there is no financial penalty to the factory, the consequences go unmeasured in the SNA.
If, in response to government legislation or otherwise, the factory incurs expenditures that reduce the noise or quantity of pollutants emitted, costs will rise and so will welfare but again the match is not necessarily one to one and the level of welfare after the ameliorations may still be lower than it might be if the factory simply closed down.

1.82 Environmental externalities are a major cause of concern both as regards measuring welfare and indeed economic growth itself.
In response to these concerns, a satellite account of the SNA has been developed and is being refined to try to answer such questions.

5. Non-economic impacts on welfare

1.83 An individual’s state of well-being, or welfare, is not determined by economic factors alone.
Personal and family circumstances, quality of health, the satisfaction of lack of it derived from employment are just some other factors that affect welfare.
It is difficult to imagine an objective way in which factors such as these could be quantified and more difficult to imagine the usefulness of including them in a system designed primarily to facilitate economic analysis

6. Welfare indicators and macroeconomic aggregates

1.84 Welfare is a wide-ranging concept with many different facets.
Some of these may be captured reasonably well by one or more of the key aggregates of the SNA.
Others may be captured by using the basic structure of the SNA and expanding it in certain directions, perhaps by including unpaid services and the effects of environmental damage, for example.
Yet other aspects are likely to remain forever outside the reach of a system not designed with the measurement of welfare as a prime consideration.
It would be foolish to deny this just as it is unrealistic to expect a system of economic accounts to necessarily and automatically yield a wholly satisfactory measure of welfare.

Chapter 2: Overview

A. Introduction

2.1 This chapter provides an overview of the accounting framework of the SNA and in doing so gives an overview of most of the following chapters also.

a. It introduces the conceptual elements that form the building blocks of the accounting system and the rules of accounting to be followed.
They are further elaborated in section B and C and in their full detail in chapters 3, 4 and 5.

b. It describes the standard view of the central framework of main accounting structure.
Each account is introduced with a description of the nature of the account and an insight into the sort of analysis the account can yield.
The accounts are described in section D and then in chapters 6 to 17.

c. Thereafter, the chapter shows some of the ways in which the central framework may be applied flexibly, depending on specific country requirements.
In particular satellite accounts are introduced.
These extensions and applications of the SNA are described briefly in section E and in chapters 18 to 29.

2.2 As explained in chapter 1, the central framework describes the essential phenomena which constitute economic behaviour: production, consumption, accumulation and the associated concepts of income and wealth.
The SNA aims to provide a representation of this set of phenomena and their interrelations that is simplified to aid comprehension but still covers all important considerations.
To achieve this, the central framework must satisfy two conditions; it must be integrated and consistent.

2.3 To be integrated, the same concepts, definitions and classifications must be applied to all accounts and sub-accounts.
For example, once it is decided dwellings are treated as assets, all dwellings must give rise to housing services that are included within the production boundary, regardless of whether the dwellings are occupied by the owners or are rented on the market.
Equally, all give rise to income that must be treated in the same way in the SNA, regardless of the relationship between the owner and the occupier.

2.4 To be consistent, each economic flow or stock level appearing in the SNA must be measured identically for the parties involved.
This consistency is achieved by applying throughout the SNA the same concepts and definitions and also by using a single set of accounting rules for all entries in the SNA.
In practice, the actual data coming from the accounts or statistics provided by elementary units will not be fully consistent for various reasons and so achieving the consistency required by the SNA requires a large amount of additional work.

1. Analysing flows and stocks

2.5 Basically, the purpose of a system of national accounts is to record economic flows and stocks.
Economic flows can be thought of in various ways.
Consider the question “Who does what?” “Who” refers to the economic agent engaged in doing something, the operator. “What” is connected with the kind of action this agent is undertaking.
In a few cases, the answer to this simple question provides a good preliminary characterization of an economic flow.
However, in general the question is too simple to provide even a rough economic description of a specific flow.
Take the example of somebody buying a loaf of bread.
In order to characterize the flow, it is necessary to consider from whom this loaf of bread is bought (a baker or a supermarket) and what is given in exchange (a coin or a note).
So the starting question is transformed into “Who does what with whom in exchange for what?” This rather simple flow involves two operators (a buyer, a seller), two main actions (a purchase, a sale), two secondary actions (a payment, a receipt) and two objects (bread, a coin or a note).
Again, a complete description would require more information, at least the weight, kind and price of the bread.

2.6 The picture in the real world is still more complicated.
Before this flow occurred, the seller had a certain quantity of bread in his shop; afterwards he has less bread but more money.
The buyer had a certain amount of money, now he has less money but some bread (before eating it).
So the flow between them has changed their initial situations.
This means that flows cannot be looked at in isolation; the situations before and after a flow occurs need to be considered.
At those two points in time, one must ask the question “Who has what?” The baker not only has bread and currency, he also has a house with the shop, baking equipment, some flour, a deposit in a bank, a car, etc.
In other words, he has (he owns) a certain stock of objects.
The same is true for the buyer.
In addition to what they are in themselves, flows modify stocks.
Flows and changes in stocks are intrinsically connected.
The previous question is again transformed into “Who does what with whom in exchange for what with what changes in stocks?”

2.7 However, the various ways of looking at this example have not yet been exhausted.
Before the baker can sell bread, he has to bake it. He uses flour, water, electricity, baking equipment, etc.
So, an additional question is “Who does what by what means?”
What he does can also be characterized in two ways: his activity (to bake) and the result of it (a product: bread).
With respect to the buyer one can ask “Why does he buy bread?”
The obvious purpose is to eat, as food; however, it could be to give to a beggar, as charity.
This raises the question “Who does what for what purpose?”

2.8 Adding all the questions together results in a rather complex combination of simple links: “Who does what, with whom, in exchange for what, by what means, for what purpose, with what changes in stocks?” Answering these questions for all economic flows and stocks and operators in a given economy would provide an enormous amount of information describing the complete network of economic interrelations.
However, it would require an enormous amount of basic information, which is not always available nor complete in that it may cover only certain aspects of the complex chain of questions.
Further, it is necessary to organize the recording of economic flows and stocks in a comprehensible way, as discussed in the next section.

2. Recording flows and stocks

2.9 Users' needs set certain requirements for the accounting framework.
The first requirement is that it should provide a picture of the economy, but the picture must be simplified in order to be both comprehensible and manageable.
The second requirement is that it should faithfully represent economic behaviour by covering all important aspects in a balanced way without neglecting or giving too little emphasis to some aspects or giving others too much prominence.
Finally, it should portray all significant economic interrelations and the results of economic activity.
Although meeting these requirements is necessary, they are somewhat contradictory.
Achieving the right balance between them is not easy.
Too great a simplification can lose sight of or neglect important aspects of economic behaviour; too detailed a portrayal of reality can overburden the picture and reduce insight; too much sophistication can lower comprehension and mislead some users; and so on.

2.10 To meet these requirements, the SNA uses a limited number of basic categories to analyse and aggregate certain aspects (Who? What? What purpose? What stocks?) of the very numerous elementary flows.
However, the SNA simplifies the picture it gives of the economic interrelations by not recording the “from-whom-to-whom?” question in a fully systematic way; that is, it does not always depict the network of flows between the various types of operators.
Consider three units, A, B and C, each of which makes payments of the same type to the other two; they might be three shopkeepers, for example, who sell different types of goods.
Suppose A buys 2 from B and 3 from C; B buys 6 from A and 1 from C; C buys 4 from each of A and B. A full articulation of the flows could be captured in a threeby-three table as follows:

	A	B	C	Total purchases
A		2	3	5
B	6		1	7
C	4	4		8
Total sales	10	6	4	20

2.11 Although only the purchases were specified, it follows that the receipts of each unit are also available in the table.
The totals in the right-most column show the total purchases of each of the three units and the bottommost row shows the total receipts by each of the three units.
The sum of each must, obviously, be the same since each is the sum of all entries within the table.
Within the central framework, the full detail of the flows from each of A, B and C to each of the others is not generally shown; it is sufficient to show only the totals in the right-most column and the bottommost row and know that these must balance.

2.12 In some presentations, particularly those using a matrix format of presentation, some of these extra details may be shown.
Discussion of this appears in chapters 14, 28 and 29.
Even in the central framework, the full detail may be available.
For example if in some case A, B and C do not interact with one another but only with another unit G, as is the case in the payment of taxes, then there are only four entries to be shown; the payments by each of A, B and C and the receipts by G.

2.13 Another case where the SNA introduces a simplification is in terms of the “what in exchange for what?” question; that is, it does not indicate, for example, the specific nature of the financial counterpart (currency or deposit or short-term loan, etc.) for the purchases of goods and services or the payment of taxes.

2.14 The fact that the SNA is integrated, although articulated in only two and not three dimensions, does not reduce its consistency requirements.
In effect, the purpose of the SNA is to derive national accounts that are as consistent as they would be if they were fully articulated; each economic flow or stock should be measured identically for both parties involved.
The consistency in the SNA is achieved by applying the same concepts and definitions throughout and also by using a single strict set of accounting rules.

B. The conceptual elements of the SNA

2.15 The SNA contains a number of conceptual elements that determine the accounting framework of the SNA and permit various aspects of the questions raised above to be answered.
These concepts are:

a. Institutional units and sectors (who?);

b. Transactions and other flows (what?);

c. Assets and liabilities (what stocks?);

d. Products and producing units (other aspects of who and what?);

e. Purposes (why?).

They are presented in turn.

1. Institutional units and sectors

2.16 The fundamental units identified in the SNA are the economic units that can engage in the full range of transactions and are capable of owning assets and incurring liabilities on their own behalf.
These units are called institutional units.
Further, because they have legal responsibility for their actions, institutional units are centres of decision-making for all aspects of economic behaviour.
In practice, some institutional units are controlled by others and thus in such cases autonomy of decision is not total and may vary over time.
Legally independent holding of assets and liabilities and autonomous behaviour do not always coincide.
In the SNA, preference is generally given to the first aspect because it provides a better way to organize the collection and presentation of statistics even if its usefulness is limited in some cases.

Institutional sectors

2.17 The institutional units are grouped together to form institutional sectors, on the basis of their principal functions, behaviour and objectives:

a. Non-financial corporations are institutional units that are principally engaged in the production of market goods and non-financial services.

b. Financial corporations are institutional units that are principally engaged in financial services including financial intermediation.

c. General government consists of institutional units that, in addition to fulfilling their political responsibilities and their role of economic regulation, produce services (and possibly goods) for individual or collective consumption mainly on a non-market basis and redistribute income and wealth.

d. Households are institutional units consisting of one individual or a group of individuals.
All physical persons in the economy must belong to one and only one household.
The principal functions of households are to supply labour, to undertake final consumption and, as entrepreneurs, to produce market goods and non-financial (and possibly financial) services.
The entrepreneurial activities of a household consist of unincorporated enterprises that remain within the household except under certain specific conditions.

e. Non-profit institutions serving households (NPISHs) are legal entities that are principally engaged in the production of non-market services for households or the community at large and whose main resources are voluntary contributions.

2.18 Each sector contains a number of subsectors distinguished according to a hierarchical classification (described in chapter 4).
A subsector comprises entire institutional units, and each institutional unit belongs to only one subsector though alternative groupings are possible.
The distinction between public, national private and foreign controlled corporations and between various socio-economic groups of households is included in the SNA in order to respond to policy concerns.

Delimitation of the total economy and the rest of the world

2.19 The total economy is defined in terms of institutional units.
It consists of all the institutional units which are resident in the economic territory of a country.
The economic territory of a country, although consisting essentially of the geographical territory, does not coincide exactly; some additions and subtractions are made (see chapter 26).
The concept of residence in the SNA is not based on nationality or legal criteria.
An institutional unit is said to be a resident unit of a country when it has a centre of predominant economic interest in the economic territory of that country; that is, when it engages for an extended period (one year or more being taken as a practical guideline) in economic activities on this territory.
The institutional sectors referred to above include only resident units.

2.20 Resident units engage in transactions with non-resident units (that is, units that are residents of other economies).
These transactions are the external transactions of the economy and are grouped in the account of the rest of the world.
Strictly speaking, the rest of the world is the account of transactions occurring between resident and non-resident units, but it may also be seen as the whole group of nonresident units that enter into transactions with resident units.
In the accounting structure of the SNA, the rest of the world plays a role similar to that of an institutional sector, although non-resident units are included only in so far as they are engaged in transactions with resident institutional units.

2. Transactions and other flows

2.21 Institutional units fulfil various economic functions; that is, they produce, consume, save, invest, etc.
They may engage in various types of production (agriculture, manufacturing, etc.) as entrepreneurs, providers of labour or suppliers of capital.
In all aspects of their economic functions and activities, they undertake a great number of elementary economic actions.
These actions result in economic flows, which, however they are characterized (wages, taxes, fixed capital formation, etc.), create, transform, exchange, transfer or extinguish economic value; they involve changes in the volume, composition or value of an institutional unit's assets or liabilities.
The economic value may take the form of ownership rights on physical objects (a loaf of bread, a dwelling) or intangible assets (a film original) or of financial claims (liabilities being understood as negative economic value).
In all cases, economic value is potentially usable to acquire goods or services, pay wages or taxes, etc.

2.22 Most economic actions are undertaken by mutual agreement between institutional units.
They are either an exchange of economic value or a voluntary transfer by one unit to another of a certain amount of economic value without a counterpart.
These actions undertaken by mutual agreement between two institutional units are called transactions in the SNA.
The SNA also treats certain economic actions involving only a single institutional unit as transactions.
They are described as internal, or intra-unit, transactions.
For example, own-account fixed capital formation is treated as a transaction between a unit in its capacity as a producer with itself in its capacity as an acquirer of fixed capital.
Such transactions are similar in nature to actions undertaken by mutual agreement by two different institutional units.

2.23 However, not all economic flows are transactions.
For example, certain actions undertaken unilaterally by one institutional unit have consequences on other institutional units without the latter's consent.
The SNA records such actions only to a limited extent, essentially when governments or other institutional units take possession of the assets of other institutional units, including non-resident units, without full compensation.
In fact, unilateral economic actions bearing consequences, either positive or negative, on other economic units (externalities) are much broader but such externalities are not recorded in the SNA.
Human action may result in the transfer of natural assets to economic activities and the subsequent transformation of these assets.
These phenomena are recorded in the SNA as economic flows, bringing in economic value.
Noneconomic phenomena, such as wars and natural disasters, may destroy economic assets, and this extinction of economic value must be accounted for.
The value of economic assets and liabilities may change during the time they are held as stocks, as a consequence of changes in prices.
These and similar flows that are not transactions, which are called other economic flows in the SNA, are described in chapter 12.

2.24 Economic flows can be actual, observable flows or they can be built up or estimated for analytical purposes.
Certain flows may be directly observed in value terms.
This is the case for monetary transactions between two institutional units, such as a purchase or sale of a good or the payment of a tax.
Other two-unit flows are observable but cannot be immediately valued.
These flows include barter of goods and services or education services consumed by students and provided free of charge by government; a value in money terms has to be attributed to them.
Barter is an example of a two-unit flow involving a “quid pro quo” that is, a flow in one direction is linked to a counterpart flow in the opposite direction; a social assistance benefit in cash is a two-unit flow that does not involve a quid pro quo.
Another kind of flow involves only one institutional unit.
Such flows may be physically observable, as in the case of output for own-account consumption or capital formation, or destruction by natural catastrophes.
A value has to be attributed to them (this may be fairly easy in certain cases, such as when output is mostly sold).
Other intra-unit, or internal, flows may not be observable as such; accounting entries are then constructed in order to measure economic performance correctly.
This is the case for the consumption of fixed capital or the revaluation of assets and liabilities.
Certain inter-units flows, such as reinvested earnings on foreign direct investment, are also accounting entries created for analytical purposes.
Finally, some observable monetary transactions are not recorded as they are observed in practice because they are of a composite nature (nominal interest, total insurance premiums) or their legal nature does not correspond to their economic one (financial leasing).
Consequently, for the SNA, they are split up into various components and their classification and routing are modified.

2.25 Although monetary transactions have a basic role in the valuation of flows in the SNA, non-monetary transactions are also significant.
They include flows of goods and services that take place between institutional units for which values have to be estimated and also some flows that are assumed to take place within units.
The relative importance of non-monetary transactions varies according to the type of economy and the objectives pursued by the accounting system.
Although the volume of non-monetary flows is generally greater for less developed economies than for developed ones, even for the latter it is not negligible.

Main types of transactions and other flows

2.26 Elementary transactions and other flows are very numerous.
They are grouped into a relatively small number of types according to their nature.
The main classification of transactions and other flows in the SNA includes four first-level types, with each subdivided according to a hierarchical classification.
It is designed to be used systematically in the accounts and tables of the central framework and cross-classified with institutional sectors, industry and product, and purpose classifications.
A full set of transactions and their codes appear in annex 1.

2.27 Transactions in goods and services (products) describe the origin (domestic output or imports) and use (intermediate consumption, final consumption, capital formation or exports) of goods and services.
By definition, goods and services in the SNA are always a result of production, either domestically or abroad, in the current period or in a previous one.
The term products is thus a synonym for goods and services.

2.28 Distributive transactions consist of transactions by which the value added generated by production is distributed to labour, capital and government and transactions involving the redistribution of income and wealth (taxes on income and wealth and other transfers).
The SNA draws a distinction between current and capital transfers, with the latter deemed to redistribute saving or wealth rather than income.
(This distinction is discussed in detail in chapter 8.)

2.29 Transactions in financial instruments (or financial transactions) refer to the net acquisition of financial assets or the net incurrence of liabilities for each type of financial instrument.
Such changes often occur as counterparts of non-financial transactions.
They also occur as transactions involving only financial instruments.
Transactions in contingent assets and liabilities are not considered transactions in the SNA (see chapter 11).

2.30 Other accumulation entries cover transactions and other economic flows not previously taken into account that change the quantity or value of assets and liabilities.
They include acquisitions less disposals of non-produced non-financial assets, other economic flows of non-produced assets, such as discovery or depletion of subsoil resources or transfers of other natural resources to economic activities, the effects of non-economic phenomena such as natural disasters and political events (wars for example) and finally, they include holding gains or losses, due to changes in prices, and some minor items (see chapter 12).

Characteristics of transactions in the SNA

2.31 In order to provide more useful answers to the questions raised in the analysis of flows, some transactions are not recorded in the SNA as they might be directly observed.
The SNA often uses categories which are more closely identified with an economic concept.
For example, gross fixed capital formation, a subcategory of transactions in goods and services, is broader than the limited coverage thought of as “purchases of fixed assets”. In order to be closer to an economic concept, it covers the acquisition of new and existing fixed assets, through purchases, barter transactions or own-account capital formation, less the disposal of existing assets, through sales or barter transactions.

2.32 As the previous example shows, the SNA also often uses categories which are compacted, that is, are the result of combining a number of elementary transactions.
The term changes in inventories, for example, refers to the difference between entries into and withdrawals from inventories and recurrent losses.
The same netting happens for transactions in financial instruments.
All transactions in an instrument held as an asset (or as a liability) are grouped under the heading of this instrument.
The item “loans,” for example, covers issuance of new loans, conversions, and redemptions or cancellations of existing loans.
Finally, some categories of transactions in the SNA, such as distributive transactions concerning interest and net nonlife insurance premiums, require an actual transaction to be split into parts.

3. Assets and liabilities

2.33 Assets and liabilities are the components of the balance sheets of the total economy and institutional sectors.
In contrast to the accounts that show economic flows, a balance sheet shows the stocks of assets and liabilities held at one point in time by each unit or sector or the economy as a whole.
Balance sheets are normally constructed at the start and end of an accounting period but they can in principle be constructed at any point in time.
However, stocks result from the accumulation of prior transactions and other flows, and they are modified by future transactions and other flows.
Thus stocks and flows are closely related.

2.34 The coverage of assets is limited to those assets which are subject to ownership rights and from which economic benefits may be derived by their owners by holding them or using them in an economic activity as defined in the SNA.
Consumer durables, human capital and those natural resources that are not capable of bringing economic benefits to their owners are outside the scope of assets in the SNA.

2.35 The classification of assets distinguishes, at the first level, financial and non-financial (produced and non-produced) assets (see chapter 10).
Most non-financial assets generally serve two purposes.
They are primarily objects usable in economic activity and, at the same time, serve as stores of value.
Financial assets are necessarily and primarily stores of value, although they may also fulfil other functions.

4. Products and producing units

Products

2.36 Goods and services, also called products, are the result of production.
They are exchanged and used for various purposes; as inputs in the production of other goods and services, as final consumption or for investment.
The SNA makes a conceptual distinction between market, own final use and non-market goods and services, allowing in principle any kind of good or service to be any of these three types.

Producing units

2.37 Institutional units such as corporations may produce various types of goods and services.
These goods and services result from processes of production which may differ as regards materials and supplies consumed, kind of equipment and labour employed and techniques used.
In other words, they may come from different production activities.
In order to study transactions in goods and services in detail, the SNA uses the Central Product Classification Version 2 (CPC) 2 (United Nations 2008b).

2.38 To study production and production functions in detail, it is necessary to refer to more homogeneous units.
The ideal solution would be to be able to identify and observe units that engaged in only one production activity.
As it is also necessary to give a picture of the distribution of production in space, this unit should also be in a single location or nearby sites.
In practice, it is not always feasible to distinguish units of production engaged in a single activity, and for which the necessary data are available, inside multiactivity units.
Inevitably, therefore, some secondary activities that cannot be separated are covered.
For that reason, for the detailed study of production, the SNA uses a unit which, in addition to its principal activity, may cover secondary activities.
This unit is the establishment.

2.39 Establishments that have the same principal activity are grouped into industries according to the International Standard Industrial Classification of All Economic Activities Revision 4 (ISIC, Rev.4) (United Nations, 2008a).

2.40 Given the fundamental role played by the market in modern economies, the SNA distinguishes, as an essential feature of its structure, between establishments that are market producers, producers for own final use and non-market producers.
Market establishments produce goods and services mostly for sale at prices that are economically significant.
Producers for own final use produce goods and services mostly for final consumption or fixed capital formation by the owners of the enterprises in which they are produced.
Non-market establishments supply most of the goods and services they produce without charge or at prices that are not economically significant.

2.41 There is a hierarchical relationship between institutional units and establishments.
An institutional unit contains one or more entire establishment(s); an establishment belongs to one and only one institutional unit.

5. Purposes

2.42 The concept of purpose, or function, relates to the type of need a transaction or group of transactions aims to satisfy or the kind of objective it pursues.
Transactions are first analysed in the SNA according to their nature.
Then, for certain sectors or kind of transactions, they are analysed from the expenditure side, by purpose, answering the earlier question “for what purpose?” Classification by purpose is described in the context of the supply and use tables in chapter 14.

C. Rules of accounting

1. Introduction

Terminology for the two sides of the accounts

2.43 The SNA utilizes the term resources for transactions which add to the amount of economic value of a unit or a sector.
For example, wages and salaries are a resource for the unit or sector receiving them.
Resources are by convention shown on the right-hand side of the current accounts.
The left-hand side of the accounts, which includes transactions that reduce the amount of economic value of a unit or sector, is termed uses.
To continue the example, wages and salaries are a use for the unit or sector that must pay them.

2.44 Balance sheets are presented with liabilities and net worth (the difference between assets and liabilities) on the right-hand side and assets on the left-hand side.
Comparing two successive balance sheets gives changes in liabilities and net worth and changes in assets.

2.45 The accumulation accounts and balance sheets being fully integrated, the right-hand side of the accumulation accounts is called changes in liabilities and net worth and their left-hand side is called changes in assets.
In the case of transactions in financial instruments, the changes in liabilities are often referred to as (net) incurrence of liabilities and the changes in assets as (net) acquisition of financial assets.

Change of ownership and the recording of transactions in goods and services

2.46 A good may be held and be processed by a unit that does not have title to the ownership of the good.
One example is a good given to a unit for repair.
The activity of the repairer is only the cost incurred to effect the repair and the cost of the good being repaired does not feature in the accounts of the repairer.
This is obvious and uncontroversial for every day types of repairs such as repairing shoes or a vehicle.
However, the same principle also applies when one unit processes goods on behalf of another unit.
For example, one unit may receive a set of components from another unit and return the assembled product.

2.47 Within the SNA, a distinction is made between legal ownership and economic ownership.
The criterion for recording the transfer of products from one unit to another in the SNA is that the economic ownership of the product changes from the first unit to the second.
The legal owner is the unit entitled in law to the benefits embodied in the value of the product.
A legal owner may, though, contract with another unit for the latter to accept the risks and rewards of using the product in production in return for an agreed amount that has a smaller element of risk in it. Such an example is when a bank legally owns a plane but allows an airline to use it in return for an agreed sum.
It is the airline that then must take all the decisions about how often to fly the plane, to where and at what cost to the passengers.
The airline is then said to be the economic owner of the plane even though the bank remains the legal owner.
In the accounts, it is the airline and not the bank that is shown as purchasing the plane.
At the same time, a loan, equal in value to payments due to the bank for the duration of the agreement between them is imputed as being made by the bank to the airline.

2.48 The same principle applies to goods sent abroad for processing.
If the processor is not concerned about how and where and for how much the item he is assembling is sold, the economic ownership remains with the legal owner.
Even though the goods may physically pass from one country to another, they are not treated as imports and exports because the economic ownership has not changed.

2.49 Within a large enterprise with several specialized establishments, it is not immediately obvious whether a delivery of goods from one establishment to another is to be recorded or not.
Since all the establishments have the same ownership, the distinction between economic and legal ownership needs refining.
The criterion used is to record a delivery when the receiving unit assumes the responsibility, in terms of economic risks and rewards, of the items delivered.
If the receiving unit does not accept this responsibility, for example by returning the processed items to the original sending unit, then it is only performing a service on the items and they are not recorded as being delivered from the first unit to the second.

Double entry or quadruple entry accounting

2.50 For a unit or sector, national accounting is based on the principle of double entry, as in business accounting.
Each transaction must be recorded twice, once as a resource (or a change in liabilities) and once as a use (or a change in assets).
The total of transactions recorded as resources or changes in liabilities and the total of transactions recorded as uses or changes in assets must be equal, thus permitting a check of the consistency of the accounts.
Economic flows that are not transactions have their counterpart directly as changes in net worth.
This is shown in section D below (and also in chapter 12, which describes the other changes in the volume of assets account and the revaluation account).

2.51 The implications of the double entry principle are easy to grasp in a number of cases.
A household's purchase on credit of a consumer good will appear as a use under final consumption expenditure and as an incurrence of a liability under loans.
If this good is paid for in cash, however, the picture is less simple.
The counterpart of a use under final consumption is now a negative acquisition of assets, under currency and deposits.
Other transactions are more complicated.
Output of goods is recorded as a resource in the account of a producer, its counterpart among uses is recorded as a positive change in inventories.
When the output is sold, there is a negative change in inventories, that is, a negative acquisition of non-financial assets, balanced by a positive acquisition of financial assets, for instance under currency and deposits.
In many instances, as explained earlier, the difficulty of seeing how the double entry principle applies is due to the fact that the categories of transactions in the SNA are compacted.

2.52 In principle, the recording of the consequences of an action as it affects all units and all sectors is based on a principle of quadruple entry accounting, because most transactions involve two institutional units.
Each transaction of this type must be recorded twice by each of the two transactors involved.
For example, a social benefit in cash paid by a government unit to a household is recorded in the accounts of government as a use under the relevant type of transfers and a negative acquisition of assets under currency and deposits; in the accounts of the household sector, it is recorded as a resource under transfers and an acquisition of assets under currency and deposits.
The principle of quadruple entry accounting applies even when the detailed from-whom-to-whom relations between sectors are not shown in the accounts.
Correctly recording the four transactions involved ensures full consistency in the accounts.

2.53 As noted in the introduction, the data available to the national accounts compiler may not in practice initially satisfy the consistency requirements of the SNA.
The accounts of the nation are not kept in the same way as a business unit or government, that is, by actually recording all flows occurring in a given period.
They rely on accounts of various units that are not always consistent, complete or even available.
For household accounts in particular, other statistics such as those from household surveys have to be used.
Reconciling disparate data sources within the consistency constraints imposed by the quadruple entry accounting principle is fundamental to compiling a complete set of accounts.

2. Time of recording

2.54 One implication of the quadruple entry accounting principle is that transactions, or other flows, have to be recorded at the same point of time in the various accounts in question for both units involved.
The same applies to stocks of financial assets and liabilities.

2.55 The general principle in national accounting is that transactions between institutional units have to be recorded when claims and obligations arise, are transformed or are cancelled.
This time of recording is called an accrual basis.
Transactions internal to one institutional unit are equivalently recorded when economic value is created, transformed or extinguished.
Generally speaking, all transactions, however they are described, can always be viewed as dealing with economic value.

2.56 One has thus to distinguish carefully between the point in time at which a transaction and the corresponding cash movement take place.
Even when a transaction (a purchase or sale of a good, for example) and the payment or receipt are simultaneous, the two aspects exist.
The purchaser incurs a liability, the seller acquires a claim as a counterpart of the delivery of the good.
Then the liability and the claim are cancelled by the payment.
In most cases there is a delay between the actual transaction and the corresponding payment or receipt.
In principle, national accounts record actual transactions on an accrual basis, not on a cash basis.
Conceptually national accounts follow the same principle as business accounting.

2.57 Although the principle is clear, its implementation is far from simple.
Institutional units do not always apply the same rules.
Even when they do, differences in actual recording may occur for practical reasons such as delays in communication.
Consequently, transactions may be recorded at different times by the transactors involved, sometimes even in a different accounting period.
Discrepancies exist which national accounts must eliminate by after-the-fact adjustments.
In addition, because the time at which a claim or liability arises is not always unambiguous, further implementation problems arise.
The rules and conventions adopted in the SNA for particular transactions are specified in subsequent chapters, in particular in chapter 3.

3. Valuation

General principles

2.58 It also follows from the quadruple entry accounting principle that a transaction must be recorded at the same value through all the accounts of both sectors involved.
The same principle applies to assets and liabilities.
It means that a financial asset and its liability counterpart have to be recorded for the same amount in the creditor and the debtor accounts.

2.59 Transactions are valued at the actual price agreed upon by the transactors.
Market prices are thus the basic reference for valuation in the SNA.
In the absence of market transactions, valuation is made according to costs incurred (for example, non-market services produced by government) or by reference to market prices for analogous goods or services (for example, services of owner-occupied dwellings).

2.60 Assets and liabilities are recorded at current values at the time to which the balance sheet relates, not at their original valuation.
Theoretically, national accounts are based on the assumption that the values of assets and liabilities are continuously uprated to current values, even if in fact up-rating occurs only periodically.
The appropriate valuation basis for assets and liabilities is the value at which they might be bought in markets at the time the valuation is required.
Ideally, values observed in markets or estimated from observed market values should be used.
When this is not possible, current values may be approximated for balance sheet valuation in two other ways, by accumulating and revaluing transactions over time or by estimating the discounted present value of future returns expected from a given asset (see also chapter 13).

2.61 Internal transactions are valued at current values at the time these transactions occur, not at the original valuation.
These internal transactions include entries into inventories, withdrawals from inventories, intermediate consumption and consumption of fixed capital.

Methods of valuation

2.62 Various methods exist of treating the effect of taxes on products, subsidies and trade and transport margins on the valuation of transactions on products (goods and services).

2.63 The preferred method of valuation of output is at basic prices, although producers' prices may be used when valuation at basic prices is not feasible.
The distinction is related to the treatment of taxes and subsidies on products.
Basic prices are prices before taxes on products are added and subsidies on products are subtracted.
Producers' prices include, in addition to basic prices, taxes less subsidies on products other than value added type taxes.
Thus three valuations of output may be encountered; at basic prices, at producers' prices in the absence of value added type taxes, and at producers' prices in the presence of value added type taxes.

2.64 In the same set of accounts and tables, all transactions on the uses of goods and services (such as final consumption, intermediate consumption, capital formation) are valued at purchasers' prices.
Purchasers' prices are the amounts paid by the purchasers, excluding the deductible part of value added type taxes.
Purchasers' prices are the actual costs to the users.

2.65 The various methods of valuing output, with intermediate consumption always at purchasers' prices, imply consequences for the content and uses of value added (the difference between output and intermediate consumption) by a producer, a sector or an industry.
When output is valued at basic prices, value added includes besides primary incomes due to labour and capital, only taxes less subsidies on production other than taxes less subsidies on products; when output is valued at producers' prices, value added includes taxes, less subsidies, on products other than value added type taxes (which means all taxes, less subsidies, on products when value added type taxes do not exist).
A complementary definition of value added is at factor cost, which excludes taxes on production of any kind, though this concept is not used explicitly in the SNA.

Volume measures and measures in real terms

2.66 Up until this point, only current values have been described.
In addition, the SNA includes calculation of some transactions in volume terms, that is, the use of the systems of prices which prevailed in a past period.
The changes over time in the current values of flows of goods and services and of many kinds of assets can be decomposed into changes in the prices of these goods and services or assets and changes in their volumes.
Flows or stocks in volume terms take into account the changes in the price of each item covered.
However, many flows or stocks do not have price and quantity dimensions of their own.
Their current values may be deflated by taking into account the change in the prices of some relevant basket of goods and services or assets, or the change in the general price level.
In the latter case, flows or stocks are said to be in real terms (that is, they represent values at constant purchasing power).
For example, the SNA provides for the calculation of income in real terms.
Interspatial comparisons raise similar but even more complex problems than inter-temporal comparisons because countries at different stages of development are involved.

2.67 Both inter-temporal and interspatial measures are discussed in chapter 15.

4. Consolidation and netting

Consolidation

2.68 Consolidation may cover various accounting procedures.
In general, it refers to the elimination from both uses and resources of transactions which occur between units that are grouped together and to the elimination of financial assets and the counterpart liabilities.

2.69 As a matter of principle, flows between constituent units within subsectors or sectors are not consolidated.
However, consolidated accounts may be compiled for complementary presentations and analyses.
Even then, transactions appearing in different accounts are never consolidated so that the balancing items are not affected by consolidation.
Consolidation may be useful, for example, for the government sector as a whole, thus showing the net relations between government and the rest of the economy.
This possibility is elaborated in chapter 22.

2.70 Accounts for the total economy, when fully consolidated, give rise to the rest of the world account (external transactions account).

Netting

2.71 Consolidation must be distinguished from netting.
For current transactions, netting refers to offsetting uses against resources.
The SNA does this only in a few specific instances; for example, taxes on products may be shown net of subsidies on products.
For changes in assets or changes in liabilities, netting may be envisaged in two ways.
The first case is where various types of changes in assets (for example, entries in inventories and withdrawals from inventories) or various types of liabilities (for example, incurrence of a new debt and redemption of an existing debt) are netted.
The second case is where changes in financial assets and changes in liabilities (or, in the balance sheet, financial assets and liabilities themselves) related to a given financial instrument are netted.
As a matter of principle, the SNA discourages netting beyond the degree shown in the classifications of the SNA.
Netting financial assets (changes in financial assets) against liabilities (changes in liabilities) is especially to be avoided.
Netting is discussed in chapters 3 and 11.

The use of “net”

2.72 With very few exceptions, in the SNA the term “net” is used only in connection with the balancing items of the accounts in juxtaposition to the term “gross”. The exceptions are the use of the expressions net worth, net borrowing and net lending in relation to the accumulation accounts and net premiums in the context of insurance.

D. The accounts

1. Introduction

2.73 With the tools introduced in sections B and C above, all flows and stocks can be recorded.
This is done in the accounts of the SNA.
Each account relates to a particular aspect of economic behaviour.
It contains flows or stocks and shows the entries for an institutional unit, a group of units such as a sector or the rest of the world.
Typically the entries in the account do not conceptually balance so a balancing item must be introduced.
Balancing items are meaningful measures of economic performance in themselves.
When calculated for the whole economy, they constitute significant aggregates.

2.74 The accounts can be divided into two main classes:

a. The integrated economic accounts; and

b. The other parts of the accounting structure.

2.75 The integrated economic accounts use the first three of the conceptual elements of the SNA described in section B, (institutional units and sectors, transactions and assets and liabilities) together with the concept of the rest of the world to form a wide range of accounts.
These include the full sequence of accounts for institutional sectors, separately or collectively, the rest of the world and the total economy.
The full sequence of accounts is described briefly below.
A full description of each of the accounts concerned is the subject matter of chapters 6 to 13.
The rest of the world account is described in chapter 26.

2.76 The other parts of the accounting system bring in the three other conceptual elements from section B, that is, establishments, products and purposes as well as population and employment.
The accounts covered here include the supply and use framework, which is the subject of chapter 14, population and employment tables which are described in chapter 19, the three dimensional analysis of financial transactions and stocks of financial assets and liabilities, showing the relations between sectors (fromwhom-to-whom) described in chapter 27 and functional analyses, whereby certain transactions of institutional sectors are presented according to the purpose they serve.
These appear in a number of chapters including chapter 14.

2.77 The sections following are devoted to:

a. The full sequence of accounts;

b. An integrated presentation of the accounts including the goods and services account, the accounts for the rest of the world and an examination of the aggregates of the SNA; and

c. The other parts of the accounting structure.

2. The full sequence of accounts

2.78 Before presenting the full sequence of accounts for institutional units and sectors, some preliminary remarks are useful.
The purpose of this subsection is to explain the accounting structure of the SNA in general, not to show the precise content of the accounts for each specific unit or sector.
The accounting structure is uniform throughout the SNA.
It applies to all institutional units, subsectors, sectors and the total economy.
However, some accounts may not be relevant for certain sectors.
Similarly, not all transactions are relevant for each sector and, when they are, they may constitute resources for some sectors and uses for others.

Table 2.1: The production account

2.79 Another remark relates to the way the classification of transactions is used when presenting the general structure of the accounts.
Section B above shows only the main categories of transactions, not the detailed ones which are displayed in the relevant chapters of the publication.
However, in order to make the accounts clear, it is necessary to include a number of specific transactions.
This is done by using the actual classification of transactions in the SNA at a level of detail sufficient for a good understanding of the accounts.
Definitions of these transactions are not given at this stage unless absolutely necessary but appear in subsequent chapters.

2.80 It is also worth noting that balancing items can be expressed gross or net, the difference being the consumption of fixed capital.
Conceptually, net balancing items are much more meaningful.
However, gross concepts, specifically gross aggregates, are widely used and gross accounts are often estimated more easily, accurately and promptly than the net ones.
In order to accommodate both solutions and to ease the integrated presentation of the accounts and aggregates, a double presentation of balancing items is allowed.

2.81 Finally, it has to be said that the sequence of accounts shows the accounting structure of the SNA; it is not necessarily a format for publishing the results.

The three sections of the sequence of accounts

2.82 The accounts are grouped into three categories: current accounts, accumulation accounts and balance sheets.

2.83 Current accounts deal with production, the generation, distribution and use of income.
Each account after the first starts with the balancing item of the previous one recorded as resources.
The last balancing item is saving which, in the context of the SNA, is that part of income originating in production, domestically or abroad that is not used for final consumption.

2.84 Accumulation accounts cover changes in assets and liabilities and changes in net worth (the difference for any institutional unit or group of units between its assets and liabilities).
The accounts concerned are the capital account, financial account, the other changes in the volume of assets account and the revaluation account.
The accumulation accounts show all changes that occur between two balance sheets.

2.85 Balance sheets present stocks of assets and liabilities and net worth.
Opening and closing balance sheets are included with the full sequence of accounts.
Even when balance sheets are not compiled, a clear understanding of the conceptual relationship between accumulation accounts and balance sheets is necessary if the accumulation accounts themselves are to be correctly elaborated.

The production account

2.86 The production account (shown in table 2.1) is designed to show value added as one of the main balancing items in the SNA.
Consequently, it does not cover all transactions linked with the production process, but only the result of production (output) and the using up of goods and services when producing this output (intermediate consumption).
Intermediate consumption does not cover the progressive wear and tear of fixed capital.
The latter is recorded as a separate transaction (consumption of fixed capital) which is the difference between the gross and net balancing items.

2.87 As already explained in section C, different types of valuation of output may be used according to the choice made between basic prices and producers’ prices and, in the latter case, the existence or absence of value added type taxes.
Consequently, the extent to which taxes (less subsidies) on products are included in value added differs.

Table 2.2: The generation of income account

Table 2.3: The allocation of primary income account

2.88 All institutional sectors have a production account.
However, in the production account of institutional sectors, output and intermediate consumption are shown in total only, not broken down by products.

2.89 The balancing item of the production account is value added.
Like all balancing items in the current accounts, value added may be measured gross or net.

The distribution of income accounts

2.90 The process of distribution and redistribution of income is so important that it is worth distinguishing various steps and depicting them separately in different accounts.
The distribution of income is decomposed into three main steps: primary distribution, secondary distribution and redistribution in kind.
As long as all kinds of distributive current transactions included in the SNA are actually measured, increasing the number of accounts adds very little to the work already done, but it allows the introduction of balancing items that are meaningful concepts of income.

The primary distribution of income account

2.91 The primary distribution of income account shows how gross value added is distributed to labour, capital, government and, where necessary, flows to and from the rest of the world.
In fact the primary distribution of income account is never presented as a single account but always as two sub-accounts.
The first of these is the generation of income account (shown in table 2.2) in which value added is distributed to labour (compensation of employees), capital and government (taxes on production and imports less subsidies as far as they are included in the valuation of output).
The distribution to capital appears in the balancing item in this account, operating surplus or mixed income.

2.92 The allocation of primary income account (table 2.3) shows the remaining part of the primary distribution of income.
It contains operating surplus or mixed income as a resource.
It records, for each sector, property income receivable and payable, and compensation of employees and taxes, less subsidies, on production and imports receivable by households and government, respectively.
Since transactions of this kind may appear in the rest of the world account, these must be included also.

2.93 The balancing item of the allocation of primary income account (and of the complete primary distribution of income account) is the balance of primary income.

2.94 For non-financial and financial corporations, the allocation of primary income account is further subdivided in order to show an additional balancing item, entrepreneurial income, which is closer to the concept of current profit before tax familiar in business accounting.
This balancing item and the related sub-accounts are shown in chapter 7.

The secondary distribution of income account

2.95 The secondary distribution of income account (table 2.4) covers redistribution of income through current transfers other than social transfers in kind made by government and NPISHs to households.
Social transfers in kind are recorded in the redistribution of income in kind account.
The secondary distribution of income account records as resources, in addition to balance of primary incomes, current taxes on income, wealth, etc. and other current transfers except social transfers in kind.
On the uses side, the same types of transfers are also recorded.
Since these transfers are resources for some sectors and uses for others also, their precise content varies from one sector to another.

2.96 It is worth explaining in some detail here the way social contributions are recorded in the SNA.
Although employers normally pay social contributions on behalf of their employees directly to the social insurance schemes, in the SNA these payments are treated as if they were made to employees who then make payments to social insurance schemes.
In terms of the accounts, this means that they first appear as a component of compensation of employees in the use side of the generation of income account of employers and the resource side of the allocation of primary income account of households (adjusted for external flows in compensation of employees).
They are then recorded as uses in the secondary distribution of income account of households (and possibly of the rest of the world), and as resources of the sectors managing social insurance schemes.
All employers’ social contributions follow this route.
This way of recording transactions as if they followed another course is often called “rerouting”.

2.97 The balancing item of the secondary distribution of income account is disposable income.
For households, this is the income that can be used for final consumption expenditure and saving.
For non-financial and financial corporations, disposable income is income not distributed to owners of equity remaining after taxes on income are paid.

The redistribution of income in kind account

2.98 Because of the nature of the transactions concerned, this account is significant only for government, households and NPISHs. Social transfers in kind cover two more elements in the portrayal of the redistribution process.
The first of these is non-market production by government and NPISHs of individual services and the second is the purchase by government and NPISHs of goods and services for transfer to households free or at prices that are not economically significant.
The redistribution of income in kind account (table 2.5) records social transfers in kind as resources for households and uses of government and NPISHs.

Table 2.4: The secondary distribution of income account

2.99 The purpose of this account is fourfold.
In the first place it aims at giving a clearer picture of the role of government as the provider of goods and services to individual households.
Secondly, it delivers a more complete measure of household income.
Thirdly, it facilitates international comparisons and comparisons over time when economic and social arrangements differ or change.
Fourthly, it gives a more complete view of the redistribution process between subsectors or other groupings of households.
Redistribution of income in kind is a tertiary distribution of income.

2.100 The balancing item of the redistribution of income in kind account is adjusted disposable income.

The use of income accounts

2.101 The use of income account exists in two variants, the use of disposable income account (table 2.6) and the use of adjusted disposable income account (table 2.7).
The use of disposable income account has the balancing item from the secondary distribution of income account, disposable income, as a resource.
The use of adjusted disposable income account has the balancing item from the redistribution of income in kind account, adjusted disposable income, as a resource.
Both accounts show how, for those sectors that undertake final consumption (that is, government, NPISHs and households), disposable income or adjusted disposable income is allocated between final consumption and saving.
In addition, both variants of the use of income account include, for households and for pension funds, an adjustment item for the change in pension entitlements which relates to the way transactions between households and pension funds are recorded in the SNA.
This adjustment item, which is explained in chapter 9, is not discussed here.

2.102 The difference between the resources of the two variants of the use of income account depends on which balancing item is carried down from an earlier account.
In terms of uses, the difference is between whether final consumption expenditure or actual final consumption is recorded.
The former is recorded in the use of disposable income account; the latter in the use of adjusted disposable income account.

2.103 Final consumption expenditure covers transactions in final consumption of goods and services for which a sector is the ultimate bearer of the expense.
Government and NPISHs produce non-market goods and services in their production account, where intermediate consumption and compensation of employees are recorded as uses.
Final consumption expenditure of these producers relates to the value of their output of non-market goods and services, less their receipts from the sale of non-market goods and services at prices which are not economically significant.
However, it also covers goods and services that are purchased by government or NPISHs for ultimate transfer, without transformation, to households.

2.104 Actual final consumption of households covers goods and services which are effectively available for individual consumption by households, regardless of whether the ultimate bearer of the expense is government, NPISHs or households themselves.
Actual final consumption of government and NPISHs is equal to consumption expenditure less social transfers in kind, or, in other words, collective consumption.

Table 2.5: The redistribution of income in kind account

Table 2.6: The use of disposable income account

Table 2.7: The use of adjusted disposable income account

2.105 At the level of total economy, disposable income and adjusted disposable income are equal, as are final consumption expenditure and actual final consumption.
They differ only when considering the relevant sectors.
For each sector, the difference between final consumption expenditure and actual final consumption is equal to social transfers in kind, provided or received.
It is also equal to the difference between disposable income and adjusted disposable income.
Thus the figures for saving are the same in both variants of the use of income account as income on the resources side and consumption on the uses side differ by the same amount.

2.106 The balancing item of the use of income account, in its two variants, is saving.
Saving ends the subsequence of current accounts.

The accumulation accounts

2.107 Saving, being the balancing item of the last current account is the starting element of accumulation accounts.

2.108 A first group of accounts covers transactions which would correspond to all changes in assets or liabilities and net worth if saving and capital transfers were the only sources of changes in net worth.
The accounts concerned are the capital account and the financial account.
These two accounts are distinguished in order to show a balancing item which is useful for economic analysis, that is, net lending or net borrowing.

2.109 A second group of accounts relates to changes in assets, liabilities and net worth due to other factors.
Examples are discoveries or depletion of subsoil resources, destruction by political events, such as war, or by natural disasters, such as earthquakes.
Such factors actually change the volume of assets, either physically or quantitatively.
Other changes in assets may also be linked with changes in the level and structure of prices.
In the latter case, only the value of assets and liabilities is modified, not their volume.
Thus the second group of accumulation accounts is subdivided between an account for other changes in volume of assets and an account for revaluation.

The capital account

2.110 The capital account (table 2.8) records transactions linked to acquisitions of non-financial assets and capital transfers involving the redistribution of wealth.
The right-hand side includes saving, net, and capital transfers receivable and capital transfers payable (with a minus sign) in order to arrive at that part of changes in net worth due to saving and capital transfers.
The capital account includes among uses the various types of investment in non-financial assets.
Because consumption of fixed capital is a negative change in fixed assets, it is recorded, with a negative sign, on the left-hand side of the account.
Recording gross fixed capital formation less consumption of fixed capital on the same side is equivalent to recording net fixed capital formation.

2.111 The balancing item of the capital account is called net lending when positive and measuring the net amount a unit or a sector finally has available to finance, directly or indirectly, other units or sectors, or net borrowing when negative, corresponding to the amount a unit or a sector is obliged to borrow from others.

Table 2.8: The capital account

Table 2.9: The financial account

The financial account

2.112 The financial account (table 2.9) records transactions in financial instruments for each financial instrument.
These transactions in the SNA show net acquisition of financial assets on the left-hand side or net incurrence of liabilities on the right-hand side.

2.113 The balancing item of the financial account is again net lending or net borrowing, which appears this time on the right-hand side of the account.
In principle, net lending or net borrowing is measured identically in both the capital and financial accounts.
In practice, achieving this identity is one of the most difficult tasks in compiling national accounts.

The other changes in the volume of assets account

2.114 The other changes in the volume of assets account (table 2.10) records the effect of exceptional events that cause not only the value but also the volume of assets and liabilities to vary.
In addition to the kind of events referred to above, such as the consequences of war or earthquakes, this account also includes some adjustment elements such as changes in classification and structure which may or may not have an influence on net worth (see chapter 12).
The balancing item, changes in net worth due to other changes in the volume of assets, is recorded on the right-hand side.

The revaluation account

2.115 The revaluation account (table 2.11) records holding gains or losses.
It starts with nominal holding gains and losses.
This item records the full change in value of the various assets or liabilities due to the change in the prices of those assets and liabilities since the beginning of the accounting period or the time of entry into stock and the time of exit from stock or the end of the accounting period.

2.116 Just as transactions and other flows in assets appear on the left of the account and transactions in liabilities on the right, so nominal gains or losses on assets appear on the left-hand side of the revaluation account, while nominal gains and losses on financial liabilities are recorded on the right-hand side.
A positive revaluation of financial liabilities is equivalent to a nominal holding loss; a negative revaluation of liabilities is equivalent to a nominal holding gain.

Table 2.10: The other changes in the volume of assets account

Table 2.11: The revaluation account

2.117 The balancing item of the revaluation account is changes in net worth due to nominal holding gains and losses.

2.118 Nominal holding gains and losses are subdivided between two components.
The first shows the revaluation in proportion to the general price level which is obtained by applying, during the same periods of time, an index of the change in general price level to the initial value of all assets or liabilities, even to those that are fixed in monetary terms.
The results of this operation are called neutral holding gains and losses because all assets and liabilities are revalued so as to preserve exactly their purchasing power.

2.119 The second component of holding gains and losses shows the difference between nominal holding gains and losses and neutral holding gains and losses.
This difference is called real holding gains and losses.
If the nominal holding gains and losses are higher than the neutral holding gains and losses, there is a real holding gain, due to the fact that on average the actual prices of the assets in question have increased more (or decreased less) than the general price level.
In other words, the relative prices of its assets have increased.
Similarly, a decrease in relative prices of assets leads to a real holding loss.

2.120 Each of the three types of holding gains or losses are subdivided according to the main groups of assets and liabilities, a decomposition which is necessary even in a simplified accounting presentation.
Changes in net worth due to nominal holding gains and losses can be subdivided into changes due to neutral holding gains and losses and changes due to real holding gains and losses.

Balance sheets

2.121 The opening and closing balance sheets (table 2.12), display assets on the left-hand side, liabilities and net worth on the right-hand side.
Assets and liabilities, as previously explained, are valued at the prices of the date a balance sheet is established.

2.122 The balancing item of a balance sheet is net worth, the difference between assets and liabilities.
Net worth is equivalent to the present value of the stock of economic value a unit or a sector holds.

2.123 The changes in the balance sheet recapitulate the content of the accumulation accounts, that is, the entry for each asset or liability is the sum of the entries in the four accumulation accounts corresponding to that asset or liability.
The changes in net worth can be calculated from these entries but must by definition be equal to the changes in net worth due to saving and capital transfers from the capital account plus changes in net worth due to other changes in the volume of assets from the other changes in the volume of assets account plus nominal holding gains and losses from the revaluation account.

2.124 Conceptually, the entries for the closing balance sheet are equal, asset by asset and liability by liability to the entries in the opening balance sheet plus the changes recorded in the four accumulation accounts.

3. An integrated presentation of the accounts

2.125 It is now possible to put together the various elements which have been introduced in the previous subsections and to present in detail the integrated economic accounts. Table 2.13 gives a simplified version of the integrated current accounts.
It is formed by taking each of tables 2.1, 2.2, 2.3, 2.4 and 2.6 and placing them immediately one under the other.
In this presentation the transactions and other flows are shown in the middle of the table with columns to the left for the uses and columns to the right for resources.
In a full presentation of this type there would be one column for each sector or subsector of interest.
In the interest of introducing the table in a simple manner, only four columns are shown in table 2.13.
The first of these represents the sum of all the five sectors of the total economy (nonfinancial corporations, financial corporations, general government, NPISHs and households).
There follows a column for the rest of the world, then one headed goods and services and the last is a column representing the sum of the previous three.
This column has little economic meaning but is a critical way of ensuring that the tables are complete and consistent since the totals on the left-hand side and right-hand side of the accounts must be equal line by line.
(When balancing items are shown as the last item in one account and the first in the next account, this equality is misaligned but still obvious.)

2.126 Table 2.14 shows the continuation of the integrated accounts, including the accumulation accounts and balance sheets as previously presented in tables 2.8, 2.9, 2.10, 2.11 and 2.12.
Here the columns to the left represent assets or changes in assets and columns to the right liabilities or changes in liabilities and net worth.
Together tables 2.13 and 2.14 make up the integrated economic accounts.
The data in the two tables are drawn from the numerical example that runs through the entire publication.
The tables for each account in chapters 6 to 13 are expanded versions of the tables shown here with columns for all institutional sectors and a full set of transactions and other flows for each of these accounts.
A composite version of the tables, with all the details just mentioned, appears in Annex 2.

2.127 The integrated economic accounts give a complete picture of the accounts of the total economy including balance sheets, in a way that permits the principal economic relations and the main aggregates to be shown.
This table shows, simultaneously, the general accounting structure of the SNA and presents a set of data for the institutional sectors, the economy as a whole and the rest of the world.

2.128 The presentation of the integrated accounts in this form is one of several ways in which a bird's eye view of the accounts can be obtained.
Another way is by means of a diagram such as figure 2.1, which gives the same information in schematic form.

2.129 The integrated economic accounts provide an overview of the economy as a whole.
As already indicated, the integrated presentation contains much more detail than has actually been included in the tables and may be used to give a more detailed view if so desired.
Columns might be introduced for subsectors.
The rest of the world column can be subdivided according to various geographical zones.
The column for goods and services may show market goods and services separately.
The classification of transactions in the rows might be used at more detailed levels, and so on. However, including more detail directly in this scheme at the same time would result in a very complicated and unmanageable table.
For this reason, more detailed analysis of production and transactions in goods and services, transactions in financial instruments, detailed balance sheets, as well as analysis by purpose are done in other frameworks.
These are presented in the next section and their links with the integrated economic accounts are also explained.

The rest of the world accounts

2.130 The rest of the world account covers transactions between resident and non-resident institutional units and the related stocks of assets and liabilities where relevant.

2.131 As the rest of the world plays a role in the accounting structure similar to that of an institutional sector, the rest of the world account is established from the point of view of the rest of the world.
A resource for the rest of the world is a use for the total economy and vice versa.
If a balancing item is positive, it means a surplus of the rest of the world and a deficit of the total economy, and vice versa if the balancing item is negative.

2.132 The external account of goods and services is shown at the same level as the production account for institutional sectors.
Imports of goods and services (499) are a resource for the rest of the world, exports (540) are a use.
The external balance of goods and services is (-41).
With a positive sign, it is a surplus of the rest of the world (a deficit of the nation) and vice versa.
To this are added or deducted the various kinds of taxes, compensation of employees and other current transfers payable to, and receivable from, the rest of the world.
The current external balance is -32, indicating a deficit for the rest of the world but a surplus for the total economy.
Again, if it had a positive sign, it would be a surplus of the rest of the world (a deficit of the total economy).

The goods and services account

2.133 As noted above, the integrated presentation of the account includes a column on each side labelled goods and services.
Entries in these columns reflect the various transactions in goods and services that appear in the accounts of the institutional sectors.
Uses of goods and services in the institutional sectors accounts are reflected on the right-hand column for goods and services; resources of goods and services in the institutional sectors accounts are reflected on the left-hand column for goods and services.
On the resources side of the table, the figures appearing in the column for goods and services are the counterparts of the uses made by the various sectors and the rest of the world: exports (540), intermediate consumption (1 883), final consumption (1 399), gross fixed capital formation (376), changes in inventories (28) and acquisitions less disposals of valuables (10).
On the use side of the table, the figures in the column for goods and services are the counterparts of the resources of the various sectors and the rest of the world: imports (499) and output (3 604).
Taxes on products (less subsidies) are also included on the resource side of the accounts.
The coverage of this item varies according to the way output is valued (see the discussion on valuation in section C).
The part (possibly the total) of taxes on products (less subsidies on products), that is not included in the value of output does not originate in any specific sector or industry; it is a resource of the total economy.
In the numerical example taxes, less subsidies, on products (133) are shown directly in the column for goods and services.
They are a component of the value of the supply of goods and services which has no counterpart in the value of the output of any institutional sector.

2.134 The goods and services account is a particularly important account as it forms the basis of the most familiar definition of GDP. Table 2.15 shows the account in the same format as earlier tables in the chapter (though with numeric values included).

Table 2.12: The opening balance sheet, changes in assets and liabilities and closing balance sheet

Table 2.13: The integrated presentation of the full sequence of the current accounts

Table 2.14: The integrated presentation of the full sequence of the accumulation accounts and balance sheets

Figure 2.1: Diagram of the integrated accounts for the total economy

The aggregates

2.135 The aggregates of the SNA, such as value added, income, consumption and saving, are composite values which measure one aspect of the activity of the entire economy.
They are summary indicators and key magnitudes for purposes of macroeconomic analysis and comparisons over time and space.
The SNA aims to provide a simplified but complete and detailed picture of complex economies, so the calculation of the aggregates is neither the sole nor the main purpose of national accounting; nevertheless summary figures are very important.

