Copyright 2010, The World Bank Group. All Rights Reserved. 1 GOVERNMENT FINANCE STATISTICS FLOWS, STOCKS, AND ACCOUNTING RULES Part 1 This lecture describes the flows and stocks of the GFS system

Copyright 2010, The World Bank Group. All Rights Reserved. 2 THIS LECTURE The previous lecture, Coverage of the GFS System, defined the concept of statistical units and discussed their relationship to the composition of the general government and public sectors. This lecture describes the flow and stock data that are collected from GFS statistical units and the rules for their recording and reporting.

Copyright 2010, The World Bank Group. All Rights Reserved. GOVERNMENT FINANCE STATISTICS Data recorded in the GFS system are either flows or stocks. Flows are monetary expressions of economic actions engaged in by institutional units and other events affecting the economic status of units that occur within an accounting period. Stocks refer to a unit’s holdings of assets and liabilities at a specific time. Flows reflect the creation, transformation, exchange, transfer, or extinction of economic value. They involve changes in the volume, composition, or value of a unit’s assets, liabilities, and net worth. The flows and stocks recorded in the GFS system are integrated, which means that all changes in stocks can be fully explained by the flows. INTEGRATION OF STOCKS AND FLOWS 3

Copyright 2010, The World Bank Group. All Rights Reserved. 4 GOVERNMENT FINANCE STATISTICS The GFS system recognizes two types of flows: 1.Transactions, and 2.Other economic flows Primarily, a transaction is an interaction between two units by mutual agreement. Mutual agreement does not mean that both parties (units) entered into the transaction voluntarily. Thus, payments of taxes are considered transactions despite being compulsory. In addition, it is analytically useful to treat certain flows within a unit as transactions, they are called internal transactions. TYPES OF FLOWS

Copyright 2010, The World Bank Group. All Rights Reserved. GOVERNMENT FINANCE STATISTICS Every transaction is either an exchange or a transfer and can be monetary or nonmonetary. A transaction is an exchange if one unit provides a good, service, asset, or labor to a second unit and receives a good, service, asset, or labor of the same value in return. A transaction is a transfer if one unit provides a good, service, asset, or labor to a second unit without receiving simultaneously a good, service, asset, or labor of any value in return. TYPES OF TRANSACTIONS 5

Copyright 2010, The World Bank Group. All Rights Reserved. 6 GOVERNMENT FINANCE STATISTICS A monetary transaction is one in which one unit makes a payment or incurs a liability stated in units of currency and the second unit receives the payment or another asset, also stated in units of currency. All other transactions are nonmonetary, but they must be assigned a monetary value as the GFS system deals only with flows and stocks expressed in monetary terms. MONETARY AND NONMONETARY TRANSACTIONS

Copyright 2010, The World Bank Group. All Rights Reserved. 7 TYPES OF NONMONETARY TRANSACTIONS Four kinds of nonmonetary transactions are recognized in the 2001 GFS system: - Barter transactions, where two units exchange goods, services, or assets other than cash of equal value, - Remuneration in kind, occurs when a government employee is compensated with goods, services, or assets other than money, - Other payments in kind, occur when a payment to settle a liability is made in the form of goods, services, or noncash assets rather than money, - Transfers in kind, may be used rather than cash for efficiency or to insure that the intended goods and services are consumed.

Copyright 2010, The World Bank Group. All Rights Reserved. 8 Some transactions are not recorded in the form in which they appear to take place. Instead they are modified to bring out their underlying economic relationships more clearly. Three modifications may be applied in the GFS system: 1.Rerouting, 2.Partitioning, and 3.Reassignment. MODIFIED TRANSACTIONS

Copyright 2010, The World Bank Group. All Rights Reserved. 9 GOVERNMENT FINANCE STATISTICS The treatment of some activities in the GFS system differs from the treatment of the same activities in the 1993 SNA. The following transactions are not recorded in the GFS system: - the output and simultaneous distribution of nonmarket goods and services, - the output of fixed assets constructed on own account and the costs of producing those assets, - ccertain transactions related to employer social insurance schemes providing retirement benefits managed by general government units, - transactions reflecting the reinvestment of earnings on direct foreign investment. DIFFERENCES WITH 1993 SNA

Copyright 2010, The World Bank Group. All Rights Reserved. 10 GOVERNMENT FINANCE STATISTICS An other economic flow is a change in the volume or value of an asset or liability that does not result from a transaction. Volume changes are described as other volume changes and comprise three kinds of events: - events that involve the addition to or deletion from the balance sheet of an existing asset or liability with no changes in its quantity or quality, - events that change the quantity or quality of assets, - changes in the classification of assets. OTHER ECONOMIC FLOWS

Copyright 2010, The World Bank Group. All Rights Reserved. 11 GOVERNMENT FINANCE STATISTICS Value changes are described as holding gains and losses. and arise as a result of changes in the prices of assets and liabilities, including changes resulting from exchange rate movements. A holding gain or loss accrues purely as a result of holding an asset or liability over time without transforming it in any way. HOLDING GAINS AND LOSSES