VI. THE PRODUCTION ACCOUNT
G. The output of particular industries
1. Introduction
| 6.93. | The general 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 intermediaries, are measured. The following sections therefore 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
| 6.94. | First, it should be noted that the growth of crops, trees, livestock or fish which is organized, managed and controlled by institutional units constitutes a process of production in an economic sense. Growth is not to be construed as a purely natural process which lies outside the production boundary. Most processes of production merely exploit natural forces for economic purposes: for example, hydroelectric plants exploit rainfall and gravity to produce electricity. |
| 6.95. | The measurement of the output of agriculture, forestry and fishing is complicated by the fact the process of production may extend over many months, or even years. Growing crops, standing timber, and stocks of fish or livestock reared for purposes of food have to be treated as work-in-progress - that is, as output which is not yet sufficiently processed to be in a form which is ready to be marketed. When the crops are harvested, the trees felled, or the livestock slaughtered, the process of production is completed and the work-in-progress is transformed into inventories of finished products ready for sale or other use. Conceptually, therefore, output in agriculture, forestry and fishing can be measured in exactly the same way as other types of production which take a long time to complete, i.e., by the value of sales plus other uses plus changes in inventories including additions to work-in-progress. Output should be recorded as being produced continuously over the entire period of production and not simply at the moment of time when the process is completed, i.e., when the crops are harvested or animals slaughtered. |
| 6.96. | Assume the process of production takes several periods (months, quarters, or years, as the case may be) to complete. The value of the output produced in each period can then be measured as work-in-progress by distributing the value of the finished agricultural products (harvested crops, slaughtered animals, etc.) in proportion to the costs incurred each period. For this purpose, farms that are corporate enterprises need to be distinguished from those that are unincorporated (presumably the great majority of farms in most countries). The output of corporate farms can be distributed in proportion to the actual costs incurred each period, including compensation of employees. However, in the case of unincorporated farms, unpaid labour inputs provided by the owner(s) may account for much of the real costs incurred. The allocation of the finished output of these farms may be accomplished as follows. First, actual costs (expenditures on seed, fuels, etc.) are allocated to the periods in which they were incurred. Secondly, the remaining part of the value of the finished output, i.e., the realized mixed income - is distributed in proportion to the unpaid hours worked by the owner(s). For this purpose, rough indicators of the relative amounts of work done in different periods may be sufficient. The value of the finished products is given by the sum of the values of the following three items:
(a) Finished products sold or bartered valued at current basic prices;
(b) Entries of finished products into inventories, less withdrawals, valued at current basic prices;
(c) Finished products used by their producer for final consumption, valued at current basic prices. |
| 6.97. | When the value of the finished products is distributed as work-in-progress it is essential also to record the reduction in work-in-progress which takes place at the moment when the production is completed and the work-in-progress is transformed into finished agricultural products. Otherwise, output would be recorded twice: first as additions to work-in-progress and then as sales, barter or additions to inventories of finished products. The negative figure for the reduction in work-in-progress cancels out the value of the finished products sold, bartered or entered into inventories so that no output is recorded at the moment when the production process is terminated, all of it having been previously recorded as additions to work-in-progress during the period of production. |
| 6.98. | If the entire production process is completed within a single accounting period, such as a year, it may be unnecessary to distribute the output as work-in-progress in the way described above. However, if the accounting period ends before the process is completed, or if accounts have to be compiled for sub-periods such as quarters, the total value of the finished products has to be distributed as work-in-progress. It must be remembered that the corresponding inputs into the same production process are in fact distributed over time and recorded in the different periods or sub-periods. Thus, if outputs are not similarly distributed as work-in-progress, inputs are recorded without outputs, in which case economically meaningless figures are liable to be recorded for value added, operating surplus or mixed income and balance of primary incomes. Moreover, it may be necessary to record work-in-progress, even when the production process is completed within a single accounting period, in order to obtain an appropriate match between the values of inputs and outputs when the general price level is rising strongly within the accounting period. |
The estimation of work-in-progress in advance