2.136 Some aggregates may be obtained directly as totals of particular transactions in the SNA; examples are final consumption, gross fixed capital formation and social contributions.
Others may result from aggregating balancing items for the institutional sectors; examples are value added, balance of primary incomes, disposable income and saving.
They may need some further elaboration.
However, some of them are so commonly used that they deserve additional explanation at this early stage.

2.137 An overview of the aggregates in the SNA and the accounts in which they appear is given in figure 2.2.

Gross domestic product (GDP)

2.138 Basically, GDP derives from the concept of value added.
Gross value added is the difference between output and intermediate consumption.
GDP is the sum of gross value added of all resident producer units plus that part (possibly the total) of taxes on products, less subsidies on products, that is not included in the valuation of output.

2.139 Next, GDP is also equal to the sum of the final uses of goods and services (all uses except intermediate consumption) measured at purchasers’ prices, less the value of imports of goods and services.

2.140 Finally, GDP is also equal to the sum of primary incomes distributed by resident producer units.

Net and gross measures

2.141 In principle, the concept of value added should exclude the allowance for consumption of fixed capital.
The latter, in effect, is not newly created value, but a reduction in the value of previously created fixed assets when they are used up in the production process.
Thus, theoretically, value added is a net concept.
This conclusion applies to domestic product as well; theoretically, domestic product should be a net concept.
Net domestic product (NDP) is obtained by deducting the consumption of fixed capital from GDP.

2.142 However, gross measures of product and income are commonly used for various reasons.
The depreciation of fixed assets as calculated in business accounting does not generally meet the requirements of the SNA.
The calculation of consumption of fixed capital requires that statisticians estimate the present value of the stock of fixed assets, the lifetime of various types of assets, patterns of depreciation, etc.
Not all countries make such calculations, and when they do there may be differences in methodology (with some of them using business data even when inadequate).
Consequently, gross figures are more often available, or available earlier, and they are generally considered more comparable between countries.
So GDP is broadly used even if it is, on a conceptual basis, economically inferior to NDP.
However, NDP should also be calculated, with improved estimates of consumption of fixed capital when necessary, in order to provide a significant tool for various types of analysis.

Gross national income (GNI)

2.143 Primary incomes generated in the production activity of resident producer units are distributed mostly to other resident institutional units; however, part of them may go to non-resident units.
Symmetrically, some primary incomes generated in the rest of the world may come from resident units.
This leads to the definition and measurement of gross national income (GNI).
GNI is equal to GDP less primary incomes payable to non-resident units plus primary incomes receivable from non-resident units.
In other words, GNI is equal to GDP less taxes (less subsidies) on production and imports, compensation of employees and property income payable to the rest of the world plus the corresponding items receivable from the rest of the world.
Thus GNI is the sum of gross primary incomes receivable by resident institutional units or sectors.
In contrast to GDP, GNI is not a concept of value added, but a concept of income.

2.144 By deducting the consumption of fixed capital from GNI, net national income (NNI) is obtained.
The remarks above about the conceptual relevance of the net concept in case of product apply even more strongly to national income.

Table 2.15: The goods and services account

National disposable income

2.145 Primary incomes receivable by resident institutional units may be used in part to make transfers to non-resident units and resident units may receive transfers originating out of primary incomes in the rest of the world.
Gross national disposable income is equal to GNI less current transfers (other than taxes, less subsidies, on production and imports) payable to non-resident units, plus the corresponding transfers receivable by resident units from the rest of the world.
Gross national disposable income measures the income available to the total economy for final consumption and gross saving.
By deducting the consumption of fixed capital from gross national disposal income, net national disposable income is obtained.
National disposable income is the sum of disposable income of all resident institutional units or sectors.

Accounts in volume terms

2.146 All the aggregates referred to above are calculated in current values.
The influence of changes in prices may also be eliminated.
Domestic product is calculated in volume terms in order to measure the real change that occurs from one period to another.
This is possible because output, intermediate consumption and taxes on products, less subsidies on products can all be calculated in volume terms.
On the other hand, aggregates of income may not be expressed in volume terms because income flows may not, strictly speaking, be broken down into a quantity and a price component.
They may, however, be calculated at constant purchasing power, which is described as being in real terms.
When moving from domestic product in volume terms to national income in real terms, the effect of changes in the terms of trade between the total economy and the rest of the world must be taken into account.
The necessary adjustment is described in chapter 15.

4. The other parts of the accounting structure

The central supply and use table and other input-output tables

2.147 The detailed analysis of production by industries and flows of goods and services by kind of products is an integral part of the integrated central framework.
It would be feasible to include further details in the integrated economic accounts table; for example, the rows for output, intermediate consumption and value added might be subdivided by kind of economic activity; the columns for goods and services might be subdivided by type of products.
However, the SNA does not adopt this solution, because the table would become cumbersome.
Instead, tables that provide a systematic cross-classification by institutional sectors and industries of output, intermediate consumption, and value added and its components are proposed.
They are described in detail in chapters 14 and 28 but the main features are outlined here.

Figure 2.2: Summary of the main accounts, balancing items and main aggregates

2.148 The production and generation of income accounts in the integrated economic accounts are given only by institutional sectors and with a global balance of transactions on goods and services.
The detailed analysis of production activities and product balances is made in the supply and use tables presenting:

a. The resources and uses of goods and services for each type of product;

b. The production and generation of income accounts for each industry according to kind of economic activity;

c. Data on factors of production (labour and fixed capital) used by industries.

The tables of financial transactions and financial assets and liabilities

2.149 The integrated economic accounts show which sectors acquire which financial assets and incur which liabilities.
In order to examine the working of the financial sector, the first expansion of the financial account is to distinguish nine subsectors within financial corporations and eight categories of financial assets and liabilities.
The subsectors of financial institutions are discussed in chapter 4 and the details of the financial instruments are described in chapter 11.

2.150 However, as explained in the introduction to this chapter, the presentation of the financial account as described in this chapter even with the elaboration of subsectors and financial instruments described in chapters 4 and 11, is still not fully articulated.
It shows which sectors and subsectors incur loans and make deposits but it does not allow an in-depth examination of the intermediation process whereby a financial institution draws in funds, repackages them and issues them as other instruments to other units.
In order to explore this, a three-dimensional “from-whom-to-whom” style of presentation is needed.
This is sometimes referred to as a flow of funds matrix.
The three-dimensional table of financial transactions is usually presented as a series of matrices, one matrix for each kind of financial instrument showing the flows from one sector to another.

2.151 As such a presentation is not necessarily useful for actually presenting the data, other presentations may be preferred in practice for publication.
For example, a table showing each type of financial asset cross-classified by debtor sector and each type of liability cross-classified by creditor sectors may be considered.
As compared to the presentation of the financial accounts made in the integrated economic accounts, this means, in short, introducing a sector distinction below headings of financial instruments when relevant.
(For a more complete explanation see chapter 27.)

Complete balance sheets and assets and liabilities accounts

2.152 In the integrated economic accounts, balance sheets are presented in a very aggregated way.
For each sector or subsector more complete balance sheets may be built up using the detailed classification of assets and liabilities when appropriate.
Changes in assets and liabilities for each sector may also be analysed for each type of asset and liability and each source of change.

2.153 In addition, three-dimensional tables may be elaborated showing the “from-whom-to-whom” links for each type of financial instrument, to permit better analysis.
The presentation of such tables is exactly the same as for tables of financial transactions except that the stock of assets or liabilities is shown instead of changes in assets or liabilities and the net financial position of each sector appears instead of its net lending or borrowing.
These tables closely follow the principles for the similar flow tables and are also described in chapter 27.

Functional analysis

2.154 As explained in section B, the description of a transaction explains what type of flow is being recorded but it does not explain why the transaction is being entered into.
In order to analyse the purpose of transactions, it is necessary to apply a functional classification to the basic transaction.
For example, instead of disaggregating household consumption by type of product, it may be disaggregated to show how much is spent on food, housing, health, recreation and so on. For government consumption a distinction may be made between consumption related to law and order, defence, health or education, for instance.
As compatible but different classifications are used according to the sector concerned, these partial analyses by purpose cannot be integrated in a single table and, in most cases, no exhaustive total for the total economy can be calculated in the central framework.

2.155 Another way of looking at function may be to identify all expenditure related to a particular functional activity, such as, for example, environmental protection.
This is not (yet) an area where all relevant expenditures are easily identified and so it may be desirable to develop this further outside the central framework in a satellite account.

Population and labour inputs tables

2.156 A dimension is added to the usefulness of a number of national accounts aggregates by calculating these figures per head.
For broad aggregates such as GDP, GNI or household final consumption, the denominator commonly used is the total (resident) population.
When subsectoring the accounts or part of the accounts of the household sector, data on the number of households and the number of persons in each subsector are also necessary.

2.157 In productivity studies, data on the labour inputs used by each industry in the process of production are indispensable.
Total hours worked is the preferred measure of labour inputs for the SNA.
Inferior alternatives are full-time equivalent jobs, the number of jobs or the number of persons employed.

2.158 Data on population and labour inputs must generally be adjusted in order to be consistent with the concepts, definitions and classifications of the SNA.
The resulting tables are an integral part of the SNA and are explained in chapter 19.

E. The integrated central framework and flexibility

1. Applying the central framework in a flexible way

2.159 The central framework of the SNA is consistent in terms of its concepts and its accounting structure.
Links between the various elements of the integrated SNA have been illustrated in order to depict its structure in a simple but complete way.
That presentation does not imply any order of priority or frequency (quarterly, annually, etc.) for implementing national accounts.
Priorities in compiling national accounts are a matter of statistical policy; no universal recommendation can be made.
(Some indications relevant to specific circumstances are provided in relevant handbooks.)
Similarly, the accounting structure does not imply that results always have to be presented exactly as they stand in this or other chapters.
A country may choose to publish mainly time series, to prepare only some accounts or aggregates, etc.

2.160 In general, the SNA has to be looked at in a consistent but flexible way.
According to analytical requirements and data availability, the attention paid to various aspects of the central framework may vary.
In general, greater emphasis may be given to one part rather than another by choosing the level of disaggregation to adopt for classifications of institutional sectors, industries, products, transactions, sequence of accounts, etc., by using different methods of valuation; by using different priorities for various parts of the accounts and different frequencies; by rearranging the results; by introducing some additional elements, etc.

2.161 The household sector provides a good illustration of what may be done in order to provide an in-depth analysis of the household conditions and the functioning of the economy as a whole.
A detailed approach to the household sector may be undertaken, first of all, by deconsolidating the household sector beyond the subsectors included in the main classification of the SNA, distinguishing, for instance, the type of economic activity carried out (formal or informal), the location of the household (urban or rural) or the level of skill.
Secondly, it is possible to adapt the way household activities are portrayed in the sequence of accounts.
For instance, a concept of discretionary income may be used by excluding from disposable income those elements which are provided in kind and for which the household has no choice on how to spend this part of income, or the classification of household transactions may be complemented, to show the industry of origin of various types of income, and so on.

2.162 The flexibility of the SNA is further illustrated with the public sector, whose components are systematically shown at various levels of detail in the classification of institutional sectors.
The components of the public sector may be rearranged to group the accounts of the overall public sector.
These accounts may be shown before consolidation and after consolidation to describe the relations between the public sector and the private sector and between the public sector and the rest of the world (by separating out the external transactions of the public sector).

2.163 Chapters 21-29 provide more detailed analyses of the above examples.
They also present illustrations of the flexible uses of the central framework in the field of key sector accounting, external accounts problems and the informal economy.

2. Introducing social accounting matrices

2.164 A social accounting matrix (SAM) is a presentation of the SNA in matrix terms that permits the incorporation of extra details of special interest.
To date, builders of SAMs have exploited the flexibility to highlight special interests and concerns such as disaggregating the household sector to show the link between income generation and consumption.
The power of a SAM, as well as of the SNA, comes from choosing the appropriate type of disaggregation to study the topic of interest.
In addition to a flexible application, SAMs may incorporate more extensive adjustments, which are of a satellite accounting nature, in order to serve specific analytical purposes.
For further explanation of the matrix presentation and SAMs, see chapters 28 and 29.

3. Introducing satellite accounts

2.165 In some cases, working with the central framework, even in a flexible way, is not sufficient.
Even when conceptually consistent, the central framework may become overburdened with details.
Moreover, some requirements may conflict with the concepts and architecture of the central framework.

2.166 In some types of analysis, the basic intention is not to use alternative economic concepts, but simply to focus on a certain field or aspect of economic and social behaviour in the context of national accounts.
The intent is to make apparent and to describe in more depth aspects that are hidden in the accounts of the central framework or surface only to a limited extent.
Tourism is a good example.
Various aspects of producing and consuming activities connected with tourism may appear in detailed classifications of activities, products and purposes.
However, transactions and purposes specific to tourism appear separately in only a few cases.
In order to describe and measure tourism in a national accounts framework, it is necessary to make a choice between two approaches: either subdivide many elements in the accounts of the central framework to get the required figures for tourism and pay the price of overburdening and unbalancing the various components of the accounts, or elaborate a specific framework for tourism.
The latter approach also allows adaptation of the various classifications and measurement of additional aggregates, such as national expenditure on tourism, which may cover intermediate as well as final consumption.

2.167 In other types of analysis, more emphasis is given to alternative concepts.
For instance, the production boundary may be changed, generally by enlarging it, for example, the production of domestic services by members of the household for their own final consumption may be brought within the production boundary.
The concept of fixed assets and the related fixed capital formation may be broadened, by covering consumer durables or human capital.
It is also possible in environmental accounting to record the relationships between natural resources and economic activities differently by recording the depletion and the degradation of subsoil or other natural resources.
In these approaches, the economic process itself is depicted differently and complementary or alternative aggregates are calculated.
The analysis of a number of important fields such as social protection, health or the environment may benefit from building a framework to accommodate elements which are included in the central accounts, explicitly or implicitly, plus complementary elements (either monetary or in physical quantities) possibly as well as alternative concepts and presentations.
In all cases, however, the links with the central framework are made explicit; there are a number of common elements and any contradictory features are introduced, not by chance, but after explicitly considering various ways of looking at reality.

2.168 Those special constructs, which are consistent with but not fully integrated the central framework, are called satellite accounts and are described in more detail in chapter 29.

Chapter 3: Stocks, flows and accounting rules

A. Introduction

3.1 The SNA is a system of accounts designed to measure stocks of, and changes in, economic value and to identify the person, group of persons, legal or social entity with claims on the economic value.
This chapter discusses the concept of stocks of economic value, the flows that reflect changes in economic value and the accounting rules applied to the recording of stocks and flows.
In order to portray stocks and flows in an accounting system, it is necessary to identify the parties with a claim to economic value measured in stocks or affected by flows.
These parties are the persons, groups of persons, legal and social entities already referred to. They are described as institutional units in the SNA and are grouped into institutional sectors according to their economic objectives, functions and behaviour.
Units and sectors are the subject of chapter 4.

3.2 Stocks measure economic value at a point in time.
Flows measure changes in economic value over a period of time.
Stocks appear in the balance sheets and related tables (and, for certain stocks, with the use table in an input-output context).
Flows appear in all the other accounts and tables of the SNA.
The flow accounts in the full sequence of accounts for institutional sectors consist of the current accounts, which deal with production, income and use of income, and the accumulation accounts, which show all changes between two balance sheets.

3.3 In order to have a system that is complete and consistent, all changes in economic value between stock measures at two points in time must be captured in flows.
The first requirement in specifying the accounting conventions is thus to define precisely what is meant by stocks and flows.
Once that is done, the rules to set the changes in economic value within an accounting system need to be specified.
These rules are defined so as to ensure that the SNA is consistent in terms of value, time of recording and classification.

1. Stocks and flows

3.4 Stocks are a position in, or holdings of, assets and liabilities at a point in time.
The SNA records stocks in accounts, usually referred to as balance sheets, compiled in respect of the beginning and end of the accounting period.
However, stocks are connected with flows: they result from the accumulation of prior transactions and other flows, and they are changed by transactions and other flows in the period.
They result in fact from a continuum of entries and withdrawals, with some changes in volume or in value occurring during the time a given asset or liability is held.

3.5 An asset is a store of value representing a benefit or series of benefits accruing to the economic owner by holding or using the entity over a period of time.
It is a means of carrying forward value from one accounting period to another.
Assets may be financial in nature or not.
For almost all financial assets, there is a corresponding [financial] liability.
A liability is established when one unit (the debtor) is obliged, under specific circumstances, to provide a payment or series of payments to another unit (the creditor).
An elaboration of these definitions and the concepts embodied in them as well as a typology of the different assets and liabilities in the SNA is given in section B of this chapter.

3.6 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.
Mirroring the diversity of the economy, economic flows have specific natures as wages, taxes, interest, capital flows, etc., that record the ways in which a unit's assets and liabilities are changed.

3.7 Economic flows consist of transactions and other flows.
A transaction is 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.
The value of an asset or a liability may be affected by economic flows that do not satisfy the requirements of a transaction.
Such flows are described as “other flows”.
Other flows are changes in the value of assets and liabilities that do not result from transactions.
Examples are losses due to natural disasters and the effect of price changes on the value of assets and liabilities.

3.8 There is a discussion of the different types of economic flows in section C of this chapter.

2. Balancing items

3.9 Economic flows are grouped together into accounts with outflows (which may be called debit entries, uses or changes in assets) on the left-hand side and inflows (credit entries, resources, or changes in liabilities or net worth) on the right-hand side.
A balancing item is an accounting construct obtained by subtracting the total value of the entries on one side of an account (resources or changes in liabilities) from the total value of the entries on the other side (uses or changes in assets).
It cannot be measured independently of the entries in the accounts; as a derived entry, it reflects the application of the general accounting rules to the specific entries on the two sides of the account.
There is also a balancing item for the balance sheet where the difference between assets and liabilities is known as net worth.

3.10 Balancing items are constructed because they convey interesting economic information.
Many of the key aggregates of the SNA including GDP actually emerge as balancing items.
Balancing items are discussed in section D.

3. Grouping stocks and flows into accounts

3.11 The accounts and tables of the SNA contain information relating to the economic actions or events that take place within a given period of time and the effect of these events on the stocks of assets and liabilities at the beginning and end of that period.

3.12 The flows and stocks are grouped according to the classification hierarchy of the SNA, shown in annex 1.
The classification of transactions and other flows has five headings at the highest level, dealing with transactions in products, transactions showing how income is distributed and redistributed within the SNA, transactions in nonproduced assets, financial assets and liabilities, and other accumulation entries.
In the accumulation accounts, the hierarchy may show both the transaction and the type of asset it applies to.

3.13 The flows and stocks are entered in the accounts of the institutional units involved and thus in the accounts of the sectors into which the institutional units are grouped.
Institutional units and sectors are the subject of chapter 4.
In general, flows and stocks are entered in the accounts of the institutional units that own or owned the goods and assets involved, in the accounts of units that deliver or take delivery of services, or in the accounts of units that provide labour and capital or use them in production.
For some purposes, an institutional unit participating in production is viewed as one or more establishments and establishments may be grouped into industries.
Establishments and industries are defined and discussed in chapter 5.

4. Accounting rules

3.14 All entries in the accounts have to be measured in terms of money, and therefore the elements from which the entries are built up must be measured in terms of money.
In some cases, the amounts entered are the actual payments that form part of flows that involve money; in other cases the amounts entered are estimated by reference to actual monetary values.
Money is thus the unit of account in which all stocks and flows are recorded.

3.15 In principle, any lapse of time may be chosen as the accounting period.
Periods that are too short have the disadvantage that statistical data are influenced by incidental factors, while long periods do not adequately portray changes going on in the economy.
Merely seasonal effects can be avoided by having the accounting period cover a whole cycle of regularly recurrent economic phenomena.
Most business and government accounting refers to complete years.
In general, calendar or financial years or quarters are best suited for drawing up a full set of national accounts.

3.16 The SNA covers all economic activity in such a way that it is possible to derive accounts for individual groups of units or for all units in the economy.
To permit this, the accounting rules ensure consistency with respect to valuation, timing, classification and grouping of flows and stocks.
These rules are summarized below to provide a context for the discussion of the nature of stocks, flows, and balancing items in sections B, C and D.

a. Flows and stocks must be recorded consistently with respect to their valuation.
Entries are at current value on the market (that is, the amount agreed upon by two parties) or at its closest equivalent.
The value on the market may need to be adjusted to the coverage of the flow or stock as defined in the SNA and expressed appropriately given the nature of the flow or stock with respect to taxes and subsidies on products, transport costs and trade margins.

b. Flows and stocks must be recorded consistently with respect to timing.
Flows are recorded at the moment of accrual within the accounting period (that is, the moment economic value is created, transformed, exchanged, transferred or extinguished).
Stocks are recorded at the moment to which the account relates, typically the beginning or end of the accounting period.

c. Individual flow and stock entries must be recorded consistently with respect to their classification, both in respect of the categories in the classifications of transactions, other flows and assets and the categories in the classification of transactors as (sub)sectors or industries.

d. Depending on the character of the entry, a distinction should be made between resources and uses or between assets and liabilities.
In the process of grouping, netting is implicit for several items, but consolidation is not advised.

3.17 The basic accounting framework of the SNA is one of quadruple accounting.
This implies that a transaction gives rise to two entries for each party to the transaction.
There is vertical consistency within each unit and horizontal consistency between the two units for each type of entry.
The principles of quadruple accounting are explained in more detail in section E in this chapter.

B. Stocks

3.18 Stocks relate to the total level of assets or liabilities in an economy at a point of time.
(In balance of payments methodology, the levels of stocks are referred to as positions.)
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.
Once the definitions are clear, the way in which assets and liabilities are classified within a balance sheet are touched on as well as the way in which items enter and leave the balance sheet.

1. Benefits

3.19 The heart of the SNA describes how labour, capital and natural resources including land are used to produce goods and services.
These goods and services are used for the three economic activities recognized in the SNA, production, consumption and accumulation.
An economic benefit is defined as denoting a gain or positive utility arising from an action.
It implies a comparison between two states.
This can be elaborated within the SNA so that benefits are seen as rewards for providing services, such as those of labour and capital to production and also the means of acquiring goods and services for production, consumption or accumulation in the current period or in future periods.

3.20 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 have to be recognized.
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.

2. Ownership

3.21 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.

3.22 Sometimes government may claim legal ownership of an entity on behalf of the community at large.
No entity that does not have a legal owner, either on an individual or collective basis, is recognized in the SNA.

3.23 The acts of production, consumption and accumulation involve varying degrees of risk.
Two main forms of risk can be identified.
The first sort refers to production.
These arise because of such uncertainties as the demand for goods and services once produced, developments in the economy in general and technical innovation that affects the benefits to be earned from capital and natural resources.
The consequence is that benefits from capital, natural resources and labour in the form of operating surplus and income from employment are not wholly predictable in advance, but embody a degree of risk.

3.24 The second type of risk refers to the process of transferring benefits between time periods.
It arises because of uncertainty over interest rates in future periods, which in turn affects the comparative performance of different types of benefits.

3.25 When economic agents make decisions about consumption or accumulation, they have to make a judgement about the relative advantages of benefits being converted to goods and services in the current period as against conversion in a later period.
Thus all economic activity involves both benefits and risks.
Transferring benefits between time periods inevitably involves transferring risks also.
An agent may opt for a lower but more certain benefit in future rather than a benefit that might be higher but is less certain.
Of particular interest is the case when an agent swaps benefits and risks associated with production with those associated with financial assets and liabilities.

3.26 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.

3.27 Every entity 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.
Part 5 of chapter 17, on contracts, leases and licences, discusses a number of cases where legal and economic ownership are different.

3.28 When government claims legal ownership of an entity on behalf of the community at large, the benefits also accrue to the government on behalf of the community at large.
Thus government is both the legal and economic owner of these entities.

3.29 The benefits inherent in financial assets and liabilities are seldom transferred from a legal owner to an economic owner in exactly the same state.
They are usually transformed to new forms of financial assets and liabilities by the intermediation of a financial institution that assumes some of the risk and benefits while passing the balance on to other units.

3. The definition of an asset

3.30 Leading on from the above it is possible to define an asset as follows.
An asset is a store of value representing a benefit or series of benefits accruing to the economic owner by holding or using the entity over a period of time.
It is a means of carrying forward value from one accounting period to another.

3.31 All assets in the SNA are economic assets.
Attributes such as reputation or skill, which are sometimes described in common parlance as an asset, are not recognized as such in the SNA because they are not economic in nature in the sense described under ownership.

4. Financial assets and liabilities

3.32 A particularly important mechanism in the economy is the device whereby one economic unit exchanges a particular set of benefits with another economic unit.
Benefits are exchanged by means of payments.
From this a financial claim, and hence a liability, can be defined.
There are no non-financial liabilities recognized in the SNA, thus the term liability necessarily refers to a liability that is financial in nature.

3.33 A liability is established when one unit (the debtor) is obliged, under specific circumstances, to provide a payment or series of payments to another unit (the creditor).
The most common circumstance in which a liability is established is a legally binding contract that specifies the terms and conditions of the payment(s) to be made and payment according to the contract is unconditional.

3.34 In addition, a liability may be established not by contract but by long and well-recognized custom that is not easily refuted.
In these cases, the creditor has a valid expectation of payment, despite the lack of a legally binding contract.
Such liabilities are called constructive liabilities.

3.35 Whenever either of these types of liability exists, there is a corresponding financial claim that the creditor has against the debtor.
A financial claim is the payment or series of payments due to the creditor by the debtor under the terms of a liability.
Like the liabilities, the claims are unconditional.
In addition, a financial claim may exist that entitles the creditor to demand payment from the debtor but whereas the payment by the debtor is unconditional if demanded, the demand itself is discretionary on the part of the creditor.

3.36 Financial assets consist of all financial claims, shares or other equity in corporations plus gold bullion held by monetary authorities as a reserve asset.
Gold bullion held by monetary authorities as a reserve asset is treated as a financial asset even though the holders have no claim over other designated units.
Shares are treated as financial assets even though the financial claim their holders have on the corporation is not a fixed or predetermined monetary amount.

5. The asset boundary and the first-level classification of assets

3.37 All entities that meet the definition of an asset given above are included in the asset boundary of the SNA.
Assets that are not financial assets are non-financial assets.
Non-financial assets are further subdivided into those that are produced and those that are non-produced.

3.38 Because assets represent a store of future benefits, all assets can be represented by a monetary value.
This value represents the market's view of the total of the benefits embodied by the asset.
Where a direct market view of this value is not available, it must be approximated by other means.
There is a discussion of this topic in chapter 11.

3.39 The only non-financial assets included in the asset boundary of an economy are those whose economic owners are resident in the economy.
However, in the case of most natural resources and immobile fixed capital, which physically cannot leave the economy, a notional resident unit is established if the economic owner is technically a non-resident unit.
In this way the assets in question do become those with resident economic owners and so are included within the asset boundary and are included on the balance sheet.
Portable non-financial assets that are physically located in an economy but are owned by nonresidents are excluded from the balance sheet; those that are physically located in the rest of the world but owned by residents are included in the asset boundary.
For example, planes belonging to a domestic airline are always assets of the domestic economy regardless of where in the world they happen to be.

Contingent liabilities and provisions

3.40 A liability, as defined in paragraph 3.33 above, is unconditional once the contract establishing the liability is agreed by both parties.
If the liability is established not by a legal contract but by long and well-established custom, it is referred to as a constructive liability.
Some liabilities may involve a legal contract but specify that one party is obliged to provide a payment or series of payments to another unit only if certain specified conditions prevail.
Such liabilities are called contingent liabilities.
In general, the SNA includes (legal) liabilities and constructive liabilities but not contingent liabilities.
An exception is made for standardized guarantees where, although each individual arrangement involves a contingent liability, the number of similar guarantees is such that an actual liability is established for the proportion of guarantees likely to be called.

3.41 A corporation may set aside funds to cover unexpected events or to cover default by their customers.
Such monies may be described as provisions.
These are not treated as liabilities in the SNA because they are not the subject of the sort of contract, legal or constructive, associated with a liability.
Though financial institutions may regularly write off bad debts, for example, it would not be appropriate to regard the provisions set aside for this as assets of the borrowers.
Even though they may be earmarked for specific purposes, the amounts designated as provisions remain part of the net worth of the corporation.
Provisions are thus a designation of the purpose for which funds may be used rather than a category of financial assets and liabilities in and of themselves.

6. Entry and exit of assets from the balance sheet

3.42 All assets appear on the balance sheet of the economy.
The first level of classification of assets is important since the process by which assets enter and leave the balance sheet differs for the three types of assets.

3.43 Produced non-financial assets come into being via the production process or as imports.
Two exceptions exist.
Historical monuments are included as produced assets even though they may have been constructed long before economic accounts existed.
Occasionally a monument may be newly recognized as having value and thus enter the asset boundary as a produced asset other than through a current production process.
Similar arguments apply to artefacts treated as valuables.
Produced non-financial assets leave the asset boundary by being exhausted or by being sold to resident units that will not continue to use the asset in production as a source of future benefits or by being sold to non-resident units.

3.44 Non-produced non-financial assets are of three types; natural resources; contracts, leases and licences; and purchased goodwill and marketing assets.
The borderline determining which natural resources are considered assets and which are not depends on a number of factors described in chapter 10.
Contracts, leases and licences may represent an asset to the holder when the agreement restricts the general use or supply of products covered by the agreement and thus enhances the benefits accruing to the party to the agreement beyond what would accrue in the case of unrestricted supply.
These assets come into existence when the agreement is made and the enhanced benefits become apparent.
They leave the balance sheet when the conditions restricting access are lifted or when there is no longer a benefit to be earned from having restricted access to the asset.
Goodwill and marketing assets are only recognized as assets in the SNA when they are evidenced by a sale.

3.45 Financial assets and liabilities come into being when a commitment is made by one unit to make a payment to another unit.
They cease to exist when there is no longer a commitment for one unit to make payments to the other.
This may be because the term of the agreement specified in the commitment has expired or for other reasons.

7. Exclusions from the asset boundary

3.46 The coverage of assets is limited to those assets used in economic activity and that are subject to ownership rights; thus for example, consumer durables and human capital, as well as natural resources that are not owned, are excluded.

3.47 Consumer durables are not regarded as assets in the SNA because the services they provide are not within the production boundary.
Because the information on the stock of durables is of analytical interest, though, it is suggested that this information appear as a memorandum item in the balance sheet but not be integrated into the totals of the table.

3.48 Human capital is not treated by the SNA as an asset.
It is difficult to envisage “ownership rights” in connection with people, and even if this were sidestepped, the question of valuation is not very tractable.

3.49 There are some environmental resources excluded from the SNA asset boundary.
These are usually of the same type as those within the boundary but are of no economic value.

C. Flows

3.50 Economic flows are of two kinds.
Most flows are transactions.
Flows included in the SNA that do not meet the characteristics of transactions as described below are called “other flows”. Transactions appear in all of the accounts and tables in which flows appear except the other changes in the volume of assets account and the revaluation account.
Other flows appear in only these two accounts.
More meaning can be given to the definition of flows by describing the two kinds.

1. Transactions

3.51 A transaction is 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.

3.52 Institutional units, referred to in the definition, are the fundamental economic units of the SNA.
They are described and defined in chapter 4.
The following are the main attributes of institutional units that are relevant to their engaging in transactions:

a. They are entitled to own goods or assets in their own right, and therefore are able to exchange them;

b. They are able to take economic decisions and engage in economic activities for which they are held to be directly responsible and accountable at law;

c. They are able to incur liabilities on their own behalf, to take on other obligations or future commitments and to enter into contracts.

3.53 The definition of a transaction stipulates that an interaction between institutional units be by mutual agreement.
When a transaction is undertaken by mutual agreement, the prior knowledge and consent of the institutional units is implied.
This does not mean, however, that both units necessarily enter a transaction voluntarily, because some transactions are imposed by force of law, such as payments of taxes or other compulsory transfers.
Although individual institutional units are not free to fix the amounts of taxes they pay, there is nevertheless collective recognition and acceptance by the community of the obligation to pay taxes.
Thus, payments of taxes are considered transactions despite being compulsory.

3.54 Transactions take so many different forms that, even with these explanations, any general definition is inevitably rather imprecise.
To give more precision, the various kinds of transactions have to be systematically described and classified.
A first distinction is between monetary and non-monetary transactions.
Other distinctions, such as between transactions with and without a quid pro quo, are drawn within each of these kinds of transactions.
Frequently the individual, identifiable transactions of everyday economic life are simply grouped together in the accounts; sometimes they are subdivided and rearranged in order to form the transaction categories of the SNA.

Monetary transactions

3.55 A monetary transaction is one in which one institutional unit makes a payment (receives a payment) or incurs a liability (receives an asset) stated in units of currency.
In the SNA, all flows are recorded in monetary terms, but the distinguishing characteristic of a monetary transaction is that the parties to the transaction express their agreement in monetary terms.
For example, a good is purchased or sold at a given number of units of currency per unit of the good, or labour is hired or provided at a given number of units of currency per hour or day.

3.56 All monetary transactions are interactions between institutional units; that is, all monetary transactions are two-party transactions.
The following is a list of common monetary transactions:

a. Expenditure on consumption of goods and services,

b. Acquisition of a security,

c. Wages and salaries,

d. Interest, dividends and rent,

e. Taxes,

f. Social assistance benefits in cash.

Transactions with and without a recompense

3.57 The expenditure on consumption goods and services, the acquisition of a security, wages and salaries, and interest, dividends, and rent are two-party transactions in which one party provides a good, service, labour or asset to the other and receives a recompense of commensurate value in return.
This kind of transaction is sometimes called a “something for something” transaction or a transaction with a quid pro quo.
Such transactions are sometimes called exchanges.

3.58 Taxes and social assistance benefits are examples of two-party transactions in which one party provides a good, service or asset to the other but does not receive a recompense in return.
This kind of transaction, sometimes called a “something for nothing” transaction, or a transaction without a quid pro quo, is called a transfer in the SNA.

3.59 The scope of the recompenses mentioned in describing exchanges and transfers does not cover entitlement to contingent benefits or collective services.
Such benefits are generally uncertain or not quantifiable, or both.
Moreover, the amount of benefit that may eventually be received by an individual unit is not proportional to the amount of the previous payment and may be very much greater or smaller than the latter.
Thus, payments such as a social insurance contribution or a non-life insurance premium may entitle the unit making the payment to some contingent future benefits, and a household paying taxes may be able to consume certain collective services provided by government units, but these payments are regarded as transfers rather than exchanges.

3.60 A distinction is made between current and capital transfers.
A capital transfer is one in which the ownership of an asset (other than cash or inventories) is transferred or which obliges one or both parties to acquire, or dispose of, an asset (other than cash or inventories).
Capital transfers redistribute wealth but leave saving unaffected.
They include, for example, capital taxes and investment grants.
Other transfers are described as current.
Current transfers redistribute income.
They include, for example, taxes on income and social benefits.
A fuller description of transfers appears in chapter 8.

Rearrangements of transactions

3.61 Monetary transactions may not always be recorded in the accounts in the same way as they appear to the institutional units involved.
The values of these actual, or observed, transactions are already available in the accounts of the units concerned, but the SNA rearranges certain transactions to bring out the underlying economic relationships more clearly.
The three kinds of rearrangements affect the channels through which the transactions are seen as taking place, the number of transactions that are seen as taking place, or the units that are seen as being involved.
The three sections below illustrate the main characteristics of these rearrangements and the kind of analytical purpose they serve.

Rerouting transactions

3.62 Rerouting records a transaction as taking place through channels that differ from the actual ones or as taking place in an economic sense when it does not take place in fact.
In the first kind of rerouting, a direct transaction between unit A and unit C is recorded as taking place indirectly through a third unit B, usually, however, with some change in the transaction category.
In the second kind of rerouting, a transaction of one kind from unit A to unit B is recorded with a matching transaction of a different kind from unit B to unit A.

3.63 The recording of the payment of social security contributions is an example of the first kind of rerouting.
In practice, employers typically deduct the contributions that the employees are obliged to make to social security funds from the employee's wages and salaries.
In addition the employers make contributions to social security funds from their own resources on behalf of the employees.
Both contributions go directly from the employer to social security funds.
However, in the SNA, the employers' contributions are treated as part of compensation of employees and are recorded as being paid to the employee.
The employee is then recorded as making a payment to social security funds consisting of both the employer's and employee's own contributions.
Social security contributions are thus recorded strictly according to the general principles governing the recording of transactions in the SNA to bring out the economic substance behind arrangements adopted for administrative convenience.
As a result of the rerouting, employers' social contributions are included as a part of labour cost.

3.64 An example of the second kind of rerouting is provided by the treatment of the 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 SNA by showing them as first remitted to the foreign owners as property income and then reinvested in the equity of the direct investment enterprise.

3.65 Similarly, the property income earned on the reserves of certain life insurance corporations is deemed to be paid out to policyholders and then paid back again as premium supplements even though in actuality the property income is retained by the insurance enterprises.
As a result, the saving of persons or households includes the amount of the rerouted property income while the saving of insurance enterprises does not.
This alternative picture of saving, which better reflects economic reality, is the purpose of the rerouting.

Partitioning transactions

3.66 Partitioning records a transaction that is a single transaction from the perspective of the parties involved as two or more differently classified transactions.
For example, the rental actually paid by the lessee under a financial lease is not recorded as a payment for a service; instead, it is partitioned into two transactions, a repayment of principal and a payment of interest.
This partitioning of the rental payment is part of a treatment that implements an economic view of financial leasing in the SNA.
Financial leasing is viewed as a method of financing the purchase of a fixed asset and a financial lease is shown in the SNA as a loan from the lessor to the lessee.

3.67 Another example is the treatment of certain financial services.
For example, the SNA prescribes partitioning interest payable by financial intermediaries on deposits and payable to financial intermediaries on loans into two components.
One component represents interest as defined in the SNA while the remainder represents the purchase of financial intermediation services for which the intermediaries do not charge explicitly.
The purpose of the partitioning is to make the service item explicit.
In consequence, intermediate and final consumption of particular industries and institutional sectors as well as gross domestic product are affected.
However, the saving of all the units concerned, including the financial intermediaries themselves, is not affected.

3.68 The recording in the SNA of transactions for wholesalers and retailers does not mirror the way in which those involved view them.
The purchases of goods for resale by wholesalers and retailers are not recorded by these units explicitly, and they are viewed as selling, not the goods, but the services of storing and displaying a selection of goods in convenient locations and making them easily available for customers.
This partitioning measures output for traders by the value of the margins realized on goods they purchase for resale.

Units facilitating a transaction on behalf of other parties

3.69 Many service activities consist of one unit arranging for a transaction to be carried out between two other units in return for a fee from one or both parties to the transaction.
In such a case, the transaction is recorded exclusively in the accounts of the two parties engaging in the transaction and not in the accounts of the third party facilitating the transaction.
Some service output may be recognized with the facilitator.
For example, purchases a commercial agent makes under the orders of, and at the expense of, another party are directly attributed to the latter.
The accounts of the agent only show the fee charged to the principal for the facilitation services rendered.

3.70 A second example is the collection of taxes by one government unit on behalf of another.
The SNA follows the guidance of the Government Finance Statistics Manual (International Monetary Fund (IMF), 2001), known as GFSM2001 as follows.
In general, a tax is attributed to the government unit that

a. exercises the authority to impose the tax (either as a principal or through the delegated authority of the principal), and

b. has final discretion to set and vary the rate of the tax.

3.71 Where an amount is collected by one government for and on behalf of another government, and the latter government has the authority to impose the tax, set and vary its rate, then the former is acting as an agent for the latter and the tax is reassigned.
Any amount retained by the collecting government as a collection charge should be treated as a payment for a service.
Any other amount retained by the collecting government, such as under a tax-sharing arrangement, should be treated as a current grant.
If the collecting government was delegated the authority to set and vary the rate, then the amount collected should be treated as tax revenue of this government.

3.72 Where different governments jointly and equally set the rate of a tax and jointly and equally decide on the distribution of the proceeds, with no individual government having ultimate overriding authority, then the tax revenues are attributed to each government according to its respective share of the proceeds.
If an arrangement allows one government unit to exercise ultimate overriding authority, then all of the tax revenue is attributed to that unit.

3.73 There may also be the circumstance where a tax is imposed under the constitutional or other authority of one government, but other governments individually set the tax rate in their jurisdictions.
The proceeds of the tax generated in each respective government's jurisdiction are attributed as tax revenues of that government.

3.74 Similar principles are applied for the payment of subsidies or social benefits.

Non-monetary transactions

3.75 Non-monetary transactions are transactions that are not initially stated in units of currency.
The entries in the SNA therefore represent values that are indirectly measured or otherwise estimated.
In some cases, the transaction may be an actual one and a value has to be estimated to record it in the accounts.
Barter is an obvious example.
In other cases, the entire transaction must be constructed and then a value estimated for it. Consumption of fixed capital is an example.
(In the past, the estimation of a value has sometimes been called imputation, but it is preferable to reserve that term for the kind of situation that involves not only estimating a value but also constructing a transaction.)

3.76 The amounts of money associated with non-monetary transactions are entries whose economic significance is different from cash payments as they do not represent freely disposable sums of money.
The various methods of valuation to be employed for non-monetary transactions are dealt with in the section on valuation in section E.

3.77 Non-monetary transactions can be either two-party transactions or actions within an institutional unit.
The two-party transactions consist of barter, remuneration in kind, payments in kind other than compensation in kind and transfers in kind.
These two-party transactions are discussed first, followed by a discussion of internal transactions.

3.78 Although two-party transactions in kind do exist in practice, in the SNA they are frequently recorded in the same way as a monetary transaction with an associated expenditure of the item provided in kind.
This ensures that there is a change in wealth of the donor without the donor acquiring the product transferred while the recipient acquires the product without any change in wealth.
There is further discussion on this in respect of current transfers in chapter 8 and of capital transfers in chapter 10.

Barter transactions

3.79 Barter transactions involve two parties, with one party providing a good, service or asset other than cash to the other in return for a good, service or asset other than cash.
As mentioned above, barter is an example of an actual transaction for which a value must be estimated.
Barter transactions in which goods are traded for goods have always been important.
The barter of goods may be systematically organized on proper markets or, in some countries, may occur only sporadically on a small scale.
Barter between nations involving exports and imports also occurs.

Remuneration in kind

3.80 Remuneration in kind occurs when an employee accepts payment in the form of goods and services instead of money.
This practice is extensive in most economies for reasons ranging from the desire of employers to find captive markets for part of their output, to tax avoidance or evasion.
Remuneration in kind takes various forms and the following list includes some of the most common types of goods and services provided without charge, or at reduced prices, by employers to their employees:

a. Meals and drinks,

b. Housing services or accommodation of a type that can be used by all members of the household to which the employee belongs,

c. The services of vehicles provided for the personal use of employees,

d. Goods and services produced as outputs from the employer's own processes of production, such as free coal for miners.

Further, in addition to goods and services, some employees may be willing, or obliged, to accept part of their compensation in the form of financial or other assets.

Payments in kind other than remuneration in kind

3.81 Payments in kind other than remuneration in kind occur when any of a wide variety of payments is made in the form of goods and services rather than money.
For example, a doctor may accept payment in wine instead of money.
Or, instead of paying rent or rentals in money, the user of land or fixed capital, respectively, may pay the owner in goods or services.
In agriculture, for example, the “rent” may be paid by handing over part of the crops produced to the landlord.
(This is known as share cropping.)
Tax payments, also, may be paid in kind; for example, inheritance taxes may be paid by making donations of paintings or other valuables.

Transfers in kind

3.82 As noted above, transactions in kind are normally recorded in the accounts as if they are monetary transfers followed by the expenditure by the recipient on the products concerned.
This treatment applies to government international cooperation, gifts and charitable contributions.
Government international cooperation, gifts, and charitable contributions are often made in kind for convenience, efficiency, or tax purposes.
For example, international aid after a natural disaster may be more effective and delivered faster if made directly in the form of medicine, food, and shelter instead of money.
Charitable contributions in kind sometimes avoid taxes that would be due if the item in question were sold and the money given to the charity.

3.83 A special case of transfers in kind is that of social transfers in kind.
These consist of goods and services provided by general government and non-profit institutions serving households (NPISHs) that are delivered to individual households.
Health and education services are the prime examples.
Rather than provide a specified amount of money to be used to purchase medical and educational services, the services are often provided in kind to make sure that the need for the services is met.
(Sometimes the recipient purchases the service and is reimbursed by the insurance or assistance scheme.
Such a transaction is still treated as being in kind because the recipient is merely acting as the agent of the insurance scheme.)

3.84 Social transfers in kind are recorded as an implicit transfer of income from government and NPISHs to households and a transfer of consumption goods and services.
The measure of income after the transfer is called adjusted disposable income (rather than disposable income) and the measure of consumption is called actual final consumption (rather than final consumption expenditure).

Internal transactions

3.85 The SNA treats certain kinds of actions within a unit as transactions to give a more analytically useful picture of final uses of output and of production.
These transactions that involve only one unit are called internal, or intra-unit, transactions.

3.86 Some households, all NPISHs and general government units operate as both producers and as final consumers.
When an institutional unit engages in both activities, it may make the choice to consume some or all of the output itself after the production is completed.
In such a case, no transaction takes place between institutional units, but it is useful to construct a transaction and estimate its value to record both output and consumption in the accounts.

3.87 For households, the principle in the SNA is that all goods produced by persons that are subsequently used by the same persons, or members of the same households, for purposes of final consumption are to be included in output in a manner analogous to that for goods sold on the market.
This means that transactions are assumed in which the persons responsible for the production of the goods are deemed to deliver the goods to themselves as consumers, or members of their own households, and then values have to be associated with them in order to enter them in the accounts.

3.88 Establishments owned by governments or NPISHs commonly provide education, health, or other kinds of services to individual households without charge or at prices that are not economically significant.
The costs of providing these services are incurred by the governments or NPISHs, and the values are recorded as internal transactions: that is, as final expenditures by governments or NPISHs on outputs produced by establishments they own themselves.
(As already explained, the acquisition of these services by households is recorded separately under social transfers in kind, another form of non-monetary transactions that take place between the government units or NPISHs and the households in question.)

3.89 The SNA recognizes several other transactions within enterprises to give a fuller view of production.
For example, when enterprises produce fixed assets for their own use, the SNA records deliveries by the enterprises to themselves as the subsequent users.
Also, when enterprises use fixed assets (whether own-account or purchased) during production, the SNA charges the decline in the value of the asset during the period of production as a cost.

3.90 The recording of deliveries between one establishment and another belonging to the same enterprise is discussed in paragraph 6.104.

Externalities and illegal actions

3.91 The sections above describe the kinds of actions that are considered transactions in the SNA.
This section focuses on externalities and illegal actions, explaining why externalities are not considered transactions and distinguishing among kinds of illegal actions that are and are not considered transactions.

Externalities

3.92 Certain economic actions carried out by institutional units cause changes in the condition or circumstances of other units without their consent.
These are externalities; they can be regarded as unsolicited services, or disservices, delivered without the agreement of the units affected.
It is an uncooperative action, usually with undesirable consequences, which is the antithesis of a market transaction.

3.93 It is necessary to consider, however, whether values should be assigned to such externalities.
Economic accounts have to measure economic functions such as production or consumption in the context of a particular legal and socioeconomic system within which relative prices and costs are determined.
Further, there would be considerable technical difficulties involved in trying to associate economically meaningful values with externalities when they are intrinsically non-market phenomena.
As externalities are not market transactions into which institutional units enter of their own accord, there is no mechanism to ensure that the positive or negative values attached to externalities by the various parties involved would be mutually consistent.
Moreover, accounts including values for externalities could not be interpreted as representing equilibrium, or economically sustainable, situations.
If such values were to be replaced by actual payments the economic behaviour of the units involved would change, perhaps considerably.

3.94 A typical example is the pollution by one producer of the air or water used by other units for purposes of production or consumption.
If the producer is allowed to pollute without charge or risk of being penalized, the private costs of production of the polluter will be less than the social costs to the community.
Some countries, at least at certain points in their history, may choose to frame their laws so that some producers are permitted to reduce their private costs by polluting with impunity.
This may be done deliberately to promote rapid industrialization, for example.
The wisdom of such a policy may be highly questionable, especially in the long run, but it does not follow that it is appropriate or analytically useful for economic accounts to try to correct for presumed institutional failures of this kind by attributing costs to producers that society does not choose to recognize.
For example, the whole purpose of trying to internalize some externalities by imposing taxes or other charges on the discharge of pollutants is to bring about a change in production methods to reduce pollution.
A complete accounting for externalities would be extremely complex as it is not sufficient merely to introduce costs into the accounts of the producers but would also necessitate introducing various other adjustments of questionable economic significance to balance the accounts.

3.95 This sort of example illustrates why some analyses are best carried out in the context of a satellite account where some of the normal constraints and conventions of the SNA are relaxed.
In the case of pollution, the SEEA 2003 has been developed precisely to explore this issue among other environmental topics.

Illegal actions

3.96 Illegal actions that fit the characteristics of transactions (notably the characteristic that there is mutual agreement between the parties) are treated the same way as legal actions.
The production or consumption of certain goods or services, such as narcotics, may be illegal but market transactions in such goods and services have to be recorded in the accounts.
If expenditures on illegal goods or services by households were to be ignored on grounds of principle, household saving would be overestimated and households presumed to obtain assets that they do not in fact acquire.
Clearly, the accounts as a whole are liable to be seriously distorted if monetary transactions that in fact take place are excluded.
It may be difficult, or even impossible, to obtain data about illegal transactions, but in principle they should be included in the accounts if only to reduce error in other items, including balancing items.

3.97 However, many illegal actions are crimes against persons or property that in no sense can be construed as transactions.
For example, theft can scarcely be described as an action into which two units enter by mutual agreement.
Conceptually, theft or violence is an extreme form of externality in which damage is inflicted on another institutional unit deliberately and not merely accidentally or casually.
Thus, thefts of goods from households, for example, are not treated as transactions and estimated values are not recorded for them under household expenditures.

3.98 If thefts, or acts of violence (including war), involve significant redistributions, or destructions, of assets, it is necessary to take them into account.
As explained below, they are treated as other flows, not as transactions.

2. Other flows

3.99 Other flows are changes in the value of assets and liabilities that do not result from transactions.
The reason that these flows are not transactions is linked to their not meeting one or more of the characteristics of transactions.
For example, the institutional units involved may not be acting by mutual agreement, as with an uncompensated seizure of assets.
Or the change may be due to a natural event such as an earthquake rather than a purely economic phenomenon.
Alternatively the value of an asset expressed in foreign currency may change as a result of an exchange rate change.

3.100 The entries for other flows appear in one of the two accounts that comprise the other changes in assets accounts.
The other changes in the volume of assets account includes changes that lead to a change in value of an asset because of a change in the quantity or physical characteristics of the asset in question.
The revaluation account includes changes in the value of assets, liabilities, and net worth due to only changes in the level and structure of prices, which are reflected in holding gains and losses.

Other changes in the volume of assets

3.101 Other changes in the volume of assets fall into three main categories.

3.102 The first category relates to the appearance and disappearance of assets and liabilities other than by transactions.
Some of these may relate to naturally occurring assets, such as subsoil resources, so that the entrances and exits come about as interactions between institutional units and nature.
Others relate to assets created by human activity, such as valuables.
For valuables, for example, the capital account records their acquisition as newly produced goods or imports in transactions, and it records transactions in existing goods already classified as valuables.
It is the recognition of a significant or special value for goods not already recorded in the balance sheets that is considered an economic appearance to be recorded as an other flow.
These valuables may not be in the balance sheets for any of several reasons.
For example, they may antedate the accounts or were originally recorded as consumption goods.

3.103 The second category relates to the effects of externalities and disasters.
One such event is one institutional unit's effectively removing an asset from its owner without the owner's agreement, an action that is not considered a transaction because the element of mutual agreement is absent.
These events also include those that destroy assets, such as natural disaster or war.
In contrast, transactions, such as consumption of fixed capital or change in inventories, refer to normal rates of loss or damage.

3.104 The third category relates to changes in assets and liabilities that reflect changes in the classification of institutional units among sectors and in the structure of institutional units, or in the classification of assets and liabilities.
For example, if an unincorporated enterprise becomes more financially distinct from its owner and takes on the characteristics of a quasi-corporation, it and the assets and liabilities it holds move from the household sector to the non-financial corporations sector and changes in the sector allocation of the assets and liabilities owned by the quasi-corporation are recorded under this heading.

Holding gains and losses

3.105 Positive or negative nominal holding gains accrue during the accounting period to the owners of assets and liabilities as a result of a change in their prices.
Holding gains are sometimes described as “capital gains”, but “holding gain” is preferred here because it emphasizes that holding gains accrue purely as a result of holding assets or liabilities over time without transforming them in any way.
Holding gains include not only gains on “capital” such as fixed assets, land and financial assets but also gains on inventories of all kinds of goods held by producers, including work-inprogress, often described as “stock appreciation”. Holding gains may accrue on assets held for any length of time during the accounting period, not only on assets held throughout the period and may thus appear for assets appearing on neither the opening or closing balance sheet.

3.106 Nominal holding gains depend upon changes in the prices of assets and liabilities over time.
The prices in question are the prices at which the assets may be sold on the market.
Nominal holding gains may be further decomposed into neutral holding gains, which reflect changes in the general price level, and real holding gains which reflect changes in the relative prices of assets.

D. Balancing items

3.107 A balancing item is an accounting construct obtained by subtracting the total value of the entries on one side of an account from the total value for the other side.
It cannot be measured independently of the other entries; as a derived entry, it reflects the application of the general accounting rules to the specific entries on the two sides of the account.
It does not relate to any specific set of transactions, or any set of assets, and so it cannot be expressed in terms of its own price or quantity units.

Balancing items in the flow accounts

3.108 Balancing items are not simply devices introduced to ensure that accounts balance.
They are often used as key macroeconomic indicators to assess economic performance.
They encapsulate a great deal of information and include some of the most important entries in the accounts, as can be seen by the examples of balancing items for the accounts containing flows reproduced below:

a. Value added or domestic product,

b. Operating surplus,

c. Disposable income,

d. Saving,

e. Net lending or net borrowing,

f. Current external balance.

Balancing items in the balance sheets

3.109 Net worth, which is defined as the value of all the non-financial and financial assets owned by an institutional unit or sector less the value of all its outstanding liabilities, is the balancing item in the balance sheets.
As is true for other balancing items in the SNA, net worth cannot be measured independently of the other entries, nor does it relate to any specific set of transactions.

3.110 As well as net worth appearing as a stock level, changes in net worth due to different sorts of transactions and other flows may also be derived.
Just as the changes in the levels of any asset can be traced through changes in transactions and other flows throughout the period, so changes in total net worth can be exhaustively described according to the transactions and other flows that led to changes in the total level of assets and liabilities.

E. Accounting rules

3.111 As noted in the introduction, this section covers the quadruple entry accounting principle, valuation, time of recording, classification of accounting entries and grouping of transactions.
The application of each of these to the individual flows and stocks is explained in detail in the chapters that describe the entries in the various tables and accounts of the central framework.
The details on classifications of accounting entries are discussed, account by account, in chapters 6 to 13.

1. Quadruple-entry accounting

3.112 The accounting system underlying the SNA derives from broad bookkeeping principles.
To understand the accounting system for the SNA, three bookkeeping principles can be distinguished:

1. Vertical double-entry bookkeeping, also known as simply double-entry bookkeeping used in business accounting,

2. Horizontal double-entry bookkeeping, and

3. Quadruple-entry bookkeeping.

3.113 The main characteristic of vertical double-entry bookkeeping is that each transaction leads to at least two entries, traditionally referred to as a credit entry and a debit entry, in the books of the transactor.
This principle ensures that the total of all credit entries and that of all debit entries for all transactions are equal, thus permitting a check on consistency of accounts for a single unit.
Each transaction requires two entries.

3.114 Other flows have their counterpart entries directly in changes in net worth.
As a result, vertical double-entry bookkeeping ensures the fundamental identity of a unit's balance sheet, that is, the total value of assets equals the total value of liabilities plus net worth.
The total value of the assets owned by an entity minus the total value of liabilities provides net worth.

3.115 The concept of horizontal double-entry bookkeeping is useful for compiling accounts that reflect the mutual economic relationships between different institutional units in a consistent way.
It implies that if unit A provides something to unit B, the accounts of both A and B show the transaction for the same amount: as a payment in A's account and as a receipt in B's account.
Horizontal double-entry bookkeeping ensures the consistency of recording for each transaction category by counterparties.
For example, dividends payable throughout the economy should be equal to dividends receivable throughout the economy once transactions with the rest of the world are taken into account.

3.116 The simultaneous application of both the vertical and horizontal double-entry bookkeeping results in a quadruple-entry bookkeeping, which is the accounting system underlying the recording in the SNA.
It deals in a coherent way with multiple transactors or groups of transactors, each of which satisfies vertical double-entry bookkeeping requirements.
A single transaction between two counterparties thus gives rise to four entries.
In contrast to business bookkeeping, national accounts deal with interactions among a multitude of units in parallel, and thus require special care from a consistency point of view.
As a liability of one unit is mirrored in a financial asset of another unit, for instance, they should be identically valued, allocated in time and classified to avoid inconsistencies in aggregating balance sheets of units by sectors or for the total economy.
The same is also true for all transactions and other flows that affect balance sheets of two counterparties.

3.117 The SNA uses the following conventions and terminologies for recording flows with the rest of the world.
Imports, for instance, are a resource of the rest of the world used in the domestic economy and payments for imports represent a drawdown of wealth for the domestic economy but a financial resource for the rest of the world.
By treating the rest of the world account as a pseudo-sector, the quadruple entry accounting principle can be applied and all stocks and flows within the economy and with the rest of the world are completely balanced.
The balance of payments accounts show the consolidated position of all domestic sectors relative to the rest of the world.
It is thus an exact mirror image of the accounts for the rest of the world within the SNA.
However, despite the reversal of the sides of the accounts on which items are shown, there is equality in coverage, measurement and classification between the two systems.
This is discussed further in chapter 24.

2. Valuation

General rules

3.118 The power of the SNA as an analytical tool stems largely from its ability to link numerous, very varied economic phenomena by expressing them in a single accounting unit.
The SNA does not attempt to determine the utility of the flows and stocks that come within its scope.
Rather, it measures the current exchange value of the entries in the accounts in money terms, that is, the values at which goods, services, labour or assets are in fact exchanged or else could be exchanged for cash (currency or transferable deposits).

