GOVERNMENT FINANCE STATISTICS

1. GOVERNMENT FINANCE STATISTICS FLOWS, STOCKS, AND ACCOUNTING RULES Part 2 This lecture describes the double-entry accounting rules used in recording the flows and stocks of the GFS system

2. GOVERNMENT FINANCE STATISTICS DOUBLE-ENTRY ACCOUNTING • Accounting rules for recording flows and stocks in the GFS system are the same as those of the 1993 SNA, with the exception of consolidation. • Double-entry accounting is used for recording flows. Each flow is recorded as a credit entry and a debit entry. • Revenue transactions, which represent an increase in net worth, are recorded as credits. • Expense transactions decrease net worth and are recorded as debits. • A credit is a decrease in an asset, an increase in a liability, or an increase in net worth. • A debit is an increase in an asset, a decrease in a liability, or a decrease in net worth.

3. GOVERNMENT FINANCE STATISTICS BALANCE SHEET IDENTITY • The fundamental identity of the balance sheet, and of accounting in general, is that the total value of the assets always equals the total value of the liabilities plus net worth. • Use of the double-entry system ensures that the identity: • assets = liabilities + net worth is maintained. • A debit represents an increase in an asset, a decrease in a liability, or a decrease in net worth. • A credit represents a decrease in an asset, an increase in a liability, or an increase in net worth.

4. GOVERNMENT FINANCE STATISTICS APPLICATION OF ACCOUNTING RULES IN GFS STATEMENTS • In the GFSM 2001 presentation of data,an increase in a GFS category is entered as a positive number and a decrease as a negative number.The balancing items are calculated using formulas which take into account whether an entry is a debit or a credit. • The implications of these rules for the Statement of Government Operations and the Statement of Sources and Uses of Cash are shown on the next two slides.

5. GOVERNMENT FINANCE STATISTICS Statement of Government Operations

6. GOVERNMENT FINANCE STATISTICS * Excludes currency and deposits (3212 and 3222) Statement of Sources and Uses of Cash

7. GOVERNMENT FINANCE STATISTICS TIME OF RECORDING FLOWS • Broadly, the time of recording flows could be determined on four bases: the accrual basis, the due-for-payment basis, the commitments basis, and the cash basis. • Because both the 1993 SNA and the GFS systems are concerned with recording events when economic value is created, transformed, exchanged, • transferred, or extinguished both use the accrual basis of recording . • In other words, the accrual basis is used primarily because the time of recording matches the time of the actual resource flows. • Therefore, the accrual basis provides the best estimate of the macroeconomic impact of government fiscal policy, including the effects of nonmonetary transactions.

8. GOVERNMENT FINANCE STATISTICS ACCRUAL RECORDING • The accrual basis provides the most comprehensive information because all resource flows are recorded, including payment arrears, internal transactions, in-kind transactions, and other economic flows. • Supplementary information, however, it may be difficult to estimate the share of total accounts payable that is in arrears. • The other major macroeconomic statistical systems (national accounts, balance of payments, and monetary and financial statistics) use the • accrual basis.

9. GOVERNMENT FINANCE STATISTICS BASIS OF RECORDING IN STATEMENTS • In the GFS system flows are presented in three separate statistical/accounting statements: • Statement of Government Operations, • Statement of Other Economic Flows, and • Statement of Sources and Uses of Cash. • A unit’s, or sector’s, stocks of assets, liabilities, and net worth are presented in the Balance Sheet. • The nature and the detail of these reporting statements is covered in the discussion of the Analytic Framework. • The integrated nature of the accounting system means that the stocks recorded on the balance sheet at the end of the period are influenced by the timing of the flows.

10. GOVERNMENT FINANCE STATISTICS RECORDING OF CASH FLOWS • In government, as in business, cash management is an essential function and mmanaging liquidity is crucial for the operation of any unit. • The GFS system follows business accounting practice of recording cash flows, which are reported in the Statement of Sources and Uses of Cash. • An economic event recorded on an accrual basis usually requires a subsequent cash flow1.