| 6.99. | In agriculture, as in other industries, it may sometimes be necessary to estimate the value of work-in-progress in advance of the production process being completed and the value of the finished products being known, although most accounts are compiled long after the production processes to which they relate are finished. It is recommended therefore that work-in-progress be calculated provisionally on the basis of the actual costs incurred, plus a mark-up for the estimated operating surplus or mixed income. An estimate of mixed income may be made by distributing the expected mixed income in proportion to the volume of unpaid labour. As soon as the actual value of the finished products becomes known, the provisional estimates should be replaced by those obtained by distributing the actual value of the finished products in the ways described earlier. If a growing crop, i.e., work-in-progress, is badly damaged or destroyed prior to the harvest, the earlier provisional estimates of the value of the work-in-progress obviously may have to be revised downwards, to zero if necessary, even before the production is completed. |
| 6.100. | There may be circumstances in which the uncertainties attached to the estimation of the value of work-in-progress in advance of the harvest are so great that no useful analytic or policy purpose is served by compiling such estimates. However, this does not prevent useful estimates being compiled in many other situations in which the margin of uncertainty is much less. In any case it is necessary to specify the appropriate way in which the output of agricultural products is to be recorded and valued when complete information is available. Accounts are essentially ex post facto records, even though initial estimates made in advance are inevitably subject to error. |
3. Machinery, equipment and construction
| 6.101. | The production of large durable goods such as ships, heavy machinery, buildings and other structures may take several months or years to complete. The output from such production must, therefore, 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 has been explained in earlier sections of this chapter, including the preceding section on agricultural output. |
| 6.102. | It is worth noting, however, that when a contract of sale is agreed in advance for the construction of a building or other structure extending over several accounting periods, the output produced each period is treated as being sold to the purchaser at the end of the period: i.e., 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 therefore 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. |
4. Transportation and storage
Transportation
| 6.103. | 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 transformation takes place even if the good remains otherwise unchanged. The volume of transport services may be measured by indicators such as ton-kilometres or passenger-kilometres, 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. Transportation is a typical service activity in that the output produced consists of transformations of persons or goods that do not themselves form part of the output of the service producers. While the services performed are easily identified and quantified, they are not separate entities from the goods or persons in which they are incorporated. The production of transportation for own use within enterprises is an ancillary activity that is not separately identified and recorded. |
Storage
| 6.104. | 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. A good available at a later point in time may need to be treated as a different quality of good from the same good available at an earlier point in time if its supply and demand conditions change in the meanwhile. Thus, storing a good can be a process of production in which an economically significant transformation may take place even if the good remains physically unchanged otherwise. Storage can be viewed as transportation over time rather than space. Of course, if the good, such as wine, also matures while in store - i.e., its physical properties are improved by the passage of time - the amount of production which takes place is correspondingly greater. The volume of storage services produced can be measured by indicators such as space-days which combine the volume of storage space provided with the length of time over which the goods are stored, taking account of other relevant factors such as the environment in which the goods are stored which affect the quality of service provided. |
Storage and the measurement of changes in inventories
| 6.105. | The price of a good may change while it is being stored for at least three reasons:
(a) The physical qualities of the good may improve or deteriorate with the passage of time;
(b) 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 otherwise change;
(c) There may be general inflation or other general factors that lead to a change in the price of the good in question even though its physical or economic characteristics are not changed over time. |
| 6.106. | In the absence of general inflation, the difference between the prices at which goods enter and are withdrawn from storage in the first two cases should reflect the value of additional output produced while the goods are being stored. General inflation, however, leads to price changes that generate nominal or real holding gains. In practice, however, it may be difficult to disentangle the effects of the different factors at work. |
| 6.107. | Suppose that there is no general price inflation. Consider the case of a good whose quality improves while being stored (e.g., wine). Conceptually, the good entering storage can be regarded as work-in-progress if its production continues while it is being stored. The increase in its value while being stored must be treated as an addition to work-in-progress; i.e., as additional output, and not as a price increase. By assumption, the good leaving storage is not the same as the one that entered. The accounting rules for the recording of changes in the value of inventories must be applied in such a way that the entries to inventories include not only the value of the good (work-in-progress) when it entered but also the value of the addition to work-in-progress that took place while it was being stored. In effect, the output produced while in storage is valued by the price of the good when it is withdrawn less the value of the (immature) good that was entered into storage. |