Valuation of transactions

3.119 Market prices for transactions are defined as amounts of money that willing buyers pay to acquire something from willing sellers; the exchanges are made between independent parties and on the basis of commercial considerations only, sometimes called “at arm's length.” Thus, according to this strict definition, a market price refers only to the price for one specific exchange under the stated conditions.
A second exchange of an identical unit, even under circumstances that are almost exactly the same, could result in a different market price.
A market price defined in this way is to be clearly distinguished from a price quoted in the market, a world market price, a going price, a fair market price, or any price that is intended to express the generality of prices for a class of supposedly identical exchanges rather than a price actually applying to a specific exchange.
Furthermore, a market price should not necessarily be construed as equivalent to a free market price; that is, a market transaction should not be interpreted as occurring exclusively in a purely competitive market situation.
In fact, a market transaction could take place in a monopolistic, monopsonistic, or any other market structure.
Indeed, the market may be so narrow that it consists of the sole transaction of its kind between independent parties.

3.120 When a price is agreed by both parties in advance of a transaction taking place, this agreed, or contractual, price is the market price for that transaction regardless of the prices that prevail when the transaction takes place.

3.121 Actual exchange values in most cases will represent market prices as described in the preceding paragraph. Paragraphs 3.131 to 3.134 describe cases where actual exchange values do not represent market prices.
Transactions that involve dumping and discounting represent market prices.
Transaction prices for goods and services are inclusive of appropriate taxes and subsidies.
A market price is the price payable by the buyer after taking into account any rebates, refunds, adjustments, etc. from the seller.

3.122 Transactions in financial assets and liabilities are recorded at the prices at which they are acquired or disposed of. Transactions in financial assets and liabilities should be recorded exclusive of any commissions, fees, and taxes whether charged explicitly, included in the purchaser's price, or deducted from the seller's proceeds.
This is because both debtors and creditors should record the same amount for the same financial instrument.
The commissions, fees, and taxes should be recorded separately from the transaction in the financial asset and liability, under appropriate categories.
The valuation of financial instruments, which excludes commission charges, differs from the valuation of non-financial assets, which includes any costs of ownership transfer.

3.123 When market prices for transactions are not observable, valuation according to market-price-equivalents provides an approximation to market prices.
In such cases, market prices of the same or similar items when such prices exist will provide a good basis for applying the principle of market prices.
Generally, market prices should be taken from the markets where the same or similar items are traded currently in sufficient numbers and in similar circumstances.
If there is no appropriate market in which a particular good or service is currently traded, the valuation of a transaction involving that good or service may be derived from the market prices of similar goods and services by making adjustments for quality and other differences.

Agricultural products sold from the farm

3.124 A significant qualification to the foregoing remark is necessary in the case of agricultural products sold directly from the farm.
The so-called farm-gate price may be significantly lower than a price in the nearest market where prices can be observed since the latter include the costs of bringing the goods to market.
Further, if only a small fraction of a crop gets to the market, it may command a higher price than would be the case if all the available crop were traded.
Such considerations are to be understood by the qualification that observed market prices are appropriate only when similar products are traded in sufficient number and in similar circumstances.
When these conditions do not hold, adjustments must be made to the observed prices.

Barter

3.125 The case of barter requires specific consideration.
The products bartered must be valued when produced as well as when acquired for consumption or for capital formation.
While it may often be the case that for small scale barter transactions entered into by the producer, there are no taxes on products payable (or if they are nominally payable the conditions of the barter means they are avoided and not paid) there is no automatic exclusion of bartered products from liability to taxes on products.
Subsidies on bartered products are possible conceptually but unlikely to be significant.
By the nature of barter, there are no wholesale or retail margins applicable to bartered products.
Goods subject to barter may, however, have associated transportation costs.
If the unit providing the goods for barter also provides the transport, this will, in general, mean that the barter “package” includes some transportation services and the value to the recipient will be a purchaser's price including this transportation cost.
If the unit receiving the goods must provide the transport, this may reduce the valuation of the goods to the recipient.

3.126 Barter transactions may concern new or existing goods acquired by one party to the barter in which case the value to that party will be the cost of acquisition (in the case of new goods) or the realizable value in the case of existing goods.

3.127 Barter transactions necessarily involve two units and (at least) two products.
Each unit may place a different value on either item being bartered.
In such a case, since the accounting rules of the SNA require a single value to be recorded for both parties, on pragmatic grounds a simple average of the different valuations (after allowing for any taxes and transportation costs) may be taken as the value of the transaction.

3.128 Barter transactions do not always take place simultaneously.
When this is not the case, an account receivable/payable should be recorded even though neither part of the barter transaction takes place in monetary terms.

Quotation prices

3.129 Market valuation also poses problems for transactions in goods in which the contracts establish a quotation period often months after the goods have changed hands.
In such cases, market value at the time of change of ownership should be estimated.
The estimate should be revised with the actual market value, when known.
Market value is given by the contract price even if it is unknown at the time of change of ownership.

Valuation of transfers in kind

3.130 When non-financial resources are provided without a quid pro quo, such resources should be valued at the market prices that would have been received if the resources had been sold in the market.
In the absence of a market price, the donor's view of the imputed value of the transaction will often be quite different from that of the recipient.
The suggested rule of thumb is to use the value assigned by the donor as a basis for recording.

Transfer pricing

3.131 In some cases actual exchange values may not represent market prices.
Examples are transactions involving transfer prices between affiliated enterprises, manipulative agreements with third parties, and certain non-commercial transactions, including concessional interest (that is, interest payable at a reduced rate as a matter of policy).
Prices may be under- or over-invoiced, in which case an assessment of a market-equivalent price needs to be made.
Although adjustment should be made when actual exchange values do not represent market prices, this may not be practical in many cases.
Adjusting the actual exchange values to reflect market prices will have consequences in other accounts.
Therefore, when such adjustments are made, corresponding adjustments in other accounts should also be made, for example, if prices of goods are adjusted, associated income account or financial account transactions or both should also be adjusted.

3.132 Values put on an invoice may deviate systematically or to such a large extent from the prices paid in the market for similar items that it must be presumed that the sums paid cover more than the specified transactions.
An example is so-called transfer pricing: affiliated enterprises may set the prices of the transactions among themselves artificially high or low in order to effect an unspecified income payment or capital transfer.
Such transactions should be made explicit if their value is considerable and would hinder a proper interpretation of the accounts.
In some cases, transfer pricing may be motivated by income distribution or equity build-ups or withdrawals.
Replacing book values (transfer prices) with market-value equivalents is desirable in principle, when the distortions are large and when availability of data (such as adjustments by customs or tax officials or from partner economies) makes it feasible to do so. Selection of the best market-value equivalents to replace book values is an exercise calling for cautious and informed judgment.

3.133 The exchange of goods between affiliated enterprises may often be one that does not occur between independent parties (for example, specialized components that are usable only when incorporated in a finished product).
Similarly, the exchange of services, such as management services and technical know-how, may have no near equivalents in the types of transactions in services that usually take place between independent parties.
Thus, for transactions between affiliated parties, the determination of values comparable to market values may be difficult, and compilers may have no choice other than to accept valuations based on explicit costs incurred in production or any other values assigned by the enterprise.

Concessional pricing

3.134 While some non-commercial transactions, such as a grant in kind, have no market price, other non-commercial transactions may take place at implied prices that include some element of grant or concession so that those prices also are not market prices.
Examples of such transactions could include negotiated exchanges of goods between governments and government loans bearing lower interest rates than those with similar grace and repayment periods or other terms for purely commercial loans.
Concessional lending is described in chapter 24.
Transactions by general government bodies and private non-profit entities not engaged in purely commercial undertakings are often subject to non-commercial considerations.
However transfers involving provision of goods and services may also be provided or received by other sectors of the economy.

Valuation at cost

3.135 If there is no appropriate market from which the value of a particular non-monetary flow or stock item can be taken by analogy, its valuation may be derived from prices that are established in less closely related markets.
Ultimately, some goods and services can only be valued by the amount that it would cost to produce them currently.
Market and own-account goods and services valued in this way should include a mark-up that reflects the net operating surplus or mixed income attributable to the producer.
For non-market goods and services produced by government units or NPISHs, however, no allowance should be made for any net operating surplus.

Valuation of assets

3.136 Sometimes it is necessary to value stocks at their estimated written down current acquisition values or production costs.
The write-down should then include all changes that have occurred to the item since it was purchased or produced (such as consumption of fixed capital, partial depletion, exhaustion, degradation, unforeseen obsolescence, exceptional losses and other unanticipated events).
The same method could be applied to non-monetary flows of existing assets.

3.137 If none of the methods mentioned above can be applied, stocks, or flows arising from the use of assets, may be recorded at the discounted present value of expected future returns.
For some financial assets, particularly those with a face value applicable at some point in the future, the present market value is established as the face value discounted to the present by the market interest rate.
In principle, therefore, if a reasonably robust estimate of the stream of future earnings to come from an asset can be made, along with a suitable discount rate, this allows an estimate of the present value to be established.
However, because it may be difficult to determine the future earnings with the appropriate degree of certainty, and given that assumptions are also needed about the asset's life length and the discount factor to be applied, the other possible sources of valuation described in the preceding paragraphs should be exhausted before resorting to this method.
Further, if this method is used, some sensitivity testing of the assumptions made may be appropriate.
In fact, the method most commonly used to derive estimates of consumption of fixed capital and the capital stock of fixed assets associates a stream of future earnings with the decline in value of a fixed asset in use in production.
(This method, the perpetual inventory method, is described further in chapters 13 and 20.)

3.138 Although the net present value method depends on making projections of future earnings and discount rates, it is theoretically sound as can often be verified for a number of financial assets.
If it is used for non-financial assets, some sensitivity testing of the assumptions made may be appropriate.

3.139 In conformity with the general rule, provision of assets, services, labour or capital in exchange for foreign cash is recorded at the actual exchange value agreed upon by the two parties to the transaction.
Flows and stocks concerning foreign currency are converted to their value in national currency at the rate prevailing at the moment they are entered in the accounts, that is, the moment the transaction or other flow takes place or the moment to which the balance sheet applies.
The midpoint between the buying and selling rate should be used so that any service charge is excluded.

Business accounting valuation

3.140 Business accounts, tax returns and other administrative records are main sources of data for drawing up the national accounts.
One should be aware, however, that none of these necessarily satisfies the valuation requirements of the SNA and that accordingly adjustments may have to be made.
In particular, in the interest of prudence, business accounting often adopts valuations that are not appropriate for the national accounts.
Similarly, valuations for tax purposes often serve objectives that differ from those of macroeconomic analysis.
For example, the depreciation methods favoured in business accounting and those prescribed by tax authorities almost invariably deviate from the concept of consumption of fixed capital employed in the SNA.

Valuation of partitioned flows

3.141 Where a single payment refers to more than one transaction category (as they are defined in the SNA), the individual flows need to be recorded separately.
In such a case, the total value of the individual transactions after partitioning must equal the market value of the exchange that actually occurred.
For example, actual exchange values involving foreign currency include commission for currency conversion.
The portion related to currency conversion should be recorded separately as transactions in services.
As another example, the SNA recommends dividing interest transactions with financial corporations between two transaction categories, one showing interest as understood in the SNA and the other representing the implicit payment for financial intermediation services.

3.142 Partitioning is not limited to transactions; an example is real holding gains, which are separated for analytical reasons from neutral holding gains that are simply proportionate to changes in the general price level.

3.143 In some cases partitioning is connected with deceptive behaviour.
An example is the sort of transfer pricing discussed in paragraph 3.132.

3.144 A less obvious mingling of transactions occurs when the provision of an asset and the related money payment or payments do not take place simultaneously.
When the time gap becomes unusually long and the amount of trade credit extended is very large, the conclusion may be that implicitly an interest fee has been charged.
In such extreme cases, the actual payment or payments should be adjusted for accrued interest in order to arrive at the correct value of the asset transferred.
Such adjustments are not recommended for normal trade credit.

Special valuations concerning products

3.145 Usually, the producer and the user of a given product perceive its value differently owing to the existence of taxes and subsidies on products, transport costs to be paid and the occurrence of trade margins.
In order to keep as close as possible to the views of the economic transactors themselves, the SNA records all uses at purchasers' prices including these elements, but excludes them from the value of output of the product.

3.146 Output of products is recorded at basic prices.
The basic price is defined as the amount receivable by the producer from the purchaser for a unit of good or service produced as output minus any tax payable and plus any subsidy receivable on the product as a consequence of its production or sale.
It excludes any transport charges invoiced separately by the producer.
If it proves impossible to obtain the required information at basic prices, output may be valued at producers' prices.
The producer's price is defined as the amount receivable by the producer from the purchaser for a unit of a good or service produced as output minus any value added tax (VAT), or similar deductible tax, invoiced to the purchaser.
It also excludes any transport charges invoiced separately by the producer.

3.147 Use of products is recorded at purchasers' prices.
The purchaser's price is defined as the amount payable by the purchaser, excluding any deductible VAT or similar deductible tax, in order to take delivery of a unit of a good or service at the time and place required by the purchaser.
The purchaser's price of a good includes any transport charges paid separately by the purchaser to take delivery at the required time and place.

3.148 The difference in value recorded for a product between when it is produced and the moment it is used for, say, final consumption expenditure can be considerable.
Components of this difference may be:

a. Taxes less subsidies on products payable by the producer;

b. Trade and transport margins, including taxes less subsidies on products payable by wholesale and retail traders;

c. Transport, including taxes less subsidies on products, paid separately by the consumer;

d. Predictable quality increases producing additional output volume less current losses during storage;

e. Holding gains while the product is with the producer and with wholesale and retail traders.

As one can see from the above, the difference between the original basic price and ultimate purchasers' price of a particular good encompasses both pure price and volume elements.
In practice, of course, the estimates do not keep track of individual products but are made at a more global level for groups of products.

3.149 Imports and exports of goods are recorded in the SNA at border values.
Total imports and exports of goods are valued free-on-board (FOB, that is, at the exporter's customs frontier).
As it may not be possible to obtain FOB values for detailed product breakdowns, the tables containing details on foreign trade show imports of goods valued at the importer's customs frontier (CIF, that is, cost, insurance and freight), supplemented with global adjustments to FOB values.
CIF values include the insurance and freight charges incurred between the exporter's frontier and that of the importer.
The value on the commercial invoice may of course differ from both of these.

3.150 As the overall balance of imports and exports must conform to actual circumstances, border valuation of goods has consequences for the recording of freight and insurance in the SNA.
Usually, the values of both imports and exports for these service items have to be adapted to compensate for the special conventions on goods traded with the rest of the world.
Further details on this treatment are in chapters 14 and 26.

Valuation of other flows

Other changes in the volumes of assets

3.151 In order to determine the valuation of the other changes in the volume of assets, it is usually necessary to value the asset before and after the change in volume and take the difference that is not explained by any transaction as the value of the other change.

3.152 Other changes in the volume of financial assets and liabilities are recorded at the market-equivalent prices of similar instruments.
For writing-off of financial instruments that are valued at nominal values, the value recorded in the other changes in the volume of assets account should correspond to their nominal value prior to being written off.
For all reclassifications of assets and liabilities, values of both the new and old instruments should be the same.

Holding gains and losses

3.153 Holding gains and losses accrue continuously and apply to both non-financial and financial assets and liabilities.
In general, they are estimated by deducting from the total change in the value of assets those that can be attributed to transactions and to other changes in volumes.

3.154 Since most financial assets are matched by liabilities, either within the domestic economy or with the rest of the world, it is important that holding gains in one are matched by holding losses in the other and vice versa.
A holding gain occurs when an asset increases in value or a liability decreases in value; a holding loss occurs when an asset decreases in value or a liability increases in value.
The value of holding gains and losses during an accounting period shows net changes in holding gains and holding losses for an asset and a liability separately.
In practice, the value of holding gains and losses is calculated for each asset and liability between two points in time: the beginning of the period or when the asset or liability is acquired or incurred and the end of the period or when the asset or liability is sold or extinguished.

Valuation of positions of financial assets and liabilities

3.155 Stocks of financial assets and liabilities should be valued as if they were acquired in market transactions on the balance sheet reporting date.
Many financial assets are traded in markets on a regular basis and therefore can be valued by directly using the price quotations from these markets.
If the financial markets are closed on the balance sheet date, the market prices that should be used in the valuation are those that prevailed on the closest preceding date when the markets were open.
Debt securities have a current market value as well as a nominal value, and for some purposes supplementary data on the nominal values of positions of debt securities may be useful.

3.156 Valuation according to market-value equivalent is needed for valuing financial assets and liabilities that are not traded in financial markets or are traded only infrequently.
For these assets and liabilities, it will be necessary to estimate fair values that, in effect, approximate market prices.
The present value of future cash flows can also be used as an approximation to market prices, provided an appropriate discount rate can be used.

3.157 Market values, fair values, and nominal values should be distinguished from such notions as amortized values, face values, book values, and historic cost.

a. Fair value is a market-equivalent value.
It is defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.
It thus represents an estimate of what could be obtained if the creditor had sold the financial claim.

b. Nominal value refers to the amount the debtor owes to the creditor, which comprises the outstanding principal amount including any accrued interest.

c. Amortized value reflects the amount at which the financial asset or liability was measured at initial recognition minus the principal repayments.
Excess payments over the scheduled principal repayments reduce the amortized value whereas payments that are less than the scheduled principal repayments or scheduled interest increase the amortized value.
On each scheduled date, amortized value is the same as nominal value, but it may differ from the nominal value on other dates due to the accrued interest being included in the nominal value.

d. Face value is the undiscounted amount of principal to be repaid.

e. Book value in business accounts generally refers to the value recorded in the enterprise's records.
Book values may have different meanings because their values are influenced by timing of acquisition, company takeovers, frequency of revaluations, and tax and other regulations.

f. Historic cost, in its strict sense, reflects the cost at the time of acquisition, but sometimes it may also reflect occasional revaluations.

3.158 The valuation of financial assets and liabilities in data reported by enterprises or other respondents may be based on commercial, supervisory, tax, or other accounting standards that do not fully reflect the market prices of the assets and liabilities.
In such cases, the data should be adjusted to reflect, as closely as possible, the market value of the financial assets and liabilities.
(More information on valuation rules can be found in External Debt Statistics: Guide for Compilers and Users ( Bank for International Settlements, the Commonwealth Secretariat, Eurostat, International Monetary Fund, Organisation for Economic Co-operation and Development, the Paris Club Secretariat, the United Nations Conference on Trade and Development and World Bank (2003)), known as the External Debt Guide.)

3. Time of recording

Choice of time of recording

3.159 When discussing timing in the SNA, an essential distinction should be made between stock data as recorded in balance sheets, on the one hand, and flow data as recorded in the accounts, on the other.
Balance sheets, by definition, refer to specific points in time.
In contrast, flows are aggregations, over some chosen accounting period, of individual transactions or other flows, which are themselves scattered over the accounting period.

3.160 Thus, the SNA does not show individual transactions or other flows, but there are two reasons why precise rules on their individual timing must be given.
In the first place, rules have to be formulated to say in which accounting period the discrete flows are to be recorded.
Secondly, an exact timing of individual flows within the accounting period is crucial to distinguish between changes in net worth due to transactions and changes due to holding gains or losses.
This distinction is particularly important in situations of high inflation.

3.161 One of the problems in pinning down the timing of transactions is that activities of institutional units often extend over periods in which several important moments can be distinguished.
For instance, many commercial sales commence with the signing of a contract between a seller and a buyer, encompass a date of delivery and a date or dates on which payments become due and are only completed as of the date the last payment is received by the seller.
Each of these distinct moments in time is to some extent economically relevant.

3.162 Similarly, in analysing government expenditure one can distinguish the day that a budget is voted upon by the legislature, the day on which the ministry of finance authorizes a department to pay out specified funds, the day a particular commitment is entered into by the departments, the day deliveries take place and finally the day payment orders are issued and cheques are paid.
With regard to taxes, for example, important moments are the day or the period in which the liability arises, the moment the tax liability is definitively assessed, the day that it becomes due for payment without penalty and the day the tax is actually paid or refunds are made.

3.163 Clearly, making entries for all successive stages discernible within the activities of institutional units, although theoretically possible, would severely overburden the SNA.
A choice has to be made, recognizing (a) the needs of macroeconomic analysis, (b) microeconomic views, and (c) commonly available sources.
Often, in this respect, a distinction is drawn between recording flows on a cash basis, due-for-payment basis, the commitment basis and accrual basis.
There may be other timing bases, such as physical movement or administrative process, used in some data sources.
The SNA recommends recording on an accrual basis throughout.

Choice for recording on an accrual basis

3.164 Cash accounting records only cash payments and records them at the times these payments occur.
This method is widely used for certain business purposes.
A practical advantage is the avoidance of problems connected with valuing non-monetary flows.
Yet, cash accounting cannot be used generally for economic and national accounting as the times at which payments take place may diverge significantly from the economic activities and transactions to which they relate and it is these underlying activities and transactions that the SNA seeks to portray.
Moreover, cash recording cannot be applied to the many non-monetary flows included in the SNA.

3.165 Due-for-payment recording shows flows that give rise to cash payments at the latest times they can be paid without incurring additional charges or penalties and, in addition to these, actual cash payments at the moments they occur.
The period of time (if any) between the moment a payment becomes due and the moment it is actually made is bridged by recording a receivable or a payable in the financial accounts.
Due-for-payment recording furnishes a more comprehensive description of monetary flows than does cash accounting.
A disadvantage is, of course, that the registration is still limited to monetary flows.

3.166 Accrual accounting records flows at the time economic value is created, transformed, exchanged, transferred or extinguished.
This means that flows that imply a change of ownership are entered when the change occurs, services are recorded when provided, output at the time products are created and intermediate consumption when materials and supplies are being used.
The SNA favours accrual accounting because:

a. The timing of accrual accounting is in full agreement with the way economic activities and other flows are defined in the SNA.
This agreement allows the profitability of productive activities to be evaluated correctly (that is, without the disturbing influence of leads and lags in cash flows) and a sector's net worth to be calculated correctly at any point in time;

b. Accrual accounting can be applied to non-monetary flows.

3.167 Many transactions, such as everyday purchases of households in shops, are monetary transactions in which some asset is delivered against immediate, or nearly immediate, payment in cash.
In those instances there are no differences between the three methods discussed here.
Accrual accounting is particularly relevant to the timing of various internal transactions (such as output that is added to the inventories of the producer), exchanges in which the parties deliver at differing times (such as sales with deferred payments) and obligatory transfers (taxes and flows connected with social security).

3.168 Usually, accrual accounting is the norm for the institutional units involved.
Numerous transactions consist of an exchange between two enterprises of, say, goods for financial assets.
In such an exchange, accounting entries will be made in the books of each enterprise, showing the same dates for the acquisition of the goods and the surrender of the financial assets, on the one hand, and for the acquisition of the financial assets and the surrender of the goods, on the other.
Sometimes, however, the two parties involved in a transaction will not perceive it as occurring at the same moment.
Furthermore, some transactors, in particular government units, do not keep records of purchases on an accrual basis.
In these cases, the rules of consistency in the SNA require that efforts should be undertaken to correct basic statistics for major deviations and flaws.
The application of the general rule of recording on an accrual basis to the most common circumstances is discussed below.

Time of recording of acquisitions of goods and services

3.169 The time of recording of the acquisition of goods is the moment when the economic ownership of those goods changes hands.
When change of ownership is not obvious, the moment of entering in the books of the transaction partners may be a good indication and, failing that, the moment when physical possession and control is acquired.
These subsidiary rules apply in particular to internal transactions or when a change of ownership is taken to occur under a financial lease or hire-purchase arrangement.
Imports and exports of goods are recorded when change of ownership occurs.
In the absence of sources specifying the date on which ownership changes, there is a strong presumption that the goods will cross the frontiers of the countries concerned either shortly before or soon after the change of ownership takes place.
Trade statistics based on customs documents reflecting the physical movement of goods across the national or customs frontier may therefore often be used as an approximation.

3.170 Services are recorded in the SNA when they are provided.
Some services are special in the sense that they are characteristically supplied on a continuous basis.
Examples are operating leasing, insurance and housing services (including those of owner-occupied dwellings).
These services are recorded as provided continuously over the whole period the contract lasts or the dwelling is available.

Time of recording of redistributive transactions

3.171 Following the general rule, distributive transactions are recorded at the moment the related claims arise.
As a result, for example, compensation of employees, interest, rent on land, social contributions and benefits are all registered in the period during which the amounts payable are built up. Equally, entries for taxes are made at the moment on which the underlying transactions or other flows occur that give rise to the liability to pay.
This implies that taxes on products and imports are recorded at the times the products in question are produced, imported or sold, depending on the basis for taxation.
Current taxes on income are recorded when the income to which they pertain is earned although taxes deducted at source may have to be recorded when they are deducted.
With respect to some distributive transactions, the time of accrual depends on the unit's decision when to distribute income or make a transfer.
The level of dividends is not unambiguously attributable to a particular earning period, and dividends are to be recorded as of the moment the associated share starts to be quoted “ex dividend”. Other examples are withdrawals from income of quasi-corporations and various voluntary transfers, which are recorded when effected.

Time of recording of transactions in financial assets and liabilities

3.172 Transactions in financial assets (including payments of cash) are recorded in the SNA on a change-of-ownership basis.
Some financial claims or liabilities defined in the SNA, in particular trade credits and advances, are the implicit result of a non-financial transaction and are not otherwise evidenced.
In these cases the financial claim is deemed to arise when its non-financial counterpart occurs.
The same holds for financial transactions that the SNA records between a quasi-corporation and its owner.

3.173 Both parties involved in a financial transaction may record it at varying dates in their own books because they acquire the documents evidencing the transaction at different times.
This variation is caused by the process of clearing, the time cheques are in the mail, etc.
The amounts involved in such “floats” are generally substantial in the case of transferable deposits and other accounts receivable and payable.
Again, reasons of consistency require that the transactions are entered on the same date for both parties.
If no precise date can be fixed on which the change of ownership occurs, the date on which the transaction is fully completed (thus the date on which the creditor receives his payment) is decisive.

3.174 For securities, the transaction date (that is, the time of the change in ownership of the securities) may precede the settlement date (that is, the time of the delivery of the securities).
Both parties should record the transactions at the time ownership changes, not when the underlying financial asset is delivered.
Any significant difference between transaction and settlement dates gives rise to accounts payable or receivable.

3.175 According to the accrual basis, repayments of debts are recorded when they are extinguished (such as when they are paid, or rescheduled, or forgiven by the creditor).
When arrears occur, no transactions should be imputed, but the arrears should continue to be shown in the same instrument until the liability is extinguished.
If the contract provided for a change in the characteristics of a financial instrument when it goes into arrears, this change should be recorded as a reclassification in the other changes in the financial assets and liabilities account.
The reclassification applies to situations where the original contract remains, but the terms within it changes (for example, interest rates or repayment periods).
If the contract is renegotiated or the nature of the instrument changes from one instrument category to another (for example, from bonds to equity), the consequences are to be recorded as new transactions.

Time of recording of output and intermediate consumption

3.176 The principle of recording on an accrual basis implies that output is recorded over the period in which the process of production takes place.
Thus, additions to work-in-progress are recorded continuously as work proceeds.
When the production process is terminated, the whole of the work-inprogress accumulated up to that point is effectively transformed into a stock of finished product ready for delivery or sale.

3.177 Similarly, the intermediate consumption of a good or service is recorded at the time when the good or service enters the process of production, as distinct from the time it was acquired by the producer.

Time of recording of changes in inventories and consumption of fixed capital

3.178 Inventories may be materials and supplies held as inputs by producers, output as yet unsold, or products held by wholesale and retail traders.
In all cases, additions to inventories are recorded when products are purchased, produced or otherwise acquired.
Deductions from inventories are recorded when products are sold, used up as intermediate consumption or otherwise relinquished.

3.179 The timing of consumption of fixed capital is inextricably linked with the question of its valuation.
Consumption of fixed capital is a cost category that accrues over the whole period the fixed asset in question is available for productive purposes.
The exact proportioning to accounting periods depends on the rate of depreciation.

Time of recording of composite transactions and balancing items

3.180 Transactions that are measured as the balance of two or more other transactions follow the timing of the constituent basic flows.
For example, financial intermediation services indirectly measured (FISIM) are recorded as interest on loans and deposits accrues.

3.181 The same rule for time of recording applies to balancing items.
However, due to the variety of transactions and other flows covered, each with its own characteristics, some thought is needed in interpreting balancing items.
For instance, in analysing the balancing item “saving” of non-financial corporations, one should be aware that the time when the operating surplus arises does not necessarily tally with the timing of the other factors, such as when dividends are payable.

Time of recording of other flows

3.182 Other changes in the volume of assets are usually discrete events that accrue at precise moments or within fairly short periods of time.

Time of recording of holding gains and losses

3.183 Changes in prices often have a more continuous character, particularly in respect of assets for which active markets exist.
In practice, nominal holding gains or losses will be computed between two points in time:

a. The moment at which:
· The accounting period begins; or
· Ownership is acquired from other units (through purchase or a transaction in kind); or
· An asset is produced; and

b. The moment at which:
· The accounting period ends; or
· The ownership of an asset is relinquished (through sale or a transaction in kind); or
· An asset is consumed in the production process.

3.184 One may wonder why nominal holding gains and losses are not calculated over a period beginning at the moment on which two units agree to a mutual exchange of assets instead of the period that starts with the moment on which the assets are acquired.
After all, does not the signing of the contract fix prices, implying that the risk for any later price changes is being transferred? The SNA, however, regards commitments resulting from a contract as contingent until one of the parties has performed its obligation (by passing the ownership of some asset to the other party, providing a service or providing labour or capital).
Also, a unit can incur holding gains and losses only on the assets or liabilities over which it has economic ownership.
The combination of these two rules implies that during the period between the signing of the contract and the date on which the first party delivers, the second party cannot incur any price risks on this contract: the second party neither owns the assets to be delivered nor owns a claim on the first party to be recorded in the financial accounts.

3.185 Changes in structure and classification should be entered at the moment when, according to the rules adopted in the SNA, a unit or an asset is moved to a different category than that to which it was classified previously.
An integrated stock-flow system like the SNA requires that all reclassifications are recorded and all entries for the reclassification are recorded at the same time.

3.186 In order to obtain statistical series that are more comparable over time, one might be tempted to stockpile major reclassifications for a number of years and enter them as one block at the end of this period.
However understandable this procedure might be, it does not conform to the recommendations of the SNA, which aim at correct estimates on levels.
Keeping records of reclassifications makes it possible in principle to reconstruct time series based on the situation in any accounting period.

Timing adjustments for international transactions

3.187 Differences in the time of recording by partner economies may occur due to various factors.
One of the intrinsic problems with recording international transactions is the difference in time zones.
Differences in time of recording may also arise from delays in mail deliveries or settlement clearing processes.
In most cases, data at some aggregate level rather than individual records are used in the compilation of international accounts.
Several data sources may often only approximate the required basis.
It is important to make timing adjustments where there are major divergences from the required basis.

3.188 In choosing among available statistical sources, compilers may wish to consider the advantage of using data for which the correct timing is already recorded.
For example, records of actual drawings on loans are preferred to sources that quote authorization dates or program dates that may not be realized in fact.
Some sources chosen by compilers as generally the most suitable may not have been specifically designed to yield information for balance of payments purposes.

Balance sheet items

3.189 Balance sheets can be drawn up for any point in time.
The SNA defines balance sheets for all sectors at the moment when one accounting period ends and a new accounting period begins.
The closing balance sheet of one period is identical to the opening balance sheet of the next one, so there remain no price changes, reclassifications or other economic flows that are not duly recognized by the SNA.

4. Aggregation, netting, consolidation

Aggregation

3.190 The immense number of individual transactions, other flows and assets within the scope of the SNA have to be arranged in a manageable number of analytically useful groups.
In the SNA, such groups are constructed by crossing two or more classifications.
As a minimum, a classification of institutional sectors or industries is crossed with the classification of transactions, other accumulation entries or assets.
Additionally, resources must be distinguished from uses and assets from liabilities.
In order to accommodate more detailed analysis, the classes thus generated may be further subdivided: examples are specifications of kind of product or asset, of function and of transaction partners.

3.191 Since the classifications in the SNA contain a number of levels made explicit in the codes, corresponding levels of aggregation may be distinguished.

3.192 Although conceptually the value for each aggregate is the sum of the values for all elementary items in the relevant category, in practice other estimation methods are frequently used.
In the first place, information on elementary transactions, other flows and assets may be incomplete or even non-existent.
Secondly, the data obtained from different primary sources are usually not fully consistent due to variations in definitions and coverage, so adjustments at aggregate level are necessary to reconcile them.

Netting

3.193 Individual units or sectors may have the same kind of transaction both as a use and as a resource (for example, they both pay and receive interest) and the same kind of financial instrument both as an asset and as a liability.
Combinations in which all elementary items are shown for their full values are called gross recordings.
Combinations whereby the values of some elementary items are offset against items on the other side of the account or which have an opposite sign are called net recordings.

3.194 The SNA recommends gross recording apart from the degree of netting that is inherent in the classifications themselves.
In fact, netting is already a feature of many of the recommendations of the SNA.
It mostly serves to highlight an economically important property that is not apparent from gross data.

3.195 Netting is implicit in various transaction categories, the most outstanding example being “changes in inventories”, which underlines the analytically significant aspect of overall capital formation rather than tracking daily additions and withdrawals.
Similarly, with few exceptions, the financial account and other changes in assets accounts record increases in assets and in liabilities on a net basis, bringing out the final consequences of these types of flows at the end of the accounting period.
All balancing items also involve netting.
To avoid confusion, the SNA uses the words “gross” and “net” in a very restrictive sense.
Apart from a few headings (“net premiums”, “net worth” and “net lending or net borrowing”), the SNA classifications employ the word “net” exclusively to indicate the value of variables after deduction of consumption of fixed capital.

3.196 In the case of flows of financial assets and liabilities, the terms “net changes in assets” and “net changes in liabilities” are used to reflect the nature of the financial flows.
Financial flows reflect changes due to all credit and debit entries during an accounting period.
That is, financial flows are recorded on a net basis separately for each financial asset and liability.
The use of the terms “net changes in assets” and “net changes in liabilities” brings the financial account into line with the convention used in the accumulation accounts.
These are general terms that apply to both the financial account and other changes in financial assets and liabilities account.
The use of these terms also simplifies the interpretation of data.
For both assets and liabilities, a positive change indicates an increase in stocks and a negative change indicates a decrease in stocks.
The interpretation of increase or decrease under the credit or debit notion, however, depends on whether the increase or decrease refers to assets or liabilities (a debit for an asset is an increase while a debit for a liability is a decrease).
While the debit and credit presentation is not emphasized for financial account transactions, it is important to recognize and maintain the accounting identities; for example, a credit is always conceptually matched with a corresponding debit, the latter relating to either an increase in an asset, or reduction in a liability.

Consolidation

3.197 Consolidation is a special kind of cancelling out of flows and stocks that should be distinguished from other kinds of netting.
It involves the elimination of those transactions or debtor or creditor relationships that occur between two transactors belonging to the same institutional sector or subsector.
Consolidation should not be seen as a sheer loss of information; it entails an elementary specification by the transaction partner.
Consolidation may be most relevant for financial institutions and general government.
There is more detail on this in chapters 22 and 27.
For certain kinds of analysis, information on the transactions of these (sub)sectors with other sectors and the corresponding “external” financial position is more significant than overall gross figures.
As a rule, however, the entries in the SNA are not consolidated.

3.198 The rule of non-consolidation takes a special form regarding the transaction categories “output” and “intermediate consumption”. These transactions are to be recorded throughout at the level of establishments.
This implies specifically that the accounts for institutional sectors and for industries should not be consolidated in respect of output delivered between establishments belonging to the same institutional unit.

Chapter 4: Institutional units and sectors

A. Introduction

4.1 This chapter is concerned with the definition and description of institutional units and the way in which they are grouped to make up the sectors and subsectors of the SNA.
Another key concept to be discussed is residence since the total economy consists of the entire set of resident institutional units.

1. Institutional units

4.2 An institutional unit is an economic entity that is capable, in its own right, of owning assets, incurring liabilities and engaging in economic activities and in transactions with other entities.
The main attributes of institutional units may be described as follows:

a. An institutional unit is entitled to own goods or assets in its own right; it is therefore able to exchange the ownership of goods or assets in transactions with other institutional units;

b. It is able to take economic decisions and engage in economic activities for which it is itself held to be directly responsible and accountable at law;

c. It is able to incur liabilities on its own behalf, to take on other obligations or future commitments and to enter into contracts;

d. Either a complete set of accounts, including a balance sheet of assets and liabilities, exists for the unit, or it would be possible and meaningful, from an economic viewpoint, to compile a complete set of accounts if they were to be required.

4.3 There are two main types of units in the real world that may qualify as institutional units, namely persons or groups of persons in the form of households, and legal or social entities.

4.4 For purposes of the SNA, a household is a group of persons who share the same living accommodation, who pool some, or all, of their income and wealth and who consume certain types of goods and services collectively, mainly housing and food.
As well as individual households, there are units described as institutional households that comprise groups of persons staying in hospitals, retirement homes, convents, prisons, etc. for long periods of time.

4.5 The individual members of multiperson households are not treated as separate institutional units.
Many assets are owned, or liabilities incurred, jointly by two or more members of the same household while some or all of the income received by individual members of the same household may be pooled for the benefit of all members.
Moreover, many expenditure decisions, especially those relating to the consumption of food, or housing, may be made collectively for the household as a whole.
It may be impossible, therefore, to draw up meaningful balance sheets or other accounts for members of the household on an individual basis.
For these reasons, the household as a whole rather than the individual persons in it must be treated as the institutional unit.

4.6 The second type of institutional unit is a legal or social entity that engages in economic activities and transactions in its own right, such as a corporation, non-profit institution (NPI) or government unit.
A legal or social entity is one whose existence is recognized by law or society independently of the persons, or other entities, that may own or control it.
Such units are responsible and accountable for the economic decisions or actions they take, although their autonomy may be constrained to some extent by other institutional units; for example, corporations are ultimately controlled by their shareholders.
Some unincorporated enterprises belonging to households or government units may behave in much the same way as corporations, and such enterprises are treated as quasi-corporations when they have complete sets of accounts.

4.7 In the legal sense, corporations may be described by different names: corporations, incorporated enterprises, public limited companies, public corporations, private companies, joint-stock companies, limited liability companies, limited liability partnerships, and so on. Conversely, some legal entities that are non-profit institutions may sometimes be described as “corporations”. The status of an institutional unit cannot always be inferred from its name, and it is necessary to examine its objectives and functions.
In the SNA, the term corporation covers legally constituted corporations and also cooperatives, limited liability partnerships, notional resident units and quasi-corporations.
The description of these various institutional units is given in section B.

4.8 Non-profit institutions (NPIs) are legal or social entities created for the purpose of producing goods and services but whose status does not permit them to be a source of income, profit or other financial gain for the units that establish, control or finance them.
In practice, their productive activities are bound to generate either surpluses or deficits but any surpluses they happen to make cannot be appropriated by other institutional units.
The articles of association by which they are established are drawn up in such a way that the institutional units that control or manage them are not entitled to a share in any profits or other income they generate.
For this reason, they are frequently exempted from various kinds of taxes.
A description of the treatment of NPIs within the SNA is given in section C.

4.9 Government units are unique kinds of legal entities established by political processes that have legislative, judicial or executive authority over other institutional units within a given area.
Viewed as institutional units, the principal functions of government are to assume responsibility for the provision of goods and services to the community or to individual households and to finance their provision out of taxation or other incomes; to redistribute income and wealth by means of transfers; and to engage in non-market production.

2. Residence

4.10 The residence of each institutional unit is the economic territory with which it has the strongest connection, in other words, its centre of predominant economic interest.
The concept of economic territory in the SNA coincides with that of the BPM6.
Some key features are as follows.
In its broadest sense, an economic territory can be any geographic area or jurisdiction for which statistics are required.
The connection of entities to a particular economic territory is determined from aspects such as physical presence and being subject to the jurisdiction of the government of the territory.
The most commonly used concept of economic territory is the area under the effective economic control of a single government.
However economic territory may be larger or smaller than this, as in a currency or economic union or a part of a country or the world.

4.11 The economic territory includes the land area, airspace, territorial waters, including jurisdiction over fishing rights and rights to fuels or minerals.
In a maritime territory, the economic territory includes islands that belong to the territory.
The economic territory also includes territorial enclaves in the rest of the world.
These are clearly demarcated land areas (such as embassies, consulates, military bases, scientific stations, information or immigration offices, aid agencies, central bank representative offices with diplomatic immunity, etc.) located in other territories and used by governments that own or rent them for diplomatic, military, scientific, or other purposes with the formal agreement of governments of the territories where the land areas are physically located.

4.12 Economic territory has the dimensions of physical location as well as legal jurisdiction.
The concepts of economic territory and residence are designed to ensure that each institutional unit is a resident of a single economic territory.
The use of an economic territory as the scope of economic statistics means that each member of a group of affiliated enterprises is resident in the economy in which it is located, rather than being attributed to the economy of location of the head office.

4.13 In general, an institutional unit is resident in one and only one economic territory determined by the unit's centre of predominant economic interest.
Exceptions may be made for multiterritory enterprises that operate a seamless operation over more than one economic territory.
Although the enterprise has substantial activity in more than one economic territory, it cannot be broken up into separate branches or a parent and branch(es) because it is run as an indivisible operation with no separate accounts or decisions.
Such enterprises are typically involved in cross-border activities and include shipping lines, airlines, hydroelectric schemes on border rivers, pipelines, bridges, tunnels and undersea cables.
If it is not possible to identify a parent or separate branches, it is necessary to prorate the total operations of the enterprise into the individual economic territories.
For more information on these special cases, reference should be made to BPM6.

4.14 An institutional unit has a centre of predominant economic interest in an economic territory when there exists, within the economic territory, some location, dwelling, place of production, or other premises on which or from which the unit engages and intends to continue engaging, either indefinitely or over a finite but long period of time, in economic activities and transactions on a significant scale.
The location need not be fixed so long as it remains within the economic territory.
Actual or intended location for one year or more is used as an operational definition; while the choice of one year as a specific period is somewhat arbitrary, it is adopted to avoid uncertainty and facilitate international consistency.

4.15 The concept of residence in the SNA is exactly the same as in BPM6.
Some key consequences follow:

a. The residence of individual persons is determined by that of the household of which they form part and not by their place of work.
All members of the same household have the same residence as the household itself, even though they may cross borders to work or otherwise spend periods of time abroad.
If they work and reside abroad so long that they acquire a centre of economic interest abroad, they cease to be members of their original households;

b. Unincorporated enterprises that are not quasi-corporations are not separate institutional units from their owners and, therefore, have the same residence as their owners;

c. Corporations and NPIs may normally be expected to have a centre of economic interest in the country in which they are legally constituted and registered.
Corporations may be resident in countries different from their shareholders and subsidiary corporations may be resident in countries different from their parent corporations.
When a corporation, or unincorporated enterprise, maintains a branch, office or production site in another country in order to engage in production over a long period of time (usually taken to be one year or more) but without creating a subsidiary corporation for the purpose, the branch, office or site is considered to be a quasi-corporation (that is, a separate institutional unit) resident in the country in which it is located;

d. Owners of land, buildings and immovable structures in the economic territory of a country, or units holding long leases on either, are deemed always to have a centre of economic interest in that country, even if they do not engage in other economic activities or transactions in the country.
All land and buildings are therefore owned by residents;

e. Extraction of subsoil resources can only be undertaken by resident institutional units.
An enterprise that will undertake extraction is deemed to become resident when the requisite licences or leases are issued, if not before;

f. For entities such as many special purpose entities, that have few if any attributes of location, the location is determined by their place of incorporation.

Further elaboration of borderline cases is given in chapter 26 and in BPM6.

3. Sectoring and economic behaviour

4.16 The institutional sectors of the SNA group together similar kinds of institutional units.
Corporations, NPIs, government units and households are intrinsically different from each other in that their economic objectives, functions and behaviour are different.

4.17 Institutional units are allocated to sector according to the nature of the economic activity they undertake.
The three basic economic activities recorded in the SNA are production of goods and services, consumption to satisfy human wants or needs and accumulation of various forms of capital.
Corporations undertake either production or accumulation (or both) but do not undertake (final) consumption.
Government undertakes production (but mainly of a different type from corporations), accumulation and final consumption on behalf of the population.
All households undertake consumption on their own behalf and may also engage in production and accumulation. NPIs are diverse in nature.
Some behave like corporations, some are effectively part of government and some undertake activities similar to government but independently of it.

4.18 Fundamental to the distinction between corporations and government is the basis on which production is undertaken.
Corporations produce for the market and aim to sell their products at economically significant prices.
Prices are said to be economically significant if they have a significant effect on the amount that producers are willing to supply and the amounts purchasers wish to buy.
These prices normally result when the producer has an incentive to adjust supply either with the goal of making a profit in the long run (or at a minimum, covering capital and other costs) and consumers have the freedom to purchase or not purchase and make the choice on the basis of the prices charged.
There is more extensive discussion of the definition of economically significant prices and the meaning of market and non-market production in chapters 6 and 22.

4.19 Corporations are divided between those mainly providing financial services and those mainly providing goods and other services.
The two groups are known as financial corporations and non-financial corporations respectively.
The distinction is made because of the special role that financial corporations play in the economy.

4.20 The economic objectives, functions and behaviour of government units are quite distinct.
They organize and finance the provision of goods and services, to individual households and the community at large and therefore incur expenditures on final consumption.
They may produce most of these goods and services themselves but the products are usually either provided free or at prices determined by considerations other than purely market forces.
Government units are also concerned with distribution and redistribution of income and wealth through taxation and other transfers.
Government units include social security funds.

4.21 The economic objectives, functions and behaviour of households are different again.
Although primarily consumer units, they can also engage in production.
Often this production activity is relatively small scale and includes informal and subsistence activities.
When the production units of households are not legal entities (and cannot be treated as such) they are described as unincorporated enterprises.
They remain part of the same institutional unit as the household to which they belong.

4.22 NPIs are institutional units created for the purpose of producing or distributing goods or services but not for the purpose of generating any income or profit for the units that control or finance them.
Nevertheless, some NPIs deliver goods and services to customers at economically significant prices and, when they do, these NPIs are treated in the same way as corporations in the SNA.
Other NPIs that are controlled by government are treated as government units.
The remaining NPIs, those that produce goods and services but do not sell them at economically significant prices and are not controlled by government, are treated as a special group of units called non-profit institutions serving households (NPISHs).
They are in effect non-governmental social institutions.

4. The total economy

4.23 The total economy is defined as the entire set of resident institutional units.
The resident institutional units that make up the total economy are grouped into five mutually exclusive institutional sectors.
Sectors are groups of institutional units and the whole of each institutional unit must be classified to one or other sector of the SNA.
The full sequence of accounts of the SNA may be constructed for a single institutional unit or a group of units.
The attributes of an institutional unit described in paragraph 4.2 explain why it is not possible to compile a full set of accounts for only part of a unit.
However, it is possible, useful and common practice to compile some accounts for sub-divisions of corporations, discriminating on the basis of the type of production the parts undertake.
This is the subject of chapter 5.
For the present chapter attention focuses on the allocation of complete units to one sector or another.

Figure 4.1: Illustrative allocation of units to institutional sectors

5. An overview of institutional sectors

4.24 All resident institutional units are allocated to one and only one of the following five institutional sectors:

The non-financial corporations sector;

The financial corporations sector;

The general government sector;

The non-profit institutions serving households sector;

The households sector.

4.25 The conceptual basis for the allocation of a unit to the appropriate sector can be seen in figure 4.1.
The boxes for the sectors of the total economy, plus the box for the rest of the world, appear with double borders.
Once non-resident units and households are set aside, only resident legal and social entities remain.
Three questions determine the sectoral allocation of all such units.
The first is whether the unit is a market or non-market producer.
This depends on whether the majority of the unit's production is offered at economically significant prices or not.

4.26 The second question determining sectoral allocation applies to non-market units, all of which, including non-market NPIs, are allocated either to general government or to the NPISH sector.
The determining factor is whether the unit is part of, or controlled by, government.
The criteria to establish control are discussed in section C below.

4.27 The third question determining sectoral allocation applies to market units, all of which, including market NPIs, are allocated to either the non-financial corporations sector or the financial corporations sector.
In the context of sectors as elsewhere in the SNA, the term “corporation” is used to encompass cooperatives, limited liability partnerships, notional resident units and quasi-corporations as well as legally constituted corporations.

4.28 All resident non-financial corporations are included in the non-financial corporations sector and make up most of the sector in practice.
In addition, the sector includes non-profit institutions (NPIs) engaged in the market production of goods and non-financial services: for example, hospitals, schools or colleges that charge fees that enable them to recover their current production costs, or trade associations financed by subscriptions from non-financial corporate or unincorporated enterprises whose role is to promote and serve the interests of those enterprises.
The non-financial corporations sector is described further in section D.

4.29 The financial corporations sector includes all resident corporations whose principal activity is providing financial services including financial intermediation, insurance and pension fund services, and units that provide activities that facilitate financial intermediation.
In addition, the sector includes NPIs engaged in market production of a financial nature such as those financed by subscriptions from financial enterprises whose role is to promote and serve the interests of those enterprises.
The financial corporations sector is described further in section E.

4.30 The general government sector consists mainly of central, state and local government units together with social security funds imposed and controlled by those units.
In addition, it includes NPIs engaged in non-market production that are controlled by government units or social security funds.

4.31 The non-profit institutions serving households sector consists of all resident NPIs, except those controlled by government, that provide non-market goods or services to households or to the community at large.

4.32 The households sector consists of all resident households.
These include institutional households made up of persons staying in hospitals, retirement homes, convents, prisons, etc. for long periods of time.
As already noted, an unincorporated enterprise owned by a household is treated as an integral part of the latter and not as a separate institutional unit unless the accounts are sufficiently detailed to treat the activity as that of a quasi-corporation.

6. Subsectors

4.33 Each of the five institutional sectors listed above may be divided into subsectors.
No single method of subsectoring may be optimal for all purposes or all countries, so that alternative methods of subsectoring are recommended for certain sectors.
Dividing the total economy into sectors enhances the usefulness of the accounts for purposes of economic analysis by grouping together institutional units with similar objectives and types of behaviour.
Sectors and subsectors are also needed in order to be able to target or monitor particular groups of institutional units for policy purposes.
For example, the household sector has to be divided into subsectors in order to be able to observe how different sections of the community are affected by, or benefit from, the process of economic development or government economic and social policy measures.
Similarly, it may be important to treat corporations subject to control by non-residents as subsectors of the financial and non-financial corporate sectors not only because they are liable to behave differently from domestically controlled corporations but because policymakers may wish to be able to identify and observe those parts of the economy that are subject to influence from abroad.
The division of sectors into subsectors depends upon the type of analysis to be undertaken, the needs of policymakers, the availability of data and the economic circumstances and institutional arrangements within a country.

Public and foreign control

4.34 One common subsectoring is to identify those non-financial and financial corporations that are controlled by the government, called public corporations, and those that are controlled from abroad.
The remaining corporations form the national private corporations in an economy.
The criteria for determining control by government and from abroad are discussed in section B. Figure 4.1 includes this type of subsectoring for both groups of corporations.

Non-profit institutions

4.35 As described above, the SNA assigns NPIs to different sectors according to whether they produce for the market or not, regardless of motivation, status of employees or the activity they are engaged in. However, there is increasing interest in considering the full set of NPIs as evidence of “civil society” so it is recommended that NPIs within the corporate and government sectors be identified in distinct subsectors so that supplementary tables summarizing all NPI activities can be derived in a straightforward manner as and when required.

Other subsectoring

4.36 The question of subsectoring is included in the more extensive consideration of each institutional sector in following sections.
Particular subsectors are suggested for general government, financial corporations and households.

7. The rest of the world

4.37 On occasion it is convenient to refer to non-resident households or corporations as units that are resident in the rest of the world.
Whenever accounts are drawn up for institutional sectors, as well as an account for the total economy, a further account is shown showing the relationship with the rest of the world.
In effect, therefore transactions with the rest of the world are recorded as if the rest of the world is a de facto sixth sector.

B. Corporations in the SNA

1. Types of corporations

4.38 In the SNA, the term corporation is used more broadly than in just the legal sense.
In general, all entities that are:

a. capable of generating a profit or other financial gain for their owners,

b. recognized at law as separate legal entities from their owners who enjoy limited liability,

c. set up for purposes of engaging in market production,

are treated as corporations in the SNA, however they may describe themselves or whatever they may be called.
As well as legally constituted corporations the term corporations is used to include cooperatives, limited liability partnerships, notional resident units and quasi-corporations.
Whenever the term corporation is used, the broader coverage rather than the narrow legal definition is intended unless otherwise stated.
Each of the main components of the broader coverage is discussed in turn below.

Legally constituted corporations

4.39 Legally constituted corporations may be described by different names: corporations, incorporated enterprises, public limited companies, public corporations, private companies, joint-stock companies, limited liability companies, limited liability partnerships, and so on.
A legally constituted corporation is a legal entity, created for the purpose of producing goods or services for the market, that may be a source of profit or other financial gain to its owner(s); it is collectively owned by shareholders who have the authority to appoint directors responsible for its general management.

4.40 The laws governing the creation, management and operations of legally constituted corporations may vary from country to country so that it is not feasible to provide a precise, legal definition of a corporation that would be universally valid.
It is possible, however, to indicate in more detail the typical features of corporations that are most relevant from the point of view of the SNA.
They may be summarized as follows:

a. A corporation is an entity created by process of law whose existence is recognized independently of the other institutional units that may own shares in its equity.
The existence, name and address of a corporation are usually recorded in a special register kept for this purpose.
A corporation may normally be expected to have a centre of predominant economic interest (that is, to be resident) in the country in which it is created and registered.

b. A corporation that is created for the purpose of producing goods or services for sale on the market does so at prices that are economically significant.
This implies that it is a market producer.
(A description of economically significant prices and the difference between market and non-market production is given in chapters 6 and 22.)

c. A corporation is fully responsible and accountable at law for its own actions, obligations and contracts, this being an essential attribute of an institutional unit in the SNA.
A corporation is subject to the tax regime of the country where it is resident in respect of its productive activities, income or assets.

d. Ownership of a corporation is vested in the shareholders collectively.
The amount of income actually distributed to shareholders as dividends in any single accounting period is decided by the directors of the corporation.
Income is usually distributed to shareholders in proportion to the value, or amounts, of the shares or other capital participations they own.
There may be different kinds of shares in the same corporation carrying different entitlements.

e. In the event of a corporation being wound up, or liquidated, the shareholders are similarly entitled to a share in the net worth of the corporation remaining after all assets have been sold and all liabilities paid.
If a corporation is declared bankrupt because its liabilities exceed the value of its assets, the shareholders are not liable to repay the excess liabilities.

f. Control of a corporation is ultimately exercised by the shareholders collectively.
A corporation has a board of directors that is responsible for the corporation's policy and appoints the senior management of the corporation.
The board of directors is usually appointed by the collective vote of the shareholders.

g. In practice, however, some shareholders may exert much more influence or control over the policies and operations of a corporation than others.

h. The voting rights of shareholders may not be equal.
Some types of shares may carry no voting rights, while others may carry exceptional rights, such as the right to make specific appointments to the board of directors or the right to veto other appointments made on a majority vote.
Such exceptional rights may be held by the government when it is a shareholder in a corporation.

i. Many shareholders with voting rights do not choose to exercise them, so that a small, organized minority of active shareholders may be in a position to control the policy and operations of a corporation.

Cooperatives, limited liability partnerships, etc.

4.41 Cooperatives are set up by producers for purposes of marketing their collective output.
The profits of such cooperatives are distributed in accordance with their agreed rules and not necessarily in proportion to shares held, but effectively they operate like corporations.
Similarly, partnerships whose members enjoy limited liability are separate legal entities that behave like corporations.
In effect, the partners are at the same time both shareholders and managers.

Quasi-corporations

4.42 Some unincorporated enterprises function in all (or almost all) respects as if they were incorporated.
These are termed quasi-corporations in the SNA and are included with corporations in the non-financial and financial corporations sectors.
A quasi-corporation is:

a. either an unincorporated enterprise owned by a resident institutional unit that has sufficient information to compile a complete set of accounts and is operated as if it were a separate corporation and whose de facto relationship to its owner is that of a corporation to its shareholders, or

b. an unincorporated enterprise owned by a nonresident institutional unit that is deemed to be a resident institutional unit because it engages in a significant amount of production in the economic territory over a long or indefinite period of time.

4.43 Three main kinds of quasi-corporations are recognized in the SNA:

a. Unincorporated enterprises owned by government units that are engaged in market production and that are operated in a similar way to publicly owned corporations;

b. Unincorporated enterprises, including unincorporated partnerships or trusts, owned by households that are operated as if they were privately owned corporations;

c. Unincorporated enterprises that belong to institutional units resident abroad, referred to as “branches”.

4.44 The intent behind the concept of a quasi-corporation is clear: namely, to separate from their owners those unincorporated enterprises that are sufficiently self-contained and independent that they behave in the same way as corporations.
If they function like corporations, they must keep complete sets of accounts.
Indeed, the existence of a complete set of accounts, including balance sheets, for the enterprise is a necessary condition for it to be treated as a quasi-corporation.
Otherwise, it would not be feasible from an accounting point of view to distinguish the quasi-corporation from its owner.

4.45 As a quasi-corporation is treated as a separate institutional unit from its owner, it must have its own value added, saving, assets, liabilities, etc.
It must be possible to identify and record any flows of income and capital that are deemed to take place between the quasi-corporation and its owner.
The amount of income withdrawn from a quasi-corporation during a given accounting period is decided by the owner, such a withdrawal being equivalent to the payment of a dividend by a corporation to its shareholder(s).
Given the amount of the income withdrawn, the saving of the quasi-corporation (that is, the amount of earnings retained within the quasi-corporation) is determined.
A balance sheet is also needed for the quasi-corporation showing the values of its non-financial assets used in production and also the financial assets and liabilities owned or incurred in the name of the enterprise.

4.46 Experience has shown that countries have difficulty treating unincorporated enterprises owned by households as quasi-corporations.
However, it is not useful to introduce additional criteria, such as size, into the definition of quasi-corporations owned by households.
If an enterprise is not in fact operated like a corporation and does not have a complete set of accounts of its own, it cannot and should not be treated as a quasi-corporation however large it may be.

