III. FLOWS, STOCKS AND ACCOUNTING RULES
G. Time of recording
1. Introduction
| 3.87. | When discussing timing in the System, 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. |
| 3.88. | Thus, the System does not show individual transactions or other flows, but there are two reasons why precise rules on their individual timing must be given. First, 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 make the distinction between changes in net worth due to transactions and those due to holding gains or losses. This distinction is particularly important in situations of high inflation. |
| 3.89. | One of the problems in pinning down the timing of transactions is that activities of institutional units often stretch 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. |
| 3.90. | Similarly, in analysing public spending 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 days 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. |
| 3.91. | Clearly, making entries for all successive stages discernible within the activities of institutional units, although theoretically possible, would severely overburden the System. 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 and accrual basis. The System recommends recording on an accrual basis throughout. |
2. Choice for recording on an accrual basis
| 3.92. | Some systems closely related to the SNA, most notably the IMF Government Finance Statistics, recommend recording on a cash basis, at least in respect of aggregate data. Cash accounting records only cash payments and records them at the times these payments occur. This method is widely used to record government revenues and expenditures and it is also employed 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 System seeks to portray. Moreover, cash recording cannot be applied to the many non-monetary flows included in the System. |
| 3.93. | Due-for-payment recording shows flows which 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. |
| 3.94. | Accrual accounting records flows at the time economic value is created, transformed, exchanged, transferred or extinguished. This means that flows which imply a change of ownership are entered when ownership passes, services are recorded when provided, output at the time products are created and intermediate consumption when materials and supplies are being used. The System 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 System. This agreement allows one, for instance, to evaluate the profitability of productive activities correctly (i.e., without the disturbing influence of leads and lags in cash flows) and to calculate a sector's net worth correctly at any point in time;
(b) Accrual accounting can be applied to non-monetary flows. |
| 3.95. | 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). |
| 3.96. | Usually, accrual accounting arises naturally to 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 System 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. |
3. Timing of exchanges and transfers
| 3.97. | With respect to exchanges and transfers of non-financial assets, the accrual principle usually comes down to recording at the moment when the legal ownership of those assets passes. 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 and trade statistics based on customs documents reflecting the physical movement of goods across the national or customs frontier may often be used as an approximation. |
| 3.98. | Services are recorded in the System 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. |
| 3.99. | 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 which 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 they are declared payable. Other examples are withdrawals from income of quasi-corporations and various voluntary transfers, which are recorded when effected. |
| 3.100. | Transactions in financial assets (including payments of cash) are recorded in the System on a change-of-ownership basis. Some financial claims/liabilities defined in the System, in particular trade credits and advances, are the implicit result of a non-financial transaction and do not involve an explicit piece of evidence. In these cases the financial claim is deemed to arise when its non-financial counterpart occurs. The same holds for financial transactions that the System records between a quasi-corporation and its owner. |
| 3.101. | 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 "float" 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. |
4. Timing of output and intermediate consumption
| 3.102. | 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-in-progress accumulated up to that point is effectively transformed into a stock of finished product ready for delivery or sale. |
| 3.103. | 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. |
5. Timing of changes in inventories and consumption of fixed capital
| 3.104. | 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. |
| 3.105. | The timing of consumption of fixed capital is nearly inseparably linked with the question of its valuation. Consumption of fixed capital is a cost category which 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 which is usually assumed to be either linear or geometric (declining balance) (see chapter VI). |
6. Timing of composite transactions and balancing items
| 3.106. | Transactions which 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 entered according to the moments property income is earned on funds put out by financial intermediaries and interest payable by these units accrues. The same rule applies to balancing items. |
| 3.107. | In order to yield significant balancing items, the System aims at timing resources in the same period as related uses (and, in particular, at matching output with the various costs of production). 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. |
7. Timing of other flows
| 3.108. | Other volume changes in assets are usually discrete events which accrue at precise moments or within fairly short periods of time. 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:
(i) The accounting period begins; or
(ii) Ownership is acquired from other units (through purchase or a transaction in kind); or
(iii) An asset is produced; and
(b) The moment at which:
(iv) The accounting period ends; or
(v) The ownership of an asset is relinquished (through sale or a transaction in kind); or
(vi) An asset is consumed in the production process. |
| 3.109. | 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 which 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 System, 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 exclusively on the assets or liabilities it effectively holds. 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. |
| 3.110. | Changes in structure and classification should be entered at the very moment when, according to the rules adopted in the System, a unit or an asset comes into a different category than it was classified previously. An integrated stock-flow system like the SNA requires that all reclassifications be recorded. Consequently, such a system does not allow reclassifications between two consecutive accounting periods. |
| 3.111. | In order to obtain statistical series which 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 System's recommendations, 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. |
8. Balance sheet items
| 3.112. | Fundamentally, balance sheets can be drawn up at any point in time. The System 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 which are not duly recognized by the System. |
9. The accounting period
| 3.113. | 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 years or quarters are best suited for drawing up a full set of national accounts tables. |
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