| 6.108. | Goods subject to seasonal fluctuations in price due to changing demand or supply conditions over time must be treated in a similar way. Suppose an annual crop is harvested at one point in time, put into storage and then gradually sold off, or used, over the remaining 12 months. Suppose further that the price gradually rises to reflect the increased scarcity of the good until the next harvest. In the absence of general price changes, the increase in the price of the good while being stored must be interpreted as measuring the value of an addition to work-in-progress, as in the previous example. The goods withdrawn from storage some months after the crop is harvested are economically different from those that entered because of the changing supply conditions over time. A similar argument may be used for goods that are produced throughout the year and entered into storage because they are sold at only one time of the year, such as Christmas: in this case the demand conditions change over time. |
| 6.109. | 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 therefore be treated as additions to work-in-progress. |
5. Wholesale and retail distribution
| 6.110. | 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 rather than goods 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 be negative on goods that are never sold because they go to waste or are stolen. |
| 6.111. | 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 include 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, including sales at reduced
prices
plus
the value of other uses of goods purchased for resale
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. |
| 6.112. | 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;
(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;
(e) Goods withdrawn from inventory of goods for resale should be valued at the prices prevailing at the time they are withdrawn (as distinct from the prices at which they were originally purchased and entered inventories). Goods withdrawn from inventory include recurrent losses due to normal rates of wastage, theft or accidental damage; goods lost are valued in the same way as goods withdrawn for sale. |
| 6.113. | 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. |
| 6.114. | The average margin realized on goods purchased for resale may thus be expected to be less then the normal margin - possibly significantly less for certain types of goods such as fashion goods or perishable goods. Finally, it should be noted that margins are defined to exclude holding gains or losses on goods for resale while they are being held in inventory by wholesalers or retailers. As in the case of other types of production, holding gains and losses are excluded from output by valuing all entries to, or withdrawals from, inventories at the prices prevailing at the times the entries or withdrawals take place. |
6. Operating leasing
| 6.115. | The activity of renting out machinery or equipment for specified periods of time which are shorter than the total expected service lives of the machinery or equipment is termed operating leasing. It is a form of production in which the owner, or lessor, provides a service to the user, or lessee, the output of which is valued by the rental which the lessee pays to the lessor. Operating leasing has to be clearly distinguished from financial leasing, which is not itself a process of production but a method of financing the acquisition of fixed assets. |
| 6.116. | Operating leasing can be identified by the following characteristics:
(a) The lessor, or owner of the equipment, normally maintains a stock of equipment in good working order which can be hired on demand, or at short notice, by users;
(b) The equipment may be rented out for varying periods of time. The lessee may renew the rental when the period expires and the user may hire the same piece of equipment on several occasions. However, the user does not undertake to rent the equipment over the whole of the expected service life of the equipment;
(c) The lessor is frequently responsible for the maintenance and repair of the equipment as part of the service which he provides to the lessee. The lessor must normally be a specialist in the operation of the equipment, a factor that may be important in the case of highly complicated equipment, such as computers, where the lessee and his employees, may not have the necessary expertise or facilities to service the equipment properly themselves. The lessor may also undertake to replace the equipment in the event of a serious or prolonged breakdown. |
| 6.117. | Thus, the service provided by the lessor goes beyond the mere provision of a piece of equipment. It includes other elements such as convenience and security which can be important from the user's point of view. Operating leasing developed originally to meet the needs of users who require certain types of equipment only intermittently. However, with the evolution of increasingly complicated types of machinery, especially in the electronics field, the servicing and back-up facilities provided by a lessor are important factors which may influence a user to rent. Other factors which may persuade users to rent over long periods rather than purchase are the consequences for the enterprise's balance sheet, cash flow or tax liability. |
Financial leasing