Branches

4.47 When a non-resident unit has substantial operations over a significant period in an economic territory, but no separate legal entity, a branch may be identified as an institutional unit.
This unit is identified for statistical purposes because the operations have a strong connection to the location of operations in all ways other than incorporation.
An unincorporated enterprise abroad should be treated as a quasi-corporation when indications of substantial operations can be identified separately from the rest of the entity.
As with other quasi-corporations, either a complete set of accounts for the unit exists or it would be meaningful from an economic point of view to compile them.
The availability of separate records indicates that an actual unit exists and makes it practical to prepare statistics.
In addition, all or most of the following factors tend to be present for a branch to be recognized:

a. Production based in the territory is undertaken or intended for one year or more in a territory other than that of its head office:
· If the production process involves physical presence, then the operations should be physically located in that territory.
Some indicators of an intention to locate in the territory include purchasing or renting business premises, acquiring capital equipment, and recruiting local staff.
· If the production does not involve physical presence, such as some cases of banking, insurance, or other financial services, the operations should be recognized as being in the territory by virtue of the registration or legal domicile of those operations in that territory.

b. The operations are recognized as being subject to the income tax system, if any, of the economy in which it is located even if it may have a tax-exempt status.

4.48 Some construction projects undertaken by a nonresident contractor may give rise to a branch.
Construction may be carried out or managed by a nonresident enterprise, without the creation of a local legal entity, for example, major projects (such as bridges, dams, power stations) that take a year or more to complete and that are managed through a local site office.

Notional resident units

4.49 Immovable assets such as land and other natural resources, and buildings and structures are treated as being owned by resident units except in one particular circumstance.
If the legal owner is actually non-resident, an artificial unit, called a notional resident unit, is created in the SNA.
The notional resident unit is recorded as owning the asset and receiving the rent or rentals that accrue to the asset.
The legal owner owns the equity in the notional resident unit and then receives income from the notional resident unit in the form of property income paid abroad.
The only exception is made for land and buildings in extraterritorial enclaves of foreign governments (such as embassies, consulates and military bases) that are subject to the laws of the home territory and not those of the territory where they are physically situated.

4.50 A long-term lease to use immovable assets such as land and other natural resources must also be held by a resident.
If necessary, a notional resident unit is identified in this case also.

2. Special cases

Groups of corporations

4.51 Large groups of corporations, or conglomerates, may be created whereby a parent corporation controls several subsidiaries, some of which may control subsidiaries of their own, and so on. For certain purposes, it may be desirable to have information relating to a group of corporations as a whole.
However, each individual corporation should be treated as a separate institutional unit, whether or not it forms part of a group.
Even subsidiaries that are wholly owned by other corporations are separate legal entities that are required by law and the tax authorities to produce complete sets of accounts, including balance sheets.
Although the management of a subsidiary corporation may be subject to the control of another corporation, it remains responsible and accountable for the conduct of its own production activities.

4.52 Another reason for not treating groups of corporations as single institutional units is that groups are not always well defined, stable or easily identified in practice.
It may be difficult to obtain data for groups whose activities are not closely integrated.
Moreover, many conglomerates are much too large and heterogeneous for them to be treated as single units, and their size and composition may be continually shifting over time as a result of mergers and takeovers.

Head offices and holding companies

4.53 Two quite different types of units exist that are both often referred to as holding companies.
The first is the head office that exercises some aspects of managerial control over its subsidiaries.
These may sometimes have noticeably fewer employees, and more at a senior level, than its subsidiaries but it is actively engaged in production.
These types of activities are described in ISIC Rev. 4 in section M class 7010 as follows:

This class includes the overseeing and managing of other units of the company or enterprise; undertaking the strategic or organizational planning and decision making role of the company or enterprise; exercising operational control and manage the day-to-day operations of their related units.

Such units are allocated to the non-financial corporations sector unless all or most of their subsidiaries are financial corporations, in which case they are treated by convention as financial auxiliaries in the financial corporations sector.

4.54 The type of unit properly called a holding company is a unit that holds the assets of subsidiary corporations but does not undertake any management activities.
They are described in ISIC Rev. 4 in section K class 6420 as follows:

This class includes the activities of holding companies, i.e. units that hold the assets (owning controlling-levels of equity) of a group of subsidiary corporations and whose principal activity is owning the group.
The holding companies in this class do not provide any other service to the enterprises in which the equity is held, i.e. they do not administer or manage other units.

Such units are always allocated to the financial corporations sector and treated as captive financial institutions even if all the subsidiary corporations are non-financial corporations.

Special purpose entities

4.55 A number of institutional units may be described as special purpose entities (SPEs) or special purpose vehicles.
There is no common definition of an SPE but some of the following characteristics may apply.

4.56 Such units often have no employees and no non-financial assets.
They may have little physical presence beyond a “brass plate” confirming their place of registration.
They are always related to another corporation, often as a subsidiary, and SPEs in particular are often resident in a territory other than the territory of residence of the related corporations.
In the absence of any physical dimension to an enterprise, its residence is determined according to the economic territory under whose laws the enterprise is incorporated or registered.
For more detail on problematical cases see BPM6.

4.57 Entities of this type are commonly managed by employees of another corporation which may or may not be a related one.
The unit pays fees for services rendered to it and in turn charges its parent or other related corporation a fee to cover these costs.
This is the only production the unit is involved in though it will often incur liabilities on behalf of its owner and will usually receive investment income and holding gains on the assets it holds.

4.58 Whether a unit has all or none of these characteristics, and whether it is described as an SPE or some similar designation or not, it is treated in the SNA in the same way as any other institutional unit by being allocated to sector and industry according to its principal activity unless it falls into one of the three following categories:

a. Captive financial institutions,

b. Artificial subsidiaries of corporations,

c. Special purpose units of general government.

Each of these is described below.

Captive financial institutions

4.59 A holding company that simply owns the assets of subsidiaries is one example of a captive financial institution.
Other units that are also treated as captive financial institutions are units with the characteristics of SPEs as described above including investment and pension funds and units used for holding and managing wealth for individuals or families, holding assets for securitization, issuing debt securities on behalf of related companies (such a company may be called a conduit), securitization vehicles and to carry out other financial functions.

4.60 The degree of independence from its parent may be demonstrated by exercising some substantive control over its assets and liabilities to the extent of carrying the risks and reaping the rewards associated with the assets and liabilities.
Such units are classified in the financial corporations sector.

4.61 An entity of this type that cannot act independently of its parent and is simply a passive holder of assets and liabilities (sometimes described as being on auto-pilot) is not treated as a separate institutional unit unless it is resident in an economy different from that of its parent.
If it is resident in the same economy as its parent, it is treated as an “artificial subsidiary” as described immediately below.

Artificial subsidiaries of corporations

4.62 Within the SNA, the term corporation is used to denote both those institutions legally recognized as corporations and other units treated in the SNA as corporations, specifically quasi-corporations, branches and notional units.
For the following six paragraphs, however, the term corporation is used in the sense of a corporation as a legal entity.

4.63 A subsidiary corporation, wholly owned by a parent corporation, may be created to provide services to the parent corporation, or other corporations in the same group, in order to avoid taxes, to minimize liabilities in the event of bankruptcy, or to secure other technical advantages under the tax or corporation legislation in force in a particular country.
For example, the parent may create a subsidiary to which ownership of its land, buildings or equipment is transferred and whose sole function is to lease them back again to the parent corporation; the subsidiary may be the nominal employer of all the staff who are then contracted to other corporations in the group, the subsidiary may keep the accounts and records of the parent on a separate computer installation; the role of the subsidiary may be established to take advantage of favourable funding or regulatory treatments and so on. In some cases, corporations may create “dormant” subsidiaries that are not actually engaged in any production but which may be activated at the convenience of the parent corporation.

4.64 In general, these sorts of corporations do not satisfy the definition of an institutional unit in the SNA because they lack the ability to act independently from their parent corporation and may be subject to restrictions on their ability to hold or transact assets held on their balance sheets.
Their level of output and the price they receive for it are determined by the parent that (possibly with other corporations in the same group) is their sole client.
They are thus not treated as separate institutional units in the SNA but are treated as an integral part of the parent and their accounts are consolidated with those of the parent.
As noted above, the accounts for passive SPEs (those on autopilot) are also consolidated with their parent corporation unless they are resident in an economy different from that where the parent is resident.

4.65 Quasi-corporations such as a partnership or trust may also be set up by a parent corporation for similar reasons to the subsidiary corporations just described.
Within the SNA, these are also treated as an integral part of the parent and their accounts are consolidated with the parent.

4.66 A distinction must be made between artificial subsidiaries as just described and a unit undertaking only ancillary activities.
As described in more detail in section D of chapter 5, ancillary activities are limited in scope to the type of service functions that virtually all enterprises need to some extent or another such as cleaning premises, running the staff payroll or providing the information technology infrastructure for the enterprise.
Units undertaking only ancillary activities will in general not satisfy the conditions of being an institutional unit (for the same sort of reason as artificial subsidiaries do not) but they may sometimes be treated as a separate establishment of the enterprise if this is analytically useful.

Special purpose units of general government

4.67 General government may also set up special units, with characteristics and functions similar to the captive financial institutions and artificial subsidiaries of corporations just described.
Such units do not have the power to act independently and are restricted in the range of transactions they can engage in. They do not carry the risks and rewards associated with the assets and liabilities they hold.
Such units, if they are resident, are treated as an integral part of general government and not as separate units.
If they are non-resident they are treated as separate units.
Any transactions carried out by them abroad are reflected in corresponding transactions with government.
Thus a unit that borrows abroad is then regarded as lending the same amount to general government, and on the same terms, as the original borrowing.

3. Ownership and control of corporations

4.68 The ownership of a listed corporation is diffused among the institutional units that own its shares in proportion to the shareholdings.
It is possible for one single institutional unit, whether another corporation, a household or a government unit, to own all the equity or shares in a corporation but, in general, ownership of a listed corporation is diffused among several, possibly very many, institutional units.

4.69 A single institutional unit owning more than a half of the shares, or equity, of a corporation is able to control its policy and operations by outvoting all other shareholders, if necessary.
Similarly, a small, organized group of shareholders whose combined ownership of shares exceeds 50 per cent of the total is able to control the corporation by acting in concert.
There may be exceptional cases in which certain shareholders enjoy privileged voting rights, such as a “golden share” giving a right of veto, but in general an individual institutional unit or group of units owning more than half the voting shares of a corporation can exercise complete control by appointing directors of its own choice.
The degree of autonomy exercised by the directors and managers of a corporation is, therefore, likely to vary considerably, depending upon the extent to which the ownership of its shares is concentrated in the hands of a small number of other institutional units, whether these are other corporations, households or government units.
In general, institutional units do not have to be autonomous but they do have to be responsible, and accountable, for the decisions and actions they take.

4.70 Because many shareholders do not exercise their voting rights, a single shareholder, or small number of shareholders acting together, may be able to secure control over a corporation, even though they may hold considerably less than half of the total shares.
When ownership of shares is widely diffused among a large number of shareholders, control may be secured by owning considerably less than half of the total shares.

4.71 However, it is not possible to stipulate a minimum shareholding below 50 per cent that will guarantee control in all cases.
The minimum must vary depending upon the total number of shareholders, the distribution of shares among them, and the extent to which small shareholders take an active interest, etc.

Subsidiary and associate corporations

4.72 It is common for corporations to own shares in other corporations, and certain interrelationships between corporations need to be specified for purposes of the SNA.

Subsidiary corporations

4.73 Corporation B is said to be a subsidiary of corporation A when:

a. Either corporation A controls more than half of the shareholders' voting power in corporation B; or

b. Corporation A is a shareholder in corporation B with the right to appoint or remove a majority of the directors of corporation B.

4.74 Corporation A may be described as the parent corporation in this situation.
As the relationship of a parent corporation to a subsidiary is defined in terms of control rather than ownership, the relationship must be transitive: that is, if C is a subsidiary of B and B is a subsidiary of A, then C must also be a subsidiary of A. If A has a majority shareholding in B while B has a majority shareholding in C, A cannot also have a majority shareholding in C. Nevertheless, A must be able to control C if it controls B. By analogy with families of persons, corporation B can be described as a first generation subsidiary of corporation A, and corporation C as a second generation subsidiary of A. Evidently, large families of corporations may be built up with any number of subsidiaries at each level or generation and also any number of generations.
Very large families of corporations, described as conglomerates, are encountered in some countries.
Conglomerates that include corporations resident in different countries are usually described as multinational corporations.

Associate corporations

4.75 Corporation B is said to be an associate of corporation A when corporation A and its subsidiaries control between 10 per cent and 50 per cent of the shareholders' voting power in B so that A has some influence over the corporate policy and management of B.

4.76 By definition, a corporation is able to exert less influence over an associate corporation than over a subsidiary.
Although some corporations may be able to exert considerable influence over their associates, this cannot be guaranteed.
The relationship between associates is weaker than that between parent and subsidiary corporations, and groups of associates may not be well defined.

Government control of corporations

4.77 A corporation is a public corporation if a government unit, another public corporation, or some combination of government units and public corporations controls the entity, where control is defined as the ability to determine the general corporate policy of the corporation.
The expression “general corporate policy” as used here is understood in a broad sense to mean the key financial and operating policies relating to the corporation's strategic objectives as a market producer.

4.78 Because governments exercise sovereign powers through legislation, regulations, orders and the like, care needs to be applied in determining whether the exercise of such powers amounts to a determination of the general corporate policy of a particular corporation and therefore control of the corporation.
Laws and regulations applicable to all units as a class or to a particular industry should not be viewed as amounting to control of these units.

4.79 The ability to determine general corporate policy does not necessarily include the direct control of the day-to-day activities or operations of a particular corporation.
The officers of such corporations would normally be expected to manage these in a manner consistent with and in support of the overall objectives of the particular corporation.
Nor does the ability to determine the general corporate policy of a corporation include the direct control over any professional, technical or scientific judgments, as these would normally be viewed as part of the core competence of the corporation itself.
For example, the professional or technical judgments exercised by a corporation set up to certify aircraft airworthiness would not be considered controlled in respect of individual approvals and disapprovals, though its broader operating and financial policies, including the airworthiness criteria, may well be determined by a government unit as part of the corporation's corporate policy.

4.80 Because the arrangements for the control of corporations can vary considerably, it is neither desirable nor feasible to prescribe a definitive list of factors to be taken into account.
The following eight indicators, however, will normally be the most important and likely factors to consider:

a. Ownership of the majority of the voting interest.
Owning a majority of shares will normally constitute control when decisions are made on a one-share one-vote basis.
The shares may be held directly or indirectly, and the shares owned by all other public entities should be aggregated.
If decisions are not made on a one-share one-vote basis, the classification should be based on whether the shares owned by other public entities provide a majority voice.

b. Control of the board or other governing body.
The ability to appoint or remove a majority of the board or other governing body as a result of existing legislation, regulation, contractual, or other arrangements will likely constitute control.
Even the right to veto proposed appointments can be seen as a form of control if it influences the choices that can be made.
If another body is responsible for appointing the directors, it is necessary to examine its composition for public influence.
If a government appoints the first set of directors but does not control the appointment of replacement directors, the body would then be part of the public sector until the initial appointments had expired.

c. Control of the appointment and removal of key personnel.
If control of the board or other governing body is weak, the appointment of key executives, such as the chief executive, chairperson and finance director, may be decisive.
Non-executive directors may also be relevant if they sit on key committees such as the remuneration committee determining the pay of senior staff.

d. Control of key committees of the entity.
Subcommittees of the board or other governing body could determine the key operating and financial policies of the entity.
Majority public sector membership on these subcommittees could constitute control.
Such membership can be established under the constitution or other enabling instrument of the corporation.

e. Golden shares and options.
A government may own a “golden share,” particularly in a corporation that has been privatized.
In some cases, this share gives the government some residual rights to protect the interests of the public by, for example, preventing the company selling off some categories of assets or appointing a special director who has strong powers in certain circumstances.
A golden share is not of itself indicative of control.
If, however, the powers covered by the golden share do confer on the government the ability to determine the general corporate policy of the entity in particular circumstances and those circumstances currently existed, then the entity should be in the public sector from the date in question.
The existence of a share purchase option available to a government unit or a public corporation in certain circumstances may also be similar in concept to the golden share arrangement discussed above.
It is necessary to consider whether, if the circumstance in which the option may be exercised exists, the volume of shares that may be purchased under the option and the consequences of such exercise means that the government has “the ability to determine the general corporate policy of the entity” by exercising that option.
An entity's status in general should be based on the government's existing ability to determine corporate policy exercised under normal conditions rather than in exceptional economic or other circumstances such as wars, civil disorders or natural disasters.

f. Regulation and control.
The borderline between regulation that applies to all entities within a class or industry group and the control of an individual corporation can be difficult to judge.
There are many examples of government involvement through regulation, particularly in areas such as monopolies and privatized utilities.
It is possible for regulatory involvement to exist in important areas, such as in price setting, without the entity ceding control of its general corporate policy.
Choosing to enter into or continue to operate in a highly regulated environment suggests that the entity is not subject to control.
When regulation is so tight as to effectively dictate how the entity performs its business, then it could be a form of control.
If an entity retains unilateral discretion as to whether it will take funding from, interact commercially with, or otherwise deal with a public sector entity, the entity has the ultimate ability to determine its own corporate policy and is not controlled by the public sector entity.

g. Control by a dominant customer.
If all of the sales of a corporation are to a single public sector customer or a group of public sector customers, there is clear scope for dominant influence.
The presence of a minority private sector customer usually implies an element of independent decision-making by the corporation so that the entity would not be considered controlled.
In general, if there is clear evidence that the corporation could not choose to deal with non-public sector clients because of the public sector influence, then public control is implied.

h. Control attached to borrowing from the government.
Lenders often impose controls as conditions of making loans.
If the government imposed controls through lending or issuing guarantees that are more than would be typical when a healthy private sector entity borrows from a bank, control may be indicated.
Similarly, control may be implied if only the government was prepared to lend.

Although a single indicator could be sufficient to establish control, in other cases, a number of separate indicators may collectively indicate control.
A decision based on the totality of all indicators must necessarily be judgmental in nature but clearly similar judgements must be made in similar cases.

Control by a non-resident unit

4.81 In general, a non-resident unit controls a resident corporation if the non-resident unit owns more than 50 per cent of the equity of the corporation.
Branches of nonresident corporations are by their nature always under foreign control.
However, control may also be possible with a holding of less than half the equity if the nonresident unit can exercise some of the powers just described as indicating possible control by government, for example the control of the board or other governing body, control of the appointment and removal of key personnel, control of key committees of the corporations and so on.

4.82 Within the balance of payments, a distinction is made between corporations where over 50 per cent of the equity is held by non-residents and those corporations where between 10 and 50 per cent of the equity is held abroad.
All corporations with foreign holdings of 10 per cent or more are described as foreign direct investment enterprises and special treatment of their earnings is applied.
Further details on this are given in chapters 7 and 26.
It is important to note, however, that while all foreign controlled corporations are foreign direct investment enterprises, the reverse is not true, for example even a publicly controlled corporation may be a foreign direct investment enterprise if, in addition to government controlling half of the equity, a further 10 per cent is owned by a non-resident.

C. Non-profit institutions

4.83 Non-profit institutions are legal or social entities, created for the purpose of producing goods and services, whose status does not permit them to be a source of income, profit or other financial gain for the units that establish, control or finance them.
In practice, their productive activities are bound to generate either surpluses or deficits but any surpluses they happen to make cannot be appropriated by other institutional units.
The articles of association by which they are established are drawn up in such a way that the institutional units that control or manage them are not entitled to a share in any profits or other income they receive.
For this reason, they are frequently exempted from various kinds of taxes.

4.84 NPIs may be created by households, corporations, or government but the motives leading to their creation are varied.
For example, NPIs may be created to provide services for the benefit of the households or corporations who control or finance them; or they may be created for charitable, philanthropic or welfare reasons to provide goods or services to other persons in need; or they may be intended to provide health or education services for a fee, but not for profit; or they may be intended to promote the interests of pressure groups in business or politics; etc.

1. The characteristics of NPIs

4.85 The main features of NPIs may be summarized as follows:

a. Most NPIs are legal entities created by process of law whose existence is recognized independently of the persons, corporations or government units that establish, finance, control or manage them.
The purpose of the NPI is usually stated in the articles of association or similar document drawn up at the time of its establishment.
In some countries, especially developing countries, an NPI may be an informal entity whose existence is recognized by society but does not have any formal legal status; such NPIs may be created for the purpose of producing non-market goods or services for the benefit of individual households or groups of households.

b. Many NPIs are controlled by associations whose members have equal rights, including equal votes on all major decisions affecting the affairs of the NPI.
Members enjoy limited liability with respect to the NPI's operations.

c. There are no shareholders with a claim on the profits or equity of the NPI.
The members are not entitled to a share in any profits, or surplus, generated by the productive activities of the NPI, such profits being retained within the NPI.

d. The direction of an NPI is usually vested in a group of officers, executive committee or similar body elected by a simple majority vote of all the members.
These officers are the counterpart of the board of directors of a corporation and are responsible for appointing any paid managers.

e. The term “non-profit institution” derives from the fact that the members of the association controlling the NPI are not permitted to gain financially from its operations and cannot appropriate any surplus that it may make.
It does not imply that an NPI cannot make an operating surplus on its production.

4.86 In some countries NPIs are subject to preferential tax treatment, possibly to exemption from income tax, but this is not necessarily so and is not a determining factor in the identification of an NPI.

4.87 As in the case of producer units owned by government units, it is important to distinguish between NPIs engaged in market and non-market production as this affects the sector of the economy to which an NPI is allocated.
NPIs do not necessarily engage in non-market production.

2. NPIs engaged in market production

4.88 Market producers are producers that sell most or all of their output at prices that are economically significant, that is, at prices that have a significant influence on the amounts the producers are willing to supply and on the amounts purchasers wish to buy.
Schools, colleges, universities, clinics, hospitals, etc. constituted as NPIs are market producers when they charge fees that are based on their production costs and that are sufficiently high to have a significant influence on the demand for their services.
Their production activities must generate an operating surplus or loss.
Any surpluses they make must be retained within the institutions as their status prevents them from distributing them to others.
On the other hand, because of their status as “non-profit institutions” they are also able to raise additional funds by appealing for donations from persons, corporations or government.
In this way, they may be able to acquire assets that generate significant property income in addition to their revenues from fees, thereby enabling them to charge fees below average costs.
However, they must continue to be treated as market producers so long as their fees are determined mainly by their costs of production and are high enough to have a significant impact on demand.
Such NPIs are not charities, their real objective often being to provide educational, health or other services of a very high quality using their incomes from endowments merely to keep down somewhat the high fees they have to charge.

Market NPIs serving enterprises

4.89 Some market NPIs restrict their activities to serving a particular subset of other market producers.
Most market NPIs serving enterprises are created by associations of the enterprises whose interests they are designed to promote.
They consist of chambers of commerce, agricultural, manufacturing or trade associations, employers' organizations, research or testing laboratories or other organizations or institutes that engage in activities that are of common interest or benefit to the group of enterprises that control and finance them.
The NPIs often engage in publicity on behalf of the group, lobby politicians or provide advice or assistance to individual members in difficulty for one reason or another.
The NPIs are usually financed by contributions or subscriptions from the group of enterprises concerned.
The subscriptions are treated not as transfers but as payments for services rendered and these NPIs are, therefore, classed as market producers.
However, as explained below, when chambers of commerce or similar organizations intended for the benefit of enterprises are controlled by government units, they are classified as non-market NPIs and allocated to the general government sector.

3. NPIs engaged in non-market production

4.90 The majority of NPIs in most countries are non-market rather than market producers.
Non-market producers are producers that provide most of their output to others free or at prices that are not economically significant.
Thus, NPIs engaged mainly in non-market production may be distinguished not only by the fact that they are incapable of providing financial gain to the units that control or manage them, but also by the fact that they must rely principally on funds other than receipts from sales to cover their costs of production or other activities.
Their principal source of finance may be regular subscriptions paid by the members of the association that controls them or transfers or donations from third parties, including government or from property income.

4.91 NPIs engaged mainly in non-market production are divided into two groups: those NPIs controlled by government and those that are not.
The former are included in the general government sector.
The latter are described as “non-profit institutions serving households” (NPISHs) and constitute a separate sector in the SNA.

Government control of non-profit institutions

4.92 Control of an NPI is defined as the ability to determine the general policy or programme of the NPI.
All NPIs allocated to the general government sector should retain their identity as NPIs in statistical records, to facilitate analysis of the complete set of NPIs.
To determine if an NPI is controlled by the government, the following five indicators of control should be considered:

a. The appointment of officers.
The government may have the right to appoint the officers managing the NPI either under the NPI’s constitution, its articles of association or other enabling instrument.

b. Other provisions of enabling instrument.
The enabling instrument may contain provisions other than the appointment of officers that effectively allow the government to determine significant aspects of the general policy or programme of the NPI.
For example, the enabling instrument may specify or limit the functions, objectives and other operating aspects of the NPI, thus making the issue of managerial appointments less critical or even irrelevant.
The enabling instrument may also give the government the right to remove key personnel or veto proposed appointments, require prior approval of budgets or financial arrangements by the government, or prevent the NPI from changing its constitution, dissolving itself, or terminating its relationship with government without government approval.

c. Contractual agreements.
The existence of a contractual agreement between a government and an NPI may allow the government to determine key aspects of the NPI’s general policy or programme.
As long as the NPI is ultimately able to determine its policy or programme to a significant extent, such as by being able to renege on the contractual agreement and accept the consequences, by being able to change its constitution or dissolve itself without requiring government approval other than that required under the general regulations, then it would not be considered controlled by government.

d. Degree of financing.
An NPI that is mainly financed by government may be controlled by that government.
Generally, if the NPI remains able to determine its policy or programme to a significant extent along the lines mentioned in the previous indicator, then it would not be considered controlled by government.

e. Risk exposure.
If a government openly allows itself to be exposed to all, or a large proportion of, the financial risks associated with an NPI’s activities, then the arrangement constitutes control.
The criteria are the same as in the previous two indicators.

A single indicator could be sufficient to establish control in some cases, but in other cases, a number of separate indicators may collectively indicate control.
A decision based on the totality of all indicators will necessarily be judgmental in nature.

NPIs serving households (NPISHs)

4.93 Non-profit institutions serving households (NPISHs) consist of non-market NPIs that are not controlled by government.
They provide goods and services to households free or at prices that are not economically significant.
Most of these goods and services represent individual consumption but it is possible for NPISHs to provide collective services.

D. The non-financial corporations sector and its subsectors

4.94 Non-financial corporations are corporations whose principal activity is the production of market goods or non-financial services.
The non-financial corporations sector is composed of the following set of resident institutional units:

a. All resident non-financial corporations (as understood in the SNA and not just restricted to legally constituted corporations), regardless of the residence of their shareholders;

b. The branches of non-resident enterprises that are engaged in non-financial production on the economic territory on a long-term basis;

c. All resident NPIs that are market producers of goods or non-financial services.

4.95 Some non-financial corporations or quasi-corporations may have secondary financial activities: for example, producers or retailers of goods may provide consumer credit directly to their own customers.
As explained more fully below, such corporations or quasi-corporations are nevertheless classified as belonging in their entirety to the non-financial corporate sector provided their principal activity is nonfinancial.
Sectors are groups of institutional units, and the whole of each institutional unit must be classified to one or other sector of the SNA even though that unit may be engaged in more than one type of economic activity.

Table 4.1: Subsectors of the non-financial corporations sector

4.96 Two classification criteria are used to subsector the nonfinancial corporations sector.
One criterion is to show NPIs separately from other units in the sector.
These units other than NPIs may be described as for profit institutions (FPIs).
The second criterion is that of control to show:

a. Public non-financial corporations,

b. National private non-financial corporations, and

c. Foreign controlled non-financial corporations.

The criteria for control of corporations and NPIs by government and non-resident units are described in detail in section B. Corporations controlled by non-resident units are described as being foreign controlled.

4.97 The full subsectoring of the non-financial corporations sector can be seen as a two-way table as shown in table 4.1.
The exact form of presentation of the subsectors will depend on both analytical and statistical considerations.
It may be that the number of NPIs is such that some control categories are empty or sufficiently sparse that the detail cannot be shown for reasons of confidentiality.
At the least, though, it is useful, and should be feasible, to distinguish the entries for the left-most column and bottom row of table 4.1.

E. The financial corporations sector and its subsectors

4.98 Financial corporations consist of all resident corporations that are principally engaged in providing financial services, including insurance and pension funding services, to other institutional units.
The financial corporations sector is composed of the following set of resident institutional units:

a. All resident financial corporations (as understood in the SNA and not just restricted to legally constituted corporations), regardless of the residence of their shareholders;

b. The branches of non-resident enterprises that are engaged in financial activity on the economic territory on a long-term basis;

c. All resident NPIs that are market producers of financial services.

The production of financial services is the result of financial intermediation, financial risk management, liquidity transformation or auxiliary financial activities.
Because the provision of financial services is typically subject to strict regulation, it is usually the case that units providing financial services do not produce other goods and services and financial services are not provided as secondary production.

4.99 One form of financial innovation has seen a substantial growth in activity of a kind traditionally carried out by, or through, financial corporations but that may also be done directly by non-financial enterprises themselves.
For example, there is a tendency in some countries for producers or retailers of goods to provide consumer credit directly to their customers.
Another example is the tendency for non-financial enterprises in some countries to raise funds themselves by selling their own obligations directly on the money or capital markets.
However, the enterprise as a whole must continue to be classified as nonfinancial provided that:

a. A non-financial enterprise does not create a new institutional unit, such as a subsidiary corporation, to carry out the financial activity; and

b. The financial activity remains secondary to the principal activity of the enterprise.

4.100 The same principle applies to the subsectoring of financial corporations.
For example, many central banks also engage in some commercial banking.
However, as a single institutional unit, the central bank as a whole, including its commercial banking activities, is classified in the subsector “central banks”. For the same reason, central bank or monetary authority-type functions carried out by agencies within the central government that are not separate institutional units from government are not allocated to the central bank subsector.
(This is discussed further in the following section and in chapter 22.)

4.101 Financial corporations can be divided into three broad classes namely, financial intermediaries, financial auxiliaries and other financial corporations.
Financial intermediaries are institutional units that incur liabilities on their own account for the purpose of acquiring financial assets by engaging in financial transactions on the market.
They include insurance corporations and pension funds.
Financial auxiliaries are institutional units principally engaged in serving financial markets, but do not take ownership of the financial assets and liabilities they handle.
Other financial corporations are institutional units providing financial services, where most of their assets or liabilities are not available on open financial markets.

4.102 The financial corporations sector can be divided into nine subsectors according to its activity in the market and the liquidity of its liabilities.
These nine subsectors are shown in table 4.2 and each is described later in this section.
Subsector 6 corresponds to financial auxiliaries; subsector 7 corresponds to other financial corporations.
All the other subsectors are financial intermediaries of one sort or another.

4.103 As well as being subsectored according to the nature of the financial activity being undertaken, the financial corporations sector can also be subsectored in the same manner as the non-financial corporations sector to show the difference between NPIs and FPIs and to show which units are subject to public control, which are national private corporations and which are foreign controlled.
Thus in principle each of the rows in table 4.2 may be further disaggregated in the manner of table 4.1 though it is unlikely that all possible cross-classifications exist and a compressed subsectoring based on local circumstance and particular analytical interest may be sufficient.

1. Central bank

4.104 The central bank is the national financial institution that exercises control over key aspects of the financial system.
In general, the following financial intermediaries are classified in this subsector:

a. The national central bank, including where it is part of a system of central banks.

b. Currency boards or independent currency authorities that issue national currency that is fully backed by foreign exchange reserves.

c. Central monetary agencies of essentially public origin (for example, agencies managing foreign exchange or issuing bank notes and coin) that keep a complete set of accounts but are not classified as part of central government.
Supervisory authorities that are separate institutional units are not included with the central bank but are included with financial auxiliaries.

As long as the central bank is a separate institutional unit, it is always allocated to the financial corporations sector even if it is primarily a non-market producer.

2. Deposit-taking corporations except the central bank

4.105 Deposit-taking corporations except the central bank have financial intermediation as their principal activity.
To this end, they have liabilities in the form of deposits or financial instruments (such as short-term certificates of deposit) that are close substitutes for deposits.
The liabilities of deposit-taking corporations are typically included in measures of money broadly defined.

4.106 In general, the following financial intermediaries are classified in this subsector:

a. Commercial banks, “universal” banks, “all-purpose” banks;

b. Savings banks (including trustee savings banks and savings and loan associations);

c. Post office giro institutions, post banks, giro banks;

d. Rural credit banks, agricultural credit banks;

e. cooperative credit banks, credit unions; and

f. Specialized banks or other financial corporations if they take deposits or issue close substitutes for deposits.

3. Money market funds (MMFs)

4.107 Money market funds (MMFs) are collective investment schemes that raise funds by issuing shares or units to the public.
The proceeds are invested primarily in money market instruments, MMF shares or units, transferable debt instruments with a residual maturity of not more than one year, bank deposits and instruments that pursue a rate of return that approaches the interest rates of money market instruments.
MMF shares can be transferred by cheque or other means of direct third-party payment.
Because of the nature of the instruments the schemes invest in, their shares or units may be regarded as close substitutes for deposits.

4. Non-MMF investment funds

4.108 Non-MMF investment funds are collective investment schemes that raise funds by issuing shares or units to the public.
The proceeds are invested predominantly in financial assets, other than short-term assets, and in non-financial assets (usually real estate).
Investment fund shares or units are generally not close substitutes for deposits.
They are not transferable by means of cheque or direct third-party payments.

Table 4.2: Subsectors of the financial corporations sector

1. Central Bank

2. Deposit-taking corporations except the Central Bank

3. Money market funds (MMF)

4. Non-MMF investment funds

5. Other financial intermediaries except insurance corporations and pension funds (ICPF)

6. Financial auxiliaries

7. Captive financial institutions and money lenders

8. Insurance corporations (IC)

9. Pension funds (PF)

5. Other financial intermediaries, except insurance corporations and pension funds (ICPFs)

4.109 Other financial intermediaries except insurance corporations and pension funds consist of financial corporations that are engaged in providing financial services by incurring liabilities, in forms other than currency, deposits or close substitutes for deposits, on their own account for the purpose of acquiring financial assets by engaging in financial transactions on the market.
It is a feature of a financial intermediary that transactions on both sides of the balance sheet are carried out in open markets.

4.110 In general, the following financial intermediaries are classified in this subsector:

a. Financial corporations engaged in the securitization of assets;

b. Security and derivative dealers (operating on own account);

c. Financial corporations engaged in lending, including the finance associates of retailers, who may be responsible for financial leasing and both personal or commercial finance;

d. Central clearing counterparties.
These organizations provide clearing and settlement transactions in securities and derivatives.
Clearing relates to identifying the obligations of both parties to the transaction, while settlement is the exchange of the securities or derivatives and the corresponding payment.
The central clearing counterparties involve themselves in the transaction and mitigate counterparty risk;

e. Specialized financial corporations that provide:
· Short-term financing for corporate mergers and takeovers;
· Export/import finance;
· Factoring services;
· Venture capital and development capital firms.

6. Financial auxiliaries

4.111 Financial auxiliaries consist of financial corporations that are principally engaged in activities associated with transactions in financial assets and liabilities or with providing the regulatory context for these transactions but in circumstances that do not involve the auxiliary taking ownership of the financial assets and liabilities being transacted.

4.112 In general, the following financial auxiliaries are classified in this subsector:

a. Insurance brokers, salvage and claims adjusters (whether employed by the insurance company, an independent adjuster or a public adjuster employed by the policyholder), insurance and pension consultants;

b. Loan brokers, securities brokers, investment advisers, etc.;

c. Flotation corporations that manage the issue of securities;

d. Corporations whose principal function is to guarantee, by endorsement, bills and similar instruments;

e. Corporations that arrange derivative and hedging instruments, such as swaps, options and futures (without issuing them);

f. Corporations providing infrastructure for financial markets;

g. Managers of pension funds, mutual funds, etc. (but not the funds they manage);

h. Corporations providing stock exchange and insurance exchange;

i. Foreign exchange bureaux;

j. Non-profit institutions recognized as independent legal entities serving financial corporations,;

k. Head offices of financial corporations that are principally engaged in controlling financial corporations or groups of financial corporations but that do not themselves conduct the business of financial corporations;

l. Central supervisory authorities of financial intermediaries and financial markets when they are separate institutional units.

7. Captive financial institutions and money lenders

4.113 Captive financial institutions and money lenders consist of institutional units providing financial services, where most of either their assets or liabilities are not transacted on open financial markets.
It includes entities transacting within only a limited group of units (such as with subsidiaries) or subsidiaries of the same holding corporation or entities that provide loans from own funds provided by only one sponsor.

4.114 In general, the following financial corporations are classified in this subsector:

a. Units which are legal entities such as trusts, estates, agencies accounts or brass plate companies.

b. Holding corporations that hold only the assets (owning controlling-levels of equity) of a group of subsidiary corporations and whose principal activity is owning the group without providing any other service to the life, accident, sickness, fire or other forms of insurance to enterprises in which the equity is held, that is, they do individual institutional units or groups of units or not administer or manage other units.

c. SPEs or conduits that qualify as institutional units and raise funds in open markets to be used by their parent corporation.

d. Units which provide financial services exclusively with own funds, or funds provided by a sponsor to a range of clients and incur the financial risk of the debtor defaulting, including
· Moneylenders.
· Corporations engaged in lending (for example providing student loans, import/export loans) from funds received from a sponsor such as a government unit or non-profit institution.
· Pawnshops that predominantly engage in lending.

8. Insurance corporations (ICs)

4.115 Insurance corporations consist of incorporated, mutual and other entities whose principal function is to provide life, accident, sickness, fire or other forms of insurance to individual institutional units or groups of units or reinsurance services to other insurance corporations.
Captive insurance is included, that is, an insurance company that serves only its owners.
Deposit insurers, issuers of deposit guarantees and other issuers of standardized guarantees that are separate entities and act like insurers by charging premiums and have reserves, are classified as insurance corporations.

9. Pension funds (PFs)

4.116 Pension liabilities arise when an employer or government obliges or encourages members of households to participate in a social insurance scheme that will provide income in retirement.
The social insurance schemes may be organized by employers or by government, they may be organized by insurance corporations on behalf of employees or separate institutional units may be established to hold and manage the assets to be used to meet the pensions and to distribute the pensions.
The pension fund subsector consists of only those social insurance pension funds that are institutional units separate from the units that create them.

F. The general government sector and its subsectors

1. Government units as institutional units

4.117 Government units are unique kinds of legal entities established by political processes that have legislative, judicial or executive authority over other institutional units within a given area.
Viewed as institutional units, the principal functions of government are to assume responsibility for the provision of goods and services to the community or to individual households and to finance their provision out of taxation or other incomes, to redistribute income and wealth by means of transfers, and to engage in non-market production.
In general terms:

a. A government unit usually has the authority to raise funds by collecting taxes or compulsory transfers from other institutional units.
In order to satisfy the basic requirements of an institutional unit in the SNA, a government unit, whether at the level of the total economy, a region or a locality, must have funds of its own either raised by taxing other units or received as transfers from other government units and the authority to disburse some, or all, of such funds in the pursuit of its policy objectives.
It must also be able to borrow funds on its own account;

b. Government units typically make three different kinds of final outlays:
· The first group consists of actual or imputed expenditures on the free provision to the community of collective services such as public administration, defence, law enforcement, public health, etc. that are organized collectively by government and financed out of general taxation or other income;
· The second group consists of expenditures on the provision of goods or services free, or at prices that are not economically significant, to individual households.
These expenditures are deliberately incurred and financed out of taxation or other income by government in the pursuit of its social or political objectives, even though individuals could be charged according to their usage;
· The third group consists of transfers paid to other institutional units, mostly households, in order to redistribute income or wealth.

4.118 Within a single territory there may be many separate government units when there are different levels of government, specifically central, state or local governments.
In addition, social security funds also constitute government units.
These different kinds of government units are described later when the subsectoring of the general government sector is explained.

Government units as producers

4.119 The fact that governments choose to supply not only collective services but also many goods and individual services free, or at prices that are not economically significant, to households or other units does not necessitate that they produce them themselves.
Even in the case of most collective services, or so-called “public goods”, governments are obliged only to assume responsibility for organizing and financing their production.
They are not obliged to produce them.
However, government units do usually engage in a wide range of productive activities in practice, covering not only collective services but also many other goods and individual services.
Because it is largely a matter of political choice, the range of goods and services produced by government units varies greatly from one country to another.
Apart from some collective services such as public administration and defence, it is therefore difficult to categorize certain types of production, such as the production of education or health services, as intrinsically governmental, even though they are often produced by government units.

4.120 When a government unit wishes to intervene in the sphere of production it has three options:

a. it may create a public corporation whose corporate policy, including pricing and investment, it is able to control;

b. it may create an NPI that it controls;

c. it may produce the goods or services itself in an establishment that it owns but that does not exist as a separate legal entity from the government unit itself.

4.121 However, a government establishment, or group of establishments engaged in the same kind of production under common management, should be treated as a quasi-corporation if the following three criteria hold:

a. the unit charges prices for its outputs that are economically significant;

b. the unit is operated and managed in a similar way to a corporation; and

c. the unit has a complete set of accounts that enable its operating surpluses, savings, assets and liabilities to be separately identified and measured.

Such quasi-corporations are market producers that are treated as separate institutional units from the government units that own them.
They are classified, sectored and subsectored in the same way as public corporations.

4.122 In order to be treated as a quasi-corporation the government must allow the management of the enterprise considerable discretion not only with respect to the management of the production process but also the use of funds.
Government quasi-corporations must be able to maintain their own working balances and business credit and be able to finance some or all of their capital formation out of their own savings, depreciation reserves or borrowing.
The ability to distinguish flows of income and capital between quasi-corporations and government implies that their operating and financing activities are not fully integrated with government revenue or finance statistics in practice, despite the fact that they are not separate legal entities.

4.123 Producer units of government that cannot be treated as quasi-corporations, like all unincorporated enterprises that cannot be separated from their owners, remain in the same institutional unit as the owner, in this case within the general government sector.
They are likely to consist largely, or entirely, of non-market producers: that is, producers most or all of whose output is supplied to other units free, or at prices that are not economically significant.
In addition to providing non-market goods or services to the general public, such units may include government producers supplying non-market goods or services to other government units for purposes of intermediate consumption or gross fixed capital formation: for example, munitions factories, government printing offices, transport agencies, computer or communications agencies, etc.
However, it is possible for an unincorporated enterprise within a government to be a market producer.
The example often quoted is that of a bookshop within a museum.

Social security schemes and social security funds

4.124 Social security schemes are social insurance schemes that cover the community as a whole or large sections of the community and are imposed and controlled by government units.
The schemes cover a wide variety of programmes, providing benefits in cash or in kind for old age, invalidity or death, survivors, sickness and maternity, work injury, unemployment, family allowance, health care, etc.
There is not necessarily a direct link between the amount of the contribution paid by an individual and the benefits he or she may receive.

4.125 When social security schemes are separately organized from the other activities of government units and hold their assets and liabilities separately from the latter and engage in financial transactions on their own account, they qualify as institutional units that are described as social security funds.
However, institutional arrangements in respect of social security schemes differ from country to country and in some countries they may become so closely integrated with the other finances of government as to bring into question whether they should be treated as separate institutional units.

4.126 The amounts raised, and paid out, in social security contributions and benefits may be deliberately varied in order to achieve objectives of government policy that have no direct connection with the concept of social security as a scheme to provide social benefits to members of the community.
They may be raised or lowered in order to influence the level of aggregate demand in the economy, for example.
Nevertheless, so long as they remain separately constituted funds, they must be treated as separate institutional units in the SNA.

2. The general government sector

4.127 The general government sector consists of the following groups of resident institutional units:

a. All units of central, state or local government (as described immediately below);

b. All non-market NPIs that are controlled by government units.

The sector also includes social security funds, either as separate institutional units or as part of any or all of central, state or local government.
The sector does not include public corporations, even when all the equity of such corporations is owned by government units.
Nor does it include quasi-corporations that are owned and controlled by government units.
However, unincorporated enterprises owned by government units that are not quasi-corporations remain integral parts of those units and, therefore, must be included in the general government sector.

3. Subsectors of the general government sector

4.128 A full subsectoring of the general government would allow for both NPIs and social security funds to be distinguished for each of central, state and local government.
In practice, though, it is usual to show all social security funds together as one subsector or to merge them all with their appropriate level of government and not show social security funds by level of government separately.
Further, NPIs may be shown as an “of which” item for general government as a whole or for central, state and local government individually.

4.129 The first method of subsectoring general government is as follows:

a. Central government;

b. State government;

c. Local government;

d. Social security funds;

where it is understood that each of the subsectors a, b and c include NPIs but exclude social security funds at that level of government.

4.130 The second method of subsectoring general government is as follows:

a. Central government;

b. State government;

c. Local government;

where it is understood that each of the subsectors a, b and c include both NPIs and social security funds at that level of government.

4.131 Under either method of subsectoring, NPIs should be shown as an “of which” heading under the appropriate level of government.

4.132 The choice between the two methods of subsectoring depends mainly on the size, or importance, of social security funds within a country and on the way in which they are managed.

4.133 In some countries there may not exist a proper intermediate level of government between central and local government, in which case the subsector “state government” is not distinguished.
In others there may be more than two levels of government below the central government.
In that case, the lower levels should be aggregated with state or local government as appropriate.

Central government

4.134 The central government subsector consists of the institutional unit or units making up the central government plus those non-market NPIs that are controlled by central government.

4.135 The political authority of central government extends over the entire territory of the country.
Central government has therefore the authority to impose taxes on all resident and non-resident units engaged in economic activities within the country.
Its political responsibilities include national defence, the maintenance of law and order and relations with foreign governments.
It also seeks to ensure the efficient working of the social and economic system by means of appropriate legislation and regulation.
It is responsible for providing collective services for the benefit of the community as a whole, and for this purpose incurs expenditures on defence and public administration.
In addition it may incur expenditures on the provision of services, such as education or health, primarily for the benefit of individual households.
Finally, it may make transfers to other institutional units, namely to households, NPIs, corporations and other levels of government.

4.136 Central government is a large and complex subsector in most countries.
It is generally composed of a central group of departments or ministries that make up a single institutional unit plus, in many countries, other institutional units.
The departments may be responsible for considerable amounts of expenditure within the framework of the government's overall budget, but often they are not separate institutional units capable of owning assets, incurring liabilities, engaging in transactions, etc., independently of central government as a whole.

4.137 The departments of central government are often deliberately dispersed geographically and located in different parts of the country, but they nevertheless remain parts of a single institutional unit.
Similarly, if the central government maintains branch offices or agencies in different parts of the country to meet local needs, including military bases or installations that serve national defence purposes, these must also be counted as parts of a single institutional unit for central government.

4.138 In addition to government departments and ministries, there may be agencies of central government with separate legal identity and substantial autonomy; they may have discretion over the volume and composition of their expenditures and may have a direct source of revenue such as earmarked (“hypothecated”) taxes.
Such agencies are often established to carry out specific functions such as road construction or the non-market production of health or education services.
These should be treated as separate institutional units if they maintain full sets of accounts but are part of the central government subsector if the services they produce are non-market and if they are controlled by central government.

4.139 In some countries, the central government may include units that engage in financial transactions that in other countries would be performed by central banks.
In particular, units of central government may be responsible for the issue of currency, the maintenance of international reserves and the operation of exchange stabilization funds, and also transactions with the International Monetary Fund (IMF).
When the units in question remain financially integrated with central government and under the direct control and supervision of central government, they cannot be treated as separate institutional units.
Moreover, whatever monetary authority functions are carried out by central government are recorded in the government sector and not the financial corporations sector.
However, because of the analytical importance that is attached to obtaining accounts covering the monetary authorities as a whole, and in order to provide links with other statistical systems, such as the BPM6, the GFSM2001 and the Monetary and Financial Statistics Manual (International Monetary Fund (IMF) 2000, known as MSFM), it is recommended that the transactions of central government agencies carrying out monetary authority and deposit-taking functions should be separately identified, so that they can be combined with those of the central bank and other deposit-taking corporations in special tabulations if desired.

State government

4.140 The state government subsector consists of state governments that are separate institutional units plus those non-market NPIs that are controlled by state governments.

4.141 State governments are institutional units exercising some of the functions of government at a level below that of central government and above that of the governmental institutional units existing at a local level.
They are institutional units whose fiscal, legislative and executive authority extends only over the individual “states” into which the country as a whole may be divided.
Such “states” may be described by different terms in different countries.
In some countries, especially small countries, individual states and state governments may not exist.
However, in large countries, especially those that have federal constitutions, considerable powers and responsibilities may be assigned to state governments.

4.142 A state government usually has the fiscal authority to levy taxes on institutional units that are resident in, or engage in economic activities or transactions within, its area of competence (but not other areas).
In order to be recognized as an institutional unit it must be able to own assets, raise funds and incur liabilities on its own account.
It must also be entitled to spend or allocate some, or possibly all, of the taxes or other income that it receives according to its own policies, within the general rules of law of the country, although some of the transfers it receives from central government may be tied to certain specified purposes.
It should also be able to appoint its own officers, independently of external administrative control.
On the other hand, if a regional unit is entirely dependent on funds from central government, and if the central government also dictates the ways in which those funds are to be spent at the regional level, it should be treated as an agency of central government rather than as a separate institutional unit.

4.143 State governments, when they exist, are distinguished by the fact that their fiscal authority extends over the largest geographical areas into which the country as a whole may be divided for political or administrative purposes.
In a few countries more than one level of government exists between the central government and the smallest governmental institutional units at a local level; in such cases, for purposes of sectoring within the SNA, these intermediate levels of government are grouped together with the level of government, either state or local, with which they are most closely associated.

4.144 State governments may own, or control, corporations in the same way as central government.
Similarly, they may have units that engage in market production, in which case the relevant producer units should be treated as quasi-corporations whenever their operations and accounting records justify this.

Local government

4.145 The local government subsector consists of local governments that are separate institutional units plus those non-market NPIs that are controlled by local governments.
In principle, local government units are institutional units whose fiscal, legislative and executive authority extends over the smallest geographical areas distinguished for administrative and political purposes.
The scope of their authority is generally much less than that of central government or state governments, and they may, or may not, be entitled to levy taxes on institutional units resident in their areas.
They are often heavily dependent on grants or transfers from higher levels of government, and they may also act as agents of central or regional governments to some extent.
However, in order to be treated as institutional units they must be entitled to own assets, raise funds and incur liabilities by borrowing on their own account; similarly, they must have some discretion over how such funds are spent.
They should also be able to appoint their own officers, independently of external administrative control.
The fact that they may also act as agents of central or state governments to some extent does not prevent them from being treated as separate institutional units provided they are also able to raise and spend some funds on their own initiative and own responsibility.

4.146 As they are the government units that are in closest contact with the institutional units resident in their localities, they typically provide a wide range of services to local residents, some of which may be financed out of transfers from higher levels of government.
The same rules govern the treatment of the production of goods and services by local government units as are applied to central and state governments.
Units such as municipal theatres, museums, swimming pools, etc., that supply goods or services on a market basis should be treated as quasi-corporations whenever the appropriate accounting information is available and classified to the non-financial corporations sector.
Other units supplying goods and services on a market basis are treated as unincorporated enterprises within local government.
Units supplying services such as education or health on a non-market basis remain an integral part of the local government unit to which they belong.

Social security funds

4.147 The social security funds subsector consists of the social security funds operating at all levels of government.

4. The alternative method of subsectoring

4.148 The alternative method of subsectoring the general government sector is to group the social security funds operating at each level of government with the corresponding government units and government controlled and financed NPIs at that level of government.
The two alternative methods of subsectoring are designed to accommodate different analytical needs.
The decision as to which method is more appropriate in a given country cannot be made a priori.
It depends on how important social security funds are and on the extent to which they are managed independently of the government units with which they are associated.
If the management of social security funds is so closely integrated with the short- or medium-term requirements of the government's general economic policy that contributions and benefits are deliberately adjusted in the interests of overall economic policy, it becomes difficult, at a conceptual level, to draw any clear distinction between the management of social security and the other economic functions of government.
Alternatively, in some countries, social security funds may exist in only a very rudimentary form.
In either of these circumstances it is difficult to justify treating social security funds as a separate subsector on a par with central, state and local government, and it is more appropriate to use the alternative method of subsectoring in which they are grouped with the corresponding government units at each level of government.
This is the approach generally favoured in the GFSM2001.

G. The households sector and its subsectors

1. Households as institutional units

4.149 For the purposes of the SNA, a household is defined as a group of persons who share the same living accommodation, who pool some, or all, of their income and wealth and who consume certain types of goods and services collectively, mainly housing and food.
In general, each member of a household should have some claim upon the collective resources of the household.
At least some decisions affecting consumption or other economic activities must be taken for the household as a whole.

4.150 Households often coincide with families, but members of the same household do not necessarily have to belong to the same family so long as there is some sharing of resources and consumption.
Households may be of any size and take a wide variety of different forms in different societies or cultures depending on tradition, religion, education, climate, geography, history and other socio-economic factors.
The definition of a household that is adopted by survey statisticians familiar with the socio-economic conditions within a given country is likely to approximate closely to the concept of a household as defined in the SNA, although survey statisticians may add more precise, or operational, criteria within a particular country.

4.151 Domestic staff who live on the same premises as their employer do not form part of their employer's household even though they may be provided with accommodation and meals as remuneration in kind.
Paid domestic employees have no claim upon the collective resources of their employers' households and the accommodation and food they consume are not included with their employer's consumption.
They should therefore be treated as belonging to separate households from their employers.

4.152 Persons living permanently in an institution, or who may be expected to reside in an institution for a very long, or indefinite, period of time are treated as belonging to a single institutional household when they have little or no autonomy of action or decision in economic matters.
Some examples of persons belonging to institutional households are the following:

a. Members of religious orders living in monasteries, convents or similar institutions;

b. Long-term patients in hospitals, including mental hospitals;

c. Prisoners serving long sentences;

d. Persons living permanently in retirement homes.

4.153 On the other hand, persons who enter hospitals, clinics, convalescent homes, religious retreats, or similar institutions for short periods, who attend residential schools, colleges or universities, or who serve short prison sentences should be treated as members of the individual households to which they normally belong.

4.154 The residence of individual persons is determined by that of the household of which they form part and not by their place of work.
All members of the same household have the same residence as the household itself, even though they may cross borders to work or otherwise spend periods of time abroad.
If they work and reside abroad so long that they acquire a centre of economic interest abroad, they cease to be members of their original households.

2. Unincorporated enterprises within households

4.155 As noted in the introduction, households are unlike corporations in that they undertake final consumption.
However, like corporations, they may also engage in production.
Household unincorporated market enterprises are created for the purpose of producing goods or services for sale or barter on the market.
They can be engaged in virtually any kind of productive activity: agriculture, mining, manufacturing, construction, retail distribution or the production of other kinds of services.
They can range from single persons working as street traders or shoe cleaners with virtually no capital or premises of their own through to large manufacturing, construction or service enterprises with many employees.

4.156 Household unincorporated market enterprises also include unincorporated partnerships that are engaged in producing goods or services for sale or barter on the market.
The partners may belong to different households.
When the liability of the partners for the debts of the enterprises is unlimited, the partnerships must be treated as unincorporated enterprises and remain within the household sector since all the assets of the household, including the dwelling itself, are at risk if the enterprise goes bankrupt.
However, unincorporated partnerships with many partners, such as some large legal, accounting or architectural firms, are likely to behave like corporations and should be treated as quasi-corporations assuming complete sets of accounts are available for the partnerships.
Partnerships whose partners enjoy limited liability are effectively separate legal entities and, as already noted, are treated as corporations.

4.157 An unincorporated enterprise can only be treated as a corporation if it is possible to separate all assets, including financial assets down to the level of cash, into those that belong to the household in its capacity as a consumer from those belonging to the household in its capacity as a producer.

3. The household sector and its subsectors

4.158 The household sector consists of all resident households.
There are many useful ways in which the households sector may be subsectored and statistical agencies are advised to give due consideration to the various possibilities.
More than one method may be adopted if there is a demand for different breakdowns of the households sector from different users, analysts or policymakers.

4.159 The SNA has to be applied flexibly, not rigidly.
In order to implement any of the possible methods of subsectoring the households sector suggested below, individual countries are obliged to make their own decisions about what they consider to be the most relevant classification.
Thus, the fact that a specific, detailed classification according to a criterion of interest is proposed here should not be interpreted as implying that the characteristics proposed are necessarily or always the most important for purposes of economic analysis and policymaking.

Subsectoring according to income

4.160 Households may be grouped into subsectors according to the nature of their largest source of income.
For this purpose, the following types of household income need to be distinguished:

a. Income accruing to the owners of household unincorporated enterprises with paid employees (employers' mixed income);

b. Incomes accruing to the owners of household unincorporated enterprises without paid employees (own-account workers mixed income);

c. Compensation of employees;

d. Property and transfer incomes.

4.161 Households are allocated to subsectors according to which of the four categories of income listed above is the largest for the household as a whole, even if it does not always account for more than half of total household income.
When more than one income of a given category is received within the same household, for example, because more than one member of the household earns compensation of employees or because more than one property or transfer income is received, the classification should be based on the total household income within each category.
The four subsectors are described as follows:

a. Employers;

b. Own-account workers;

c. Employees;

d. Recipients of property and transfer incomes.

4.162 The fourth subsector, households for which property and transfer incomes make up the largest source of income, constitutes a heterogeneous group and it is recommended that it should be divided into three further subsectors when possible.
These subsectors are defined as follows:

· Recipients of property incomes;

· Recipients of pensions;

· Recipients of other transfer incomes.

Subsectoring according to characteristics of a reference person

4.163 Other methods of subsectoring usually require a reference person to be identified for each household.
The reference person is not necessarily the person that other members of the household regard as the “head of the household”, as the reference person should be decided on grounds of economic importance rather than age or seniority.
The reference person should normally be the person with the largest income although the reference person could also be the person who makes the major decisions with regard to the consumption of the household.

