Copyright 2010, The World Bank Group. All Rights Reserved. 1 THE BALANCE SHEET GOVERNMENT FINANCE STATISTICS Part 1 This chapter defines assets, liabilities, and net worth and describes their valuation and estimation at market prices.

Copyright 2010, The World Bank Group. All Rights Reserved. 2 GOVERNMENT FINANCE STATISTICS THIS LECTURE This lecture, and the following three lectures, are concerned with the stocks and flows of assets and liabilities. This lecture defines the assets and liabilities included in the GFS system, provides guidelines on methods of estimating the current market value of various types of assets and liabilities, provides a classification of types of assets and liabilities, describes in detail the contents of each classification category, and defines the various balance sheet memorandum items.

Copyright 2010, The World Bank Group. All Rights Reserved. 3 DEFINITION GOVERNMENT FINANCE STATISTICS A balance sheet, or compilation of stocks, is a statement of the values of the assets owned at a specific time and the financial claims, or liabilities, held by other units against the owner of those assets. A balance sheet can be compiled for an individual unit or any collection of units.

Copyright 2010, The World Bank Group. All Rights Reserved. 4 GOVERNMENT FINANCE STATISTICS Balance sheets provides four indicators to assess fiscal policies and their sustainability: - Net worth position, - Net financial wealth position, - Gross debt position, - Contingent liabilities. BALANCE SHEET INDICATORS

Copyright 2010, The World Bank Group. All Rights Reserved. 5 DEFINITION OF ASSETS GOVERNMENT FINANCE STATISTICS All assets recorded in the GFS system are economic assets, which are entities: - over which ownership rights are enforced by institutional units, individually or collectively, and - from which economic benefits may be derived by their owners by holding them or using them over a period of time. Every economic asset provides benefits by functioning as a store of value.

Copyright 2010, The World Bank Group. All Rights Reserved. 6 GOVERNMENT FINANCE STATISTICS When ownership rights are established and enforced, the entity is an economic asset regardless of who receives the benefits. To be an economic asset, an entity must also be able to supply economic benefits. Some entities would be economic assets except that ownership rights over them have not been established or are not enforced. Governments use assets to produce goods and services much like corporations. DEFINITION OF ASSETS (cont’d)

Copyright 2010, The World Bank Group. All Rights Reserved. 7 GOVERNMENT FINANCE STATISTICS Government units frequently own general-purpose assets, infrastructure assets, and heritage assets. Governments can create economic assets by exercising their sovereign powers. DEFINITION OF ASSETS (cont’d)

Copyright 2010, The World Bank Group. All Rights Reserved. 8 AN OVERVIEW OF ASSETS AND LIABILITIES GOVERNMENT FINANCE STATISTICS Financial assets consist of financial claims, monetary gold, and Special Drawing Rights (SDRs) allocated by the IMF. Financial claims are assets that entitle one unit, the owner of the asset, or the creditor, to receive one or more payments from a second unit, the debtor. Most contracts, also referred to as instruments or financial instruments, that underlie a financial claim are created when one unit provides funds to a second unit and the second unit agrees to repay the funds in the future.

Copyright 2010, The World Bank Group. All Rights Reserved. 9 GOVERNMENT FINANCE STATISTICS When a financial claim is created, a liability of equal value is simultaneously incurred by the debtor as the counterpart of the financial asset. Shares and other equities issued by corporations are treated as financial claims even though their holders do not have a fixed or predetermined monetary claim on the corporation. Because of their treatment as financial claims, shares and other equities must also be treated as liabilities of the issuing units. AN OVERVIEW OF ASSETS AND LIABILITIES (cont’d)

Copyright 2010, The World Bank Group. All Rights Reserved. 10 GOVERNMENT FINANCE STATISTICS Contingent assets or liabilities are not treated as financial assets and liabilities. Monetary gold and SDRs are not financial claims, which means that they are not the liability of any other unit. AN OVERVIEW OF ASSETS AND LIABILITIES (cont’d)

Copyright 2010, The World Bank Group. All Rights Reserved. 11 GOVERNMENT FINANCE STATISTICS Nonfinancial assets are all economic assets other than financial assets. Nonfinancial assets may come into existence as outputs from a production process, be naturally occurring, or be constructs of society. Produced assets are classified as fixed assets, inventories, or valuables. Naturally occurring assets and constructs of society are both referred to as nonproduced assets. AN OVERVIEW OF ASSETS AND LIABILITIES (cont’d)

Copyright 2010, The World Bank Group. All Rights Reserved. 12 GOVERNMENT FINANCE STATISTICS VALUATION OF ASSETS AND LIABILITIES All assets and liabilities should be valued at their current market value. The ideal source of prices on which to base a valuation is a market in which identical assets are traded. If there are no observable prices then a price or value has to be estimated.

Copyright 2010, The World Bank Group. All Rights Reserved. 13 GOVERNMENT FINANCE STATISTICS ESTIMATING CURRENT MARKET PRICES If assets of the same kind are still being produced and sold on the market, an existing asset may be valued at the current market price of a newly produced asset. Information from markets may also be used to price assets that are not being traded currently. It may be possible to value assets at their initial acquisition costs plus an appropriate revaluation for subsequent price changes.

Copyright 2010, The World Bank Group. All Rights Reserved. 14 GOVERNMENT FINANCE STATISTICS The perpetual inventory method is commonly used to estimate the written-down replacement cost of a category of assets, especially tangible fixed assets. Market prices may be approximated by the present value of the future economic benefits expected from a given asset. The value of assets and liabilities denominated in foreign currencies should be converted into the national currency at the market exchange rate prevailing on the date to which the balance sheet relates. ESTIMATING CURRENT MARKET PRICES