| 6.118. | In contrast to operating leasing, financial leasing is not itself a process of production. It is an alternative to lending as a method of financing the acquisition of machinery and equipment. A financial lease is a contract between a lessor and a lessee whereby the lessor purchases machinery or equipment that is put at the disposal of the lessee and the lessee contracts to pay rentals which enable the lessor, over the period of the contract, to recover all, or virtually all, of his costs including interest. Financial leases may be distinguished by the fact that all the risks and rewards of ownership are, de facto, transferred from the legal owner of the good, the lessor, to the user of the good, the lessee. In order to capture the economic reality of such arrangements, a change of ownership from the lessor to the lessee is deemed to take place, even though legally the leased good remains the property of the lessor, at least until the termination of the lease when the legal ownership is usually transferred to the lessee. The lessor is treated as making a loan to the lessee which enables the latter to finance the acquisition of the equipment. The rentals are then treated as covering repayments of the loan and interest payments. |
| 6.119. | Thus, operating leasing and financial leasing are treated as totally different kinds of activity, the one being a process of production while the other is a method by which funds are channelled from a lender to a borrower. Of course, some incidental services are provided by the lessor in the process of arranging the lease, but the value of these services is very small compared with the total rentals paid. It is therefore essential to distinguish between the two types of leasing, even though financial arrangements may be devised which are hybrids of the two and which are consequently difficult to classify. |
7. Financial intermediaries except insurance corporations and pension funds
Introduction
| 6.120. | This section is concerned with financial intermediaries except insurance corporations and pension funds, which are dealt with in the following sections. |
| 6.121. | Financial intermediaries incur liabilities on their own account on financial markets by borrowing funds which they lend on different terms and conditions to other institutional units. As explained in chapter IV, they intermediate between lenders and borrowers by channelling funds from one to the other, putting themselves at risk in the process. They include almost all institutions describing themselves as "banks". They also include unincorporated enterprises engaged on financial intermediation on a small scale; these may be important in some developing countries. |
| 6.122. | Some financial intermediaries raise most of their funds by taking deposits; others do so by issuing bills, bonds or other securities. They lend funds by making loans or advances, or by purchasing bills, bonds or other securities. The pattern of their financial assets is different from that of their liabilities and in this way they transform the funds they receive in ways more suited to the requirements of borrowers. The rates of return they receive on the funds they lend are generally higher than the rates they pay on the funds they borrow, and they obtain most of the funds to defray their expenses and provide an operating surplus in this way. Many financial intermediaries do not charge explicitly for the intermediation services which they provide to their customers so that there may be no receipts from sales which can be used to value these services, although there may be an increasing tendency to make charges. |
| 6.123. | Financial intermediaries are also increasingly tending to provide various kinds of auxiliary financial services, or business services, as secondary activities: for example, currency exchange, or advice about investments, the purchase of real estate, or taxation. The output of such services is valued on the basis of the fees or commissions charged, in the same way as other services. The measurement of the production and consumption of these services poses no special conceptual or practical problems. The question to be resolved here is how to value the output of financial intermediation for which no explicit charges are made and for which there are no sales receipts. Such output has to be valued indirectly and the way in which this is done is explained in the following section. |
The output of financial intermediation services indirectly measured
| 6.124. | Some financial intermediaries are able to provide services for which they do not charge explicitly by paying or charging different rates of interest to borrowers and lenders (and to different categories of borrowers and lenders). They pay lower rates of interest than would otherwise be the case to those who lend them money and charge higher rates of interest to those who borrow from them. The resulting net receipts of interest are used to defray their expenses and provide an operating surplus. This scheme of interest rates avoids the need to charge their customers individually for services provided and leads to the pattern of interest rates observed in practice. However, in this situation, the System must use an indirect measure, financial intermediation services indirectly measured (FISIM), of the value of the services for which the intermediaries do not charge explicitly. |
| 6.125. | The total value of FISIM is measured in the System as the total property income receivable by financial intermediaries minus their total interest payable, excluding the value of any property income receivable from the investment of their own funds, as such income does not arise from financial intermediation. Whenever the production of output is recorded in the System the use of that output must be explicitly accounted for elsewhere in the System. Hence, FISIM must be recorded as being disposed of in one or more of the following ways - as intermediate consumption by enterprises, as final consumption by households, or as exports to non-residents. |
| 6.126. | In principle, the total output should, therefore, be allocated among the various recipients or users of the services for which no explicit charges are made. In practice, however, it may be difficult to find a method of allocating the total output among different users in a way which is conceptually satisfactory from an economic viewpoint and for which the requisite data are also available. Some flexibility has therefore to be accepted in the way in which the output is allocated. Some countries may prefer to continue to use the convention proposed in the 1968 version of the SNA whereby the whole of the output is recorded as the intermediate consumption of a nominal industry. This convention makes total GDP for the economy as a whole invariant to the size of the estimated output. |