4.164 Once a reference person has been identified, it is possible to group households into subsectors on the basis of the reference person's characteristics.
For example, subsectors may be defined according to:

a. Occupation of the reference person;

b. Industry, if any, in which the reference person works;

c. Educational attainment of the reference person;

d. Qualifications or skills possessed by the reference person.

Each of the criteria listed above provides its own possible scheme of subsectoring.
It would also be possible to group households into subsectors according to the main income of the reference person if, for some reason, it was not possible to group on the basis of the largest income received by the household.
For this purpose, the same income categories may be used as those recommended for the household's largest income.

Subsectoring according to household size and location

4.165 Finally, it may be noted that households may be subsectored using criteria that apply to the household as a whole.
For example, subsectors may be defined according to:

a. Size of the total income of the household;

b. Size of the household as measured by number of persons;

c. Type of area in which the household is located.

The last criterion enables households living in agricultural, urban or metropolitan areas to be distinguished from each other, or from households located in different geographical regions.

H. The non-profit institutions serving households sector

4.166 Previous sections have explained that NPIs are allocated to the corporations sectors when they are engaged in market production and to the general government sector if they are engaged in non-market production but subject to government control.
The remaining NPIs are termed nonprofit institutions serving households (NPISHs).
All provide goods and services free or at prices that are not economically significant.

4.167 One type of NPISHs consists of those that are created by associations of persons to provide goods or, more often, services primarily for the benefit of the members themselves.
The services are usually provided free, being financed by regular membership subscriptions or dues.
They include NPISHs such as professional or learned societies, political parties, trades unions, consumers' associations, churches or religious societies, and social, cultural, recreational or sports clubs.
They do not include bodies serving similar functions that are controlled by government units.
Religious institutions are treated as NPISHs even when mainly financed by government units if this majority financing is not seen as empowering control by government.
Political parties in countries with one-party political systems that are controlled by government units by means of providing the necessary finance are included in the general government sector.

4.168 In some communities, NPISHs may be found that do not possess any legal status or formal articles of association.
They should be treated as NPISHs when they perform the same kinds of functions as the societies, political parties, trades unions, etc., described above, even if they are not legally constituted as NPISHs.
However, when groups of households collaborate on communal construction projects (such as construction of buildings, roads, bridges, ditches, dykes, etc.), they should be treated as informal partnerships engaged on own-account construction rather than NPISHs.
NPISHs should normally have a continuing role to play and not be deemed to be created for single projects of limited duration.

4.169 A second type of NPISH consists of charities, relief or aid agencies that are created for philanthropic purposes and not to serve the interests of the members of the association controlling the NPISH.
Such NPISHs provide goods or services on a non-market basis to households in need, including households affected by natural disasters or war.
The resources of such NPISHs are provided mainly by donations in cash or in kind from the general public, corporations or governments.
They may also be provided by transfers from non-residents, including similar kinds of NPISHs resident in other countries.

4.170 The third type of NPISHs consist of those that provide collective services, such as research institutions that make their results freely available, environmental groups, etc.
These are less common that the first two types of NPISHs and may not always be significantly represented in a country.

4.171 If the number or size of NPISHs funded from abroad is significant, it may be useful to disaggregate NPISHs into those that are mainly funded domestically and those that are mainly funded from abroad.

I. The rest of the world

4.172 For purposes of the SNA, the rest of the world consists of all non-resident institutional units that enter into transactions with resident units, or have other economic links with resident units.
It is not a sector for which complete sets of accounts have to be compiled, although it is often convenient to describe the rest of the world as if it were a sector.
The accounts, or tables, for the rest of the world are confined to those that record transactions between residents and non-residents or other economic relationships, such as claims by residents on non-residents, and vice versa.
The rest of the world includes certain institutional units that may be physically located within the geographic boundary of a country; for example, foreign enclaves such as embassies, consulates or military bases, and also international organizations.

1. International organizations

4.173 Certain international organizations have all the essential attributes of institutional units.
The special characteristics of an “international organization” as this term is used in the SNA may be summarized as follows:

a. The members of an international organization are either national states or other international organizations whose members are national states; they thus derive their authority either directly from the national states that are their members or indirectly from them through other international organizations;

b. They are entities established by formal political agreements between their members that have the status of international treaties; their existence is recognized by law in their member countries;

c. Because they are established by international agreement, they are accorded sovereign status; that is, international organizations are not subject to the laws or regulations of the country, or countries, in which they are located; they are not treated as resident institutional units of the countries in which they are located;

d. International organizations are created for various purposes including, among others, the following types of activities:
· The provision of non-market services of a collective nature for the benefit of their members;
· Financial intermediation at an international level, that is, channelling funds between lenders and borrowers in different countries.

4.174 Formal agreements concluded by all the member countries of an international organization may sometimes carry the force of law within those countries.

4.175 Most international organizations are financed wholly or partly by contributions (transfers) from their member countries, but some organizations may raise funds in other ways such as borrowing on financial markets or by subscriptions to the capital stock of international organizations and lending by member countries.
For purposes of the SNA, international organizations are treated as units that are resident in the rest of the world.

2. Central banks of currency unions

4.176 The central bank of a currency union is treated as a special kind of international organization.
The members of the international organization of which the central bank is part are the governments or the national central banks of the countries in the currency union.
The central bank is treated as being non-resident in any of the member countries of the currency union but is resident in the currency area as a whole.
More on the treatment of currency and economic unions can be found in appendix 3 of BPM6.

Chapter 5: Enterprises, establishments and industries

A. Introduction

5.1 Institutional units are defined in chapter 4.
The present chapter is concerned with production activities and the units that undertake them, starting with institutional units and then considering parts of institutional units.
An enterprise is the view of an institutional unit as a producer of goods and services.
The term enterprise may refer to a corporation, a quasi-corporation, an NPI or an unincorporated enterprise.
Since corporations and NPIs other than NPISHs are primarily set up to engage in production, the whole of their accounting information relates to production and associated accumulation activities.
Government, households and NPISHs necessarily engage in consumption and may engage in production also; indeed government and NPISHs always engage in production and many, but not all, households do. As explained in chapter 4, whenever the necessary accounting information exists, the production activity of these units is separated from their other activities into a quasi-corporation.
It is when this separation is not possible that an unincorporated enterprise exists within the government unit, household or NPISH.
It is thus possible to define an unincorporated enterprise as follows.
An unincorporated enterprise represents the production activity of a government unit, NPISH or household that cannot be treated as the production activity of a quasi-corporation.

5.2 The majority of enterprises by number engages in only one sort of production.
The majority of production, though, is carried out by a relatively small number of large corporations that undertake many different kinds of production, there being virtually no upper limit to the extent of diversity of production in a large enterprise.
If enterprises are grouped together on the basis of their principal activities, at least some of the resulting groupings are likely to be very heterogeneous with respect to the type of production processes carried out and also the goods and services produced.
Thus, for analyses of production in which the technology of production plays an important role, it is necessary to work with groups of producers that are engaged in essentially the same kind of production.
This requirement means that some institutional units must be partitioned into smaller and more homogeneous units, which the SNA defines as establishments.
An establishment is an enterprise, or part of an enterprise, that is situated in a single location and in which only a single productive activity is carried out or in which the principal productive activity accounts for most of the value added.
Further, the SNA defines industries in terms of establishments.
An industry consists of a group of establishments engaged in the same, or similar, kinds of activity.
In the SNA, production accounts and generation of income accounts are compiled for industries as well as sectors.

5.3 This chapter first discusses productive activity and its classification in order to lay the ground for defining establishments and subsequently industries.
All enterprises require some basic, routine services to support their production activities.
When they are provided in house they are called ancillary activities.
The recording of ancillary activities follows a number of conventions depending on exactly how they are provided.
Ancillary activities are described in section D.

5.4 The definitions that emerge, as well as the underlying definitions of kinds of activities and of statistical units other than establishments, are consistent with the definitions in ISIC, Rev. 4.
Any slight differences in wording between this chapter and the “Introduction” to the ISIC are noted and explained in the appropriate places below.
Here and elsewhere reference is also made to the CPC, which is the classification of products used in the SNA.

B. Productive activities

5.5 Production in the SNA, as will be discussed in detail in chapter 6, consists of processes or activities carried out under the control and responsibility of institutional units that use inputs of labour, capital, goods and services to produce outputs of goods and services.
Any such activity may be described, and classified, with reference to various characteristics, for example:

a. Type of goods or services produced as outputs,

b. Type of inputs used or consumed,

c. Technique of production employed,

d. Ways in which the outputs are used.

The same goods or services may be produced using different methods of production.
Certain types of goods may be produced from quite different inputs; for example, sugar may be produced from sugar cane or from sugar beet, or electricity from coal, oil, nuclear power stations or from hydroelectric plants.
Many production processes also produce joint products, such as meat and hides, whose uses are quite different.

1. The classification of activities in the SNA

5.6 The classification of production activities used in the SNA is ISIC (Rev.4).
The criteria used in ISIC to delineate each of its four levels of the classification are complex.
The structure consists of 21 Sections, 88 Divisions, 238 Groups and 419 Classes.
At the Division and Group levels, substantial weight is placed on the nature of the good or service that is produced as the principal product of the activity in question by referring to the physical composition and stage of fabrication of the item and the needs served by the item.
This criterion furnishes the basis for grouping producer units according to similarities in, and links between, the raw materials consumed and the sources of demand for the items.
As well, two other major criteria are considered at these levels: the uses to which the goods and services are put, and the inputs, the process and the technology of production.

5.7 While it is not necessary for purposes of this chapter to explain the concept of an activity in any detail, it is necessary to clarify the fundamental distinction between principal and secondary activities on the one hand and ancillary activities on the other.

2. Principal and secondary activities

Principal activities

5.8 The principal activity of a producer unit is the activity carried out within the same unit. (The producer unit may be an enterprise or an establishment as defined below.)
The classification of the principal activity is determined by reference to ISIC, first at the highest level of the classification and then at more detailed levels.
The principal activity of an enterprise consists of the principal product and any by-products, that is, products necessarily produced together with principal products.
The output of the principal activity must consist of goods or services that are capable of being delivered to other units even though they may be used for own consumption or own capital formation.

Secondary activities

5.9 A secondary activity is an activity carried out within a single producer unit in addition to the principal activity and whose output, like that of the principal activity, must be suitable for delivery outside the producer unit.
The value added of a secondary activity must be less than that of the principal activity, by definition of the latter.
The output of the secondary activity is a secondary product.
Most producer units produce at least some secondary products.

3. Ancillary activities

5.10 As its name implies, an ancillary activity is incidental to the main activity of an enterprise.
It facilitates the efficient running of the enterprise but does not normally result in goods and services that can be marketed.
For enterprises that are relatively small and have only a single location, ancillary activities are not separately identified.
For larger enterprises with multiple locations, it may be useful to treat ancillary activities in the same way as a secondary or even a principal product.
A detailed discussion of the recording of ancillary activities is given in section D after the discussion on the recording of primary and secondary production is complete.

C. Partitioning enterprises into more homogeneous units

5.11 Although it is possible to classify enterprises according to their principal activities using the ISIC and to group them into “industries”, some of the resulting “industries” are likely to be very heterogeneous because some enterprises may have several secondary activities that are quite different from their principal activities.
In order to obtain groups of producers whose activities are more homogeneous, enterprises have to be partitioned into smaller and more homogeneous units.

1. Types of production units

Kind-of-activity units

5.12 One way to partition an enterprise is by reference to activities.
A unit resulting from such a partitioning is called a kind-of-activity unit (KAU).
A kind-of-activity unit is an enterprise, or a part of an enterprise, that engages in only one kind of productive activity or in which the principal productive activity accounts for most of the value added.
Each enterprise must, by definition, consist of one or more kind-of-activity units.
When partitioned into two or more kind-of-activity units, the resulting units must be more homogeneous with respect to output, cost structure and technology of production than the enterprise as a whole.

Local units

5.13 Enterprises often engage in productive activity at more than one location, and for some purposes it may be useful to partition them accordingly.
Thus, a local unit is an enterprise, or a part of an enterprise, that engages in productive activity at or from one location.
The definition has only one dimension in that it does not refer to the kind of activity that is carried out.
Location may be interpreted according to the purpose, narrowly, such as a specific address, or more broadly, such as within a province, state, county, etc.

Establishments

5.14 The establishment combines both the kind-of-activity dimension and the locality dimension.
An establishment is an enterprise, or part of an enterprise, that is situated in a single location and in which only a single productive activity is carried out or in which the principal productive activity accounts for most of the value added.
Establishments are sometimes referred to as local kind-of activity units (local KAUs).

5.15 Although the definition of an establishment allows for the possibility that there may be one or more secondary activities carried out, they should be on a small scale compared with the principal activity.
If a secondary activity within an enterprise is as important, or nearly as important, as the principal activity, then that activity should be treated as taking place within a separate establishment from that in which the principal activity takes place.

5.16 Thus, establishments are designed to be units that provide data that are more suitable for analyses of production in which the technology of production plays an important role.
However, it may still be necessary to transform the resulting data subsequently for purposes of input-output analysis, as explained briefly below in describing the unit of homogeneous production and in more detail in chapter 28.

5.17 In practice, an establishment may usually be identified with an individual workplace in which a particular kind of productive activity is carried out: an individual farm, mine, quarry, factory, plant, shop, store, construction site, transport depot, airport, garage, bank, office, clinic, etc.

2. Data and accounts for establishments

5.18 The only data that can meaningfully be compiled for an establishment relate to its production activities.
They include the following:

a. The items included in the production account and the generation of income account;

b. Statistics of numbers of employees, types of employees and hours worked;

c. Estimates of the stock of non-financial capital and natural resources used;

d. Estimates of changes in inventories and gross fixed capital formation undertaken.

5.19 The compilation of a production account and a generation of income account implies that it must be feasible to calculate output and intermediate consumption and thus value added and also compensation of employees, taxes on production and imports, subsidies and the operating surplus or mixed income.
In principle, it must be feasible to collect at least the above kinds of statistics for an establishment, even if they may not always be available, or needed, in practice.

3. Application of the principles in specific situations

5.20 The application of the principles given above for partitioning an enterprise into establishments is not always straightforward.
This section discusses several situations in which the organization of production is such that the application is particularly difficult.

Establishments within integrated enterprises

5.21 A horizontally integrated enterprise is one in which several different kinds of activities that produce different kinds of goods or services for sale on the market are carried out simultaneously using the same factors of production.
This definition is consistent with ISIC Rev.4 which reads in part:

Horizontal integration occurs when an activity results in end-products with different characteristics.
This could theoretically be interpreted as activities carried out simultaneously using the same factors of production.
In this case, it will not be possible to separate them statistically into different processes, assign them to different units or generally provide separate data for these activities.
Another example would be the production of electricity through a waste incineration process.
The activity of waste disposal and the activity of electricity production cannot be separated in this case.

5.22 Within the SNA, a separate establishment should be identified for each different kind of activity wherever possible.

5.23 A vertically integrated enterprise is one in which different stages of production, which are usually carried out by different enterprises, are carried out in succession by different parts of the same enterprise.
The output of one stage becomes an input into the next stage, only the output from the final stage being actually sold on the market. ISIC describes vertically integrated enterprises as follows:

Vertical integration of activities occurs where the different stages of production are carried out in succession by the same unit and where the output of one process serves as input to the next.
Examples of common vertical integration include tree felling and subsequent on-site sawmilling, a clay pit combined with a brickworks, or production of synthetic fibres in a textile mill.

5.24 In ISIC Rev.4, vertical integration should be treated like any other form of multiple activities.
A unit with a vertically integrated chain of activities should be classified to the class corresponding to the principal activity within this chain, that is, to the activity accounting for the largest share of value added, as determined by the top-down method.
This treatment has changed from previous versions of ISIC.
It should be noted that the term “activity” in this context is used for each step in the production process that is defined in a separate ISIC class, even though the output of each step may not be intended for sale.

5.25 If value added or substitutes for the individual steps in a vertically integrated process cannot be determined directly from accounts maintained by the unit itself, comparisons with other units (for example, based on market prices for intermediate and final products) could be used.
The same precautions for using substitutes as listed above apply here.
If it is still impossible to determine the share of value added for the different stages in the chain of production activities, default assignments for typical forms of vertical integration can be applied.
The Companion Guide to ISIC and CPC (United Nations (forthcoming)) provides a set of examples for such cases.

5.26 While the procedure for the treatment of vertically integrated activities could be applied to any unit, it should be noted that the SNA recommends that when a vertically integrated enterprise spans two or more sections of ISIC, at least one establishment must be distinguished within each section.
With such a treatment, activities of units engaged in vertically integrated activities will not cross section boundaries of ISIC.

5.27 From an accounting point of view it can be difficult to partition a vertically integrated enterprise into establishments because values have to be imputed for the outputs from the earlier stages of production which are not actually sold on the market and which become intermediate inputs into later stages.
Some of these enterprises may record the intra-enterprise deliveries at prices that reflect market values, but others may not.
Even if adequate data are available on the costs incurred at each stage of production, it may be difficult to decide what is the appropriate way in which to allocate the operating surplus of the enterprise among the various stages.
One possibility is that a uniform rate of operating surplus be applied to the costs incurred at each stage.

5.28 Despite the practical difficulties involved in partitioning vertically integrated enterprises into establishments, it is recommended in the SNA, as noted in the section of ISIC quoted above, that when a vertically integrated enterprise spans two or more sections of the ISIC, at least one establishment must be distinguished within each section.
ISIC sections correspond to broad industry groups such as agriculture, fishing, mining and quarrying, manufacturing, etc.

Establishments owned by general government

5.29 Government units, especially central governments, may be particularly large and complex in terms of the kinds of activities in which they engage.
The principles outlined above have to be applied consistently and systematically to government units.
The procedures to be followed when dealing with the main kinds of producer units owned by government may be summarized as follows.

5.30 If an unincorporated enterprise of government is a market producer and there is sufficient information available to treat it as a quasi-corporation, it should be treated as a publicly controlled unit in the non-financial or financial corporations sectors as appropriate.
The usual conventions about distinguishing different establishments within the quasi-corporation apply.

5.31 An example of an unincorporated market enterprise that can be treated as a quasi-corporation is a municipal swimming pool that is independently managed and whose accounts permit its income, saving and capital to be measured separately from government so that flows of income, or capital, between the unit and government can be identified.

5.32 If an unincorporated enterprise of government is a market producer and there is insufficient information to treat it as a quasi-corporation, or if the unincorporated enterprise is a non-market producer, then it remains within the general government sector but it should be treated as an establishment in its own right and allocated to the appropriate industry.

5.33 Non-market producers such as public administration, defence, health and education providing final goods or services should be partitioned into establishments using the activity classification given in Sections O, P and Q of ISIC Rev. 4.
Agencies of central government may be dispersed over the country as a whole in which case it will be necessary to distinguish different establishments for activities that are carried out in different locations.

5.34 When a government agency supplies goods to other government agencies it should be treated as a separate establishment and classified under the appropriate heading of ISIC.
This applies to the production of munitions or weapons, printed documents or stationery, roads or other structures, etc.
A government that produces its own weapons to supply to its own armed forces is, in effect, a vertically integrated enterprise that spans two or more sections of ISIC.
Therefore, at least one separate establishment should be distinguished in each heading.
The same argument applies to a government printing office and other goods producers owned by government.

D. Ancillary activities

5.35 As noted in section B, ancillary activities require special consideration because of the different ways of recording that are recommended depending on circumstances.
As a preliminary step, though, it is as well to review exactly what is meant by an ancillary activity.
Essentially, they are the basic services that every enterprise needs to have in order to operate effectively.
The sorts of services referred to include keeping records, files or accounts in written form or on computers; providing electronic and traditional written communication facilities; purchasing materials and equipment; hiring, training, managing and paying employees; storing materials or equipment: warehousing; transporting goods or persons inside or outside the producer unit; promoting sales; cleaning and maintenance of buildings and other structures; repairing and servicing machinery and equipment; and providing security and surveillance.

5.36 These types of services can be produced in house or can be purchased on the market from specialist service producers though, in practice, the requisite services may not be readily available in the right quantities on local markets.
When the services are produced in house, they are termed ancillary activities.
An ancillary activity is a supporting activity undertaken within an enterprise in order to create the conditions within which the principal or secondary activities can be carried out.
In addition, ancillary activities have certain common characteristics related to their output.
These additional characteristics include:

a. The output of an ancillary activity is not intended for use outside the enterprise.

b. Ancillary activities typically produce outputs that are commonly found as inputs into almost any kind of productive activity;

c. Ancillary activities produce services (and, as exceptions, goods that do not become a physical part of the output of the principal or secondary activity) as output;

d. The value of ancillary activity output is likely to be small compared with that of the principal or secondary activities of an enterprise.

5.37 The defining characteristics that ancillary activities support the principal and secondary activities of an enterprise and are used within the enterprise are by no means sufficient to identify an ancillary activity.
There are many kinds of activities whose outputs are entirely consumed within the same enterprise but which could not possibly be considered as ancillary.
Goods are not commonly used as inputs in the same way as services such as accounting, transportation or cleaning.
For example, an enterprise may produce milk, all of which is processed into butter or cheese within the same enterprise.
However, milk production cannot be considered an ancillary activity, because milk is a particular kind of input found only in special types of productive activity.
In general, goods that become embodied in the output of the principal or secondary activities are not outputs of ancillary activities.

5.38 Certain activities, although common, are not so common as to be considered ancillary.
Many enterprises produce their own machinery and equipment, build their own structures and carry out their own research and development.
These activities are not to be treated as ancillary, whether carried out centrally or not, as they are not found frequently and extensively in all kinds of enterprises, small as well as large.

Recording (or not) the output of ancillary activities

5.39 An ancillary activity is not undertaken for its own sake but purely in order to provide supporting services for the principal or secondary activities with which it is associated.
If all the ancillary activity is undertaken in the establishment where its output is used, the ancillary activity is regarded as an integral part of the principal or secondary activities with which it is associated.
As a result:

a. The output of an ancillary activity is not explicitly recognized and recorded separately in the SNA.
It follows that the use of this output is also not recorded.

b. All the inputs consumed by an ancillary activity, materials, labour, consumption of fixed capital, etc., are treated as inputs into the principal or secondary activity that it supports.

In this case it is not possible to identify the value added of an ancillary activity because that value added is combined with the value added of the principal or secondary activity.

5.40 When the production of an enterprise takes place in two or more different establishments, certain ancillary activities may be carried out centrally for the benefit of all the establishments collectively.
For example, the purchasing, sales, accounts, computing, maintenance or other departments of an enterprise may all be the responsibility of a head office located separately from the establishments in which the principal or secondary activities of the enterprise are carried out.

5.41 If an establishment undertaking purely ancillary activities is statistically observable, in that separate accounts for the production it undertakes are readily available, or if it is in a geographically different location from the establishments it serves, it may be desirable and useful to consider it as a separate unit and allocate it to the industrial classification corresponding to its principal activity.
However, it is recommended that statisticians do not make extraordinary efforts to create separate establishments for these activities artificially in the absence of suitable basic data being available.

5.42 When such a unit is recognized, the ancillary activity is recognized as a primary output.
The value of its output should be derived on a sum of costs basis, including the cost of the capital used in the unit.
The output will be deemed to be non-market output when the parent enterprise is a non-market enterprise and market otherwise.
If the output is treated as non-market, the cost of capital should be replaced by the consumption of fixed capital when summing costs to determine the value of output.
The output of the ancillary unit is treated as intermediate consumption of the establishments it serves and should be allocated across them using an appropriate indicator such as the output, value added or employment of these establishments.

5.43 It is appropriate to treat specialized agencies serving central government as a whole, for example, computer or communications agencies, which tend to be large, as separate establishments.

5.44 Even when an ancillary activity is undertaken in the establishment where it is used, it may grow to the point that it has the capacity to provide services outside the enterprise.
For example, a computer processing unit may develop in-house capabilities for which there is an outside demand.
When an activity starts to provide a proportion of its services to outsiders, the part of the output that is sold has to be treated as secondary rather than ancillary output.

The role of ancillary activities in the SNA

5.45 The production accounts of the SNA do not provide comprehensive information about the production of services treated in some cases as ancillary services.
It is therefore difficult to obtain information about their role in the economy.
For example, it is difficult to know how much output is produced, how many persons are engaged in such activities, how many resources are consumed, etc.
This may be regarded as a serious disadvantage for certain purposes, such as analysing the impact of “information technology” on productivity when the processing and communication of information are typical ancillary activities or when looking at the role of freight transport.
For some purposes, a satellite account may be compiled that makes estimates of all activities of a certain type regardless of whether they are ancillary or not.
The overall measure of value added does not alter because both output and intermediate consumption increase by the same amount but a more inclusive picture of the role of the activity in the economy can be obtained.
There is a discussion on the role of satellite accounts in chapter 29.

E. Industries

5.46 Industries are defined in the SNA in the same way as in ISIC: an industry consists of a group of establishments engaged in the same, or similar, kinds of activity.
At the most detailed level of classification, an industry consists of all the establishments falling within a single Class of ISIC.
At higher levels of aggregation corresponding to the Groups, Divisions and, ultimately, Sections of the ISIC, industries consist of a number of establishments engaged on similar types of activities.

1. Market, own account and non-market producers

5.47 The term “industry” is not reserved for market producers.
An industry, as defined in the ISIC and in the SNA, consists of a number of establishments engaged in the same type of production, whether the institutional units to which they belong are market producers or not.
The distinction between market and other production is a different dimension of production and economic activity.
For example, the health industry in a particular country may consist of a number of establishments, some of which are market producers while others are non-market producers.
Because the distinction between market and other kinds of production is based on a different criterion from the nature of activity itself, it is possible to cross-classify establishments by type of activity and by whether they are market producers, non-market producers or producers for own final use.

2. Industries and products

5.48 As already mentioned, a one-to-one correspondence does not exist between activities and products and hence between industries and products.
Certain activities produce more than one product simultaneously, while the same product may sometimes be produced by using different techniques of production.

5.49 When two or more products are produced simultaneously by a single productive activity they are “joint products”. Examples of joint products are meat and hides produced by slaughtering animals or sugar and molasses produced by refining sugar canes.
The by-product from one activity may also be produced by other activities, but there are examples of by-products, such as molasses, that are produced exclusively as the by-products of one particular activity.

5.50 The relationship between an activity and a product classification is exemplified by that between the ISIC and the CPC.
The CPC is a classification based on the physical characteristics of goods or on the nature of the services rendered, while the ISIC also takes into account the inputs in the production process and the technology used in the production process.
In the development of the CPC, it is intended that each good or service distinguished in the CPC is defined in such a way that it is normally produced by only one activity as defined in ISIC.
However, due to different types of criteria employed, this is not always possible.
An example would be the product of mushrooms, which can be produced by controlled growing, that is, an activity classified in Agriculture in ISIC, or by simply gathering wild growing mushrooms, an activity classified in Forestry.
More detailed national classifications may distinguish different forms of energy production in ISIC, based on different technologies, resulting in separate activities for the operation of hydroelectric power plants, nuclear power plants etc.
The output of all these activities, however, would be the single product electricity.

5.51 Conversely, each activity of the ISIC, no matter how narrowly defined, will tend to produce a number of products as defined in the CPC, although they are often clustered within the CPC structure and could be perceived as one “type” of product.
As far as practically possible, an attempt is made to establish a correspondence between the two classifications, by allocating to each category of the CPC a reference to the ISIC class in which the good or service is mainly produced.
However, due to the reasons outlined above, this typically does not result in a one-to-one correspondence.
The majority of links between ISIC and CPC will tend to be one-to-many links, with a few cases requiring many-to-one links.
It is possible to force this correspondence into a stricter relationship by selecting one link out of the many-to-one correspondence.
This selection may facilitate data conversion, but is not a real description of the link between the two classifications.

F. Units of homogeneous production

5.52 In most fields of statistics the choice of statistical unit, and methodology used, are strongly influenced by the purposes for which the resulting statistics are to be used.
For purposes of input-output analysis, the optimal situation would be one in which each producer unit were engaged in only a single productive activity so that an industry could be formed by grouping together all the units engaged in a particular type of production without the intrusion of any secondary activities.
Such a unit is called a “unit of homogeneous production”.

5.53 Although the unit of homogeneous production may be the optimal unit for purposes of certain kinds of analysis, particularly input-output analysis, it may not be possible to collect directly from the enterprise or establishment the accounting data corresponding to units of homogeneous production.
Such data may have to be estimated subsequently by transforming the data supplied by enterprises on the basis of various assumptions or hypotheses.
Units that are constructed by statistical manipulation of the data collected by the agency are called analytical units.

5.54 If a producer unit carries out a principal activity and also one or more secondary activities, it will be partitioned into the same number of units of homogeneous production.
If it is desired to compile production accounts and input-output tables by region, it is necessary to treat units of homogeneous production located in different places as separate units even though they may be engaged in the same activity and belong to the same institutional unit.

5.55 Chapter 28 discusses the estimation of analytical units for use in an input-output context.

Chapter 6: The production account

A. Introduction

6.1 The production account is the starting point for the sequence of accounts for institutional units and sectors displaying how income is generated, distributed and used throughout the economy.
Activities defined as production therefore determine the extent of GDP and the level of income for the economy.
In concept, the economy-wide production account is the aggregation of a similar account for each production unit.
Importantly, while production accounts can be compiled for an individual institutional unit as well as for sectors, they can also be compiled for establishments and thus for industries.
It is this feature that allows the study of industrial activity in the economy and permits the compilation of supply and use tables and input-output tables.

6.2 The production account is linked to the definition of production.
Production is an activity, carried out under the responsibility, control and management of an institutional unit, that uses inputs of labour, capital, and goods and services to produce outputs of goods and services.
The production account shows the output of production and the various inputs to it. To do this, three concepts need clarifying.

6.3 The first concept to be clarified is what constitutes production within the SNA.
This delineation is referred to as the production boundary of the SNA.
Thereafter several key types of production need to be identified depending on whether production is for sale, for own use or is made available to others at little or no cost.

6.4 The next concept to be addressed is how output is to be valued.
Key to this question is the role played by the various types of taxes imposed by (and subsidies given by) government on products and on the activity of production.

6.5 The third major concept to be considered is how the production process adds to the value of goods and services and leads to the generation of income.
Does the whole contribution of labour and capital add to the value of these goods and services or should the fact that most capital declines in value as it is used need to be taken into account?

6.6 The general format of an account in the sequence of accounts is to show how resources are received and, after uses are deducted, a balancing item is left.
Because the production account is the first in the sequence of accounts, it is the first time the concept of a balancing item appears.
The importance of balancing items in general and the one in this account in particular is also discussed before considering each of the entries of the production account in turn.

6.7 The production account for institutional units and sectors is illustrated in table 6.1.
It contains only three items apart from the balancing item.
The output from production is recorded under resources on the right-hand side of the account.
This item may be disaggregated to distinguish different kinds of output.
For example, non-market output should be shown separately from market output and output for own final use in the sector accounts, when possible.
The uses recorded on the left-hand side of the account consist of intermediate consumption and consumption of fixed capital.
Both of these may also be disaggregated.

6.8 The balancing item in the production account is value added.
It can be measured either gross or net, that is, before or after deducting consumption of fixed capital:

a. Gross value added is the value of output less the value of intermediate consumption;

b. Net value added is the value of output less the values of both intermediate consumption and consumption of fixed capital.

6.9 As value added is intended to measure the value created by a process of production, it ought to be measured net, since the consumption of fixed capital is a cost of production.
However, as explained later, consumption of fixed capital can be difficult to measure in practice and it may not always be possible to make a satisfactory estimate of its value and hence of net value added.
Provision has therefore to be made for value added to be measured gross as well as net.
It follows that provision has also to be made for the balancing items in subsequent accounts of the SNA to be measured either gross or net of the consumption of fixed capital.

B. The concept of production

1. Production as an economic activity

6.10 Production can be described in general terms as an activity in which an enterprise uses inputs to produce outputs.
The economic analysis of production is mainly concerned with activities that produce outputs of a kind that can be delivered or provided to other institutional units.
Unless outputs are produced that can be supplied to other units, either individually or collectively, there can be no division of labour, no specialization of production and no gains from trading.
There are two main kinds of output, namely goods and services, and it is necessary to examine their characteristics in order to be able to delineate activities that are productive in an economic sense from other activities.
Collectively, goods and services are described as products.

6.11 In the SNA, it is seldom if ever necessary to make a clear distinction between goods and services but in making the link to other data sets it is often necessary to understand which products have been treated as goods and which as services.

6.12 Industrial classifications, such as ISIC, identify a group of manufacturing industries.
However, many of these industries also produce services.
For example, some aircraft engine manufacturers may both fabricate aircraft engines and repair and service existing engines.
When goods dispatched to another unit for processing do not change ownership, the work done on them constitutes a service even though it may be undertaken by a manufacturing industry.
The fact that the processing is classified as a service does not prevent the processor from being classified within manufacturing.

6.13 Similarly, some service-producing industries may produce products that have many of the characteristics of goods.
For convenience, the products of these industries are described in the SNA as knowledge-capturing products.

6.14 Products are goods and services (including knowledge-capturing products) that result from a process of production.

Goods

6.15 Goods are physical, produced objects for which a demand exists, over which ownership rights can be established and whose ownership can be transferred from one institutional unit to another by engaging in transactions on markets.
They are in demand because they may be used to satisfy the needs or wants of households or the community or used to produce other goods or services.
The production and exchange of goods are quite separate activities.
Some goods may never be exchanged while others may be bought and sold numerous times.
The production of a good can always be separated from its subsequent sale or resale.

Services

6.16 The production of services must be confined to activities that are capable of being carried out by one unit for the benefit of another.
Otherwise, service industries could not develop and there could be no markets for services.
It is also possible for a unit to produce a service for its own consumption provided that the type of activity is such that it could have been carried out by another unit.

6.17 Services are the result of a production activity that changes the conditions of the consuming units, or facilitates the exchange of products or financial assets.
These types of service may be described as change-effecting services and margin services respectively.
Change-effecting services are outputs produced to order and typically consist of changes in the conditions of the consuming units realized by the activities of producers at the demand of the consumers.
Change-effecting services are not separate entities over which ownership rights can be established.
They cannot be traded separately from their production.
By the time their production is completed, they must have been provided to the consumers.

6.18 The changes that consumers of services engage the producers to bring about can take a variety of different forms as follows:

a. Changes in the condition of the consumer's goods: the producer works directly on goods owned by the consumer by transporting, cleaning, repairing or otherwise transforming them;

b. Changes in the physical condition of persons: the producer transports the persons, provides them with accommodation, provides them with medical or surgical treatments, improves their appearance, etc.;

c. Changes in the mental condition of persons: the producer provides education, information, advice, entertainment or similar services in a face to face manner.

Table 6.1: The production account - uses

6.19 The changes may be temporary or permanent.
For example, medical or education services may result in permanent changes in the condition of the consumers from which benefits may be derived over many years.
On the other hand, attending a football match is a short-lived experience.
In general, the changes may be presumed to be improvements, as services are produced at the demand of the consumers.
The improvements usually become embodied in the persons of the consumers or the goods they own and are not separate entities that belong to the producer.
Such improvements cannot be held in inventories by the producer or traded separately from their production.

6.20 A single process of production may provide services to a group of persons, or units, simultaneously.
For example, groups of persons or goods belonging to different institutional units may be transported together in the same plane, ship, train or other vehicle.
People may be instructed or entertained in groups by attending the same class, lecture or performance.
Certain services are provided collectively to the community as a whole, or large sections of the community, for example, the maintenance of law and order, and defence.

6.21 Margin services result when one institutional unit facilitates the change of ownership of goods, knowledge-capturing products, some services or financial assets between two other institutional units.
Margin services are provided by wholesalers and retailers and by many types of financial institutions.
Margin services resemble change-effecting services in that they are not separate entities over which ownership rights can be established.
They cannot be traded separately from their production.
By the time their production is completed they must have been provided to the consumers.

Knowledge-capturing products

6.22 Knowledge-capturing products concern the provision, storage, communication and dissemination of information, advice and entertainment in such a way that the consuming unit can access the knowledge repeatedly.
The industries that produce the products are those concerned with the provision, storage, communication and dissemination of information, advice and entertainment in the broadest sense of those terms including the production of general or specialized information, news, consultancy reports, computer programs, movies, music, etc.
The outputs of these industries, over which ownership rights may be established, are often stored on physical objects (whether on paper or on electronic media) that can be traded like ordinary goods.
They have many of the characteristics of goods in that ownership rights over these products can be established and they can be used repeatedly.
Whether characterized as goods or services, these products possess the essential common characteristic that they can be produced by one unit and supplied to another, thus making possible division of labour and the emergence of markets.

2. The production boundary

6.23 Given the general characteristics of the goods and services produced as outputs, it becomes possible to define production.
A general definition of production is given first, followed by the rather more restricted definition that is used in the SNA.
Following this there is a discussion of the production boundary as it affects household activities and non-observed activities.

The general production boundary

6.24 Economic production may be defined as an activity carried out under the control and responsibility of an institutional unit that uses inputs of labour, capital, and goods and services to produce outputs of goods or services.
There must be an institutional unit that assumes responsibility for the process of production and owns any resulting goods or knowledge-capturing products or is entitled to be paid, or otherwise compensated, for the change-effecting or margin services provided.
A purely natural process without any human involvement or direction is not production in an economic sense.
For example, the unmanaged growth of fish stocks in international waters is not production, whereas the activity of fish farming is production.

Table 6.1(cont): The production account - resources

6.25 While production processes that produce goods can be identified without difficulty, it is not always so easy to distinguish the production of services from other activities that may be both important and beneficial.
Activities that are not productive in an economic sense include basic human activities such as eating, drinking, sleeping, taking exercise, etc., that it is impossible for one person to employ another person to perform instead.
Paying someone else to take exercise is no way to keep fit.
On the other hand, activities such as washing, preparing meals, caring for children, the sick or aged are all activities that can be provided by other units and, therefore, fall within the general production boundary.
Many households employ paid domestic staff to carry out these activities for them.

The production boundary in the SNA

6.26 The production boundary in the SNA is more restricted than the general production boundary.
For reasons explained below, activities undertaken by households that produce services for their own use are excluded from the concept of production in the SNA, except for services provided by owner-occupied dwellings and services produced by employing paid domestic staff.
Otherwise, the production boundary in the SNA is the same as the more general one defined in the previous paragraphs.

6.27 The production boundary of the SNA includes the following activities:

a. The production of all goods or services that are supplied to units other than their producers, or intended to be so supplied, including the production of goods or services used up in the process of producing such goods or services;

b. The own-account production of all goods that are retained by their producers for their own final consumption or gross capital formation;

c. The own-account production of knowledge-capturing products that are retained by their producers for their own final consumption or gross capital formation but excluding (by convention) such products produced by households for their own use;

d. The own-account production of housing services by owner occupiers; and

e. The production of domestic and personal services by employing paid domestic staff.

The production boundary within households

The exclusion of most services produced for own use by households

6.28 The production of services by members of the household for their own final consumption has traditionally been excluded from measured production in national accounts and it is worth explaining briefly why this is so. It is useful to begin by listing those services for which no entries are recorded in the accounts when they are produced by household members and consumed within the same household:

a. The cleaning, decoration and maintenance of the dwelling occupied by the household, including small repairs of a kind usually carried out by tenants as well as owners;

b. The cleaning, servicing and repair of household durables or other goods, including vehicles used for household purposes;

c. The preparation and serving of meals;

d. The care, training and instruction of children;

e. The care of sick, infirm or old people;

f. The transportation of members of the household or their goods.

6.29 In most countries a considerable amount of labour is devoted to the production of these services, and their consumption makes an important contribution to economic welfare.
However, national accounts serve a variety of analytical and policy purposes and are not compiled simply, or even primarily, to produce indicators of welfare.
The reasons for not imputing values for unpaid domestic or personal services produced and consumed within households may be summarized as follows:

a. The own-account production of services within households is a self-contained activity with limited repercussions on the rest of the economy.
The decision to produce a household service entails a simultaneous decision to consume that service.
This is not true for goods.
For example, if a household engages in the production of agricultural goods, it does not follow that it intends to consume them all.
Once the crop has been harvested, the producer has a choice about how much to consume, how much to store for future consumption or production and how much to offer for sale or barter on the market.
Indeed, although it is customary to refer to the own-account production of goods, it is not possible to determine at the time the production takes place how much of it will eventually be consumed by the producer.
For example, if an agricultural crop turns out to be better than expected, the household may dispose of some of it on the market even though it may have originally supposed it would consume it all.
This kind of possibility is non-existent for services; it is not possible to produce a service and then decide whether to offer it for sale or not.

b. As the vast majority of household services are not produced for the market, there are typically no suitable market prices that can be used to value such services.
It is therefore extremely difficult to estimate values not only for the outputs of the services but also for the associated incomes and expenditures that can be meaningfully added to the values of the monetary transactions on which most of the entries in the accounts are based.

c. With the exception of the imputed rental of owner-occupied dwellings, the decision to produce services for own consumption is not influenced by and does not influence economic policy because the imputed values are not equivalent to monetary flows.
Changes in the levels of household services produced do not affect the tax yield of the economy or the level of the exchange rate, to give two examples.

6.30 Thus, the reluctance of national accountants to impute values for the outputs, incomes and expenditures associated with the production and consumption of services within households is explained by a combination of factors, namely the relative isolation and independence of these activities from markets, the extreme difficulty of making economically meaningful estimates of their values, and the adverse effects it would have on the usefulness of the accounts for policy purposes and the analysis of markets and market disequilibria.

6.31 The exclusion of household services from the production boundary has consequences for labour force and employment statistics.
According to International Labour Organization (ILO) guidelines, economically active persons are persons engaged in production included within the boundary of production of the SNA.
If that boundary were to be extended to include the production of own-account household services, virtually the whole adult population would be economically active and unemployment eliminated.
In practice, it would be necessary to revert to the existing boundary of production in the SNA, if only to obtain meaningful employment statistics.

Own-account production of goods

6.32 Although services produced for own consumption within households fall outside the boundary of production used in the SNA, it is nevertheless useful to give further guidance with respect to the treatment of certain kinds of household activities which may be particularly important in some developing countries.
The SNA includes the production of all goods within the production boundary.
The following types of production by households are included whether intended for own final consumption or not:

a. The production of agricultural products and their subsequent storage; the gathering of berries or other uncultivated crops; forestry; wood-cutting and the collection of firewood; hunting and fishing;

b. The production of other primary products such as mining salt, cutting peat, etc.;

c. The processing of agricultural products; the production of grain by threshing; the production of flour by milling; the curing of skins and the production of leather; the production and preservation of meat and fish products; the preservation of fruit by drying, bottling, etc.; the production of dairy products such as butter or cheese; the production of beer, wine, or spirits; the production of baskets or mats; etc.;

d. Other kinds of processing such as weaving cloth; dress making and tailoring; the production of footwear; the production of pottery, utensils or durables; making furniture or furnishings; etc.;

e. The supply of water is also considered a goods-producing activity in this context.
In principle, supplying water is a similar kind of activity to extracting and piping crude oil.

6.33 It is not feasible to draw up a complete, exhaustive list of all possible productive activities but the above list covers the most common types.
When the amount of a good produced within households is believed to be quantitatively important in relation to the total supply of that good in a country, its production should be recorded.
Otherwise, it may not be worthwhile trying to estimate it in practice.

Services of owner-occupied dwellings

6.34 The production of housing services for their own final consumption by owner occupiers has always been included within the production boundary in national accounts, although it constitutes an exception to the general exclusion of own-account service production.
The ratio of owner-occupied to rented dwellings can vary significantly between countries, between regions of a country and even over short periods of time within a single country or region, so that both international and inter-temporal comparisons of the production and consumption of housing services could be distorted if no imputation were made for the value of own-account housing services.
The imputed value of the income generated by such production is taxed in some countries.

Production of domestic and personal services by employing paid domestic staff

6.35 Although paid domestic staff produce many of the services excluded from the production boundary of the SNA when undertaken by household members, paying a person who comes to the house to wash, cook or look after children, for example, is as much a market activity as taking clothes to a laundry, eating at a restaurant or paying a nursery to care for children.
By convention, though, only the wages of the domestic staff are treated as the value of output.
Other materials used in their work are treated as household consumption expenditure because of the difficulty of identifying what is used by the staff and what by household members.
Nor are payments to other household members treated as payments for services even if the payments are nominally for the performance of chores, for example pocket-money paid to children.

“Do-it-yourself” decoration, maintenance and small repairs

6.36 “Do-it-yourself” repairs and maintenance to consumer durables and dwellings carried out by members of the household constitute the own-account production of services and are excluded from the production boundary of the SNA.
The materials purchased are treated as final consumption expenditure.

6.37 In the case of dwellings, “do-it-yourself” activities cover decoration, maintenance and small repairs, including repairs to fittings, of types that are commonly carried out by tenants as well as by owners.
On the other hand, more substantial repairs, such as replastering walls or repairing roofs, carried out by owners, are essentially intermediate inputs into the production of housing services.
However, the production of such repairs by an owner-occupier is only a secondary activity of the owner in his capacity as a producer of housing services.
The production accounts for the two activities may be consolidated so that, in practice, the purchases of materials for repairs become intermediate expenditures incurred in the production of housing services.
Major renovations or extensions to dwellings are fixed capital formation and recorded separately.

The use of consumption goods

6.38 The use of goods within the household for the direct satisfaction of human needs or wants is not treated as production.
This applies not only to materials or equipment purchased for use in leisure or recreational activities but also to foodstuffs purchased for the preparation of meals.
The preparation of a meal is a service activity and is treated as such in the SNA and ISIC Rev.4.
It therefore falls outside the production boundary when the meal is prepared for own consumption within the household.
The use of a durable good, such as a vehicle, by persons or households for their own personal benefit or satisfaction is intrinsically a consumption activity and should not be treated as if it were an extension, or continuation, of production.

The “non-observed” economy

6.39 There is considerable interest in the phenomenon of the non-observed economy.
This term is used to describe activities that, for one reason or another, are not captured in regular statistical enquiries.
The reason may be that the activity is informal and thus escapes the attention of surveys geared to formal activities; it may be that the producer is anxious to conceal a legal activity, or it may be that the activity is illegal. Chapter 25 discusses measurement of the informal economy within households.

6.40 Certain activities may clearly fall within the production boundary of the SNA and also be quite legal (provided certain standards or regulations are complied with) but deliberately concealed from public authorities for the following kinds of reasons:

a. To avoid the payment of income, value added or other taxes;

b. To avoid the payment of social security contributions;

c. To avoid having to meet certain legal standards such as minimum wages, maximum hours, safety or health standards, etc.;

d. To avoid complying with certain administrative procedures, such as completing statistical questionnaires or other administrative forms.

6.41 Because certain kinds of producers try to conceal their activities from public authorities, it does not follow that they are not included in national accounts in practice.
Many countries have had considerable success in compiling estimates of production that cover the non-observed economy as well as the ordinary economy.
In some industries, such as agriculture or construction, it may be possible by using various kinds of surveys and the commodity flow method to make satisfactory estimates of the total output of the industry without being able to identify or measure that part of it that is not observed.
Because the non-observed economy may account for a significant part of the total economy of some countries, it is particularly important to try to make estimates of total production that include it, even if it cannot always be separately identified as such.

6.42 There may be no clear borderline between the non-observed economy and illegal production.
For example, production that does not comply with certain safety, health or other standards could be described as illegal.
Similarly, the evasion of taxes is itself usually a criminal offence.
However, it is not necessary for the purposes of the SNA to try to fix the precise borderline between non-observed and illegal production as both are included within the production boundary in any case.
It follows that transactions on unofficial markets that exist in parallel with official markets (for example, for foreign exchange or goods subject to official price controls) must also be included in the accounts, whether or not such markets are actually legal or illegal.

6.43 There are two kinds of illegal production:

a. The production of goods or services whose sale, distribution or possession is forbidden by law;

b. Production activities that are usually legal but become illegal when carried out by unauthorized producers; for example, unlicensed medical practitioners.

6.44 Examples of activities that may be illegal but productive in an economic sense include the manufacture and distribution of narcotics, illegal transportation in the form of smuggling of goods and of people, and services such as prostitution.

6.45 Both kinds of illegal production are included within the production boundary of the SNA provided they are genuine production processes whose outputs consist of goods or services for which there is an effective market demand.
The units that purchase smuggled goods, for example, may not be involved in any kind of illegal activities and may not even be aware that the other party to the transaction is behaving illegally.
Transactions in which illegal goods or services are bought and sold need to be recorded not simply to obtain comprehensive measures of production and consumption but also to prevent errors appearing elsewhere in the accounts.
The incomes generated by illegal production may be disposed of quite legally, while conversely, expenditures on illegal goods and services may be made out of funds obtained quite legally.
The failure to record illegal transactions may lead to significant errors within the accounts if the consequences of the activity are recorded in the financial account and the external accounts, say, but not in the production and income accounts.

6.46 Regular thefts of products from inventories are not included in the value of output.
Suppose a shop suffers regular theft from inventories.
In calculating the value of output of the shop, part of the margin on the goods sold must cover the cost of the goods stolen.
Thus the margin is calculated as the value received for the goods sold less the cost of both 6.48 the goods sold and the goods stolen.
If the stolen products are sold elsewhere, for example on a street stall, the value of the output of the street trader is still calculated as the difference between the value received for the goods and the value paid for them.
In this case, though, if nothing is paid for the goods, the whole of the sales value appears as the margin.

6.47 Illegal production does not refer to the generation of externalities such as the discharge of pollutants.
Externalities may result from production processes that are themselves quite legal.
Externalities are created without the consent of the units affected and no values are imputed for them in the SNA.

6.48 Although non-observed and illegal activities require special consideration, it is not necessarily the case that they are excluded from normal data collection processes.

C. Basic, producers' and purchasers' prices

6.49 More than one set of prices may be used to value outputs and inputs depending upon how taxes and subsidies on products, and also transport charges, are recorded.
Moreover, value added taxes (VAT), and similar deductible taxes may also be recorded in more than one way.
The methods of valuation used in the SNA are explained in this section.

6.50 The detailed discussion of taxes related to production appears in section C of chapter 7 but it is important in the context of discussing alternative price measures to make the distinction between taxes (and subsidies) on products and other taxes (and subsidies) on production.
As the name implies, taxes on products are payable per unit of the product.
The tax may be a flat amount dependent on the physical quantity of the product or may be a percentage of the value at which the product is sold.
Other taxes on production are taxes imposed on the producer that do not apply to products nor are levied on the profits of the producer.
Examples include taxes on land or premises used in production or on the labour force employed.
The distinction between subsidies on products and other subsidies on production is made on similar grounds.

1. Basic and producers' prices

6.51 The SNA utilizes two kinds of prices to measure output, namely, basic prices and producers' prices:

a. The basic price is the amount receivable by the producer from the purchaser for a unit of a good or service produced as output minus any tax payable, and plus any subsidy receivable, by the producer as a consequence of its production or sale.
It excludes any transport charges invoiced separately by the producer.

b. The producer's price is the amount receivable by the producer from the purchaser for a unit of a good or service produced as output minus any VAT, or similar deductible tax, invoiced to the purchaser.
It excludes any transport charges invoiced separately by the producer.

Neither the producer's nor the basic price includes any amounts receivable in respect of VAT, or similar deductible tax, invoiced on the output sold.

6.52 Unlike the basic price, the producer's price includes taxes on products (taxes payable per unit of output) and excludes subsidies on products (subsidies receivable per unit of output).
The producer's price is the price, excluding VAT, that the producer invoices to the purchaser.
The basic price measures the amount retained by the producer and is, therefore, the price most relevant for the producer's decision-taking.
It is becoming increasingly common in many countries for producers to itemize taxes separately on their invoices so that purchasers are informed about how much they are paying to the producer and how much as taxes to the government.

6.53 Basic prices exclude any taxes on products the producer receives from the purchaser and passes on to government but include any subsidies the producer receives from government and uses to lower the prices charged to purchasers.

6.54 Both producers' and basic prices are actual transaction prices that can be directly observed and recorded.
Basic prices are often reported in statistical inquiries and some official “producer price” indices actually refer to basic prices rather than to producers' prices as defined here.

VAT and similar deductible taxes

6.55 Many countries have adopted some form of VAT.
VAT is a wide-ranging tax usually designed to cover most or all goods and services.
In some countries, VAT may replace most other forms of taxes on products, but VAT may also be levied in addition to some other taxes on products, such as excise duties on tobacco, alcoholic drink or fuel oils.

6.56 VAT is a tax on products collected in stages by enterprises.
Producers are required to charge certain percentage rates of VAT on the goods or services they sell.
The VAT is shown separately on the sellers' invoices so that purchasers know the amounts they have paid.
However, producers are not required to pay to the government the full amounts of the VAT invoiced to their customers because they are usually permitted to deduct the VAT that they themselves have paid on goods and services purchased for their own intermediate consumption, resale or gross fixed capital formation.
Producers are obliged to pay only the difference between the VAT on their sales and the VAT on their purchases for intermediate consumption or capital formation, hence the expression value added tax.
The percentage rate of VAT is liable to vary between different categories of goods and services and also according to the type of purchaser.
For example, sometimes goods purchased by visiting non-residents, which count as exports, may be exempt from VAT.

6.57 Other tax regimes exist, not called VAT, that operate in a similar manner.
Within the SNA, the term VAT is used to apply to any similar deductible tax scheme even if the scope is narrower than a full system of VAT.

6.58 The following terminology needs to be defined:

a. Invoiced VAT is the VAT payable on the sales of a producer; it is shown separately on the invoice that the producer presents to the purchaser.

b. Deductible VAT is the VAT payable on purchases of goods or services intended for intermediate consumption, gross fixed capital formation or for resale that a producer is permitted to deduct from his own VAT liability to the government in respect of VAT invoiced to his customers.

c. Non-deductible VAT is VAT payable by a purchaser that is not deductible from his own VAT liability, if any.

Thus, a market producer is able to recover the costs of any deductible VAT payable on his own purchases by reducing the amount of his own VAT liability in respect of the VAT invoiced to his own customers.
On the other hand, the VAT paid by households for purposes of final consumption or fixed capital formation in dwellings is not deductible.
The VAT payable by non-market producers owned by government units or NPISHs may also not be deductible.

Gross and net recording of VAT

6.59 There are two alternative systems that may be used to record VAT, the “gross” or “net” systems.
Under the gross system, all transactions are recorded including the amounts of any invoiced VAT.
Thus, the purchaser and the seller record the same price, irrespective of whether or not the purchaser is able to deduct the VAT subsequently.

6.60 While the gross system of recording seems to accord with the traditional notion of recording at “market” prices, it presents some difficulties.
Practical experience with the operation of VAT over many years in a number of countries has shown it may be difficult, if not impossible, to utilize the gross system because of the way business accounts are computed and records are kept.
Sales are normally reported excluding invoiced VAT in most industrial inquiries and business surveys.
Conversely, purchases of goods and services by producers are usually recorded excluding deductible VAT.
Although the gross system has been tried in some countries, it has had to be abandoned for these reasons.
Further, it can be argued that the gross system distorts economic reality to the extent that it does not reflect the amounts of VAT actually paid by businesses.
Large amounts of invoiced VAT are deductible and thus represent only notional or putative tax liabilities.

6.61 The SNA therefore requires that the net system of recording VAT should be followed.
In the net system:

a. Outputs of goods and services are valued excluding invoiced VAT; imports are similarly valued excluding invoiced VAT;

b. Purchases of goods and services are recorded including non-deductible VAT.

Under the net system, VAT is recorded as being payable by purchasers, not sellers, and then only by those purchasers who are not able to deduct it. Almost all VAT is therefore recorded in the SNA as being paid on final uses, mainly on household consumption.
However, small amounts of VAT may be paid by businesses in respect of certain kinds of purchases on which VAT may not be deductible.

6.62 The disadvantage of the net system is that different prices must be recorded for the two parties to the same transaction when the VAT is not deductible.
The price recorded for the producer does not include invoiced VAT whereas the price recorded for the purchaser does include the invoiced VAT to the extent that it is not deductible.
Thus, in aggregate, the total value of the expenditures recorded for purchasers must exceed the total value of the corresponding sales receipts recorded for producers by the total amount raised as nondeductible VAT.

6.63 The producer's price thus defined is a hybrid that excludes some, but not all, taxes on products.
The basic price, which does not include any taxes on the product (but includes subsidies on the product) becomes a clearer concept in these circumstances and is the preferred method for valuing the output of producers.

2. Purchasers' prices

6.64 The purchaser's price is the amount paid by the purchaser, excluding any VAT or similar tax deductible by the purchaser, in order to take delivery of a unit of a good or service at the time and place required by the purchaser.
The purchaser's price of a good includes any transport charges paid separately by the purchaser to take delivery at the required time and place.

6.65 When a purchaser buys directly from the producer, the purchaser's price may exceed the producer's price by:

a. The value of any non-deductible VAT, payable by the purchaser; and

b. The value of any transport charges on a good paid separately by the purchaser and not included in the producer's price.

It follows that the purchaser's price may exceed the basic price by the amount of the two items just listed plus the value of any taxes less subsidies on the product (other than VAT).

6.66 If purchasers buy output not from the producer directly but from a wholesaler or retailer, it is necessary to include their margins in the difference between basic and purchasers' prices also.

6.67 For certain purposes, including input-output analysis, it may be convenient to consider that the purchase of a product consists of two separate transactions.
The first of these is the purchase of the product from the producer and the second is the margin paid to the wholesaler or retailer of the product.
The margin represents the difference between the price paid by the final purchaser of a product after it has passed through the wholesale and retail distribution chains and the producer's price received by its original producer.

6.68 The traditional concept of the “market” price becomes somewhat blurred under a system of VAT or similar deductible taxes because there may be two different prices for a single transaction: one from the seller's point of view and another from the purchaser's, depending upon whether or not the tax is deductible.
It is recommended in the SNA that the term “market prices” should be avoided when referring to value added and the price basis used, (basic, producers' or purchasers'), be specified to avoid ambiguity.

3. Basic, producers' and purchasers' prices - a summary

6.69 Figure 1 gives an overview of the essential differences between basic, producers' and purchasers' prices.

Figure 6.1: Basic, producers' and purchasers' prices
Basic prices
+
Taxes on products excluding invoiced VAT
-
Subsidies on products
=
Producers' prices
+
VAT not deductible by the purchaser
+
Separately invoiced transport charges
+
Wholesalers' and retailers' margins
=
Purchasers' prices

D. Value added and GDP

1. Gross and net value added

6.70 The balancing item of a current account is the excess of resources over uses.
The rationale for dividing transactions into sets of accounts is that the balancing item of each account is of economic interest.
The balancing item of the production account is value added, so called because it measures the value created by production.
Because a production account may be compiled for an institutional unit or sector, or establishment or industry, so value added may be derived for any of these.
Value added is of analytical interest because when the value of taxes on products (less subsidies on products) is added, the sum of value added for all resident units gives the value of gross domestic product (GDP).