11. GOVERNMENT FINANCE STATISTICS RECORDING GUIDELINES • Taxes and other compulsory transfers should be recorded when the activities, transactions, or other events occur that create the government’s claim to the taxes or other payments. • Only those taxes and social security contributions that are evidenced by tax assessments and declarations, customs declarations, and similar documents are considered to create revenue for government units. • The amount of taxes and social security contributions that is recorded as revenue should be the amount that is realistically expected to be collected.

12. GOVERNMENT FINANCE STATISTICS RECORDING GUIDELINES (contd) • If taxes are imposed on specific transactions or events, they are recorded at the times the underlying transaction or event occurs. • Some compulsory transfers, such as fines, penalties, and property forfeitures, are determined at a specific time2. • Grants and other voluntary transfers are recorded when all requirements and eligibility conditions are satisfied. • Dividends and withdrawals from income of quasi-corporations are recorded as of the date on which they are declared payable or actually take place if no prior declaration occurs. • Transactions in goods and nonfinancial assets are recorded when legal ownership changes.

13. GOVERNMENT FINANCE STATISTICS RECORDING GUIDELINES (contd) • Transactions in services normally should be recorded when the services are provided. • Additions to inventories are recorded when products are purchased, produced, or otherwise acquired. • Transactions in financial assets, such as securities, loans, currency, and deposits, are recorded when legal ownership changes. • For various types of accounts payable and receivable; such as general accounts payable, interest payable, and wages payable; the financial claim is deemed to arise when the counterpart flow occurs. • Holding gains and losses occur continuously as prices change.

14. GOVERNMENT FINANCE STATISTICS VALUATION • Flows should be valued at prices current on the date the flows are recorded, referred to as current market prices. • Flows expressed in a foreign currency are converted to their value in the national currency at the rate prevailing when they take place. • All balance sheet stocks should be valued at current market prices. . • Stocks in foreign currency are converted to national currency at the rate prevailing on the balance sheet date.

15. GOVERNMENT FINANCE STATISTICS ESTIMATION • Flows that are not already expressed at their current market value, such as barter transactions, must be estimated. • It may be possible to estimate the values of transactions based on values taken from markets in which similar transactions take place under similar • conditions. • Fixed assets can be valued using the market price for similar new goods, adjusted for consumption of fixed capital. • Goods and services can be valued by the amount that it would cost to produce them currently. • Assets can also be valued at the discounted present value of their expected future returns.

16. GOVERNMENT FINANCE STATISTICS DERIVED MEASURES • Derived measures consist of aggregates and balancing items. • Aggregates are summations of elements in a class of flows or stocks. • Balancing items are economic constructs obtained by subtracting one aggregate from another aggregate.

17. GOVERNMENT FINANCE STATISTICS NETTING • An item presented on a net basis is calculated as the sum of one • set of flows or stocks less the sum of a second set. • Except for certain exceptions, GFS data are presented on a gross basis. • Revenue categories are presented net of refunds of the relevant revenue, and expense categories are presented net of inflows of the same expense arising from erroneous transactions. • Changes in materials and supplies inventories are presented as the net value of additions less withdrawals. • Acquisitions and disposals of each category of financial assets are presented net. • Other economic flows are presented net.

18. GOVERNMENT FINANCE STATISTICS CONSOLIDATION • Consolidation is a method of presenting statistics for a set of units as if they constituted a single unit. • Consolidation involves the elimination of all transactions and debtor-creditor relationships that occur among the units being consolidated. • The 1993 SNA recommends that statistics of institutional units should not be consolidated. • In financial accounting reports, data are presented on a consolidated basis for the reporting entity and all of its controlled entities.

19. GOVERNMENT FINANCE STATISTICS CONTINGENCIES • Contingencies are conditions that may affect the financial position of • the general government sector depending on the occurrence of a future • event. • The GFS Manual follows the 1993 SNA by not treating any contingencies as financial assets or liabilities because they are not unconditional claims or obligations. • When a contingency is recognized as a liability of a general government unit, a flow is recorded with an expense as the debit and an increase in a liability as the credit.