6.71 Value added represents the contribution of labour and capital to the production process.
Once the amount of value added appropriated by government in the form of other taxes on production is deducted from value added and the value of subsidies is added, the compensation of labour and capital is revealed.
However, capital in the form of fixed capital has a finite life length.
Some part of value added should therefore be regarded as the reduction in value of fixed capital due to its use in production.
This allowance is called consumption of fixed capital.

6.72 Consumption of fixed capital is one of the most important elements in the SNA.
In most cases, when a distinction is drawn between “gross” and “net” recording, “gross” means without deducting consumption of fixed capital while recording “net” means after deducting consumption of fixed capital.
In particular, all the major balancing items in the accounts from value added through to saving may be recorded gross or net, that is, before or after deducting consumption of fixed capital.
It should also be noted that consumption of fixed capital is typically quite large compared with most of the net balancing items.
It may account for 10 per cent or more of GDP.

6.73 Consumption of fixed capital is one of the most difficult items in the accounts to define conceptually and to estimate in practice.
Further, consumption of fixed capital does not represent the aggregate value of a set of transactions.
It is an imputed value whose economic significance is different from entries in the accounts based mainly on market transactions.
For these reasons, the major balancing items in national accounts have always tended to be recorded both gross and net of consumption of fixed capital.
This tradition is continued in the SNA where provision is made for balancing items from value added through to saving to be recorded both ways.
In general, the gross figure is the easier to estimate and so may be more reliable, but the net figure is usually the one that is conceptually more appropriate and relevant for analytical purposes.

6.74 As stated above:

a. Gross value added is defined as the value of output less the value of intermediate consumption;

b. Net value added is defined as the value of output less the values of both intermediate consumption and consumption of fixed capital.

To avoid repetition, only gross value added will be cited in the following sections when the corresponding conclusions for net value added are obvious.

2. Alternative measures of value added

6.75 In the SNA, intermediate inputs are valued and recorded at the time they enter the production process, while outputs are recorded and valued as they emerge from the process.
Intermediate inputs are normally valued at purchasers' prices and outputs at basic prices, or alternatively at producers' prices if basic prices are not available.
The difference between the value of the intermediate inputs and the value of the outputs is gross value added against which must be charged consumption of fixed capital, taxes on production (less subsidies) and compensation of employees.
The positive or negative balance remaining is the net operating surplus or mixed income.

6.76 As indicated above, alternative measures of gross value added may be obtained by associating different sets of prices with a set of quantities of inputs and outputs.
The various measures that may be derived using the different sets of prices recognized in the SNA are considered below.

Gross value added at basic prices

6.77 Gross value added at basic prices is defined as output valued at basic prices less intermediate consumption valued at purchasers' prices.
Although the outputs and inputs are valued using different sets of prices, for brevity the value added is described by the prices used to value the outputs.
From the point of view of the producer, purchasers' prices for inputs and basic prices for outputs represent the prices actually paid and received.
Their use leads to a measure of gross value added that is particularly relevant for the producer.

Gross value added at producers' prices

6.78 Gross value added at producers' prices is defined as output valued at producers' prices less intermediate consumption valued at purchasers' prices.
As already explained, in the absence of VAT, the total value of the intermediate inputs consumed is the same whether they are valued at producers' or at purchasers' prices, in which case this measure of gross value added is the same as one that uses producers' prices to value both inputs and outputs.
It is an economically meaningful measure that is equivalent to the traditional measure of gross value added at market prices.
However, in the presence of VAT, the producer's price excludes invoiced VAT, and it would be inappropriate to describe this measure as being at “market” prices.

6.79 Both this measure of gross value added and that described in the previous section use purchasers' prices to value intermediate inputs.
The difference between the two measures is entirely attributable to their differing treatments of taxes or subsidies on products payable on outputs (other than invoiced VAT).
By definition, the value of output at producers' prices exceeds that at basic prices by the amount, if any, of the taxes on products, less subsidies on products so that the two associated measures of gross value added must differ by the same amount.

Gross value added at factor cost

6.80 Gross value added at factor cost is not a concept used explicitly in the SNA.
Nevertheless, it can easily be derived from either of the measures of gross value added presented above by subtracting the value of any taxes on production, less subsidies on production, payable out of gross value added as defined.
For example, the only taxes on production remaining to be paid out of gross value added at basic prices consist of “other taxes on production”. These consist mostly of current taxes (or subsidies) on the labour or capital employed in the enterprise, such as payroll taxes or current taxes on vehicles or buildings.
Gross value added at factor cost can thus be derived from gross value added at basic prices by subtracting other taxes on production, less subsidies on production.

6.81 The conceptual difficulty with gross value added at factor cost is that there is no observable set of prices such that gross value added at factor cost is obtained directly by multiplying this set of prices by the sets of quantities of outputs.
By definition, other taxes or subsidies on production are not taxes or subsidies on products that can be eliminated from the input and output prices.
Thus, despite its traditional name, gross value added at factor cost is not strictly a measure of value added; it is essentially a measure of income and not output.
It represents the amount remaining for distribution out of gross value added, however defined, after the payment of all taxes on production and the receipt of all subsidies on production.
It makes no difference which measure of gross value added is used to derive this income measure because the alternative measures of value added considered above differ only in respect of the amounts of the taxes or subsidies on production that remain payable out of gross value added.

3. Gross domestic product (GDP)

6.82 The underlying rationale behind the concept of gross domestic product (GDP) for the economy as a whole is that it should measure the total gross value added from all institutional units resident in the economy.
However, while the concept of GDP is based on this principle, GDP as defined in the SNA is such that an identity exists between a measure built on value added, a measure built on income and one based on final expenditures.
To achieve this, it is important that the same contribution to GDP is made by taxes on production under all three measures.
The expenditure measure of GDP includes all taxes on production and taxes on imports since ultimately these are included in the purchasers' prices of the final users.

6.83 Given this definition of GDP, the following identities hold when the summations are taken over all resident producers:

a. GDP = the sum of the gross value added at producers' prices,

plus taxes on imports,

less subsidies on imports,

plus non-deductible VAT.

b. GDP = the sum of the gross value added at basic prices,

plus all taxes on products,

less all subsidies on products.

c. GDP = the sum of the gross value added at factor cost

plus all taxes on products,

less all subsidies on products,

plus all other taxes on production,

less all other subsidies on production.

In cases (b) and (c), the items taxes on products and subsidies on products includes taxes and subsidies on imports as well as on outputs.

4. Domestic production

6.84 GDP measures the production of all resident producers.
This does not necessarily coincide with all production taking place within the geographical boundary of the economic territory.
Some of the production of a resident producer may take place abroad, while some of the production taking place within the geographical boundary of the economy may be carried out by non-resident producer units.
For example, a resident producer may have teams of employees working abroad temporarily on the installation, repair or servicing of equipment.
This output is an export of a resident producer and the productive activity does not contribute to the GDP of the country in which it takes places.
Thus, the distinction between resident and non-resident institutional units is crucial to the definition and coverage of GDP.
In practice most of the productive activity of resident producers takes place within the country in which they are resident.
However, producers in service industries that typically have to deliver their outputs directly to their clients wherever they are located are increasingly tending to engage in production in more than one country, a practice that is encouraged by rapid transportation and instantaneous communication facilities.
Geographical boundaries between adjacent countries are becoming less significant for mobile service producers, especially in small countries bordered by several other countries.

E. The measurement of output

1. Production versus output

6.85 Production is an activity carried out by an establishment.
It may not always be clear whether an establishment is producing a good or is providing a service.
For example, an oil refinery processing crude oil that it owns is producing a good (refined petroleum); if the same refinery processes crude oil belonging to another unit, then it is providing a refinery service to that unit.
This lack of clarity may often appear for goods passing between establishments of the same enterprise and it is important to know when to record the output of a good and when of a change-effecting service.
When the establishments belong to different enterprises (that is to different institutional units), the defining principle is that of economic ownership.
If an establishment has no discretion about the level of production, the price to be charged for the good or the destination of the good, there is evidence that the establishment has not taken economic ownership of the goods being processed and the value of the output should be treated as the processing element only.
This is the case for the refinery service cited above.

6.86 When the establishments involved belong to the same enterprise, there is no change of ownership since both establishments have the same owner.
However, the principle of transferring risk, which accompanies change of ownership, can still be applied.
Suppose, for example, that an establishment receives coal from another establishment in the same enterprise, uses it to generate electricity and then sells the electricity on the open market.
The electricity generator has discretion about the amount of coal it demands, the amount of electricity to be generated and the prices to be charged.
In such a case, the value of electricity generated should be measured including the cost of the coal consumed in the process even though there is no legal change in ownership given that both establishments belong to the same enterprise.

6.87 In general, all goods and services that are produced and used by the same establishment are excluded from the measure of output.
However, there are exceptions here also.
For example, output is recorded if the goods and services being produced are used for capital formation of the establishment.
Similarly output is recorded for products entering inventories even if eventually they are withdrawn from inventories for use as intermediate consumption in the same establishment in a later period.
If the establishment is a household unincorporated enterprise growing maize, the value of maize produced includes maize kept for household consumption.

6.88 An establishment may produce goods and services that are used as its own intermediate consumption.
An example is unglazed china that is only delivered to other units after glazing.
In general the unglazed china is not recorded as output but if there is some china remaining unglazed at the end of the production period, it should be recorded as being produced and entering inventories.
In the subsequent period, the unglazed china is withdrawn from inventories and the act of glazing constitutes output in the second period.

6.89 Although production is related to activities and thus the output of one production process is one set of products, output is measured for an establishment and may include the output of several production processes.
Thus output is defined as the goods and services produced by an establishment,

a. excluding the value of any goods and services used in an activity for which the establishment does not assume the risk of using the products in production, and

b. excluding the value of goods and services consumed by the same establishment except for goods and services used for capital formation (fixed capital or changes in inventories) or own final consumption.

2. Time of recording

6.90 The output of most goods or services is usually recorded when their production is completed.
However, when it takes a long time to produce a unit of output, it becomes necessary to recognize that output is being produced continuously and to record it as “work-in-progress”. For example, the production of certain agricultural goods or large durable goods such as ships or buildings may take months or years to complete.
In such cases, it would distort economic reality to treat the output as if it were all produced at the moment of time when the process of production happens to terminate.
Whenever a process of production extends over two or more accounting periods, it is necessary to calculate the work-in-progress completed within each of the periods in order to be able to measure how much output is produced in each period.

6.91 On the other hand, goods and services may be completed in an accounting period but not delivered (sold) to a user in that period.
Output is recorded when the work is completed and not when sold.
There is thus a significant difference between the value of output in a period and the value of sales, the difference being accounted for by changes in inventories of finished goods and work-in-progress.

3. Valuation of output

6.92 Goods and services produced for sale on the market at economically significant prices may be valued either at basic prices or at producers' prices.
The preferred method of valuation is at basic prices, especially when a system of VAT, or similar deductible tax, is in operation.
Producers' prices should be used only when valuation at basic prices is not feasible.

6.93 Output produced by market producers for own final use should be valued at the average basic prices of the same goods or services sold on the market, provided they are sold in sufficient quantities to enable reliable estimates to be made of those average prices.
If not, the output should be valued by the total production costs incurred, including consumption of fixed capital, plus any taxes (less subsidies) on production other than taxes or subsidies on products, plus a net return on the fixed capital and natural resources used in production.
The concept of the net return to capital is introduced in section H and discussed more fully in chapter 20.

6.94 The non-market output produced by government units and NPISHs that is supplied free, or at prices that are not economically significant, to other institutional units or the community as a whole is valued by total production costs, including consumption of fixed capital, plus taxes (less subsidies) on production other than taxes or subsidies on products.
By convention, no net return to capital is included for non-market production.
Similarly, no net return to capital is included in the estimates of production for own final use by non-market producers when these are estimated as the sum of costs.

4. Market output, output for own final use and non-market output

6.95 A fundamental distinction is drawn in the SNA between market output and non-market output because of the way the output of each is valued.
Market output is the normal situation in a market economy where producers make decisions about what to produce and how much to produce in response to expected levels of demand and expected costs of supply.
The determining factor behind production decisions is that economically significant prices prevail.
Economically significant prices are prices that have a significant effect on the amounts that producers are willing to supply and on the amounts purchasers wish to buy.
These prices normally result when:

a. The producer has an incentive to adjust supply either with the goal of making a profit in the long run or, at a minimum, covering capital and other costs; and

b. Consumers have the freedom to purchase or not purchase and make the choice on the basis of the prices charged.

6.96 There is further discussion on economically significant prices in chapter 22.

6.97 Non-market output is output undertaken by general government and NPISHs that takes place in the absence of economically significant prices.
A price is said to be not economically significant when it has little or no influence on how much the producer is prepared to supply and is expected to have only a marginal influence on the quantities demanded.
It is a price that is not quantitatively significant from the point of view of either supply or demand.
Such prices are likely to be charged in order to raise some revenue or achieve some reduction in the excess demand that may occur when services are provided completely free, but they are not intended to eliminate such excess demand.
Once a decision has been taken on administrative, social or political grounds about the total amount of a particular non-market good or service to be supplied, its price is deliberately fixed below the equilibrium price that would clear the market.
The difference between a price that is not economically significant and a zero price is, therefore, a matter of degree.
The price merely deters those units whose demands are the least pressing without greatly reducing the total level of demand.

6.98 Non-market output may be produced for two reasons:

a. It may be technically impossible to make individuals pay for collective services because their consumption cannot be monitored or controlled.
The pricing mechanism cannot be used when transactions costs are too high and there is market failure.
The production of such services has to be organized collectively by government units and financed out of funds other than receipts from sales, namely taxation or other government incomes;

b. Government units and NPISHs may also produce and supply goods or services to individual households for which they could charge but choose not to do so as a matter of social or economic policy.
The most common examples are the provision of education or health services, free or at prices that are not economically significant, although other kinds of goods and services may also be supplied.

Market output

6.99 Market output consists of output intended for sale at economically significant prices.
The value of market output is determined as the sum of the following items:

a. The value of goods and services sold at economically significant prices;

b. The value of goods or services bartered in exchange for other goods, services or assets;

c. The value of goods or services used for payments in kind, including compensation in kind;

d. The value of goods or services supplied by one establishment to another belonging to the same market enterprise to be used as intermediate inputs where the risk associated with continuing the production process is transferred along with the goods;

e. The value of changes in inventories of finished goods and work-in-progress intended for one or other of the above uses;

f. The margins charged on the supply of goods and services, transport margins, margins on the acquisition and disposal of financial assets, etc.

Recording of sales

6.100 The times at which sales are to be recorded are when the receivables and payables are created: that is, when the ownership of the goods passes from the producer to the purchaser or when the services are provided to the purchaser.
Goods or services are valued at the basic prices at which they are sold.
If valuation at basic prices is not feasible, they may be valued at producers' prices instead.
If it is necessary to value the sale of goods at producers' prices rather than basic prices, then the implicit value of margin services should also include any applicable taxes on products.
For some margin services, especially those concerning financial assets, the value of the service provided may be implicit.

6.101 The values of sales are determined by the amounts receivable and payable by the producers and purchasers, suitably adjusted for trade and transport margins.
The amounts receivable and payable do not always coincide with the amounts actually received and paid.
The amount payable should be shown in the production account and the difference between amounts payable and paid should be shown as accounts payable or receivable in the financial account.
Subsequent payments of these amounts outstanding are recorded as financial transactions and not as part of the production account.
If payments made in advance or in arrears attract interest charges, these should be shown as separate transactions and not included in the value of sales.

Recording of barter

6.102 Barter occurs when goods and services are exchanged for other goods, services or assets.
The value of goods or services bartered should be recorded when the ownership of the goods is transferred or the services are provided.
The output of goods bartered is valued at the basic prices that would have been received if they had been sold.

Recording of compensation in kind or other payments in kind

6.103 Goods or services provided to employees as compensation in kind, or used for other payments in kind, should be recorded when the legal ownership of the goods is transferred or the services are provided.
They should be valued at the basic prices that would have been received if they had been sold.

Recording of intra-enterprise deliveries

6.104 Intra-enterprise deliveries are recorded only when the establishment receiving the goods assumes responsibility for making the decisions about the levels of supply and prices at which their output is delivered to the market.
When incoming deliveries are recorded, they should be valued at the basic prices that would have been received if they had been sold.

Changes in inventories of finished goods

6.105 The basic principle underlying the measurement of changes in inventories of finished goods is that output should be recorded at the time it is produced and valued at the same price whether it is sold, otherwise used or entered into inventories for sale or use later.
In effect, goods only enter inventories when they are not immediately used for sale or other use in the period they are produced.
Similarly, goods are withdrawn from inventories when the demand for the goods exceeds the amount produced in a period.
No output is recorded when goods produced previously are withdrawn from inventories and sold or otherwise used unless a storage activity as described below in section F takes place.

6.106 Inventories of finished goods therefore explain the difference between production and sales (or other use) in a single period.
It follows that entries into inventories must be valued at the basic prices prevailing at the time of entry, while withdrawals must be valued at the prices at which they are then sold.
This method of valuing changes in inventories, which may be described as the “perpetual inventory method” or PIM, is not always easy to implement in practice, however, and it sometimes leads to results that may be counter intuitive.

6.107 When prices are stable, the measurement of changes in inventories is relatively simple.
However, when there is inflation (or deflation), significant price increases (decreases) may occur while goods are held in inventories.
Holding gains (losses) accruing on goods held in inventories after they have been produced must not be included in the value of output.
It follows from the valuation method used that, when prices are changing, goods entering and leaving inventories at different times are valued at different prices, even within the same accounting period (as also are goods sold at different times).
This requires that, in principle, all entries to, and withdrawals from, inventories be recorded continuously as they occur, and helps explain the complexity of the perpetual inventory method.
The perpetual inventory method ensures their exclusion by valuing goods withdrawn from inventories at the prices prevailing at the time they are withdrawn and not at the prices at which they are entered, or their “historic costs”. This method of valuation can lead to much lower figures for both output and profits in times of inflation than those obtained by business accounting methods based on historic costs.
Further discussion on the valuation of inventories appears in chapter 10.

6.108 It follows from the general principles outlined in the previous section that:

a. Goods entering inventories are valued at the basic prices prevailing at that time: that is, at the prices at which they could have been sold when first produced;

b. Goods withdrawn from inventories are valued at the basic prices prevailing at that time: that is, at the prices at which they can then be sold.

6.109 Goods held in inventories are subject to deterioration through the passage of time and are at risk from theft or accidental damage.
Recurrent losses due to normal rates of wastage, theft and accidental damage are treated in the same way as withdrawals from inventories and thus reduce the value of output.
This practice is followed even if the losses are high relative to output as long as they are recurrent.
The total value of the changes in inventories of finished goods recorded within a specified accounting period is then given by:

the sum of the values of all goods entering inventories

less the sum of the values of all goods withdrawn from inventories

less the value of any recurrent losses of goods held in inventories.

Changes in inventories of work-in-progress

6.110 When the process of production takes a long time to complete, output must be recognized as being produced continuously as work-in-progress.
As the process of production continues, intermediate inputs are continually being consumed so that it is necessary to record some corresponding output.
Otherwise, recording the inputs and outputs as if they took place at different times, or even in different accounting periods would give meaningless figures for value added.
Work-in-progress is essentially incomplete output that is not yet marketable: that is, output that is not sufficiently processed to be in a state in which it can easily be supplied or sold to other institutional units.
It is essential to record such output whenever the process of production is not completed within a single accounting period so that work-in-progress is carried forward from one period to the next.
In this case, the current value of the work-in-progress completed up to the end of one period is recorded in the closing balance sheet, which also serves as the opening balance sheet for the next period.

6.111 Work-in-progress may need to be recorded in any industry, including service industries such as the production of movies, depending upon the length of time it takes to produce a unit of output.
It is particularly important in industries with long gestation periods, such as certain types of agricultural production or durable producers' goods production, where the period of production may extend over several years.

6.112 Work-in-progress is treated in the SNA as one component of inventories of outputs held by producers.
However, the borderline between inventories of partially completed buildings and structures and gross fixed capital formation may not always be clear.
Gross fixed capital formation is undertaken by users of fixed assets so gross fixed capital formation cannot be recorded until the legal ownership of the assets is transferred from their producers to their users.
This transfer does not usually occur until the process of production is completed.
However, when a contract of sale has been concluded in advance, the transfer of legal ownership may be deemed to occur in stages as value is put in place.
In such cases, stage payments made by the purchaser can often be used to approximate the value of the gross fixed capital formation although stage payments may sometimes be made in advance or in arrears of the completion of the stage, in which case short-term credits are also extended from the purchaser to the producer, or vice versa.
In the absence of a contract of sale, the output produced must be treated as additions to the producer's inventories, that is, as work-in-progress, however large the partially completed structure may be. When the production process is terminated, the whole of the work-in-progress accumulated up to that point is effectively transformed into inventories of finished product ready for delivery or sale.
When a sale takes place, the value of the sale must be cancelled by a withdrawal from inventories of equal value so that only the additions to work-in-progress recorded while production was taking place in the period in question remain as measures of output.
In this way, the output is distributed over the entire period of production.

6.113 Additions to, and withdrawals from, work-in-progress are treated in the accounts in the same way as entries to, and withdrawals from, inventories of finished goods.
They must be recorded at the times they take place and at the basic prices prevailing at those times.
However, further explanation is needed of the valuation in view of the special characteristics of work-in-progress.
This explanation appears in chapter 20.

Output for own final use

6.114 Output for own final use consists of products retained by the producer for his own use as final consumption or capital formation.
The value of output for own final use is determined as the sum of the following:

a. The value of goods produced by an unincorporated enterprise and consumed by the same household;

b. The value of services provided to households by paid domestic staff;

c. The value of the imputed services of owner-occupied dwellings;

d. The value of the fixed assets produced by an establishment that are retained within the same enterprise for use in future production (own-account gross fixed capital formation);

e. The value of changes in inventories of finished goods and work-in-progress intended for one or other of the above uses;

f. In exceptional cases, as described later in this section, there may be output for own intermediate use.

Goods produced by households

6.115 All goods produced by households are within the production boundary and those that are not delivered to other units should be treated as either being consumed immediately or stored in inventories for later use.

Services of domestic staff

6.116 Paid domestic staff (child minders, cooks, gardeners, chauffeurs, etc.) are formally treated as employees of an unincorporated enterprise that is owned by the household.
The services produced are consumed by the same unit that produces them and they constitute a form of own-account production.
By convention, any intermediate costs in the production of the domestic services are treated not as intermediate consumption of the output of the domestic services but as final consumption expenditure of the household.
Thus the value of the output produced is deemed to be equal to the compensation of employees paid, including any compensation in kind such as food or accommodation.

Services of owner-occupied dwellings

6.117 Households that own the dwellings they occupy are formally treated as owners of unincorporated enterprises that produce housing services consumed by those same households.
When well-organized markets for rented housing exist, the output of own-account housing services can be valued using the prices of the same kinds of services sold on the market in line with the general valuation rules adopted for goods or services produced on own account.
In other words, the output of the housing services produced by owner occupiers is valued at the estimated rental that a tenant would pay for the same accommodation, taking into account factors such as location, neighbourhood amenities, etc. as well as the size and quality of the dwelling itself.
The same figure is recorded under household final consumption expenditures.
In many instances, no well-organized markets exist and other means of estimating the value of housing services must be developed.

Own gross fixed capital formation

6.118 Goods or services used for own gross fixed capital formation can be produced by any kind of enterprise, whether corporate or unincorporated.
They include, for example, the special machine tools produced for their own use by engineering enterprises, or dwellings, or extensions to dwellings, produced by households.
A wide range of construction activities may be undertaken for the purpose of own gross fixed capital formation in rural areas in some countries, including communal construction activities undertaken by groups of households.
In addition, intellectual property products such as R&D and software products may be produced on own account.

Changes in inventories

6.119 Additions to work-in-progress on structures intended for own use are treated as acquisitions of fixed assets by their producers.
Goods or services produced for own final use may be placed in inventories of finished products for use later.
They are valued at the basic prices of similar products sold on the market at the time they enter inventories or by their costs of production if no suitable basic prices are available.

Own intermediate consumption

6.120 It is unusual to record goods and services used as intermediate consumption within the same establishment but there are occasions where it may be desirable.
If such recording is made, the goods and services in question add to both intermediate consumption and output so value added is unaffected by this practice.

6.121 If an activity such as delivery services is of particular interest and there is a diversity of practice about whether it is treated as secondary output (that is, is charged for) or as being for own use (not charged for) then it may be desirable to show all delivery services as if they were secondary products with the output shown as own intermediate consumption where appropriate.

6.122 As explained in paragraph 6.104 if a product is delivered by one establishment to another within the same enterprise, the delivery is recorded as output of the first establishment and intermediate consumption of the second only when the second establishment assumes the responsibility for making the decisions about the level of supply and prices at which the output is delivered to the market.
When this is not the case, the output of the first establishment is shown as entering inventories while the second establishment delivers a processing service and charges for it. If a production account is being compiled for the enterprise, in the first case it may be preferable to show the product as both output and intermediate consumption of the enterprise rather than to consolidate it out.
In the second case, the output of the enterprise will be the value of the product as produced by the first establishment plus the processing fee for the second.

6.123 In some cases, part of the current output may be placed in inventories for use as intermediate consumption in future.
An example is agriculture where some of the current crop may be used for seed in future.

Valuation of output for own final use

6.124 Output for own final use should be valued at the basic prices at which the goods and services could be sold if offered for sale on the market.
In order to value them in this way, goods or services of the same kind must actually be bought and sold in sufficient quantities on the market to enable reliable market prices to be calculated for use for valuation purposes.
The expression “on the market” means the price that would prevail between a willing buyer and willing seller at the time and place that the goods and services are produced.
In the case of agricultural produce, for example, this does not necessarily equate to the prices in the local market where transportation costs and possibly wholesale margins may be included.
The nearest equivalent price is likely to be the so-called “farm-gate” price; that is, the price that the grower could receive by selling the produce to a purchaser who comes to the farm to collect the produce.

6.125 When reliable market prices cannot be obtained, a second best procedure must be used in which the value of the output of the goods or services produced for own final use is deemed to be equal to the sum of their costs of production: that is, as the sum of:

a. Intermediate consumption;

b. Compensation of employees;

c. Consumption of fixed capital;

d. A net return to fixed capital;

e. Other taxes (less subsidies) on production.

By convention, no net return to capital is included when own-account production is undertaken by non-market producers.

6.126 For unincorporated enterprises, it may not be possible to estimate compensation of employees, consumption of fixed capital and a return to capital separately in which case an estimate of mixed income, covering all these items, should be made.

6.127 It will usually be necessary to value the output of own-account construction on the basis of costs as it is likely to be difficult to make a direct valuation of an individual and specific construction project that is not offered for sale.
When the construction is undertaken for itself by an enterprise, the requisite information on costs may be easily ascertained, but not in the case of the construction of dwellings by households or communal construction for the benefit of the community undertaken by informal associations or groups of households.
Most of the inputs into communal construction projects, including labour inputs, are likely to be provided free so that even the valuation of the inputs may pose problems.
As unpaid labour may account for a large part of the inputs, it is important to make some estimate of its value using wage rates paid for similar kinds of work on local labour markets.
While it may be difficult to find an appropriate rate, it is likely to be less difficult than trying to make a direct valuation of a specific construction project itself.
The fact that an imputation is made for the value of labour input is a means to approximate the market price for the construction.
It does not imply that these labour costs should also be treated as compensation of employees.
As explained in chapter 7, when labour is provided on a voluntary basis to a producer unit other than the labourer's own household, no imputation for compensation of employees is made.
If labour is provided for a nominal payment, only the nominal payment is recorded as compensation of employees.
The other labour costs are treated as mixed income.

Non-market output

6.128 Non-market output consists of goods and individual or collective services produced by non-profit institutions serving households (NPISHs) or government that are supplied free, or at prices that are not economically significant, to other institutional units or the community as a whole.
Although this output is shown as being acquired by government and NPISHs in the use of income account, it should not be confused with production for own use.
The expenditure is made by government and by NPISHs but the use of individual goods and services is by households, and the use of collective services by households or other resident institutional units.
Thus non-market output should never be confused with output for own use where the producer unit not only has imputed expenditure on the output but also actually uses the output. Chapter 9 discusses the difference between expenditure and use in more detail.

6.129 As explained above, government units or NPISHs may engage in non-market production because of market failure or as a matter of deliberate economic or social policy.
Such output is recorded at the time it is produced, which is also the time of delivery in the case of non-market services.
In general, however, it cannot be valued in the same way as goods or services produced for own final consumption or own capital formation that are also produced in large quantities for sale on the market.
There are no markets for collective services such as public administration and defence, but even in the case of non-market education, health or other services provided to individual households, suitable prices may not be available.
It is not uncommon for similar kinds of services to be produced on a market basis and sold alongside the non-market services but there are usually important differences between the types and quality of services provided.
In most cases it is not possible to find enough market services that are sufficiently similar to the corresponding non-market services to enable their prices to be used to value the latter, especially when the non-market services are produced in very large quantities.

6.130 The value of the non-market output provided without charge to households is estimated as the sum of costs of production, as follows:

a. Intermediate consumption;

b. Compensation of employees;

c. Consumption of fixed capital;

d. Other taxes (less subsidies) on production.

6.131 If the output is made available at nominal cost, the prices are not economically significant prices and may reflect neither relative production costs nor relative consumer preferences.
They therefore do not provide a suitable basis for valuing the outputs of the goods or services concerned.
The non-market output of goods or services sold at these prices is valued in the same way as goods or services provided free, that is, by their costs of production.
Part of this output is purchased by households, the remainder constituting final consumption expenditures by government units or NPISHs.

6.132 Government units and NPISHs may be engaged in both market and non-market production.
Whenever possible, separate establishments should be distinguished for these two types of activities, but this may not always be feasible.
Thus, a non-market establishment may have some receipts from sales of market output produced by a secondary activity: for example, sales of reproductions by a non-market museum.
However, even though a non-market establishment may have sales receipts, its total output covering both its market and its non-market output is still valued by the production costs.
The value of its market output is given by its receipts from sales of market products, the value of its non-market output being obtained residually as the difference between the values of its total output and its market output.
The value of receipts from the sale of non-market goods or services at prices that are not economically significant remains as part of the value of its non-market output.

Market and non-market producers

6.133 Market producers are establishments, all or most of whose output is market production.
Non-market producers consist of establishments owned by government units or NPISHs that supply goods or services free, or at prices that are not economically significant, to households or the community as a whole.
These producers may also have some sales of secondary market output whose prices are intended to cover their costs or earn a surplus: for example, sales of reproductions by non-market museums.
Though government and NPISHs may have establishments undertaking market production, including own account capital construction, most of their activity will be undertaken on a non-market basis.

6.134 When production for own final use is undertaken by a unit in the general government or NPISHs sector it is treated as being undertaken by a non-market producer.
It may also be undertaken by market producers or by units outside general government and NPISHs who produce only for own final use.

F. The output of particular industries

1. Introduction

6.135 The rules governing the recording and valuation of output are not sufficient to determine the way in which the output of certain kinds of industries, mostly service industries, such as wholesale and retail trade and financial institutions, is measured.
The following sections provide further information about the measurement of the output of a number of specific industries.
For convenience, the industries concerned are given in the same order as they appear in the ISIC.

2. Agriculture, forestry and fishing

6.136 The growth and regeneration of crops, trees, livestock or fish which are controlled by, managed by and under the responsibility of institutional units constitute a process of production in an economic sense.
Growth is not to be construed as a purely natural process that lies outside the production boundary.
Many processes of production exploit natural forces for economic purposes, for example, hydroelectric plants exploit rivers and gravity to produce electricity.

6.137 The measurement of the output of agriculture, forestry and fishing is complicated by the fact that the process of production may extend over many months, or even years.
Many agricultural crops are annual with most costs incurred at the beginning of the season when the crop is sown and again at the end when it is harvested.
However, immature crops have a value depending on their closeness to harvest.
The value of the crop has to be spread over the year and treated as work-in-progress.
Often the final value of the crop will differ from the estimate made of it and imputed to the growing crop before harvest.
In such cases revisions to the early estimates will have to be made to reflect the actual outcome.
When the crop is harvested, the cumulated value of work-in-progress is converted to inventories of finished goods that is then run down as it is used by the producer, sold or is lost to vermin.

6.138 Some plants and many animals take some years to reach maturity.
In this case, the increase in their value is shown as output and treated as increases in fixed capital or inventories depending on whether the plant or animal yields repeat products or not.
(There is more discussion of this distinction in chapter 10.)
The value of the increase in the plants or animals should take account of the delay before the yield from them is realized as explained in chapter 20.
Once the plant or animal has reached maturity, it will decline in value and this decline should be recorded as consumption of fixed capital.

3. Machinery, equipment and construction

6.139 The production of high value capital goods such as ships, heavy machinery, buildings and other structures may take several months or years to complete.
The output from such production must usually be measured by work-in-progress and cannot be recorded simply at the moment in time when the process of production is completed.
The way in which work-in-progress is to be recorded and valued is explained in chapter 20.

6.140 When a contract of sale is agreed in advance for the construction of buildings and structures, but not for other production spreading over several periods, the output produced each period is treated as being sold to the purchaser at the end of each period, that is, as a sale rather than work-in-progress.
In effect, the output produced by the construction contractor is treated as being sold to the purchaser in stages as the latter takes legal possession of the output.
It is recorded as gross fixed capital formation by the purchaser and not as work-in-progress by the producer.
When the contract calls for stage payments, the value of the output may often be approximated by the value of stage payments made each period.
In the absence of a contract of sale, however, the incomplete output produced each period must be recorded as work-in-progress of the producer.
Dwellings built speculatively (that is, without a prior contract of sale) remain in the inventories of the construction company until sold, changing status within inventories from work-in-progress to finished products if they remain unsold on completion.

4. Transportation and storage

Transportation

6.141 The output of transportation is measured by the value of the amounts receivable for transporting goods or persons.
In economics a good in one location is recognized as being a different quality from the same good in another location, so that transporting from one location to another is a process of production in which an economically significant change takes place even if the good remains otherwise unchanged.
The volume of transport services may be measured by indicators such as tonne-kilometres or passengerkilometres, which combine both the quantities of goods, or numbers of persons, and the distances over which they are transported.
Factors such as speed, frequency or comfort also affect the quality of services provided.

Storage

6.142 Although the production of storage for the market may not be very extensive, the activity of storage is important in the economy as a whole as it is carried out in many enterprises.
During storage the inventories of goods have to be physically stored somewhere.
Many goods have to be stored in a properly controlled environment and the activity of storage can become an important process of production in its own right whereby goods are “transported” from one point of time to another.
In economics, it is generally recognized that the same goods available at different times, or locations, may be qualitatively different from each other and command different prices for this reason.
The increase in price of a product due to the fact that it has been in storage and storage costs have been incurred is a production process.
However, it is important that the increase in price due to storage is clearly distinguished from holding gains and losses, which must be excluded from the value of production in the case of storage as in other activities.

6.143 When goods are first produced, they may be held in store for a time in the expectation that they may be sold, exchanged or used more advantageously in the future.
If the increase in value simply reflects a rise in price with no change in quality resulting from being held in storage, then there is no further production during the period in addition to the costs of storage just described.
However, there are three reasons why the increase in value can be construed as further production.
The first is that the production process is sufficiently long that discounting factors should be applied to work put in place significantly long before delivery.
The second reason is that the quality of the good may improve with the passage of time (such as wine).
The third reason is that there may be seasonal factors affecting the supply or the demand for the good that lead to regular, predictable variations in its price over the year, even though its physical qualities may not have changed otherwise.
In all these circumstances, storage can be regarded as an extension of the production process over time.
The storage services become incorporated in the goods, thereby increasing their value while being held in store.
Thus, in principle, the values of additions to inventories should include not only the values of the goods at the time they are stored but also the value of the additional output produced while the goods are held in store.

6.144 However, most manufactured goods are produced and sold continuously throughout the year and are not subject to regular changes in supply or demand conditions.
Nor do they “mature” while being stored.
Changes in the prices of such goods while in inventories cannot be treated as additions to work-in-progress.
In order to estimate the increase in the value of goods stored over and above the storage costs, use may be made of the expected increase in value over and above the general rate of inflation over a predetermined period.
Any gain that occurs outside the predetermined period continues to be recorded as a holding gain or loss.
Further explanation of the calculation of the value of storage and its separation from holding gains and losses is given in the annex to this chapter.

6.145 This inclusion of output due to storage applies only to goods that take a long time to complete, those that have an established annual seasonal pattern or those where maturing is part of the regular production process.
It does not apply to holding financial assets, valuables or other non-financial assets including land and buildings.
Even if anticipated increases in value result in these cases, the motive for holding the items is speculation.
The increases in value are treated as holding gains and not as part of the production process.

5. Wholesale and retail distribution

6.146 Although wholesalers and retailers actually buy and sell goods, the goods purchased are not treated as part of their intermediate consumption when they are resold with only minimal processing such as grading, cleaning, packaging, etc.
Wholesalers and retailers are treated as supplying services to their customers by storing and displaying a selection of goods in convenient locations and making them easily available for customers to buy.
Their output is measured by the total value of the trade margins realized on the goods they purchase for resale.
A trade margin is defined as the difference between the actual or imputed price realized on a good purchased for resale and the price that would have to be paid by the distributor to replace the good at the time it is sold or otherwise disposed of.
The margins realized on some goods may be negative if their prices have to be marked down.
They must also be negative on goods that are never sold because they go to waste or are stolen.

6.147 The standard formula for measuring output has to be modified for wholesalers or retailers by deducting from the value of the goods sold or otherwise used the value of the goods that would need to be purchased to replace them.
The latter includes the additional goods needed to make good recurrent losses due to normal wastage, theft or accidental damage.
In practice, the output of a wholesaler or retailer is given by the following identity:

the value of output = the value of sales,

plus the value of goods purchased for resale and used for intermediate consumption, compensation of employees, etc.,

minus the value of goods purchased for resale, plus the value of additions to inventories of goods for resale,

minus the value of goods withdrawn from inventories of goods for resale,

minus the value of recurrent losses due to normal rates of wastage, theft or accidental damage.

6.148 The following points should be noted:

a. Goods sold are valued at the prices at which they are actually sold, even if the trader has to mark their prices down to get rid of surpluses or avoid wastage.
Allowance should also be made for the effect of reductions in price due to loyalty programmes or other schemes to offer reduced prices to certain customers in certain circumstances.

b. Goods provided to employees as remuneration in kind should be valued at the current purchasers' prices payable by the traders to replace them; that is, the realized margins are zero.
Similarly, goods withdrawn by the owners of unincorporated enterprises for their own final consumption should be valued at the current purchasers' prices payable by the traders to replace them.

c. Goods purchased for resale should be valued excluding any transport charges invoiced separately by the suppliers or paid to third parties by wholesalers or retailers: these transport services form part of the intermediate consumption of the wholesalers or retailers.

d. Additions to inventories of goods for resale should be valued at the prices prevailing at the time of entry into inventories.

e. The value of goods withdrawn from inventories of goods for resale depends on whether the goods were acquired with the intention of making a real holding gain over a given period in storage.
In the general case, when the goods being resold were not expected to realize a real holding gain while in storage, the value of the goods on withdrawal from inventories should be the cost to the wholesaler or retailer at the time of the withdrawal of acquiring exactly similar replacement goods for later sale.
This valuation is necessary to exclude holding gains and losses from the measurement of output, as is the general rule in the SNA.
However, when the goods have been stored for reasons of seasonal variation in prices or as part of the maturing process, the expected real holding gain over the anticipated period is deducted from the replacement value of goods withdrawn from inventories.
This deduction is fixed in value at the time the goods enter storage and is not altered in the light of actual holding gains, real or nominal.

f. The value of recurrent losses due to wastage, theft or accidental damage; goods lost are valued in the same way as goods withdrawn from inventories.
For this reason, the two terms are often combined.

6.149 The costs of storage incurred by wholesalers and retailers are not added to the value of the goods when they are withdrawn from inventories but are treated as part of intermediate consumption.

6.150 The margins realized on goods purchased for resale thus vary according to their eventual use.
The margins realized on goods sold at the full prices intended by the traders could be described as the normal margins.
In fixing these margins, traders take account not only of their ordinary costs such as intermediate consumption and compensation of employees but also of the fact that some goods may ultimately have to be sold off at reduced prices while others may go to waste or be stolen.
The margins realized on goods whose prices have to be marked down are obviously less than the normal margins and could be negative.
The margins on goods used to pay employees as compensation in kind or withdrawn for final consumption by owners are zero because of the way these goods are valued.
Finally, the margins on goods wasted or stolen are negative and equal to the current purchasers' prices of replacements for them.
The average margin realized on goods purchased for resale may be expected to be less than the normal margin, possibly significantly less for certain types of goods such as fashion goods or perishable goods.

6. Output of the central bank

6.151 Before discussing financial services more generally, it is helpful to discuss the output of the central bank.
There are three broad groups of central bank services.
These are monetary policy services, financial intermediation and borderline cases.
Monetary policy services are collective in nature, serving the community as a whole, and thus represent non-market output.
Financial intermediation services are individual in nature and in the absence of policy intervention in the interest rates charged by the central banks, would be treated as market production.
The borderline cases, such as supervisory services may be classified as market or non-market services depending on whether explicit fees are charged that are sufficient to cover the costs of providing the services.

6.152 In principle, a distinction should be made between market and non-market output but in practice the possible resource intensiveness of the exercise and the relative importance of making the distinction should be considered before implementing the conceptual recommendations.
In cases where market output is not separated from non-market output, the whole of the output of the central bank should be treated as non-market and valued at the sum of costs.

Borderline cases such as supervisory services

6.153 Central banks frequently provide supervisory services overseeing the financial corporations.
One could argue that this is for the benefit of society in general and the national accounts should record them as government final consumption.
In support of this view, one could draw a parallel with government performing market regulation policies, which it also may entrust to a specialized agency, or to government providing for roads, dams and bridges.
From this point of view, surveillance services are collective services and should be recorded as government consumption expenditure.

6.154 However, one could also argue that government's regulatory services are to the benefit of the financial intermediaries, because these services contribute to the functioning and financial performance of these institutions.
From this perspective, they are comparable to regulatory services of government such as quality control on food and drugs, which the national accounts record as intermediate consumption of producers.
The fact that financial intermediaries pay a fee for these services in some countries (for example in a number of countries in Latin America) supports this view.
Following this reasoning, surveillance services are not collective services but should be recorded as intermediate consumption of financial intermediaries.
However, even if the view is taken that supervisory services are market output because a fee is charged, if the fees are not sufficient to cover the supervisory costs incurred by the bank, then the services should be treated as non-market output and part of government consumption expenditure.

Provision of non-market output

6.155 As long as it can be identified as a separate institutional unit, the central bank is always included in the financial institutions sector and never in general government.
The collective consumption represented by monetary policy services is recorded as expenditure by general government but government does not incur the costs incurred by the central bank.
Therefore a current transfer of the value of the non-market output should be recorded as payable by the central bank and receivable by the general government to cover the purchase of the non-market output of the central bank by government.
This is described in paragraph 8.130.

Provision of market output

6.156 If the financial intermediation services provided by the central bank are significant, and if it is possible and worthwhile to compile data for a separate establishment providing them, these services should be shown as payable by the units to whom they are delivered.
Supervisory services treated as market output are recorded similarly.

7. Financial services other than those associated with insurance and pension funds

6.157 A comprehensive discussion of the contribution of financial assets and liabilities to the generation and distribution of income and changes in wealth in an accounting period is given in part 4 of chapter 17.
What follows is a summary of the main aspects affecting the measurement of the output of financial services.
There are three types of financial activities; financial intermediation, the services of financial auxiliaries and other financial services.
Financial services include monitoring services, convenience services, liquidity provision, risk assumption, underwriting and trading services.

6.158 Financial intermediation involves financial risk management and liquidity transformation, activities in which an institutional unit incurs financial liabilities for the purpose of acquiring mainly financial assets.
Corporations engaged in these activities obtain funds, not only by taking deposits but also by issuing bills, bonds or other securities.
They use these funds as well as own funds to acquire mainly financial assets not only by making advances or loans to others but also by purchasing bills, bonds or other securities.
Auxiliary financial activities facilitate risk management and liquidity transformation activities.
Financial auxiliaries, which are the units primarily engaged in auxiliary financial activities, typically act on behalf of other units and do not put themselves at risk by incurring financial liabilities or by acquiring financial assets as part of an intermediation service.

6.159 Financial services are produced almost exclusively by financial institutions because of the usually stringent supervision of the provision of those services.
Similarly, financial institutions rarely produce other services.
If a retailer wishes to offer credit facilities to its customers, for example, the credit facilities are usually offered by a subsidiary of the retailer, the subsidiary being treated as a financial institution in its own right regardless of the classification of the parent.
Financial institutions may also create subsidiaries dealing with only particular forms of financial services.
For example, a credit card operation may be associated with a given bank but may be institutionally separate.

6.160 Financial services may be paid for explicitly or implicitly.
Some transactions in financial assets may involve both explicit and implicit charges.
Four main ways in which financial services are provided and charged for may be considered:

a. Financial services provided in return for explicit charges;

b. Financial services provided in association with interest charges on loans and deposits;

c. Financial services associated with the acquisition and disposal of financial assets and liabilities in financial markets;

d. Financial services associated with insurance and pension schemes.

The following sections look at each of these in turn.
In chapter 17 there is an overview of the transactions and other flows associated with each type of financial instrument.
The recording of investment income is described in chapter 7 and the acquisition and disposal of financial assets and liabilities in chapter 11.
Changes in the value of financial assets and liabilities not arising from transactions are described in chapter 12.

Financial services provided in return for explicit charges

6.161 Many services come under this heading and may be provided by different categories of financial institutions.
Deposit taking institutions, such as banks, may charge households to arrange a mortgage, manage an investment portfolio, give taxation advice, administer an estate, and so on. Specialized financial institutions may charge non-financial corporations to arrange a flotation of shares or to administer a restructuring of a group of corporations.
However, the most pervasive and probably largest direct fee is likely to be that charged by credit card issuers to the units that accept credit cards as a means of payment for the goods and services they provide.
The charge is usually calculated as a percentage of the sale; in the case of retailers the sale value corresponds to turnover and not output.
Although the percentage is usually small in absolute terms, maybe one or two percent, the fact that it is applied to such large totals means that the total value of the charge is very large.
The charge represents output of the credit card companies and intermediate consumption of the corporations that accept credit cards as means of payment.
Ignoring the role of the credit card company does not affect the measurement of the expenditure (usually final consumption or exports) on the goods and services concerned but does underestimate the costs of the provider of goods and services and the output of the credit card company.
This in turn leads to a misallocation of value added from the credit card company to the provider of the goods and services paid for by credit card.

6.162 The example of the credit card company is one that clearly demonstrates that a financial corporation may provide services that are paid for by different means by different customers or in different circumstances.
The fee charged to the corporations accepting a credit card as means of payment has just been discussed.
A card holder may also be charged an explicit fee, usually each year, for holding the card.
In addition, if a card holder uses the credit facilities offered by the card, he will pay indirect charges associated with interest payable on the outstanding credit (which is treated as a loan in the SNA).

Financial services provided in association with interest charges on loans and deposits

6.163 One traditional way in which financial services are provided is by means of financial intermediation.
This is understood to refer to the process whereby a financial institution such as a bank accepts deposits from units wishing to receive interest on funds for which the unit has no immediate use and lends them to other units whose funds are insufficient to meet their needs.
The bank thus provides a mechanism to allow the first unit to lend to the second.
Each of the two parties pays a fee to the bank for the service provided, the unit lending funds by accepting a rate of interest lower than that paid by the borrower, the difference being the combined fees implicitly charged by the bank to the depositor and to the borrower.
From this basic idea the concept emerges of a “reference” rate of interest.
The difference between the rate paid to banks by borrowers and the reference rate plus the difference between the reference rate and the rate actually paid to depositors represent charges for financial intermediation services indirectly measured (FISIM).

6.164 However, it is seldom the case that the amount of funds lent by a financial institution exactly matches the amount deposited with them.
Some money may have been deposited but not yet loaned; some loans may be financed by the bank's own funds and not from borrowed funds.
However, the depositor of funds receives the same amount of interest and service whether or not his funds are then lent by the bank to another customer, and the borrower pays the same rate of interest and receives the same service whether his funds are provided by intermediated funds or the bank's own funds.
For this reason an indirect service charge is to be imputed in respect of all loans and deposits offered by a financial institution irrespective of the source of the funds.
The reference rate applies to both interest paid on loans and interest paid on deposits so that the amounts of interest recorded as such in the SNA are calculated as the reference rate times the level of loan or deposit in question.
The difference between these amounts and the amounts actually paid to the financial institution are recorded as service charges paid by the borrower or depositor to the financial institution.
For clarity the amounts based on the reference rate recorded in the SNA as interest are described as “SNA interest” and the total amounts actually paid to or by the financial institution are described as “bank interest”. The implicit service charge is thus the sum of the bank interest on loans less the SNA interest on the same loans plus the SNA interest on deposits less the bank interest on the same deposits.
The service charge is payable by or to the unit in receipt of the loan or owning the deposit as appropriate.

6.165 By convention within the SNA, these indirect charges in respect of interest apply only to loans and deposits and only when those loans and deposits are provided by, or deposited with, financial institutions.
The financial institutions in question need not be resident; nor need the clients of the financial institution be resident.
Thus imports and exports of this type of financial service are possible.
Nor need the financial institution necessarily offer deposit-taking facilities as well as making loans.
The financial subsidiaries of retailers are examples of financial institutions that make loans without accepting deposits.
A money lender who has sufficiently detailed accounts to be treated as an actual or quasi-corporation may receive this sort of charge; indeed since money lenders usually charge especially high rates of interest, their service charges may exceed the SNA interest payments by significant amounts.

6.166 The reference rate to be used in the calculation of SNA interest is a rate between bank interest rates on deposits and loans.
However, because there is no necessary equality between the level of loans and deposits, it cannot be calculated as a simple average of the rates on loans or deposits.
The reference rate should contain no service element and reflect the risk and maturity structure of deposits and loans.
The rate prevailing for inter-bank borrowing and lending may be a suitable choice as a reference rate.
However, different reference rates may be needed for each currency in which loans and deposits are denominated, especially when a non-resident financial institution is involved.
For banks within the same economy, there is often little if any service provided in association with banks lending to and borrowing from other banks.

6.167 Banks may offer loans that they describe as being fixed interest loans.
This is to be interpreted as a situation where the level of bank interest is fixed but as the reference rate changes, the level of SNA interest and the service charge will vary.

6.168 When an enterprise acquires a fixed asset under the terms of a financial lease, a loan is imputed between the lessor and the lessee.
Regular payments under the lease are treated as being payments of interest and repayment of capital.
When the lessor is a financial institution, the interest payable under the terms of a financial lease corresponds to bank interest and should be separated into SNA interest and financial service charge as for any other loan.

6.169 Even when a loan is described as non-performing, interest and the associated service charge continue to be recorded in the SNA.
There is discussion on the treatment of non-performing loans in chapter 13.

Financial services associated with the acquisition and disposal of financial assets and liabilities in financial markets

6.170 Debt securities such as bills and bonds are other forms of financial assets that give rise to interest payments, interest being payable to the owner of the security by the issuer.
As described in chapter 17, some of these interest charges may themselves be imputed from changes in the value of securities as they approach maturity.
When a financial institution offers a security for sale, a service charge is levied, the purchase price (or ask price) representing the estimated market value of the security plus a margin.
Another charge is levied when a security is sold, the price offered to the seller (the bid price) representing the market value less a margin.

6.171 Prices of securities may change rapidly and to avoid including holding gains and losses in the calculation of the service margins, it is important to calculate the margins on sales and purchases in terms of mid-prices.
The mid-price of a security is the average at a given point in time between the bid and ask price.
Thus the margin on the purchase of a security is the difference between the ask price and mid-price at the time of the purchase and the margin on a sale is the difference between the mid-price and the bid price at the time of the sale.

6.172 It is important when measuring interest as the increase in value of a security between the date it is purchased and the date it matures (or is subsequently sold) to measure from one mid-point value to another and to treat the differences between mid-point price and bid or ask price at the time of purchase, sale or redemption as a service margin.
Ignoring the margins understates the value of output of financial institutions and may understate interest payments also.

6.173 Equities and investment fund shares or units give rise to property income other than interest but, like debt securities, they are offered for sale and purchase at different prices.
The difference between the buying price and mid-price and the mid-price and selling price should be treated as the provision of financial services as in the case of securities.
The same principles as for securities apply for the same reason.

6.174 Although no property income flows are involved, margins between buying and selling prices also apply to purchases of foreign currencies (including transactions denominated in foreign currencies such as payments for imports and exports as well as the acquisition of physical notes and coins of a foreign currency).
Again these margins should be treated as the provision of financial services in a manner similar to that described for securities.

8. Financial services associated with insurance and pension schemes.

6.175 Five types of activities are covered under this heading:

Non-life insurance;

Life insurance and annuities;

Reinsurance;

Social insurance schemes;

Standardized guarantee schemes.

6.176 All these schemes lead to redistribution of funds, which are recorded in either the secondary distribution of income account or the financial account.
For non-life insurance and standardized guarantee schemes, most of the redistribution takes place between different units in the same period.
Many client units pay relatively small policy premiums or fees and a small number of them receive relatively large claims or payments.
For life insurance, annuities and pension schemes, the redistribution is primarily, though not entirely, between different periods for a single client.
In fulfilling their responsibilities as managers of these funds, insurance companies and pension funds are involved in both risk management and liquidity transformation, the prime functions of financial institutions.

6.177 Non-life insurance provides cover to the policyholder against loss or damage suffered as a result of an accident.
A premium is paid to the insurance corporation and a claim is paid to the policyholder only if the event insured against occurs.
If the event occurs then the maximum amount to be paid is specified in the policy so that the uncertainty concerns whether a payment will take place, not the amount of it.

6.178 Under a life insurance policy, many small payments are made over a period of time and either a single lump sum or a stream of payments is made at some pre-agreed time in the future.
There is little conditionality involved in life insurance, usually the fact that a payment will be made is certain but the amount may be uncertain.

6.179 Annuities are offered by insurance corporations and are a means for an individual person to convert a lump sum into a stream of payments in the future.

6.180 Just as an individual may limit their exposure to risk by taking out an insurance policy, so may insurance corporations themselves.
Insurance between one insurance corporation and another is called reinsurance.
(Insurance other than reinsurance is called direct insurance.)
Many reinsurance transactions are with specialized institutions in a few international financial centres.
Reinsurers may also take out a further reinsurance policy.
This practice is known as “retrocession”.

6.181 A social insurance scheme is one where a third party, usually an employer or the government, encourages or obliges individuals to participate in a scheme to provide benefits for a number of identified circumstances, including pensions in retirement.
Social insurance schemes have much in common with direct insurance and may be run by insurance corporations.
This is not necessarily the case, however, and there are special variations in how the payment of contributions (corresponding to premiums in the case of direct insurance) and benefits are recorded.

6.182 In some circumstances a unit, possibly but not necessarily within general government, may offer very many guarantees of very similar nature.
One example is export guarantees and another is student loans.
Because the guarantees are very similar and numerous, it is possible to make robust statistical estimates of the number of defaults the guarantor will have to cover and so these also are treated in a manner similar to direct non-life insurance.

6.183 The detailed recording for each of these activities, including the measurement of output, the recording of flows between the insurance corporations or pension funds on the one hand and policyholders or beneficiaries on the other, and the implications for changes in the balance sheets of both sets of institutions are described in part 3 of chapter 17.
What follows is a summary of the key features of measuring output for the various activities listed above.

Non-life insurance

6.184 Under a non-life insurance policy, the insurance company accepts a premium from a client and holds it until a claim is made or the period of the insurance expires.
In the meantime, the insurance company invests the premium and the property income is an extra source of funds from which to meet any claim due.
The property income represents income foregone by the client and so is treated as an implicit supplement to the actual premium.
The insurance company sets the level of the actual premiums to be such that the sum of the actual premiums plus the property income earned on them less the expected claim will leave a margin that the insurance company can retain; this margin represents the output of the insurance company.
Within the SNA, the output of the insurance industry is determined in a manner intended to mimic the premium setting policies of the insurance corporations.

6.185 The basic method for measuring non-life insurance output is the following:

Total premiums earned,

plus premium supplements,

less adjusted claims incurred.

6.186 The actual premium is the amount payable to the direct insurer or reinsurer to secure insurance cover for a specific event over a stated time period.
Cover is frequently provided for one year at a time with the premium due to be paid at the outset, though cover may be provided for shorter (or longer) periods and the premium may be payable in instalments, for example monthly.

6.187 The premium earned is the part of the actual premium that relates to cover provided in the accounting period.
For example, if an annual policy with a premium of 120 units comes into force on April 1 and accounts are being prepared for a calendar year, the premium earned in the calendar year is 90.
The unearned premium is the amount of the actual premium received that relates to the period past the accounting point.
In the example just given, at the end of the accounting period there will be an unearned premium of 30, intended to provide cover for the first three months of the next year.
A claim (benefit) is the amount payable to the policyholder by the direct insurer or reinsurer in respect of an event covered by the policy occurring in the period for which the policy is valid.
Claims normally become due when the event occurs, even if the payment is made some time later.
(The exception to this time of recording is described in paragraph 8.121.)
Claims that become due are described as claims incurred.
In some contested cases the delay between the occurrence of the event giving rise to the claim and the settlement of the claim may be several years.
Claims outstanding cover claims that have not been reported, have been reported but are not yet settled or have been both reported and settled but not yet paid.

6.188 The insurance corporation has at its disposal reserves consisting of unearned premiums and claims outstanding.
These reserves are called technical reserves and are used by the insurance company to generate investment income.
Because the technical reserves are a liability of the insurance corporation to the policyholders, the investment income they generate is treated as being attributed to the policyholders.
However, the amounts remain with the insurance corporation and are in effect a hidden supplement to the apparent premium.
This income is therefore treated as a premium supplement paid by the policyholder to the insurance corporation.

6.189 In setting the level of premiums, which obviously the insurance corporation must do ex ante, it makes an estimate of the level of claims it expects to be faced with.
Within the SNA there are two ways in which the appropriate level of claims (described as adjusted claims) can be determined.
One is an ex ante method, described as the expectation method, and estimates the level of adjusted claims from a model based on the past pattern of claims payable by the corporation.
The other means of deriving adjusted claims is to use accounting information.
Within the accounts for the insurance corporations there is an item called “equalization provisions” that gives a guide to the funds the insurance corporation sets aside to meet unexpectedly large claims.
Adjusted claims are derived ex post as actual claims incurred plus the change in equalization provisions.
In circumstances where the equalization provisions are insufficient to bring adjusted claims back to a normal level, some contribution from own funds must be added also.

6.190 On occasion, the levels of technical reserves and of equalization provisions may be altered in response to financial regulation and not because of changes in the expected patterns of premiums and claims.
Such changes should be recorded in the other changes in the volume of assets account and excluded from the formula to determine output.

6.191 In circumstances where information is not available for either approach to deriving adjusted claims, it may be necessary to estimate output instead by the sum of costs including an allowance for normal profits.

Life insurance

6.192 A life insurance policy is a sort of saving scheme.
For a number of years, the policyholder pays premiums to the insurance corporation against a promise of benefits at some future date.
These benefits may be expressed in terms of a formula related to the premiums paid or may be dependent on the level of success the insurance corporation has in investing the funds.

6.193 The insurance corporation cumulates premiums paid until the promised date when benefits become payable and in the meantime uses the reserves to produce investment income.
Some of the investment income is added to the life insurance reserves belonging to the policyholders to meet benefits in future.
This allocation is an asset of the policyholders but is retained by the insurance corporation which continues to invest the amounts until benefits become payable.
The remainder of the investment income not allocated to the policyholders is retained by the insurance corporation as its fee for the service they provide.

6.194 The method of calculating output for life insurance follows the same general principles as for non-life insurance but because of the time interval between when premiums are received and when benefits are paid, special allowances must be made for changes in the technical reserves.

6.195 The output of life insurance is derived as:

Premiums earned,

plus premium supplements,

less benefits due,

less increases (plus decreases) in life insurance technical reserves.

6.196 Premiums are defined in exactly the same way for life insurance as for non-life insurance.

6.197 Premium supplements are more significant for life insurance than for non-life insurance.
They consist of all the investment income earned on the reserves of the policyholders.
The amount involved is earnings forgone by the policyholders by putting the funds at the disposal of the insurance corporation and are thus recorded as property income in the distribution of primary income account.

6.198 Benefits are recorded as they are awarded or paid.
There is no need under life insurance to derive an adjusted figure since there is not the same unexpected volatility in the payment due under a life policy.
It is possible for the insurance corporation to make robust estimates of the benefits due to be paid even years in advance.

6.199 Life insurance technical reserves increase each year because of new premiums paid, new investment income allocated to the policyholders (but not withdrawn by them) and decrease because of benefits paid.
It is thus possible to express the level of output of life insurance as the difference between the total investment income earned on the life insurance technical reserves less the part of this investment income actually allocated to the policyholders and added to the insurance technical reserves.

Reinsurance

6.200 The method of calculating the output of reinsurance is exactly the same as for non-life insurance, whether it is life or non-life policies that are being reinsured.

Social insurance schemes

6.201 There are four different ways in which social insurance may be organized.

a. Some social insurance is provided by government under a social security scheme;

b. An employer may organize a social insurance scheme for his employees;

c. An employer may have an insurance corporation run the scheme for the employer in return for a fee;

d. An insurance corporation may offer to run a scheme for several employers in return for any property income and holding gains they may make in excess of what is owed to the participants in the scheme.
The resulting arrangement is called a multiemployer scheme.

The output for each of these modes of running a social insurance scheme is calculated in a different manner.

6.202 Social security schemes are run as part of the operation of general government.
If separate units are distinguished, their output is determined in the same way as all non-market output as the sum of costs.
If separate units are not distinguished, the output of social security is included with the output of the level of government at which it operates.

6.203 When an employer operates his own social insurance scheme, the value of the output is also determined as the sum of costs including an estimate for a return to any fixed capital used in the operation of the scheme.
Even if the employer establishes a segregated pension fund to manage the scheme, the value of output is still measured in the same way.

6.204 When an employer uses an insurance corporation to manage the scheme on his behalf, the value of the output is the fee charged by the insurance corporation.

6.205 For a multiemployer scheme, the value of output is measured as for life insurance policies; it is the excess of the investment income receivable by the schemes less the amount added to the reserves to meet present and future pension entitlements.

Standardized guarantee schemes

6.206 If a standardized guarantee scheme operates as a market producer, the value of output is calculated in the same way as non-life insurance.
If the scheme operates as a non-market producer, the value of output is calculated as the sum of costs.

9. Research and development

6.207 Research and development is creative work undertaken on a systematic basis to increase the stock of knowledge, and use this stock of knowledge for the purpose of discovering or developing new products, including improved versions or qualities of existing products, or discovering or developing new or more efficient processes of production.
Research and development is not an ancillary activity, and a separate establishment should be distinguished for it when possible.
The research and development undertaken by market producers on their own behalf should, in principle, be valued on the basis of the estimated basic prices that would be paid if the research were subcontracted commercially, but in practice is likely to have to be valued on the basis of the total production costs including the costs of fixed assets used in production.
Research and development undertaken by specialized commercial research laboratories or institutes is valued by receipts from sales, contracts, commissions, fees, etc. in the usual way.
Research and development undertaken by government units, universities, non-profit research institutes, etc. is non-market production and is valued on the basis of the total costs incurred.
The activity of research and development is different from teaching and is classified separately in ISIC.
In principle, the two activities ought to be distinguished from each other when undertaken within a university or other institute of higher education, although there may be considerable practical difficulties when the same staff divide their time between both activities.
There may also be interaction between teaching and research which makes it difficult to separate them, even conceptually, in some cases.
The treatment of R&D as capital formation is discussed in chapter 10.

10. The production of originals and copies

6.208 The production of books, recordings, films, software, tapes, disks, etc. is a two-stage process of which the first stage is the production of the original and the second stage the production and use of copies of the original.
The output of the first stage is the original itself over which legal or de facto ownership can be established by copyright, patent or secrecy.
The value of the original depends on the actual or expected receipts from the sale or use of copies at the second stage, which have to cover the costs of the original as well as costs incurred at the second stage.

6.209 The output of the first stage is a fixed asset that belongs to the producer of the original (author, film company, program writer, etc.).
It may be produced for sale or for own-account gross fixed capital formation by the original producer.
As the asset may be sold to another institutional unit the owner of the asset at any given time need not be the original producer, although they are often one and the same unit.
If the original is sold when it has been produced, the value of the output of the original producer is given by the price paid.
If it is not sold, its value may be estimated on the basis of its production costs with a mark-up. However, the size of any mark-up must depend on the discounted value of the future receipts expected from using it in production, so that it is effectively this discounted value, however uncertain, that determines its value.

6.210 The owner of the asset may use it directly to produce copies in subsequent periods.
The value of the copies made is also recorded as production separately from the production involved in the making of the original.
Consumption of fixed capital is recorded in respect of the use of the asset in the making of the copies the same way as for any other fixed asset used in production.

6.211 The owner may also license other producers to make use of the original in production.
The latter may produce and sell copies, or use copies in other ways, for example, for film or music performances.
The copier undertakes production in making the copies.
Part of the cost of making the copies is the fee paid by the licensee to the owner or licensor.
This fee represents both intermediate consumption of the licensee and output of the owner that is recorded as a service sold to the licensee.
The payments made for the licences may be described in various ways, such as fees, commissions or royalties, but however they are described they are treated as payments for services rendered by the owner.

6.212 In certain circumstances the licence to make copies may also be treated as an asset, distinct from the original.
The conditions under which this applies and the consequences are discussed in greater detail in chapter 17.

G. Intermediate consumption

1. Coverage of intermediate consumption

6.213 Intermediate consumption consists of the value of the goods and services consumed as inputs by a process of production, excluding fixed assets whose consumption is recorded as consumption of fixed capital.
The goods or services may be either transformed or used up by the production process.
Some inputs re-emerge after having been transformed and incorporated into the outputs, for example, grain may be transformed into flour which in turn may be transformed into bread.
Other inputs are completely consumed or used up, for example, electricity and most services.

6.214 Intermediate consumption does not include expenditures by enterprises on valuables consisting of works of art, precious metals and stones and articles of jewellery fashioned out of them.
Valuables are assets acquired as stores of value: they are not used up in production and do not deteriorate physically over time.
Expenditures on valuables are recorded in the capital account.
Intermediate consumption also does not include costs incurred by the gradual using up of fixed assets owned by the enterprise: the decline in their value during the accounting period is recorded as consumption of fixed capital.
However, intermediate consumption does include the rentals paid on the use of fixed assets, whether equipment or buildings, that are leased from other institutional units under an operating lease, and also fees, commissions, royalties, etc., payable under licensing arrangements, as explained above.

6.215 Where ancillary services are not shown as the output of a separate establishment, intermediate consumption includes the value of all the goods or services used as inputs into ancillary activities such as purchasing, sales, marketing, accounting, data processing, transportation, storage, maintenance, security, etc.
In this case, the goods and services consumed by these ancillary activities are not distinguished from those consumed by the principal (or secondary) activities of a producing establishment.
When a unit provides only ancillary services, it continues to be shown as a separate unit as long as the necessary information is available.
There is more discussion of the treatment of ancillary activities in chapter 5.

2. The timing and valuation of intermediate consumption

6.216 The intermediate consumption of a good or service is recorded at the time when the good or service enters the process of production, as distinct from the time it was acquired by the producer.
In practice, establishments do not usually record the actual use of goods in production directly.
Instead, they keep records of purchases of materials and supplies intended to be used as inputs and also of any changes in the amounts of such goods held in inventories.
An estimate of intermediate consumption during a given accounting period can then be derived by subtracting the value of changes in inventories of materials and supplies from the value of purchases made.
Changes in inventories of materials and supplies are equal to entries less withdrawals and recurrent losses on goods held in inventories.
Thus, by reducing the value of changes in inventories, recurrent losses increase intermediate consumption.
Even if they are consistently large, as long as they occur regularly, losses are treated as increasing intermediate consumption.
Goods entering and leaving inventories are valued at the purchasers' prices prevailing at the times the entries, withdrawals or recurrent losses take place.
This is exactly the same method as that used to value changes in inventories of goods produced as outputs from the production process.
Thus, the earlier discussion of the properties and behaviour of the PIM applies to inventories of inputs.

6.217 A good or service consumed as an intermediate input is normally valued at the purchaser's price prevailing at the time it enters the process of production; that is, at the price the producer would have to pay to replace it at the time it is used.
As explained in more detail in section C, the purchaser's price can be regarded as being composed of three elements:

a. The basic price received by the producer of the good or service;

b. Any transportation costs paid separately by the purchaser in taking delivery of a good at the required time and location plus the cumulative trade margin on a good that passes through the chain of wholesale or retail distribution;

c. Any non-deductible tax on the product payable on the good or service when it was produced or while in transit to the purchaser less any subsidy on the product.

For purposes of the input-output tables, it may be necessary to distinguish all three elements but this is not necessary in the accounts for institutional sectors or the central supply and use table.

6.218 Intermediate inputs treated as being acquired from other establishments belonging to the same enterprise should be valued at the same prices as were used to value them as outputs of those establishments plus any additional transport charges not included in the output values.

6.219 When goods or services produced within the same establishment are fed back as inputs into the production within the same establishment, they are only recorded as part of the intermediate consumption if they have been recorded as part of the output of that establishment.
There is discussion on when this might be appropriate in section E. Deliveries of goods and services between different establishments belonging to the same enterprise are recorded as outputs by the producing establishments and intermediate inputs by the receiving establishments only when the receiving establishment effectively assumes all risks for completing the production process.

3. The boundary between intermediate consumption and compensation of employees

6.220 Certain goods and services used by enterprises do not enter directly into the process of production itself but are consumed by employees working on that process.
In such cases it is necessary to decide whether the goods and services are intermediate consumption or, alternatively, remuneration in kind of employees.
In general, when the goods or services are used by employees in their own time and at their own discretion for the direct satisfaction of their needs or wants, they constitute remuneration in kind.
However, when employees are obliged to use the goods or services in order to enable them to carry out their work, they constitute intermediate consumption.

6.221 It is immaterial to the employer whether they are treated as intermediate consumption or compensation of employees because they are both costs from the employer's viewpoint and the net operating surplus is the same.
However, reclassifying such goods and services from remuneration in kind to intermediate consumption, or vice versa, changes value added and balance of primary incomes, and hence GDP as a whole.

6.222 The following types of goods and services provided to employees must be treated as part of intermediate consumption:

a. Tools or equipment used exclusively, or mainly, at work;

b. Clothing or footwear of a kind that ordinary consumers do not choose to purchase or wear and which are worn exclusively, or mainly, at work; for example, protective clothing, overalls or uniforms;

c. Accommodation services at the place of work of a kind that cannot be used by the households to which the employees belong: barracks, cabins, dormitories, huts, etc.;

d. Special meals or drinks necessitated by exceptional working conditions, or meals or drinks provided to servicemen or others while on active duty;

e. Transportation and hotel services including allowances for meals provided while the employee is travelling on business;

f. Changing facilities, washrooms, showers, baths, etc. necessitated by the nature of the work;

g. First aid facilities, medical examinations or other health checks required because of the nature of the work.

Employees may sometimes be responsible for purchasing the kinds of goods or services listed above and be subsequently reimbursed in cash by the employer.
Such cash reimbursements must be treated as intermediate expenditures by the employer and not as part of the employee's wages and salaries.

6.223 The provision of other kinds of goods and services, such as ordinary housing services, the services of vehicles or other durable consumer goods used extensively away from work, transportation to and from work, etc. should be treated as remuneration in kind, as explained more fully in chapter 7.

4. The boundary between intermediate consumption and gross fixed capital formation

6.224 Intermediate consumption measures the value of goods and services that are transformed or entirely used up in the course of production during the accounting period.
It does not cover the costs of using fixed assets owned by the enterprise nor expenditures on the acquisition of fixed assets.
The boundary between these kinds of expenditures and intermediate consumption is explained in more detail below.

Small tools

6.225 Expenditures on durable producer goods that are small, inexpensive and used to perform relatively simple operations may be treated as intermediate consumption when such expenditures are made regularly and are very small compared with expenditures on machinery and equipment.
Examples of such goods are hand tools such as saws, spades, knives, axes, hammers, screwdrivers, and so on. However, in countries where such tools account for a significant part of the stock of producers' durable goods, they may be treated as fixed assets.

Maintenance and repairs

6.226 The distinction between maintenance and repairs and gross fixed capital formation is not clear-cut.
The ordinary, regular maintenance and repair of a fixed asset used in production constitute intermediate consumption.
Ordinary maintenance and repair, including the replacement of defective parts, are typical ancillary activities but such services may also be provided by a separate establishment within the same enterprise or purchased from other enterprises.

6.227 The practical problem is to distinguish ordinary maintenance and repairs from major renovations, reconstructions or enlargements that go considerably beyond what is required simply to keep the fixed assets in good working order.
Major renovations, reconstructions, or enlargements of existing fixed assets may enhance their efficiency or capacity or prolong their expected working lives.
They must be treated as gross fixed capital formation as they add to the stock of fixed assets in existence.

6.228 Ordinary maintenance and repairs are distinguished by two features:

a. They are activities that owners or users of fixed assets are obliged to undertake periodically in order to be able to utilize such assets over their expected service lives.
They are current costs that cannot be avoided if the fixed assets are to continue to be used.
The owner or user cannot afford to neglect maintenance and repairs as the expected service life may be drastically shortened otherwise;

b. Maintenance and repairs do not change the fixed asset or its performance, but simply maintain it in good working order or restore it to its previous condition in the event of a breakdown.
Defective parts are replaced by new parts of the same kind without changing the basic nature of the fixed asset.

6.229 On the other hand, major renovations or enlargements to fixed assets are distinguished by the following features:

a. The decision to renovate, reconstruct or enlarge a fixed asset is a deliberate investment decision that may be undertaken at any time and is not dictated by the condition of the asset.
Major renovations of ships, buildings or other structures are frequently undertaken well before the end of their normal service lives;

b. Major renovations or enlargements increase the performance or capacity of existing fixed assets or significantly extend their previously expected service lives.
Enlarging or extending an existing building or structure obviously constitutes a major change in this sense, but a complete refitting or restructuring of the interior of a building, or ship, also qualifies.

Research and development

6.230 Research and development is treated as capital formation except in any cases where it is clear that the activity does not entail any economic benefit for its owner in which case it is treated as intermediate consumption.

Mineral exploration and evaluation

6.231 Expenditures on mineral exploration and evaluation are not treated as intermediate consumption.
Whether successful or not, they are needed to acquire new reserves and so are all classified as gross fixed capital formation.

Military equipment

6.232 Expenditures on military equipment, including large military weapons systems, are treated as fixed capital formation.
Expenditure on durable military goods such as bombs, torpedoes and spare parts are recorded as inventories until used when they are recorded as intermediate consumption and a withdrawal from inventories.

5. Services provided by government to producers

6.233 Government may provide services to producers.
To the extent that a charge is made for these services, the charges form part of the intermediate consumption of the producer.
However, when the charge does not represent an economically significant price, the value of the service to the producer is greater than the cost.
However, no estimation of this benefit is made and the costs of the services not covered by the charges made are included in collective consumption of government.

6. Social transfers in kind

6.234 Expenditures by government or NPISHs on goods or services produced by market producers that are provided directly to households, individually or collectively, without any further processing constitute final consumption expenditures by government or NPISHs and not intermediate consumption.
The goods and services in question are treated as social transfers in kind and enter into the actual consumption of households.

6.235 By convention, non-financial and financial corporations do not make social transfers in kind, nor engage in final consumption.

7. Services of business associations

6.236 Non-profit institutions in the form of business associations that exist to protect the interests of their members and are financed by them are market producers.
The subscriptions paid by the businesses constitute payments for services rendered.
These services are consumed as intermediate inputs by the members of the association and are valued by the amounts paid in subscriptions, contributions or dues.

8. Outsourcing

6.237 It is increasingly common for producers to change the way in which a production activity is completed.
Different stages in the process or different support activities such as office cleaning or assembly of electronic components may be contracted out to another producer, in the same country or abroad.
This changes the pattern of intermediate inputs even though the underlying technology may be the same.
The impact of this on input-output tables is discussed in chapters 14 and 28.

9. Leasing fixed assets

6.238 The decision to rent buildings, machinery or equipment under an operating lease, rather than purchase them, can have a major impact on the ratio of intermediate consumption to value added and the distribution of value added between producers.
Rentals paid on buildings or on machinery or equipment under an operating lease constitute purchases of services that are recorded as intermediate consumption.
However, if an enterprise owns its buildings, machinery and equipment, most of the costs associated with their use are not recorded under intermediate consumption.
The consumption of fixed capital on the assets forms part of gross value added while interest costs, both actual and implicit, have to be met out of the net operating surplus.
Only the costs of the materials needed for maintenance and repairs appear under intermediate consumption.
Decisions to rent rather than purchase may be influenced by factors quite unrelated to the technology of production, such as taxation, the availability of finance, or the consequences for the balance sheet.

6.239 There is a significant difference between rentals of fixed assets under an operating lease and the acquisition of an asset under a financial lease.
Under an operating lease, the lessor has a productive activity that involves the equipment in question and is responsible for the production risks associated with the operational status of the asset.
Payments by the lessee are treated as payments for a service.
Under a financial lease, the lessee accepts all risks and rewards associated with the use of the asset in production.
A financial lease is thus treated as a loan by the lessor to the lessee and purchase of the equipment by the lessee.
Subsequent payments are treated as payments of interest and repayments of principal by the lessee to the lessor.
Further details on the treatment of operating and financial leases are given in chapter 17.

H. Consumption of fixed capital

1. The coverage of consumption of fixed capital

6.240 Consumption of fixed capital is the decline, during the course of the accounting period, in the current value of the stock of fixed assets owned and used by a producer as a result of physical deterioration, normal obsolescence or normal accidental damage.
The term depreciation is often used in place of consumption of fixed capital but it is avoided in the SNA because in commercial accounting the term depreciation is often used in the context of writing off historic costs whereas in the SNA consumption of fixed capital is dependent on the current value of the asset.

6.241 Consumption of fixed capital is calculated for all fixed assets owned by producers, but not for valuables (precious metals, precious stones, etc.) that are acquired precisely because their value, in real terms, is not expected to decline over time.
Fixed assets must have been produced as outputs from processes of production as defined in the SNA.
Consumption of fixed capital does not, therefore, cover the depletion or degradation of natural assets such as land, mineral or other deposits, coal, oil, or natural gas, or contracts, leases and licences.

6.242 The value of assets may decline not merely because they deteriorate physically but because of a decrease in the demand for their services as a result of technical progress and the appearance of new substitutes for them.
In practice, many structures, including roads and railway tracks, are scrapped or demolished because they have become obsolete.
Even though the estimated service lives may be very long for some structures, such as roads, bridges, dams, etc., they cannot be assumed to be infinite.
Thus, capital consumption needs to be calculated for all types of structures, including those owned and maintained by government units, as well as machinery and equipment.

6.243 Losses of fixed assets due to normal or expected levels of accidental damage are also included under consumption of fixed capital; that is, damage caused to assets used in production resulting from their exposure to the risk of fires, storms, accidents due to human error, etc.
When these kinds of accidents occur with predictable regularity they are taken into account in calculating the average service lives of the goods in question.
For an individual unit, or group of units, any difference between the average and the actual normal accidental damage within a given period is recorded in the other changes in the volume of assets account.
However, at the level of the economy as a whole, the actual normal accidental damage within a given accounting period may be expected to be equal, or close, to the average.

6.244 On the other hand, losses due to war or to major natural disasters that occur very infrequently, such as major earthquakes, volcanic eruptions, tidal waves or exceptionally severe hurricanes, are not included under consumption of fixed capital.
There is no reason for such losses to be charged in the production account as costs of production.
The values of the assets lost in these ways are recorded in the other changes in the volume of assets account.
Similarly, although consumption of fixed capital includes reductions in the value of fixed assets resulting from normal, expected rates of obsolescence, it should not include losses due to unexpected technological developments that may significantly shorten the service lives of a group of existing fixed assets.
Such losses are treated in the same way as losses due to above average rates of normal accidental damage.

2. Consumption of fixed capital and rentals on fixed assets

6.245 It is possible to draw a comparison between consumption of fixed capital and rental of assets under an operating lease.
The rental is the amount payable by the user of a fixed asset to its owner, under an operating lease or similar contract, for the right to use that asset in production for a specified period of time.
The rental needs to be large enough to cover (i) any direct costs incurred by the owner including the costs of maintaining the asset, (ii) the reduction in the value of the asset over that period (the consumption of fixed capital) and (iii) the interest costs on the value of the asset at the start of the period.
The interest costs may consist either of actual interest paid on borrowed funds or the loss of interest incurred as a result of investing own funds in the purchase of the fixed asset instead of a financial asset.
Whether owned or rented, the full cost of using the fixed asset in production is measured by the actual or imputed rental on the asset and not by consumption of fixed capital alone.
When the asset is actually rented under an operating lease or similar contract, the rental is recorded under intermediate consumption as the purchase of a service produced by the lessor.
When the user and the owner are one and the same unit, the direct costs are recorded as intermediate consumption.
The consumption of fixed capital represents the second element of the cost of using the asset.
The third part of the cost, referred to above as the interest cost, is also known as the return to fixed capital.
Like consumption of fixed capital, the return to capital is part of value added.
The sum of the consumption of fixed capital and the value of the return to capital is known as the capital services rendered by the asset.
Capital services are discussed in more detail in chapter 20.

6.246 The value of a fixed asset to its owner at any point of time is determined by the present value of the future capital services (that is, the sum of the values of the stream of future rentals less operating costs discounted to the present period) that can be expected over its remaining service life.
Consumption of fixed capital is measured by the decrease, between the beginning and the end of the current accounting period, in the present value of the remaining sequence of expected future benefits.
The extent of the decrease will be influenced not only by the amount by which the efficiency of the asset may have declined during the current period but also by the shortening of its service life and the rate at which its economic efficiency declines over its remaining service life.
The decrease is expressed in the average prices of the current period for an asset of exactly the same quality and should exclude holding gains and losses.
When the flow of future benefits that determines the present values used to derive consumption of fixed capital is expressed in terms of flows that include an element of inflation, then the discount factor should be nominal.
When the flows are expressed in terms of current period prices, then a real discount rate should be used.
Either procedure results in a present value expressed in current period prices.

6.247 Consumption of fixed capital is a forward-looking measure that is determined by future, and not past, events namely, the benefits that institutional units expect to derive in the future from using the asset in production over the remainder of its service life.
Unlike depreciation as usually calculated in business accounts, consumption of fixed capital is not, at least in principle, a method of allocating the costs of past expenditures on fixed assets over subsequent accounting periods.
The value of a fixed asset at a given moment in time depends only on the remaining benefits to be derived from its use and consumption of fixed capital must be based on values calculated in this way.

3. The calculation of consumption of fixed capital

6.248 Fixed assets may have been purchased in the past at times when both relative prices and the general price level were very different from prices in the current period.
In order to be consistent with the other entries in the same production account, consumption of fixed capital must be valued with reference to the same overall set of current prices as that used to value output and intermediate consumption.
Consumption of fixed capital should reflect underlying resource costs and relative demands at the time the production takes place.
It should therefore be calculated using the actual or estimated prices and rentals of fixed assets prevailing at that time and not at the times the goods were originally acquired.
The “historic costs” of fixed assets, that is, the prices originally paid for them, become quite irrelevant for the calculation of consumption of fixed capital as prices change over time.

6.249 For these reasons, depreciation as recorded in business accounts may not provide the right kind of information for the calculation of consumption of fixed capital.
If data on depreciation are used, they must, at the very least, be adjusted from historic costs to current prices.
However, depreciation allowances for tax purposes have often been grossly manipulated in quite arbitrary ways to try to influence rates of investment and are best ignored altogether in many cases.
It is recommended that independent estimates of consumption of fixed capital should be compiled in conjunction with estimates of the capital stock.
These can be built up from data on gross fixed capital formation in the past combined with estimates of the rates at which the efficiency of fixed assets decline over their service lives.

6.250 Whenever possible, the initial value of a new fixed asset should be that prevailing on the market when the asset is acquired.
If assets of all ages and specifications were regularly traded on markets, these prices should be used to value every asset as it ages.
However, there is scarce information on the prices of second-hand assets and faced with this lack, a more theoretical approach to determining the price of an asset as it ages must be adopted.

6.251 Conceptually, market forces should ensure that the purchaser's price of a new fixed asset is equivalent to the present value of the future benefits that can be derived from it. Given the initial market price, therefore, and knowledge of the characteristics of the asset in question, it is possible to project the stream of future benefits and continually update the remaining present value of these.
This method of building up estimates of the capital stock and changes in the capital stock over time is known as the perpetual inventory method, or PIM.
Estimates of consumption of fixed capital are obtained as a by-product of the PIM.

4. The perpetual inventory method

6.252 A brief explanation of how consumption of fixed capital may be calculated as a by-product of the perpetual inventory method of calculating the capital stock is given in this section.
An overview of the link between the calculation of consumption of fixed capital, the return to capital and the stock of assets is given in chapter 20.
Much more guidance on the way to calculate capital stock estimates appears in the manual Measuring Capital. (OECD, 2009).

Calculation of the gross capital stock

6.253 The perpetual inventory method requires an estimate to be made of the stock of fixed assets in existence and in the hands of producers.
The first step is to estimate how many of the fixed assets installed as a result of gross fixed capital formation undertaken in previous years have survived to the current period.
Average service lives, or survival functions, based on observations or technical studies may be applied to past investments for this purpose.
Fixed assets purchased at different prices in the past have then to be revalued at the prices of the current period by utilizing appropriate price indices for fixed assets.
The construction of suitable price indices covering long periods of time raises difficult conceptual and practical problems, but these technical problems of price measurement must be faced in any case in developing balance sheet values of assets.
The stock of fixed assets surviving from past investment and revalued at the purchasers' prices of the current period is described as the gross capital stock.
The gross capital stock can also be measured at the prices of a given base year if it is desired to have annual time series for the gross capital stock in volume terms.

Relative efficiencies

6.254 The inputs into production obtained from the use of a given fixed asset tend to diminish over time.
The rate at which the efficiency declines may vary from one type of asset to another.
The simplest case to consider is one where the efficiency of the asset remains constant until it disintegrates, like a light bulb.
Other simple cases include the case where the efficiency declines linearly or exponentially over its life.
Other methods employ a hyperbolic rate of efficiency loss with relatively little decline in the initial years but increasingly steeper decline as time progresses.
However, in practice calculations are not undertaken asset by asset individually but for cohorts of assets of similar ages and characteristics.
Individual assets within the cohort will retire at different moments but the efficiency-retirement profile for the cohort as a whole is typically convex to the origin.

6.255 The efficiency profiles of fixed assets determine the profiles of the benefits they command over their service lives.
Once the profiles of the benefits over the service lives of the fixed asset have been determined, it becomes possible to calculate the consumption of fixed capital, period by period.

Rates of consumption of fixed capital

6.256 Consumption of fixed capital is derived as the reduction in the present value of the remaining benefits, as explained earlier.
This reduction, and the rate at which it takes place over time, must be clearly distinguished from the decline in the efficiency of the capital assets themselves.
Although the efficiency, and hence the benefit, of an asset with the efficiency characteristics of a light bulb may remain constant from period to period until it disintegrates, the value of the asset declines over time.
It also follows that the consumption of fixed capital is not constant.
It can easily be shown in this case that the decline in the present value of the remaining benefits from period to period is considerably lower earlier in the life of the asset than when the asset is approaching the end of its life.
Consumption of fixed capital tends to increase as the asset gets older even though the efficiency and benefits remain constant to the end.

Values of consumption of fixed capital

6.257 Consumption of fixed capital should not be estimated in isolation from the derivation of a set of capital stock data.
Such data are needed for the balance sheet and, as shown in chapter 20, trying to identify consumption of fixed capital in isolation from the level of the stock of the asset and its patterns of price and efficiency decline is likely to be error prone.

Chapter 7: The distribution of income accounts

A. Introduction

7.1 There are two accounts that record how income arising from involvement in processes of production or from ownership of assets needed for production are distributed among institutional units and the second of these is further subdivided in two also:

a. The generation of income account;

b. The allocation of primary income account;
· The entrepreneurial income account; and
· The allocation of other primary income account.

7.2 Basic to all these accounts is the concept of primary income.
Primary incomes are incomes that accrue to institutional units as a consequence of their involvement in processes of production or ownership of assets that may be needed for purposes of production.
A major item of primary income is compensation of employees that represents the income accruing to individuals in return for their labour input into production processes.
Property income is that part of primary incomes that accrues by lending or renting financial or natural resources, including land, to other units for use in production.
Receipts from taxes on production and imports (less subsidies on production and imports) are treated as primary incomes of governments even though not all of them may be recorded as payable out of the value added of enterprises.
Primary incomes do not include the payments of social contributions to social insurance schemes and the receipt of benefits from them, current taxes on income, wealth, etc. and other current transfers, such current transfers being recorded in the secondary distribution of income account.

1. The generation of income account

7.3 The generation of income account (shown in table 7.1) represents a further extension or elaboration of the production account in which the primary incomes accruing to government units and to the units participating directly in production are recorded.
Like the production account, it may be compiled for establishments and industries as well as for institutional units and sectors.
The generation of income account shows the sectors, subsectors or industries in which the primary incomes originate, as distinct from the sectors or subsectors destined to receive such incomes.
For example, the only compensation of employees recorded in the generation of income account for the household sector consists of the compensation of employees payable by unincorporated enterprises owned by households.
This item is very different from the compensation of employees receivable by the household sector, which is recorded in the account below, the allocation of primary income account.

7.4 The resources, listed on the right-hand side of the generation of income account, consist of only a single item, value added, the balancing item carried forward from the production account.
As stated in chapter 6, value added may be measured before the deduction of consumption of fixed capital (gross) or after the deduction of consumption of fixed capital (net).
Provision must also be made throughout the remaining accounts of the SNA for the relevant balancing items to be measured gross or net of consumption of fixed capital.
The concept and measurement of consumption of fixed capital have already been explained in detail in chapter 6.
For simplicity, it will be assumed that value added is measured net, except when the context requires gross value added to be referred to explicitly.

7.5 The left-hand side of the generation of income account records the uses of value added.
There are only two main types of charges that producers have to meet out of value added: compensation of employees payable to workers employed in the production process and any taxes, less subsidies, on production payable or receivable as a result of engaging in production.
Compensation of employees is defined as the total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period.
Taxes less subsidies on production consist of taxes payable or subsidies receivable on goods or services produced as outputs and other taxes or subsidies on production, such as those payable on the labour, machinery, buildings or other assets used in production.
Taxes on production do not include any income taxes payable by the recipients of incomes accruing from production, whether employers or employees.

7.6 The content of the item taxes less subsidies on production payable out of value added varies according to the way in which output is valued.
Value added tax (VAT), or other similar deductible tax, invoiced on output is never treated as part of the price receivable by the producer from the purchaser.
Invoiced VAT is always omitted from value of output, whether output is valued at producers' or basic prices.
Hence, invoiced VAT is not a charge against value added and is not recorded as a payable in the producer's generation of income account.
However, when output is valued at producers' prices, any other tax on products payable on the output is treated as an integral part of the price receivable by the producer from the purchaser.
The tax is recorded as being payable by the producer out of value added at producers' prices in the generation of income account, that is, as a component of the item “taxes less subsidies on production”. Similarly, any subsidy on products receivable on the output is recorded as being receivable by the producer from government in the generation of income account as a supplement to value added at producers' prices.
By convention, it is not recorded under resources but as a component of “taxes less subsidies on production” as if it were a negative tax on output.

7.7 As explained in chapter 6, the basic price is obtained from the producer's price by deducting any tax on products payable on a unit of output (other than invoiced VAT already omitted from the producer's price) and adding any subsidy on products receivable on a unit of output.
In consequence, no taxes on products or subsidies on products are to be recorded as payables or receivables in the producer's generation of income account when value added is measured at basic prices, the preferred valuation basis in the SNA.
When basic prices are used to value output, the item “taxes less subsidies on production” refers only to other taxes or subsidies on production.

7.8 After deducting compensation of employees and taxes, less subsidies, on production from value added, the balancing item of the generation of income account is obtained.
The balancing item is shown on the left-hand side of the account under uses.
It measures the surplus or deficit accruing from production before taking account of any interest, rent or similar charges payable on financial assets or natural resources borrowed or rented by the enterprise, or any interest, rent or similar receipts receivable on financial assets or natural resources owned by the enterprise.

Operating surplus and mixed income

7.9 The balancing item is described as operating surplus except for unincorporated enterprises owned by households in which the owner(s) or members of the same household may contribute unpaid labour inputs of a similar kind to those that could be provided by paid employees.
In the latter case, the balancing item is described as mixed income because it implicitly contains an element of remuneration for work done by the owner, or other members of the household, that cannot be separately identified from the return to the owner as entrepreneur.
In many cases, though, the element of remuneration may dominate the value of mixed income.
In practice, all unincorporated enterprises owned by households that are not quasi-corporations are deemed to have mixed income as their balancing item, except owner-occupiers in their capacity as producers of housing services for own final consumption, households leasing dwellings and households employing paid domestic staff.
For owner-occupiers and those leasing dwellings, all value added is operating surplus.
For domestic staff all value added is compensation of employees (unless any taxes or subsidies on production are payable or receivable on the output).

7.10 As noted in chapter 6, gross domestic product (GDP) at market prices is equal to the sum of the gross value added of all resident enterprises plus those taxes, less subsidies, on products that are not payable on the values of the outputs of those enterprises, that is, taxes or subsidies on imports plus non-deductible VAT when output is valued at producers' prices, and all taxes or subsidies on products when output is valued at basic prices.
For this reason, taxes and subsidies on imports and VAT must also be recorded under uses of GDP in the generation of income account for the total economy, even though they do not appear in the generation of income account for individual institutional units or sectors.

7.11 As already noted, the preferred measure of value added is after deducting consumption of fixed capital, that is, net value added.
However, provision is made in the accounts of the SNA for value added, and all subsequent balancing items that depend on value added, to be measured gross or net of consumption of fixed capital.
Operating surplus and mixed income may therefore both be expressed as gross or net.

7.12 Operating surplus or mixed income is a measure of the surplus accruing from processes of production before deducting any explicit or implicit interest charges, rent or other property incomes payable on the financial assets, land or other natural resources required to carry on the production.
It is, therefore, invariant as to whether:

a. The land or other natural resources used in production are owned or rented by the enterprise; and

b. The inventories, fixed assets, land or other natural resources owned by the enterprise and used in production are financed out of own funds (or equity capital) or out of borrowed funds (or loan capital).

Table 7.1: The generation of income account - concise form - uses

7.13 Although operating surplus or mixed income is invariant to the extent to which land is owned or assets in general are financed, it needs to be sufficient to cover both any explicit, or implicit, rent on land and the explicit, or implicit, interest charges on the value of all the assets owned by the enterprise in order to justify their continued use in production.
The implicit interest costs of using the enterprise's own funds to purchase inventories, fixed assets or other assets are the opportunity costs of using the funds in this way rather than to acquire financial assets on which interest could be earned.
These costs are captured in estimates of capital services.
The amounts of rent and interest actually payable on rented land and borrowed funds are recorded in the allocation of primary income account and the entrepreneurial income account.

7.14 The operating surplus or mixed income of an individual producer unit is not invariant, however, to the extent to which the fixed assets used in production are owned or rented.
When buildings, other structures, machinery or equipment are rented by an enterprise, the payments of rentals under an operating lease are recorded as purchases of services.
These services form part of intermediate consumption.
Thus, as explained in chapter 17, the payment of the rental on a fixed asset tends to reduce gross value added below what it would be if the producer owned the asset.
The impact on net value added is mitigated by the fact that a tenant, or lessee, incurs no consumption of fixed capital.
However, even net value added will tend to be lower when a fixed asset is rented as the rental has to cover the lessor's operating and interest costs.
At the level of the total economy, the lower surpluses accruing to tenants or lessees will tend to be counterbalanced by the operating surpluses earned by the lessors.

2. The allocation of primary income account

7.15 Whereas the generation of income account focuses on resident institutional units or sectors in their capacity as producers whose activities generate primary incomes, the allocation of primary income account (shown in table 7.2) focuses on resident institutional units or sectors in their capacity as recipients of primary incomes.
The allocation of primary income account shows where the items payable in the generation of income account are receivable and also includes the amounts of property incomes receivable and payable by institutional units or sectors.
As already noted, the generation of income account, being related to production activities, can be compiled for establishments and industries as well as for institutional units and sectors.
However, the allocation of primary income account has no such direct link with production and can only be compiled for institutional units and sectors.

7.16 Enterprises may invest surplus funds in financial assets or even land, especially in times of uncertainty and high interest rates.
Considerable property income may be received from such investments.
The property income paid out by a corporation will be influenced by the amount of property income received as well as by its operating surplus.
Thus, it is not appropriate to record all the property income paid out by an enterprise as if it were chargeable against operating surplus.
Some interest costs, especially implicit costs, may be attributable to assets other than those used in production.
For this reason, the explicit and implicit interest costs payable by an enterprise ought not to be recorded in the generation of income account in which the resources consist only of value added accruing from production.
They are recorded in the allocation of primary income account along with any property income receivable as well as the operating surplus.

7.17 There are two kinds of income listed under resources on the right-hand side of the allocation of primary income account.
The first shows where primary incomes already recorded in the generation of income account are receivable, as follows:

a. Compensation of employees receivable by households or non-resident households;

b. Taxes (less subsidies) on production or imports receivable (or payable) by government units or a foreign government;

c. Operating surplus, or mixed income, of enterprises carried forward from the generation of income account.

The second kind of income consists of property incomes receivable from the ownership of financial assets or natural resources:

d. Investment income receivable by the owners of financial assets from either resident or non-resident units;

e. Rent receivable by owners of natural resources leased to other units.

Table 7.1(cont): The generation of income account - concise form - resources

The balancing items and national income

7.18 The uses, listed on the left-hand side of the allocation of primary income account, consist only of the property incomes payable by institutional units or sectors to creditors, shareholders, landowners, etc.
Except for rent on natural resources, these may be payable to non-residents as well as residents.
The remaining item recorded under uses is the balancing item, the balance of primary incomes, defined as the total value of the primary incomes receivable by an institutional unit or sector less the total of the primary incomes payable.
At the level of the total economy it is described as national income.

7.19 The composition of the balance of primary incomes varies considerably from one sector to another as certain types of primary incomes are receivable by certain sectors only or by non-residents.
In particular, taxes are received only by the general government sector and non-residents while compensation of employees is received only by the household sector and non-residents.
These balances are described below.

a. The balance of primary incomes of the non-financial and financial corporate sectors consists only of operating surplus plus property income receivable less property income payable.

b. The balance of primary incomes of the general government sector consists of taxes on production and on imports receivable less subsidies on production payable, plus property income receivable less property income payable.
It may also include a small amount of operating surplus from units within general government undertaking market production.

c. The balance of primary incomes of the household sector consists of compensation of employees and mixed incomes accruing to households, plus property income receivable less property income payable.
It also includes the operating surplus from housing services produced for own consumption by owner-occupiers.

d. The balance of primary incomes of the non-profit institutions serving households (NPISHs) sector consists almost entirely of property income receivable less property income payable.

Net national income and gross national income

7.20 Net national income (NNI) is the aggregate value of the net balances of primary incomes summed over all sectors.
Similarly, gross national income (GNI) is the aggregate value of the gross balances of primary incomes for all sectors.

7.21 Gross value added is strictly a production measure defined only in terms of output and intermediate consumption.
It follows that GDP is also a production measure as it is obtained by summing the gross value added of all resident institutional units, in their capacities as producers, and adding the values of any taxes, less subsidies, on production or imports not already included in the values of the outputs, and value added, of resident producers. GNI is obtained by summing the balance of primary incomes of the same resident institutional units.
It follows that the difference between the numerical values of GNI and GDP is equal to the difference between the total primary incomes receivable by residents from non-residents and the total primary incomes payable by residents to non-residents (that is, net income from abroad).
However, as both GDP and GNI are obtained by summing over the same set of resident institutional units, there is no justification for labelling one as “domestic” and the other as “national”. Both aggregates refer to the total economy defined as the complete set of resident institutional units or sectors.
The difference between them is not one of coverage but the fact that one measures production while the other measures income.
Both have an equal claim to be described as domestic or as national.
However, as the terms “gross domestic product” and “gross national income” are deeply embedded in economic usage, it is not proposed to change them.
Emphasis should be given, however, to the third rather than second letter of the acronym to emphasize the fact that GDP refers to production (output) and GNI to income.

Table 7.2: The allocation of primary income account - concise form - uses

3. The entrepreneurial income account

7.22 The allocation of primary income account may be partitioned into two sub-accounts: the entrepreneurial income account and the allocation of other primary income account.
The purpose is to identify an additional balancing item, entrepreneurial income, that may be useful for market producers.
Like operating surplus and mixed income, it is a balancing item that is relevant only to producers, but one that can be calculated only for institutional units and sectors and not for establishments and industries.

7.23 Entrepreneurial income is calculated by deducting from operating surplus any interest, investment income disbursements and rent payable and adding property incomes receivable.
For the non-financial and financial corporations sectors, the only difference between entrepreneurial income and the balance of primary incomes is that entrepreneurial income is measured before the payment of dividends, the withdrawals of income from quasi-corporations and reinvested earnings.
Entrepreneurial income is not calculated for other sectors.
Although government and households may contain unincorporated enterprises undertaking market production, the fact that the assets attributed to this activity cannot be distinguished from the entirety of assets of the institution means that identification of property income relating to the activity is also difficult.
(If the assets and property income could be identified, it is probable that the unincorporated enterprise could be treated as a quasi-corporation and included in one of the corporate sectors.)

7.24 Entrepreneurial income is an income concept that is close to the concept of profit or loss as understood in business accounting (at least when there is no inflation).
On the other hand, it should be remembered that when profits are calculated at historic costs in business accounts, they also include nominal holding gains on the inventories and other assets owned by the enterprise; these holding gains and losses may be quite substantial during inflationary conditions.

4. The allocation of other primary income account

7.25 When the entrepreneurial income account is compiled for an institutional unit or sector, it is followed by the allocation of other primary income account in order to arrive at the balance of primary incomes.
In the allocation of other primary income account, the first item listed under resources is entrepreneurial income, the balancing item carried forward from the entrepreneurial income account instead of operating surplus or mixed income, which are the balancing items carried forward from the generation of income account.
The only item in the account, for non-financial and financial corporations, apart from the balancing items, is the entry for the distributed income of corporations.

7.26 For general government, households and NPISHs, the allocation of other primary income account matches the allocation of primary income account.

7.27 The entrepreneurial income account and the account for other primary income are shown in table 7.3.

Table 7.2(cont): The allocation of primary income account - concise form - resources

B. Compensation of employees

1. Identifying employees

7.28 It is not always self-evident whether a person is an employee or self-employed, for example, some workers paid by results may be employees while others may be self-employed.
The boundary also affects the subsectoring of the household sector.
The definitions in the SNA are consistent with resolutions of the International Conference of Labour Statisticians (ICLS) concerning the definitions of the economically active population.
For the SNA, though, the main objective is to clarify the nature of the employment relationship in order to fix the boundary between compensation of employees and other kinds of receipts.
Some persons who in labour statistics may be included with the self-employed, in particular some owners of quasi-corporations and owner-managers of corporations, are treated in the SNA as employees.
Further discussion on the measurement of the labour force and definitions of the related terms appear in chapter 19.

The employment relationship

7.29 In order to be classified as employed, that is, either as an employee or self-employed, the person must be engaged in an activity that falls within the production boundary of the SNA.
The relationship of employer to employee exists when there is a written or oral agreement, which may be formal or informal, between an enterprise and a person, normally entered into voluntarily by both parties, whereby the person works for the enterprise in return for remuneration in cash or in kind.
The remuneration is normally based on either the time spent at work or some other objective indicator of the amount of work done.

7.30 The self-employed are persons who work for themselves, when the enterprises they own are distinguished neither as separate legal entities nor as separate institutional units in the SNA.
They may be persons who are the sole owners, or joint owners, of the unincorporated enterprises in which they work; members of a producers' cooperative or contributing family workers (that is, family members who work in an unincorporated enterprise without pay).

a. Workers engaged in production undertaken entirely for their own final consumption or own capital formation, either individually or collectively, are self-employed.
Although a value may be imputed for the output of own-account production based on costs, including estimated labour costs, no imputation is made for the wages of workers engaged in such production, even in the case of collective, or communal, projects undertaken by groups of persons working together.
The surplus of the imputed value of the output over any monetary costs or taxes on production explicitly incurred is treated as gross mixed income.

b. Contributing family workers, including those working without pay in unincorporated enterprises engaged wholly or partly in market production, are also treated as self-employed.

c. The whole of the equity of a corporation may be owned by a single shareholder or small group of shareholders.
When those shareholders also work for the corporation and receive paid remuneration other than dividends, the shareholders are treated as employees.
The owners of quasi-corporations who work in those quasi-corporations and receive paid remuneration other than withdrawal of earnings from the quasi-corporation are also treated as employees.

d. Outworkers may be either employees or self-employed depending on their exact status and circumstances.
The treatment of outworkers is specified in more detail below.

Table 7.3: The entrepreneurial income and allocation of other primary income accounts - uses

7.31 The remuneration of the self-employed is treated as mixed income.

7.32 Students in their capacity as consumers of educational or training services are not employees.
However, if students also have a formal commitment whereby they contribute some of their own labour as an input into an enterprise’s process of production, for example, as apprentices or similar kinds of worker trainees, articled clerks, student nurses, research or teaching assistants, hospital interns, etc., they are treated as employees, whether or not they receive any remuneration in cash for the work that they do in addition to training received as in-kind payment.

Table 7.3(cont): The entrepreneurial income and allocation of other primary income accounts - resources

Employers and own-account workers

7.33 Self-employed persons may be divided into two groups: those who do and those who do not engage paid employees on a continuous basis.
Those who do engage employees on a continuous basis are described as employers and those without paid employees are described as own-account workers.
The distinction is used for purposes of subsectoring the household sector.
Own-account workers may be further subdivided into outworkers who are under some kind of formal or informal contract to supply goods or services to a particular enterprise, and ordinary own-account workers who may be engaged in either market production or production for own final consumption or own capital formation.

Outworkers

7.34 An outworker is a person who agrees to work for a particular enterprise or to supply a certain quantity of goods or services to a particular enterprise, by prior arrangement or contract with that enterprise, but whose place of work is not within any of the establishments that make up that enterprise.
The enterprise does not control the time spent at work by an outworker and does not assume responsibility for the conditions in which that work is carried out, although it may carry out checks on the quality of work.
Most outworkers work at home but may use other premises of their own choice.
Some outworkers are provided with the equipment or materials, or both, on which they work, by an enterprise but other outworkers may purchase their own equipment or materials, or both.
In any case, outworkers have to meet some production costs themselves: for example, the actual or imputed rentals on the buildings in which they work; heating, lighting and power; storage or transportation; etc.

7.35 Outworkers have some of the characteristics of employees and some of the characteristics of self-employed workers.
The way in which they are to be classified is determined primarily by the basis on which they are remunerated.
A distinction can be drawn between two cases that, in principle, are quite different from one another:

a. The person is remunerated directly, or indirectly, on the basis of the amount of work done, that is, by the amount of labour that is contributed as an input into some process of production, irrespective of the value of the output produced or the profitability of the production process.
This kind of remuneration implies that the worker is an employee.

b. The income received by the person is a function of the value of the outputs from some process of production for which that person is responsible, however much or little work was put in. This kind of remuneration implies that the worker is self-employed.

7.36 In practice it may not always be easy to distinguish between employees and self-employed on the basis of these criteria.
Outworkers who employ and pay others to work for them must be treated as the self-employed owners of unincorporated enterprises, that is as employers.
The issue, therefore, is to distinguish own-account workers from employees.

7.37 An outworker is considered an employee when an employment relationship exists between the enterprise and the outworker.
This implies the existence of an implicit or explicit employment contract or agreement whereby it is agreed that the outworker is remunerated on the basis of the work done.
Conversely, an outworker is considered to be an own-account worker when there is no such implicit or explicit employment contract or agreement and the income earned by the outworker depends on the value of the goods or services supplied to the enterprise.
This suggests that decisions on markets, scale of operations and finance are likely to be in the hands of self-employed outworkers who are also likely to own, or rent, the machinery or equipment on which they work.

Table 7.4: The generation of income account - compensation of employees - uses

7.38 The status of an outworker has important implications for the accounts.
When the outworker is an own-account worker, the payment from the enterprise to the outworker constitutes a purchase of intermediate goods or services.
For the outworker, the payment from the enterprise represents the value of output and the excess over direct costs to the outworker (treated as intermediate consumption) is gross mixed income.
When the outworker is an employee, the payment constitutes compensation of employees and so is paid out of the value added of the enterprise.
Thus, the outworker's status affects the distribution of value added between enterprises as well as the distribution of incomes between compensation of employees of the employing enterprise and net mixed income of the household of the outworker.

2. The components of compensation of employees

7.39 Compensation of employees is recorded under uses in the generation of income account and under resources in the allocation of primary income account.
The uses side of the generation of income account showing the detailed entries for compensation of employees is given in table 7.4 and the corresponding resources part of the allocation of primary income account in table 7.5.
The only item, apart from the balancing items, relevant to these accounts that is not shown is the entry for compensation of employees payable by the rest of the world, which appears in the uses part of the allocation of primary income account.

7.40 As noted above, compensation of employees is defined as the total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period.

7.41 Compensation of employees is recorded on an accrual basis; that is, it is measured by the value of the remuneration in cash or in kind that an employee becomes entitled to receive from an employer in respect of work done during the relevant period, whether paid in advance, simultaneously or in arrears of the work itself.
No compensation of employees is payable in respect of unpaid work undertaken voluntarily, including the work done by members of a household within an unincorporated enterprise owned by the same household.
Compensation of employees does not include any taxes payable by the employer on the wage and salary bill, for example, a payroll tax; such taxes are treated as taxes on production in the same way as taxes on buildings, land or other assets used in production.

7.42 Compensation of employees has two main components:

a. Wages and salaries payable in cash or in kind;

b. Social insurance contributions payable by employers, which include contributions to social security schemes; actual social contributions to other employment-related social insurance schemes and imputed social contributions to other employment-related social insurance schemes.

Social insurance schemes and the nature of benefits they provide are discussed in section D of chapter 8.

Table 7.5: The allocation of primary income account - compensation of employees - resources

Wages and salaries

7.43 Wages and salaries include the values of any social contributions, income taxes, etc., payable by the employee even if they are actually withheld by the employer for administrative convenience or other reasons and paid directly to social insurance schemes, tax authorities, etc., on behalf of the employee.
Wages and salaries may be paid in various ways, including goods or services provided to employees as remuneration in kind instead of, or in addition to, remuneration in cash.

Wages and salaries in cash

7.44 Wages and salaries in cash include the following kinds of remuneration:

a. Wages or salaries payable at regular weekly, monthly or other intervals, including payments by results and piecework payments; enhanced payments or special allowances for working overtime, at nights, at weekends or other unsocial hours; allowances for working away from home or in disagreeable or hazardous circumstances; expatriation allowances for working abroad; etc.;

b. Supplementary allowances payable regularly, such as housing allowances or allowances to cover the costs of travel to and from work, but excluding social benefits (see below);

c. Wages or salaries payable to employees away from work for short periods, for example, on holiday or as a result of a temporary halt to production, except during absences due to sickness, injury, etc. (see below);

d. Ad hoc bonuses or other exceptional payments linked to the overall performance of the enterprise made under incentive schemes;

e. Commissions, gratuities and tips received by employees: these should be treated as payments for services rendered by the enterprise employing the worker, and so should also be included in the output and gross value added of the employing enterprise when they are paid directly to the employee by a third party.

7.45 Wages and salaries in cash do not include the reimbursement by employers of expenditures made by employees in order to enable them to take up their jobs or to carry out their work.
For example:

a. The reimbursement of travel, removal or related expenses made by employees when they take up new jobs or are required by their employers to move their homes to different parts of the country or to another country;

b. The reimbursement of expenditures by employees on tools, equipment, special clothing or other items that are needed exclusively, or primarily, to enable them to carry out their work.

The amounts reimbursed are treated as intermediate consumption by employers.
To the extent that employees who are required by their contract of employment to purchase tools, equipment, special clothing, etc., are not fully reimbursed, the remaining expenses they incur should be deducted from the amounts they receive in wages and salaries and the employers' intermediate consumption increased accordingly.
Expenditures on items needed exclusively, or primarily, for work do not form part of household final consumption expenditures, whether reimbursed or not.

7.46 Wages and salaries in cash also do not include social insurance benefits paid by employers in the form of:

a. Children's, spouse's, family, education or other allowances in respect of dependants;

b. Payments made at full, or reduced, wage or salary rates to workers absent from work because of illness, accidental injury, maternity leave, etc.;

c. Severance payments to workers or their survivors who lose their jobs because of redundancy, incapacity, accidental death, etc.

In practice, it may be difficult to separate payments of wages or salaries during short periods of absence due to sickness, accidents, etc., from other payments of wages and salaries, in which case they have to be grouped with the latter.

7.47 In some instances a benefit such as a car or extra pension contributions may not be provided free but be “purchased” from the employer by foregoing some salary.
The attraction of such schemes lies in the tax advantages of doing so. A car bought by the employer and sold to the employee may be taxed at a lower rate than a car purchased by an individual; pension contributions may be taxed differently from other income if deducted at source.
In these cases, the full salary should be recorded as payable in cash with the cost to the employee shown as consumption expenditure or pension contribution etc. as appropriate.

Wages and salaries in kind

7.48 Employers may remunerate their employees in kind for various reasons.
For example:

a. There may be tax advantages for the employer, the employee, or both by avoiding payments in cash;

b. The employer may wish to dispose of outputs that are periodically in excess supply.

7.49 Income in kind may bring less satisfaction than income in cash because employees are not free to choose how to spend it. Some of the goods or services provided to employees may be of a type or quality that the employee would not normally buy.
Nevertheless, they must be valued consistently with other goods and services.
When the goods or services have been purchased by the employer, they should be valued at purchasers' prices.
When produced by the employer, they should be valued at producers' prices.
When provided free, the value of the wages and salaries in kind is given by the full value of the goods and services in question.
When provided at reduced prices, the value of the wages and salaries in kind is given by the difference between the full value of the goods and services and the amount paid by the employees.

7.50 Goods or services that employers are obliged to provide to their employees in order for them to be able to carry out their work are treated as intermediate consumption by the employer: for example, special protective clothing.
A list of such items is given in paragraph 6.222.
Remuneration in kind, on the other hand, consists of goods and services that are not necessary for work and can be used by employees in their own time, and at their own discretion, for the satisfaction of their own needs or wants or those of other members of their households.

7.51 5Almost any kind of consumption good or service may be provided as remuneration in kind.
The following includes some of the most common types of goods and services provided without charge, or at reduced prices, by employers to their employees:

a. meals and drinks provided on a regular basis including any subsidy element of an office canteen (for practical reasons, it is unnecessary to make estimates for meals and drinks consumed as part of official entertainment or during business travel);

b. housing services or accommodation of a type that can be used by all members of the household to which the employee belongs;

c. the services of vehicles or other durables provided for the personal use of employees;

d. goods and services produced as outputs from the employer's own processes of production, such as free travel for the employees of railways or airlines, or free coal for miners;

e. sports, recreation or holiday facilities for employees and their families;

f. transportation to and from work, free or subsidized car parking, when it would otherwise have to be paid for;

g. childcare for the children of employees.

7.52 Some of the services provided by employers, such as transportation to and from work, car parking and childcare have some of the characteristics of intermediate consumption.
However, employers are obliged to provide these facilities to attract and retain labour, and not because of the nature of the production process or the physical conditions under which employees have to work.
On balance, they are more like other forms of compensation of employees than intermediate consumption.
Many workers have to pay for transportation to and from work, car parking and childcare out of their own incomes, the relevant expenditures being recorded as final consumption expenditures.

7.53 A frequent item provided as income in kind is a car.
The car may be provided free to the employee but for tax purposes an imputed cash amount is attached to the benefit.
In a country where many cars are provided as a fringe benefit to employees, the purchasing power of the employer may be such as to obtain a significant discount on the purchase price of the car.
Thus the employee receives a higher quality car than the cash equivalent would buy for an individual.
The value of the car to the employee should be estimated at the actual cost to the employer.

7.54 Remuneration in kind may also include the value of the interest foregone by employers when they provide loans to employees at reduced, or even zero rates of interest for purposes of buying houses, furniture or other goods or services.
Its value may be estimated as the amount the employee would have to pay if average mortgage, or consumer loan, interest rates were charged less the amount of interest actually paid.
The sums involved could be large when nominal interest rates are very high because of inflation but otherwise they may be too small and too uncertain to be worth estimating.

Stock options

7.55 Another form of income in kind results from the practice of an employer giving an employee the option to buy stocks (shares) at some future date.
The details of valuing and recording of stock options are described in part 6 of chapter 17.

Employers' social contributions

7.56 Employers' social contributions are social contributions payable by employers to social security funds or other employment-related social insurance schemes to secure social benefits for their employees.
Social security schemes are operated by general government; other employer-related social insurance schemes may be operated by the employers themselves, by an insurance corporation or may be an autonomous pension scheme.

7.57 As employers' social contributions are made for the benefit of their employees, their value is recorded as one of the components of compensation of employees together with wages and salaries in cash and in kind.
The social contributions are then recorded as being paid by the employees as current transfers to the social security schemes or other employment-related social insurance schemes.
Although it is administratively more efficient for employers to pay the contributions on behalf of their employees, this must not be allowed to obscure the underlying economic reality.
The payment made by the employer to the social security scheme or other employment-related social insurance schemes is not, in fact, a current transfer to the fund on the part of the employer.
The transfer takes place between the employee and the social security scheme or other employment-related social insurance schemes out of remuneration provided by the employer.
The situation is parallel to one in which income taxes payable by employees are deducted by employers from the wages or salaries and paid directly to the tax authorities.
In this case, it is evident that the taxes are not current transfers payable by the employers.
It is customary to describe the employers' social contributions as being re-routed in the accounts via the employees' primary and secondary distribution of income accounts.
However, the accounts depict the various payables and receivables correctly.
The direct payment of social contributions, or income taxes, by employers to social security schemes, other employment-related social insurance schemes or tax authorities is merely a short cut taken on grounds of administrative convenience and efficiency.

7.58 An amount equal in value to employers' social contributions is first recorded in the generation of income account as one of the components of compensation of employees and then recorded either in the secondary distribution of income account as being transferred by households to social security funds or other employment-related social insurance schemes as the case may be, or is recorded in the use of income account as the payment by households for the financial services associated with running the schemes.
The transactions are recorded simultaneously in all three accounts at the times when the work that gives rise to the requirement to pay the contributions is carried out.
The contributions paid to social security schemes may be fixed amounts per employee or may vary with the levels of wages or salaries paid.
The amounts paid under other employment-related social insurance schemes depend on the arrangements agreed between employers and employees.

7.59 Social insurance schemes in respect of pensions are of two types, described as defined contribution schemes or defined benefit schemes.
A defined contribution scheme is one where the benefits are determined by the contributions actually made to the scheme.
Under a defined benefit scheme, the ultimate benefit is calculated by means of a formula embodied in the terms of the social insurance scheme.
Similarly, the increase in the employee's entitlement due to the period of employment in the current accounting period can also be determined by the formula.

7.60 The contributions made by employers to social insurance schemes are divided into actual and imputed contributions.

7.61 For both actual and imputed contributions, the components relating to pensions and other benefits are shown separately.

Employers' actual contributions to social insurance schemes

7.62 The actual contributions by employers to social insurance schemes consist of actual contributions made to both social security and other employment-related schemes.
The contributions relating to pensions and other benefits are shown separately.

Employers' imputed contribution to social insurance schemes

Employers' imputed pension contributions

7.63 There are no imputed contributions to social security schemes.

7.64 For a defined contribution pension scheme, there are no imputed contributions unless the employer operates the scheme himself.
In that case, the value of the costs of operating the scheme is treated as an imputed contribution payable to the employee as part of compensation of employees.
This amount is also recorded as final consumption expenditure by households on financial services.

7.65 For a defined benefit pension scheme, there is an imputed contribution by the employer calculated as a residual.
It must be such that the sum of the employer's actual contribution plus the sum of any contribution by the employee plus the imputed contribution by the employer is equal to the increase in benefit due to current period employment plus the costs of operating the scheme.

7.66 Some defined benefit pension schemes may be so well run that the funds available to the scheme exceed the liabilities of the scheme to present and past employees.
It is possible that in this case the employer may take a “contribution holiday” and not make actual contributions for one or more periods.
Nonetheless, an imputed contribution by the employer should be calculated and recorded as described here.

7.67 Some schemes may be expressed as non-contributory because no actual contributions are ever made by the employee.
Nevertheless, an imputed contribution by the employer is calculated and imputed as just described.

Employers' imputed non-pension contributions

7.68 Some employers provide non-pension benefits themselves directly to their employees, former employees or dependants without involving an insurance enterprise or autonomous pension fund, and without creating a special fund or segregated reserve for the purpose.
In this situation, existing employees may be considered as being protected against various specified needs or circumstances, even though no reserves are built up to provide future entitlement.
Remuneration should therefore be imputed for such employees equal in value to the amount of social contributions that would be needed to secure the de facto entitlements to the social benefits they accumulate.
These amounts take into account any actual contributions made by the employer or employee and depend not only on the levels of the benefits currently payable but also on the ways in which employers' liabilities under such schemes are likely to evolve in the future as a result of factors such as expected changes in the numbers, age distribution and life expectancies of their present and previous employees.
Thus, the values that should be imputed for the contributions ought, in principle, to be based on the same kind of actuarial considerations that determine the levels of premiums charged by insurance enterprises.

7.69 In practice, however, it may be difficult to decide how large such imputed contributions should be. The enterprise may make estimates itself, perhaps on the basis of the contributions paid into similar funded schemes, in order to calculate its likely liabilities in the future, and such estimates may be used when available.
Otherwise, the only practical alternative may be to use the unfunded non-pension benefits payable by the enterprise during the same accounting period as an estimate of the imputed remuneration that would be needed to cover the imputed contributions.
While there are obviously many reasons why the value of the imputed contributions that would be needed may diverge from the unfunded non-pension benefits actually paid in the same period, such as the changing composition and age structure of the enterprise's labour force, the benefits actually paid in the current period may nevertheless provide the best available estimates of the contributions and associated imputed remuneration.

7.70 The fact that, failing other information, the value of contributions for a non-contributory scheme may be set equal to the value of benefits does not mean that the benefits themselves are treated as part of compensation of employees.

C. Taxes on production and on imports

1. Recording of taxes on production and on imports

7.71 Taxes are compulsory, unrequited payments, in cash or in kind, made by institutional units to government units.
They are described as unrequited because the government provides nothing in return to the individual unit making the payment, although governments may use the funds raised in taxes to provide goods or services to other units, either individually or collectively, or to the community as a whole.

7.72 The full classification of taxes on production and on imports consists of:

· Taxes on products,
·· Value added type taxes (VAT),
·· Taxes and duties on imports excluding VAT,
··· Import duties,
··· Taxes on imports excluding VAT and duties,
·· Export taxes,
·· Taxes on products, excluding VAT, import and export taxes,
· Other taxes on production.

7.73 At the highest level of the classification, taxes on production and on imports consist of taxes on products and other taxes on production.
Taxes on products consist of taxes on goods and services that become payable as a result of the production, sale, transfer, leasing or delivery of those goods or services, or as a result of their use for own consumption or own capital formation.
The way in which taxes on products are recorded in the SNA depends on the valuation used for the recording of output as described below.
Other taxes on production consist mainly of taxes on the ownership or use of land, buildings or other assets used in production or on the labour employed, or compensation of employees paid.
Whatever the valuation of output used, other taxes on production are always recorded as a charge on value added in the generation of income account.

7.74 A full explanation of the content of each of the categories of taxes on production and on imports is given below after a discussion of the rules of recording taxes.
This explanation provides links to the main publications of data on tax yields, the GFSM2001 and Revenue Statistics (Organisation for Economic Co-operation and Development (OECD), annual publication).

7.75 In business accounting, taxes on production, except invoiced VAT, are usually regarded as costs of production that may be charged against sales or other receipts when calculating profits for tax or other purposes.
They correspond to “indirect taxes” as traditionally understood, indirect taxes being taxes that supposedly can be passed on, in whole or in part, to other institutional units by increasing the prices of the goods or services sold.
However, it is extremely difficult, if not impossible, to determine the real incidence of different kinds of taxes, and the use of the terms “direct” and “indirect” taxes has fallen out of favour in economics and is not used in the SNA.

The recording of taxes on production and on imports in the accounts

7.76 Taxes on production and imports are recorded under uses in the generation of income account and under resources in the allocation of primary income account.

7.77 In the generation of income account, taxes on imports are recorded only at the level of the total economy as they are not payable out of the value added of domestic producers.
Moreover, at the level of an individual institutional unit or sector, only those taxes on products that have not been deducted from the value of the output of that unit or sector need to be recorded under uses in its generation of income account.
These vary depending upon the way in which output is valued.
When output is valued at basic prices, all taxes (subsidies) on products payable (receivable) on the goods or services produced as outputs are deducted from (added to) the value of that output at producers' prices.
Therefore they do not have to be recorded under uses in the generation of income account of the units or sectors concerned, being recorded only at the level of the total economy, in the same way as taxes on imports.
When output is valued at producers' prices, all taxes or subsidies on products payable or receivable on outputs have to be recorded under uses in the generation of income accounts of the units or sectors concerned, except invoiced VAT or similar deductible taxes as invoiced VAT is never included in the value of output.
Non-deductible VAT and similar taxes are recorded under uses only at the level of the total economy, like taxes on imports.

7.78 Other taxes or subsidies on production, that is, taxes payable on the land, assets, labour, etc., employed in production are not taxes payable per unit of output and cannot be deducted from the producer's price.
They are recorded as being payable out of the value added of the individual producers or sectors concerned.

7.79 In the allocation of primary income account, taxes on production and imports appear under resources only for the general government sector and the total economy, apart from any such taxes payable to foreign governments.

Taxes versus fees

7.80 One of the regulatory functions of governments is to forbid the ownership or use of certain goods or the pursuit of certain activities, unless specific permission is granted by issuing a licence or other certificate for which a fee is demanded.
If the issue of such licences involves little or no work on the part of government, the licences being granted automatically on payment of the amounts due, it is likely that they are simply a device to raise revenue, even though the government may provide some kind of certificate, or authorization, in return.
However, if the government uses the issue of licences to exercise some proper regulatory function, for example, checking the competence, or qualifications, of the person concerned, checking the efficient and safe functioning of the equipment in question, or carrying out some other form of control that it would otherwise not be obliged to do, the payments made should be treated as purchases of services from government rather than payments of taxes, unless the payments are clearly out of all proportion to the costs of providing the services.
The borderline between taxes and payments of fees for services rendered is not always clear-cut in practice (see paragraph 8.64 (c) below for a further explanation of this matter in the case of households).
The general case of government issued permits is discussed in part 5 of chapter 17.

Links with the IMF and OECD tax classifications

7.81 The coverage of taxes in the SNA coincides with that of “tax revenue” as defined in the GFSM2001 except for implicit taxes resulting from the central bank imposing a higher rate of interest than the market rate.
In contrast to “taxes” as defined in Revenue Statistics, the SNA includes imputed taxes or subsidies resulting from the operation of official multiple exchange rates, imputed taxes and subsidies resulting from a central bank imposing interest rates above or below the market rate but does not classify social security contributions under the heading of taxes. Chapter 5 of the GFSM2001 contains a detailed listing and classification of taxes according to the nature of the tax.
Annex A of Revenue Statistics contains a closely related classification.

7.82 The categories of taxes distinguished in the SNA depend on the interaction of the following three factors, of which the nature of tax is only one:

a. The nature of the tax, as specified in the GFSM2001/ OECD classification;

b. The type of institutional unit paying the tax;

c. The circumstances in which the tax is payable.

Table 7.6: The generation of income account - taxes and subsidies on production - uses

7.83 Thus, payments of exactly the same tax may be recorded under two different headings in the SNA.
For example, payment of an excise duty may appear under “taxes on imports, except value added taxes (VAT) and duties” or under “taxes on products, except VAT, import and export taxes” depending upon whether the excise duty is paid on an imported or domestically produced good.
Similarly, payments of an annual tax on automobiles may be recorded under “other taxes on production” or under “current taxes on income, wealth, etc.” depending upon whether the tax is paid by an enterprise or by a household.
For this reason, it is not possible to arrive at the SNA categories simply by regrouping the GFSM2001/OECD classifications.
However, in order to take advantage of the existence of these detailed classifications, each category of tax listed below contains a cross-reference to the corresponding GFSM2001 and OECD classifications.
It should be noted, though, that the SNA categories are included within the GFSM2001 and OECD categories but may not be identical with them.

The accrual basis of recording

7.84 All taxes should be recorded on an accrual basis in the SNA, that is, when the activities, transactions or other events occur that create the liabilities to pay taxes.
However, some economic activities, transactions or events, which under tax legislation ought to impose on the units concerned the obligation to pay taxes, permanently escape the attention of the tax authorities.
It would be unrealistic to assume that such activities, transactions or events give rise to financial assets or liabilities in the form of payables and receivables.
For this reason the amounts of taxes to be recorded in the SNA are determined by the amounts due for payment only when evidenced by tax assessments, declarations or other instruments, such as sales invoices or customs declarations, that create liabilities in the form of clear obligations to pay on the part of taxpayers.
(In determining the amount of tax accruing, care must be taken not to include tax unlikely ever to be collected.)
Nevertheless, in accordance with the accrual principle, the times at which the taxes should be recorded are the times at which the tax liabilities arise.
For example, a tax on the sale, transfer or use of output should be recorded when that sale, transfer or use took place, which is not necessarily the same time as when the tax authorities were notified, when a tax demand was issued, when the tax was due to be paid or when the payment was actually made.
Some flexibility is permitted, however, as regards the time of recording of income taxes deducted at source.

7.85 In some countries, and for some taxes, the amounts of taxes eventually paid may diverge substantially and systematically from the amounts due to be paid to the extent that not all of the latter can be effectively construed as constituting financial liabilities as these are understood within the SNA.
In such cases, it may be preferable for analytic and policy purposes to ignore unpaid tax liabilities and confine the measurement of taxes within the SNA to those actually paid.
Nevertheless, the taxes actually paid should still be recorded on an accrual basis at the times at which the events took place that gave rise to the liabilities.

Interest, fines or other penalties

7.86 In principle, interest charged on overdue taxes or fines, or penalties imposed for the attempted evasion of taxes, should be recorded separately and not as taxes.
However, it may not be possible to separate payments of interest, fines or other penalties from the taxes to which they relate, so that in practice they are usually grouped with taxes.

Table 7.7: The allocation of primary income account - taxes and subsidies on production - resources

Taxes and subsidies within the primary distribution of income accounts

7.87 Table 7.6 shows the details of taxes and subsidies as uses in the generation of income account; table 7.7 shows them as resources in the allocation of primary income account.
Because of the way that taxes on products and subsidies on products are recorded in the SNA, no details of payables by sector appear in table 7.6, only the totals.
This is consistent with the presentation in table 6.1.
Taxes and subsidies on products payable by the rest of the world appear in the resources part of the allocation of primary income account, not shown here.

2. Taxes on products

7.88 A tax on a product is a tax that is payable per unit of some good or service.
The tax may be a specific amount of money per unit of quantity of a good or service (the quantity units being measured either in terms of discrete units or continuous physical variables such as volume, weight, strength, distance, time, etc.), or it may be calculated ad valorem as a specified percentage of the price per unit or value of the goods or services transacted.
A tax on a product usually becomes payable when it is produced, sold or imported, but it may also become payable in other circumstances, such as when a good is exported, leased, transferred, delivered, or used for own consumption or own capital formation.
An enterprise may or may not itemize the amount of a tax on a product separately on the invoice or bill that it charges its customers.

Value added type taxes

7.89 A value added type tax (VAT) is a tax on goods or services collected in stages by enterprises but that is ultimately charged in full to the final purchasers.
Such taxes have already been described in paragraphs 6.55 to 6.62.
They are described as a “deductible” tax because producers are not usually required to pay to the government the full amount of the tax they invoice to their customers, being permitted to deduct the amount of tax they have been invoiced on their own purchases of goods or services intended for intermediate consumption or fixed capital formation.
VAT is usually calculated on the price of the good or service including any other tax on the product.
VAT is also payable on imports of goods or services in addition to any import duties or other taxes on the imports (GFSM2001 11411; OECD, 5111).

Taxes and duties on imports, excluding VAT

7.90 Taxes and duties on imports consist of taxes on goods and services that become payable at the moment when those goods cross the national or customs frontiers of the economic territory or when those services are delivered by non-resident producers to resident institutional units.

7.91 Imported goods on which all the required taxes on imports have been paid when they enter the economic territory may subsequently become subject to a further tax, or taxes, as they circulate within the economy.
For example, excise duties or sales taxes may become due on goods as they pass through the chain of wholesale or retail distribution, such taxes being levied on all goods at the same point, whether those goods have been produced by resident enterprises or imported.
Taxes payable subsequently on goods that have been already imported are not recorded as taxes on imports but as taxes on products, excluding VAT, import and export taxes.

7.92 Exceptionally, some taxes and duties may be payable on goods that physically enter the country but where there is no change of ownership so they are not treated as imports.
Nevertheless, any such taxes and duties are still included in the heading of taxes and duties on imports.

Import duties

7.93 Import duties consist of customs duties, or other import charges, that are payable on goods of a particular type when they enter the economic territory.
The duties are specified under customs tariff schedules.
They may be intended as a means of raising revenue or discouraging imports in order to protect resident goods producers (GFSM2001, 1151; OECD, 5123).

Taxes on imports, excluding VAT and duties

7.94 Taxes on imports, excluding VAT and duties consist of all taxes (except VAT and import duties) as defined in the GFSM/OECD classifications that become payable when goods enter the economic territory or services are delivered by non-residents to residents.
They include the following:

a. General sales taxes: these consist of general sales taxes (excluding VAT) that are payable on imports of goods and services when the goods enter the economic territory or the services are delivered to residents (GFSM2001, 11412; OECD, 5110-5113);

b. Excise duties: excise duties are taxes levied on specific kinds of goods, typically alcoholic beverages, tobacco and fuels; they may be payable in addition to import duties when the goods enter the economic territory (GFSM2001, 1142; OECD, 5121);

c. Taxes on specific services: these may be payable when non-resident enterprises provide services to resident units within the economic territory (GFSM2001, 1156; OECD, 5126);

d. Profits of import monopolies: these consist of the profits transferred to governments of import marketing boards, or other public enterprises exercising a monopoly over the imports of some good or service.
The justification for treating these profits as implicit taxes on products is the same as that shown in paragraph 7.96 (e) for fiscal monopolies (GFSM2001, 1153; OECD, 5127);

e. Taxes resulting from multiple exchange rates: these consist of implicit taxes resulting from the operation of multiple exchange rates by the central bank or other official agency (GFSM2001, 1154).

Export taxes

7.95 Export taxes consist of taxes on goods or services that become payable by government when the goods leave the economic territory or when the services are delivered to non-residents.
They include the following:

a. Export duties: general or specific taxes or duties on exports (GFSM2001, 1152; OECD, 5124);

b. Profits of export monopolies: these consist of the profits transferred to governments of export marketing boards, or other public enterprises exercising a monopoly over the exports of some good or service.
The justification for treating these profits as implicit taxes on products is the same as that shown in paragraph 7.96(e) for fiscal monopolies (GFSM2001, 1153; OECD, 5124);

c. Taxes resulting from multiple exchange rates: these consist of implicit taxes on exports resulting from the operation of an official system of multiple exchange rates. (GFSM2001, 1154).

Taxes on products, excluding VAT, import and export taxes

7.96 Taxes on products, excluding VAT, import and export taxes, consist of taxes on goods and services that become payable as a result of the production, sale, transfer, leasing or delivery of those goods or services, or as a result of their use for own consumption or own capital formation.
They include the following commonly occurring taxes:

a. General sales or turnover taxes: these include manufacturers', wholesale and retail sales taxes, purchase taxes, turnover taxes, and so on, but exclude VAT and other systems of deductible taxes (GFSM2001, 11412-11413; OECD, 5110-5113).

b. Excise duties: these consist of taxes levied on specific kinds of goods, typically alcoholic beverages, tobacco and fuels (GFSM2001, 1142; OECD, 5121).

c. Taxes on specific services: these include taxes on transportation, communications, insurance, advertising, hotels or lodging, restaurants, entertainments, gambling and lotteries, sporting events, etc. (GFSM2001, 1144; OECD, 5126).

d. Taxes on financial and capital transactions: these consist of taxes payable on the purchase or sale of non-financial and financial assets including foreign exchange.
They become payable when the ownership of land or other assets changes, except as a result of capital transfers (mainly inheritances and gifts) (GFSM2001, 1134; OECD, 4400).
They are treated as taxes on the services of the unit selling the asset.

e. Profits of fiscal monopolies: these consist of the profits of fiscal monopolies that are transferred to government.
Fiscal monopolies are public corporations, public quasi-corporations, or government-owned unincorporated enterprises that have been granted a legal monopoly over the production or distribution of a particular kind of good or service in order to raise revenue and not in order to further the interests of public economic or social policy.
Such monopolies are typically engaged in the production of goods or services that may be heavily taxed in other countries, for example, alcoholic beverages, tobacco, matches, petroleum products, salt, playing cards, etc.
The exercise of monopoly powers is simply an alternative way for the government to raise revenue instead of the more overt procedure of taxing the private production of such products.
In such cases the sales prices of the monopolies are deemed to include implicit taxes on the products sold.
While in principle only the excess of the monopoly profits over some notional “normal” profits should be treated as taxes, it is difficult to estimate this amount and, in practice, the value of the taxes should be taken as equal to the amount of the profits actually transferred from fiscal monopolies to government (GFSM2001, 1143; OECD, 5122).
When a public enterprise is granted monopoly powers as a matter of deliberate economic or social policy because of the special nature of the good or service or the technology of production (for example, public utilities, post offices and telecommunications, railways, etc.) it should not be treated as a fiscal monopoly.
As a general rule, fiscal monopolies tend to be confined to the production of consumer goods or fuels.
As the profits of a fiscal monopoly are calculated for the enterprise as a whole, it is not possible to estimate the average amount of the tax per unit of good or service sold when the enterprise has more than one good or service as output without introducing an assumption about the rates of tax on the different products.
Unless there is good reason otherwise, it should be assumed that the same ad valorem rate of tax is applied to all products, this rate being given by the ratio of the total value of the implicit taxes to the value of total sales less the total value of the implicit taxes.
It is necessary to establish this rate in order to be able to calculate the basic prices of the products concerned.

f. Taxes resulting from the central bank imposing a higher rate of interest than the market rate: These taxes are described in paragraphs 7.122 to 7.126.
(These taxes are not mentioned in GFSM2001.)

3. Other taxes on production

7.97 Other taxes on production consist of all taxes except taxes on products that enterprises incur as a result of engaging in production.
Such taxes do not include any taxes on the profits or other income received by the enterprise and are payable regardless of the profitability of the production.
They may be payable on the land, fixed assets or labour employed in the production process or on certain activities or transactions.
Other taxes on production include the following:

a. Taxes on payroll or work force: these consist of taxes payable by enterprises assessed either as a proportion of the wages and salaries paid or as a fixed amount per person employed.
They do not include compulsory social security contributions paid by employers or any taxes paid by the employees themselves out of their wages or salaries (GFSM2001, 112; OECD, 3000);

b. Recurrent taxes on land, buildings or other structures: these consist of taxes payable regularly, usually each year, in respect of the use or ownership of land, buildings or other structures utilized by enterprises in production, whether the enterprises own or rent such assets (GFSM2001, 1131; OECD, 4100);

c. Business and professional licences: these consist of taxes paid by enterprises in order to obtain a licence to carry on a particular kind of business or profession.
Licences such as taxi and casino licences are included.
In certain circumstances, licences to use a natural resource, however, are treated not as a tax but as the sale of an asset.
These circumstances are described in part 5 of chapter 17.
However, if the government carries out checks on the suitability, or safety of the business premises, on the reliability, or safety, of the equipment employed, on the professional competence of the staff employed, or on the quality or standard of goods or services produced as a condition for granting such a licence, the payments are not unrequited and should be treated as payments for services rendered, unless the amounts charged for the licences are out of all proportion to the costs of the checks carried out by governments (GFSM2001, 11452; OECD, 5210).
(See also paragraph 8.64 (c) for the treatment of licences obtained by households for their own personal use.);

d. Taxes on the use of fixed assets or other activities: these include taxes levied periodically on the use of vehicles, ships, aircraft or other machinery or equipment used by enterprises for purposes of production, whether such assets are owned or rented.
These taxes are often described as licences, and are usually fixed amounts that do not depend on the actual rate of usage (GFSM2001, 11451-11452 and 5.5.3; OECD, 5200);

e. Stamp taxes: these consist of stamp taxes that do not fall on particular classes of transactions already identified, for example, stamps on legal documents or cheques.
These are treated as taxes on the production of business or financial services.
However, stamp taxes on the sale of specific products, such as alcoholic beverages or tobacco, are treated as taxes on products (GFSM2001, 1161; OECD, 6200);

f. Taxes on pollution: these consist of taxes levied on the emission or discharge into the environment of noxious gases, liquids or other harmful substances.
They do not include payments made for the collection and disposal of waste or noxious substances by public authorities, which constitute intermediate consumption of enterprises (GFSM2001, 11452; OECD, 5200);

g. Taxes on international transactions: these consist of taxes on travel abroad, foreign remittances or similar transactions with non-residents (GFSM2001, 1156; OECD, 5127).

D. Subsidies

7.98 Subsidies are current unrequited payments that government units, including non-resident government units, make to enterprises on the basis of the levels of their production activities or the quantities or values of the goods or services that they produce, sell or import.
They are receivable by resident producers or importers.
In the case of resident producers they may be designed to influence their levels of production, the prices at which their outputs are sold or the remuneration of the institutional units engaged in production.
Subsidies have the same impact as negative taxes on production in so far as their impact on the operating surplus is in the opposite direction to that of taxes on production.

7.99 Subsidies are not payable to final consumers; current transfers that governments make directly to households as consumers are treated as social benefits.
Subsidies also do not include grants that governments may make to enterprises in order to finance their capital formation, or compensate them for damage to their capital assets, such grants being treated as capital transfers.

1. Subsidies on products

7.100 A subsidy on a product is a subsidy payable per unit of a good or service.
The subsidy may be a specific amount of money per unit of quantity of a good or service, or it may be calculated ad valorem as a specified percentage of the price per unit.
A subsidy may also be calculated as the difference between a specified target price and the market price actually paid by a buyer.
A subsidy on a product usually becomes payable when the good or service is produced, sold or imported, but it may also be payable in other circumstances such as when a good is transferred, leased, delivered or used for own consumption or own capital formation.

Import subsidies

7.101 Import subsidies consist of subsidies on goods and services that become payable when the goods cross the frontier of the economic territory or when the services are delivered to resident institutional units.
They include implicit subsidies resulting from the operation of a system of official multiple exchange rates.
They may also include losses incurred as a matter of deliberate government policy by government trading organizations whose function is to purchase products from non-residents and then sell them at lower prices to residents (see also export subsidies in paragraph 7.103).

7.102 As in the case of taxes on products, subsidies on imported goods do not include any subsidies that may become payable on such goods after they have crossed the frontier and entered into free circulation within the economic territory of the country.

Export subsidies

7.103 Export subsidies consist of all subsidies on goods and services that become payable by government when the goods leave the economic territory or when the services are delivered to non-resident units.
They include the following:

a. Direct subsidies on exports payable directly to resident producers when the goods leave the economic territory or the services are delivered to non-residents;

b. Losses of government trading organizations: these consist of losses incurred as a matter of deliberate government policy by government trading organizations whose function is to buy the products of resident enterprises and then sell them at lower prices to non-residents.
The difference between the buying and selling prices is an export subsidy (see also paragraph 7.105 (b));

c. Subsidies resulting from multiple exchange rates: these consist of implicit subsidies resulting from the operation of an official system of multiple exchange rates.

Exclusions from export subsidies

7.104 Export subsidies do not include the repayment at the customs frontier of taxes on products previously paid on goods or services while they were inside the economic territory.
They also exclude the waiving of the taxes that would be due if the goods were to be sold or used inside the economic territory instead of being exported.
General taxes on products such as sales or purchase taxes, VAT, excise taxes or other taxes on products are usually not payable on exports.

Other subsidies on products

7.105 Other subsidies on products consist of subsidies on goods or services produced as the outputs of resident enterprises, or on imports, that become payable as a result of the production, sale, transfer, leasing or delivery of those goods or services, or as a result of their use for own consumption or own capital formation.
The most common types are the following:

a. Subsidies on products used domestically: these consist of subsidies payable to resident enterprises in respect of their outputs that are used or consumed within the economic territory;

b. Losses of government trading organizations: these consist of the losses incurred by government trading organizations whose function is to buy and sell the products of resident enterprises.
When such organizations incur losses as a matter of deliberate government economic or social policy by selling at lower prices than those at which they purchased the goods, the difference between the purchase and the selling prices should be treated as a subsidy.
Entries to the inventories of goods held by such organizations are valued at the purchasers' prices paid by the trading organizations and the subsidies are recorded at the time the goods are sold;

c. Subsidies to public corporations and quasi-corporations: these consist of regular transfers paid to public corporations and quasi-corporations that are intended to compensate for persistent losses (that is, negative operating surpluses) incurred on their productive activities as a result of charging prices that are lower than their average costs of production as a matter of deliberate government economic and social policy.
In order to calculate the basic prices of the outputs of such enterprises, it will usually be necessary to assume a uniform ad valorem implicit rate of subsidy on those outputs determined by the size of the subsidy as a percentage of the value of sales plus subsidy.

d. Subsidies resulting from the central bank accepting a lower rate of interest than the market rate: These subsidies are described in paragraphs 7.122 to 7.126.
(These subsidies are not mentioned in GFSM2001.)

2. Other subsidies on production

7.106 Other subsidies on production consist of subsidies except subsidies on products that resident enterprises may receive as a consequence of engaging in production.
Examples of such subsidies are the following:

a. Subsidies on payroll or workforce: these consist of subsidies payable on the total wage or salary bill, or total work force, or on the employment of particular types of persons such as physically handicapped persons or persons who have been unemployed for long periods.
The subsidies may also be intended to cover some or all of the costs of training schemes organized or financed by enterprises;

b. Subsidies to reduce pollution: these consist of subsidies intended to cover some or all of the costs of additional processing undertaken to reduce or eliminate the discharge of pollutants into the environment.

E. Property incomes

1. Defining property income

7.107 Property income accrues when the owners of financial assets and natural resources put them at the disposal of other institutional units.
The income payable for the use of financial assets is called investment income while that payable for the use of a natural resource is called rent.
Property income is the sum of investment income and rent.

7.108 Investment income is the income receivable by the owner of a financial asset in return for providing funds to another institutional unit.
The terms governing the payment of investment income are usually specified in the financial instrument created when the funds are transferred from the creditor to the debtor.
Such arrangements are typically made only for a limited period of time, after which the funds must be returned.
The period of time may be several months or several years, though the arrangements may be renewed.

7.109 Rent is the income receivable by the owner of a natural resource (the lessor or landlord) for putting the natural resource at the disposal of another institutional unit (a lessee or tenant) for use of the natural resource in production.
The terms under which rent on a natural resource is payable are expressed in a resource lease.
A resource lease is an agreement whereby the legal owner of a natural resource that the SNA treats as having an infinite life makes it available to a lessee in return for a regular payment recorded as property income and described as rent.
A resource lease may apply to any natural resource recognized as an asset in the SNA.
For resources such as land it is assumed that, at the end of the resource lease, the land is returned to the legal owner in the same state as when the lease started.
For resources such as subsoil assets, though the resources potentially have an infinite life, they are not all returned to the legal owner at the end of the lease since the purpose of the lease is to permit extraction and disposal of the resource.
Although the resource may suffer depletion in excess of any new discoveries or re-evaluations (or natural replenishments for renewable resources) the fact that rent is shown without deduction for any consumption of natural resources means that, in the SNA, the resource is effectively treated as having an infinite life as far as income generation is concerned.

7.110 The regular payments made by the lessees of natural resources such as subsoil assets are often described as royalties, but they are treated as rent in the SNA.
The term “rent” is reserved in this manual for rent on natural resources, payments under operating leases being described as “rentals”.

7.111 Property incomes are classified in the following way in the SNA:

· Investment income
·· Interest
·· Distributed income of corporations
··· Dividends
··· Withdrawals from income of quasi-corporations
··· Reinvested earnings on foreign direct investment
·· Other investment income
··· Investment income attributable to insurance policyholders
··· Investment income payable on pension entitlements
··· Investment income attributable to collective investment fund shareholders
· Rent

Each of these items is described in more detail below.

Table 7.8: The allocation of primary income account - property income - uses

7.112 Table 7.8 shows an expansion of table 7.2 to include the details of property income payable and receivable.

2. Interest

7.113 Interest is a form of income that is receivable by the owners of certain kinds of financial assets, namely: deposits, debt securities, loans and (possibly) other accounts receivable for putting the financial asset at the disposal of another institutional unit.
Income on SDR holdings and allocations is also treated as interest.
The financial assets giving rise to interest are all claims of creditors over debtors.
Creditors lend funds to debtors that lead to the creation of one or other of the financial instruments listed above.
The amount the debtor owes the creditor is known as the principal.
Over time, the amount due to the creditor declines as the debt is repaid and increases as interest accrues.
The balance at any time is referred to as the principal outstanding.

7.114 Interest may be a predetermined sum of money or a fixed or variable percentage of the principal outstanding.
If some or all of the interest accruing to the creditor is not paid during the period in question, it may be added to the amount of the principal outstanding or it may constitute an additional, separate liability incurred by the debtor.
However, the interest may not necessarily be due for payment until a later date and sometimes not until the loan, or other financial instrument matures.

The accrual basis of recording

7.115 Interest is recorded on an accrual basis, that is, interest is recorded as accruing continuously over time to the creditor on the amount of principal outstanding.
The interest accruing is the amount receivable by the creditor and payable by the debtor.
It may differ not only from the amount of interest actually paid during a given period but also the amount due to be paid within the period.
Some financial instruments are drawn up in such a way that the debtor is obliged to make regular interest payments, period by period, as the interest accrues but in other cases there may be no such requirement.
As explained in part 4 of chapter 17, there are many different kinds of financial instruments and new instruments are continually being developed.
Interest may therefore be paid in various different ways, not always explicitly described as interest.
However, streams of net settlement payments under a swap or forward rate agreement contract (possibly described as “interest” in the contract) are not considered as property income but are to be recorded as transactions in financial derivatives in the financial account (see paragraphs 11.111 to 11.115).

Interest payable and receivable on loans and deposits

7.116 As explained in chapter 6, the amounts of interest on loans and deposits payable to and receivable from financial corporations include a margin that represents an implicit payment for the services provided by the financial corporations in providing loans and accepting deposits.
The actual payments or receipts to or from financial corporations, described as bank interest, need to be partitioned so that SNA interest and the service charges may be recorded separately.
The amounts of SNA interest paid by borrowers to financial corporations are less than bank interest by the estimated values of the charges payable, while the amounts of SNA interest receivable by depositors is higher than bank interest by the amount of the service charge payable.
The values of the charges are recorded as sales of services in the production accounts of financial corporations and as uses in the accounts of their customers.

Table 7.8(cont): The allocation of primary income account - property income - resources

7.117 If bank interest is unpaid, it must be the case that both SNA interest and the service charge are unpaid.
In other words, the amount of principal outstanding increases by both the amount of SNA interest unpaid plus the unpaid service charge.

Interest payable on debt securities

7.118 Certain financial instruments, for example, bills and zero coupon bonds, are such that the debtor is under no obligation to make any payments to the creditor until the asset matures.
In effect, no interest becomes due for payment until the end of the asset's life at which point the debtor's liability is discharged by a single payment covering both the amount of the funds originally provided by the creditor and the interest accumulated over the entire life of the asset.
In such cases the amount of interest payable over the life of the security is derived as the difference between the value at which the instrument is acquired and its value when it matures.

Further elaboration

7.119 Chapter 17 contains in part 4 a section detailing how all the transactions and other flows associated with financial instruments are to be recorded in the accounts.
It contains, in particular, specific recommendations on how interest on each of the relevant financial instruments is to be calculated.

Nominal and real interest

7.120 When a debtor discharges the principal by making payments equal in money value to the funds borrowed plus the interest accruing at the agreed rate over the time the debt exists, the associated interest payments are described as “nominal”. Such interest payments do not represent the “real” return to the creditor when, as a result of inflation, the purchasing power of the funds repaid is less than that of the funds borrowed.
In situations of chronic inflation the nominal interest payments demanded by creditors typically rise in order to compensate them for the losses of purchasing power that they expect when their funds are eventually repaid.

7.121 In practice, the interest recorded in the allocation of primary income account is not partitioned in this way.
The interest recorded is always the amount of nominal interest receivable or payable (plus or minus the charges for services of financial intermediaries for which no explicit charges are made, when relevant).
However, the information needed to calculate real interest is provided within the SNA as a whole since the real holding losses incurred by creditors are recorded in the revaluation account.

The special case of interest rates set by the central bank

7.122 The central bank's main responsibility is to formulate and carry out part of economic policy.
It therefore often acts differently than other financial corporations and generally has received the authority from government to enforce its views.
In cases where the central bank uses its special powers to oblige market participants to pay transfers without a direct quid pro quo, it is appropriate to record the proceeds as implicit taxes.
Conversely, in cases when the central bank makes payments that are clearly for policy rather than commercial purposes, it may be argued that implicit subsidies are paid.
Three cases are considered:

a. The central bank is able to dictate below market rates for reserve deposits;

b. The central bank pays above market rates in a situation where the external value of the currency is under pressure;

c. The central bank acts as a development bank offering loans at below market rates to priority industries.

7.123 If central bank interest rates are out of line with those of commercial banks, then the difference between flows calculated using the reference rate and the actual rate set by the central bank should be recorded not as market output, specifically FISIM, but as implicit taxes and subsidies as described immediately below.
This procedure is analogous to and consistent with the practice of treating the difference between the market exchange rate and an alternative exchange rate imposed by the central bank as an implicit tax or subsidy.

Below market rates on reserve deposits

7.124 Suppose the central bank pays only three per cent to a commercial bank on reserve deposits when the market rate is five per cent.
The following recording is made in the SNA:

a. Although the commercial bank actually receives only three per cent as “interest”, it is recorded as receiving five per cent as interest and paying two per cent to government as a tax on production;

b. Government is recorded as receiving two per cent from the commercial bank as a tax on production and as making a payment of a current transfer of two per cent to the central bank (both these flows are notional); and

c. The central bank actually pays three per cent to the commercial bank but is recorded as paying five per cent to the commercial bank and receiving two per cent from government in the form of a current transfer.

No financial account transactions are involved with this rerouting.

Above market rates for currency support

7.125 Suppose the central bank pays seven per cent to a commercial bank for a limited period when the currency is under pressure at a time when the market rate is five per cent.
The following recording is made in the SNA:

a. Although the commercial bank actually receives seven per cent as “interest”, it is recorded as receiving five per cent as interest and receiving another two per cent from government as a subsidy on production;

b. Government is recorded as paying two per cent to the commercial bank as a subsidy on production and as receiving a current transfer of two per cent from the central bank (both these flows are notional); and

c. The central bank actually pays seven per cent to the commercial bank but is recorded as paying five per cent to the commercial bank and paying two per cent to government in the form of a current transfer.

No financial account transactions are involved with this rerouting.

Below market rates to priority industries

7.126 Suppose the central bank charges only three per cent to a priority industry when the market rate is five per cent.
The following recording is made in the SNA:

a. Although the priority industry actually pays only three per cent as “interest”, it is recorded as paying five per cent as interest but receiving two per cent from government as a subsidy on production;

b. Government is recorded as paying two per cent to the priority industry as a subsidy on production and as receiving a current transfer of two per cent from the central bank (both these flows are notional); and

c. The central bank actually receives three per cent from the priority industry but is recorded as receiving five per cent from the priority industry and paying two per cent to government in the form of a current transfer.

No financial account transactions are involved with this rerouting.

3. Distributed income of corporations

Dividends

7.127 Corporations obtain funds by issuing shares in their equity that entitle the holders to a proportion of both distributed profits and the residual value of the assets of the corporation in the event of its liquidation.
Shareholders are the collective owners of a corporation.

7.128 Dividends are a form of investment income to which shareholders become entitled as a result of placing funds at the disposal of corporations.
Raising equity capital through the issue of shares is an alternative to borrowing as a way of raising funds.
In contrast to loan capital, however, equity capital does not give rise to a liability that is fixed in monetary terms and it does not entitle the holders of shares of a corporation to a fixed or predetermined income.

7.129 Just as corporations are understood in the SNA to cover a set of institutional units engaged in production that may be described by different names such as private or public corporations, private or public companies, cooperatives and limited liability partnerships, so dividends must also be understood to cover all distributions of profits by corporations to their shareholders or owners, by whatever name they are called.
Dividends may occasionally take the form of an issue of shares, but this excludes issues of bonus shares that simply represent a reclassification between own funds, reserves and undistributed profits.

Time of recording

7.130 Although dividends represent a part of income that has been generated over a substantial period, often six or twelve months, dividends are not recorded in the SNA on a strict accrual basis.
For a short period after a dividend is declared but before it is actually payable, shares may be sold “ex dividend” meaning that the dividend is still payable to the owner at the date the dividend was declared and not to the owner on the date payable.
A share sold “ex dividend” is therefore worth less than one sold without this constraint.
The time of recording of dividends in the SNA is the point at which the share price starts to be quoted on an ex dividend basis rather than at a price that includes the dividend.

Super-dividends

7.131 Although dividends are notionally paid out of the current period's operating surplus, corporations often smooth the payments of dividends, often paying out rather less than operating surplus but sometimes paying out a little more, especially when the operating surplus itself is very low.
For practical reasons, no attempt is made in the SNA to align dividend payments with earnings except in one circumstance.
The exception occurs when the dividends are disproportionately large relative to the recent level of dividends and earnings.
In order to determine whether the dividends are disproportionately large, it is helpful to introduce the concept of distributable income.
Distributable income of a corporation is equal to entrepreneurial income, plus all current transfers receivable, less all current transfers payable and less the adjustment for the change in pension entitlements relating to the pension scheme of that corporation.
From this it is possible to look at the ratio of dividends to distributable income over the recent past and assess the plausibility that the current level of dividends declared is in line with past practice, accepting some degree of smoothing from year to year.
If the level of dividends declared is greatly in excess of this, the excess should be treated as a financial transaction, specifically the withdrawal of owners' equity from the corporation.

7.132 This treatment applies to all corporations, whether incorporated or quasi-corporate and whether subject to public, foreign or domestic private control.
There is more discussion on the case of publicly controlled corporations in chapter 22.

Withdrawals of income from quasi-corporations

7.133 Withdrawal of income from a quasi-corporation consists of that part of distributable income that the owner withdraws from the quasi-corporation.
The income that the owners of quasi-corporations withdraw from them is analogous to the income withdrawn from corporations by paying out dividends to their shareholders.
It is therefore treated as property income accruing to the owners of quasi-corporations.
The withdrawal of income by the owners of quasi-corporations needs to be identified in order to be able to establish a full set of accounts for the entity and to treat it as an institutional unit separate from that of its owner.

7.134 Withdrawals of income from a quasi-corporation do not include withdrawals of funds realized by the sale or disposal of the quasi-corporation's assets: for example, the sale of inventories, fixed assets, land or other non-produced assets.
Such sales would be recorded as disposals in the capital account of the quasi-corporation and the transfer of the resulting funds would be recorded as a withdrawal from the equity of quasi-corporations in the financial account of the quasi-corporation and as a receivable by its owner(s).
Similarly, funds withdrawn by liquidating large amounts of accumulated retained savings or other reserves of the quasi-corporation, including those built up out of provisions for consumption of fixed capital, are treated as withdrawals from equity.
This situation corresponds to the treatment of superdividends payable by listed enterprises described immediately above.

7.135 Conversely, any funds provided by the owner(s) of a quasi-corporation for the purpose of acquiring assets or reducing its liabilities should be treated as additions to its equity.
Just as there cannot be a negative distribution from the distributable income of corporations in the form of negative dividends, it is not possible to have a negative distribution from the distributable income of quasi-corporations in the form of negative withdrawals.
However, if the quasi-corporation is owned by government, and if it runs a persistent operating deficit as a matter of deliberate government economic and social policy, any regular transfers of funds into the enterprise made by government to cover its losses should be treated as subsidies, as explained in paragraph 7.105 (c) above.

Reinvested earnings on foreign direct investment

7.136 As explained in chapter 26, a foreign direct investment enterprise is a corporate or unincorporated enterprise in which a foreign investor has made a foreign direct investment.
A foreign direct investment enterprise may be either:

a. The (unincorporated) branch of a non-resident corporate or unincorporated enterprise: this is treated as a quasi-corporation; or

b. A corporation in which at least one foreign investor (which may, or may not, be another corporation) owns sufficient shares to have an effective voice in its management.

7.137 Actual distributions may be made out of the distributable income of foreign direct investment enterprises in the form of dividends or withdrawals of income from quasi-corporations.
The payments made in these ways to foreign direct investors are recorded in the accounts of the SNA and in the balance of payments as international flows of investment income.
However, both systems also require the retained earnings of a foreign direct investment enterprise to be treated as if they were distributed and remitted to foreign direct investors in proportion to their ownership of the equity of the enterprise and then reinvested by them by means of additions to equity in the financial account.
The imputed remittance of these retained earnings is classified in the SNA as a form of distributed income that is separate from, and additional to, any actual payments of dividends or withdrawals of income from quasi-corporations.

7.138 The rationale behind this treatment is that since a foreign direct investment enterprise is, by definition, subject to control, or influence, by a foreign direct investor or investors, the decision to retain some of its earnings within the enterprise must represent a deliberate investment decision on the part of the foreign direct investor(s).
In practice, the great majority of direct investment enterprises are subsidiaries of foreign corporations or the unincorporated branches of foreign enterprises, which are completely controlled by their parent corporations or owners.

7.139 Retained earnings of a corporation or quasi-corporation are equal to the distributable income less the dividends payable or withdrawal of income from the corporation or quasi-corporation respectively.
If the foreign direct investment enterprise is wholly owned by a single foreign direct investor (for example, a branch of a foreign enterprise), the whole of the retained earnings is deemed to be remitted to that investor and then reinvested, in which case the saving of the enterprise must be zero.
When a foreign direct investor owns only part of the equity of the direct investment enterprise, the amount that is deemed to be remitted to, and reinvested by, the foreign investor is proportional to the share of the equity owned.

Retained earnings of domestic enterprises

7.140 A suggestion has been made to extend the treatment of distributing retained earnings to the owners of other corporations, in particular of public corporations.
Investigation of this suggestion is part of the research agenda.

4. Investment income disbursements

Investment income attributed to insurance policyholders

7.141 Investment income attributable to insurance policyholders should be divided between holders of non-life and life policies.

7.142 For non-life policies, the insurance corporation has a liability towards the policyholder of the amount of the premium deposited with the corporation but not yet earned, the value of any claims due but not yet paid and a reserve for claims not yet notified or notified but not yet settled.
Set against this liability, the insurance corporation holds technical reserves.
The investment income on these reserves is treated as income attributable to the policyholders, then distributed to the policyholders in the allocation of primary income account and paid back to the insurance corporation as a premium supplement in the secondary distribution of income account.
The reserves concerned are those where the insurance corporation recognizes a corresponding liability to the policyholders.

7.143 For an institutional unit operating a standardized guarantee scheme against fees, there may also be investment income earned on the reserves of the scheme and this should also be shown as being distributed to the units paying the fees (who may not be the same units which stand to benefit from the guarantees) and treated as supplementary fees in the secondary distribution of income account.

7.144 For life insurance policies and annuities, the insurance corporations have liabilities towards the policyholders and annuitants equal to the present value of expected claims.
Set against these liabilities, the insurance corporations have funds belonging to the policyholders consisting of bonuses declared for with-profits policies as well as provisions for both policyholders and annuitants of the payment of future bonuses and other claims.
These funds are invested in a range of financial assets and possibly non-financial assets such as property and land.
The insurance enterprises receive investment income from the financial assets and land, and earn net operating surpluses from the renting or leasing of residential and other buildings.
In addition they make holding gains or losses on the financial assets held.
The bonuses declared to holders of life policies should be recorded as investment income receivable by the policyholders (resident and possibly non-resident households) and are treated as premium supplements paid by the policyholders to the insurance corporations.
As with interest and dividends, the source of the investment income payable may not be investment income itself, but for the SNA, the decisive criterion for recording this as investment income is that of the recipient who regards these payments as the rewards for putting financial assets at the disposal of the insurance corporation.

7.145 The investment income attributed to life insurance policyholders is recorded as payable by the insurance company and receivable by households in the allocation of primary income account.
This amount carries through automatically to saving without the need of an adjustment item as is the case for changes in pension entitlements.
The investment income is treated as premium supplements and so forms part of the net premiums, less claims, recorded in the financial account as payable by households and receivable by insurance corporations as changes in life insurance and annuities entitlements.

7.146 Unlike the case of non-life insurance or pensions, the amount carries through to saving and is then recorded as a financial transaction, specifically an increase in the liabilities of life insurance corporations, in addition to new premiums less the service charge offset by claims payable.

Investment income payable on pension entitlements

7.147 As explained in part 2 of chapter 17, pension entitlements arise from one of two different types of pension schemes.
These are defined contribution schemes (sometimes described as money purchase schemes) and defined benefit schemes.

7.148 A defined contribution scheme is one where contributions by both employers and employees are invested on behalf of the employees as future pensioners.
No other source of funding of pensions is available and no other use is made of the funds.
The investment income payable on defined contribution entitlements is equal to the investment income on the funds plus any net operating surplus earned by renting land or buildings owned by the fund.

7.149 A defined benefit scheme is one where the benefits payable are defined in terms of a formula.
The formula often takes the form of a link to final salary (hence the alternative terminology final salary schemes) or average salary over some defined period.
The formula may be expressed in many ways including, for example, a variation on a defined contribution scheme such as the growth in earnings of the funds or a minimum percentage growth.

7.150 Because the benefits are calculated according to a formula, it is possible to determine the level of entitlements necessary at any point in time to meet future obligations.
The value of the entitlements is the present value of all future payments, calculated using actuarial assumptions about life lengths and economic assumptions about the interest or discount rate.
The present value of the entitlements existing at the start of the year increases because the date when the entitlements become payable has become one year nearer.
The amount of the increase is not affected by whether the pension scheme actually has sufficient funds to meet all the obligations nor by the type of increase in the funds, whether it is investment income or holding gains, for example.

Investment income attributed to investment fund shareholders

7.151 Investment income attributed to holders of shares or units in investment funds (including mutual funds and unit trusts) is shown as two separate items.
The first of these is the dividends distributed to investment fund shareholders.
The second is retained earnings attributed to investment fund shareholders.

7.152 The dividend component is recorded in exactly the same manner as dividends for individual corporations, as described above.
The retained earnings component is recorded using the same principles as those described for foreign direct investment enterprises but is calculated excluding any reinvested earnings on foreign direct investment.
That is to say, the remaining retained earnings are distributed to the shareholders (leaving the investment fund with no saving) and are reinjected into the fund by the shareholders in a transaction recorded in the financial account.

5. Rent

Rent distinguished from rentals

7.153 The distinction between rent and the rentals receivable and payable under operating leases is basic to the SNA as rent is a form of property income and rentals are treated as sales or purchases of services.
Rentals are payments made under an operating lease to use a fixed asset belonging to another unit where that owner has a productive activity in which the fixed assets are maintained, replaced as necessary and made available on demand to lessees.
Rent is a payment made under a resource lease for the use of a natural resource.
Not only is the type of asset leased different as between rent and rentals, so is the nature of the lease.
The distinction between different types of leases is explained in part 5 of chapter 17.

Rent on natural resources

7.154 Rent is the income receivable by the owner of a natural resource (the lessor or landlord) for putting the natural resource at the disposal of another institutional unit (a lessee or tenant) for use of the natural resource in production.
Two particular cases of resource rent are considered, rent on land and rent on subsoil resources.
Resource rent on other natural resources follows the pattern laid out by these two instances.

Rent on land

7.155 Rent on land is recorded as accruing continuously to the landowner throughout the period of the contract agreed between the landowner and the tenant.
The rent recorded for a particular accounting period is equal to the value of the accumulated rent payable over that period of time, as distinct from the amount of rent due to be paid during that period or the rent actually paid.

7.156 Rent may be paid in cash or in kind.
Under share-cropping or similar schemes, the value of the rent payable is not fixed in advance in monetary terms and is measured by the value at basic prices of the crops that the tenants are obliged to provide to the landowner under the contract between them.
Rent on land also includes the rent payable to the owners of inland waters and rivers for the right to exploit such waters for recreational or other purposes, including fishing.

7.157 A landowner may be liable to pay land taxes or incur certain maintenance expenses solely as a consequence of owning the land.
By convention, such taxes or expenses are treated as payable by the tenant who is deemed to deduct them from the rent that he would otherwise be obliged to pay to the landowner.
Rent reduced in this way by taxes or other expenses for which the landowner is liable is described as “after-tax rent”. By adopting the convention that the tenant pays only the after-tax rent, the taxes or expenses are recorded in the production or generation of income accounts of the tenant.
This treatment does not change the income of the tenant.
The convention avoids the necessity to create a notional enterprise for the landowner as the lessor.

7.158 Rentals payable on buildings or other structures are treated as purchases of services.
In practice, however, a single payment may cover both rent and rentals when an institutional unit rents land that consists of land improvements and land in its natural state and may include any buildings situated on it in a single contract, or lease, in which the two kinds of payments are not differentiated from each other.
For example, a farmer may rent a farmhouse, farm buildings, cultivated and grazing farmland in a contract in which only a single payment is required to cover all four.
If there is no objective basis on which to split the payment between rent on land and rental on the buildings, it is recommended to treat the whole amount as rent when the value of the grazing land is believed to exceed the value of the buildings and cultivated land, and as a rental otherwise.

Rent on subsoil assets

7.159 The ownership of subsoil assets in the form of deposits of minerals or fossil fuels (coal, oil or natural gas) depends upon the way in which property rights are defined by law and also on international agreements in the case of deposits below international waters.
In some cases the assets may belong to the owner of the ground below which the deposits are located but in other cases they may belong to a local or central government unit.

7.160 The owners of the assets, whether private or government units, may grant leases to other institutional units permitting them to extract such deposits over a specified period of time in return for the payment of rent.
These payments are often described as royalties, but they are essentially rent that accrues to owners of the assets in return for putting them at the disposal of other institutional units for specified periods of time and are treated as such in the SNA.
The rent may take the form of periodic payments of fixed amounts, irrespective of the rate of extraction or, more commonly, they may be a function of the quantity or volume of the asset extracted.
Enterprises engaged in exploration may make payments to the owners of surface land in exchange for the right to make test drillings or investigate by other means the existence and location of subsoil resources.
Such payments are also to be treated as rent even though no extraction is taking place.

Foreword

Preface

A. Introduction

B. New features of the System of National Accounts

Assets

The financial sector

Globalization and related issues

The general government and public sectors

The informal sector

C. The SNA in the context of other statistical systems

The SNA provides guidance for national accounts almost universally

The SNA recognizes the need for flexibility

The SNA reinforces the central role of national accounts in statistics

Future developments: the research agenda

D. Acknowledgements

The ISWGNA and project staff

The Advisory Expert Group

Other expert groups

Country contributions

Notes

References

Annex: Authors of Issues Papers Prepared for Task Forces, Groups and Committees Considering SNA Update Issues

Canberra II Group on the Measurement of Nonfinancial Assets

IMF Committee on Balance of Payments Statistics

IMF-BEA Task Force on Employers’ Retirement Schemes

IMF-OECD Task Force on the Harmonization of Public Sector Accounts

OECD Task Force on Financial Services

OECD Task Force on the Measurement of Non-life Insurance

Chapter 1: Introduction

A. What is the System of National Accounts?

B. The conceptual elements of the SNA

1. Activities and transactions

2. The institutional sectors of the economy

3. Accounts and their corresponding economic activities

The goods and services account

The sequence of accounts

Current accounts

Accumulation accounts

Balance sheets

Other accounts of the SNA

Supply and use tables

Accounts in volume terms

C. Uses of the SNA

1. Monitoring the behaviour of the economy

2. Macroeconomic analysis

3. International comparisons

D. The boundaries of the SNA

1. Non-monetary transactions

2. The production boundary

Household production

Other production boundary problems

3. The consumption boundary

4. The asset boundary

5. National boundaries

6. Final consumption, intermediate consumption and gross fixed capital formation

Human capital

Repairs, maintenance and gross fixed capital formation

E. The SNA as a coordinating framework for statistics

1. Harmonization between different statistical systems

2. The use of microdata for macroeconomic accounting

F. Links with business accounting

1. International accounting standards

G. Expanding the scope of the SNA

H. The SNA and measures of welfare

1. Qualifications to treating expenditure as a welfare measure

2. Unpaid services and welfare

3. The impact of external events on welfare

4. The impact of externalities on welfare

5. Non-economic impacts on welfare

6. Welfare indicators and macroeconomic aggregates

Chapter 2: Overview

A. Introduction

1. Analysing flows and stocks

2. Recording flows and stocks

B. The conceptual elements of the SNA

1. Institutional units and sectors

Institutional sectors

Delimitation of the total economy and the rest of the world

2. Transactions and other flows

Main types of transactions and other flows