| 6.127. | When the output is allocated among different users, one possible way of proceeding is to base the allocation on the difference between the actual rates of interest payable and receivable and a "reference" rate of interest. When the requisite information is available, estimates of the following may be calculated and used to allocate the total output:
(a) For those to whom the intermediaries lend funds, both resident and non-resident, the difference between the interest actually charged on loans, etc. and the amount that would be paid if a reference rate were used;
(b) For those from whom the intermediaries borrow funds, both resident and non-resident, the difference between the interest they would receive if a reference rate were used and the interest they actually receive. |
| 6.128. | The reference rate to be used represents the pure cost of borrowing funds - that is, a rate from which the risk premium has been eliminated to the greatest extent possible and which does not include any intermediation services. The type of rate chosen as the reference rate may differ from country to country but the inter-bank lending rate would be a suitable choice when available; alternatively, the central bank lending rate could be used. |
| 6.129. | If this type of information is not available or not appropriate, the total value of FISIM could be allocated using different indicators. For example, it could be allocated in proportion to the total financial assets and liabilities that exist between financial intermediaries and various groups of users, or in proportion to other relevant financial variables. |
| 6.130. | For the System as a whole, the allocation of FISIM among different categories of users is equivalent to reclassifying certain parts of interest payments as payments for services. This reclassification has important consequences for the values of certain aggregate flows of goods and services - output, intermediate and final consumption, imports and exports - which affect the values added of particular industries and sectors, and also total gross domestic product (GDP). There are also implications for the flows of interest recorded in the primary distribution of income accounts. However, the saving of all the units concerned, including the financial intermediaries themselves, are not affected. Nor is the financial account affected. |
| 6.131. | Because of these effects, it is desirable for compilers to provide additional information to give some indication to users of the accounts of the consequences of alternative treatments. When FISIM is actually allocated among users, the resulting values should be identified and shown separately. Conversely, when the whole of the value of FISIM is, by convention, allocated to the intermediate consumption of a nominal industry, it is recommended that compilers should provide supplementary estimates, even if only approximate and very aggregative, of the allocation of FISIM between intermediate consumption and the main categories of final demand and of the effects that such an allocation would have on GDP, GNI and other relevant aggregrates. The treatment of FISIM is explained in greater detail in annex III on this subject at the end of this manual. |
Central banks
| 6.132. | The services of financial intermediation provided by central banks should be measured in the same way as those of other financial intermediaries. Because of the unique functions which may be performed by central banks, the value of their output may sometimes appear exceptionally large in relation to the resources employed. Services other than financial intermediation which may be carried out by central banks should be valued by the fees or commissions charged, in the same way as for other financial enterprise. |
Unincorporated financial intermediaries and money lenders
| 6.133. | The output of unincorporated financial intermediaries, including those whose activities are not monitored and subject to regulation by central banks or other authorities, is measured in the same way as for financial corporations. Money lenders who incur liabilities on their own account in order to mobilize funds which they lend to others are clearly engaged in financial intermediation. Their output must be measured by the difference between the property income they receive from the lending of borrowed funds and the interest paid on the borrowed funds. As in the case of large corporations, the income they receive from the investment of their own funds is excluded from this calculation. |
| 6.134. | Some money lenders lend only their own funds. The activity of such small-scale money lenders, including many village money lenders, is not financial intermediation as they do not channel funds from one group of institutional units to another. Lending as such is not a process of production and the interest received from the lending of own funds cannot be identified with the value of any services produced. |
8. Insurance
| 6.135. | The activity of insurance is intended to provide individual institutional units exposed to certain risks with financial protection against the consequences of the occurrence of specified events. It is also a form of financial intermediation in which funds are collected from policyholders and invested in financial or other assets which are held as technical reserves to meet future claims arising from the occurrence of the events specified in the insurance policies. Although insurance involves transfers in which funds are redistributed among institutional units, insurance enterprises also produce services that are paid for, directly or indirectly, by their policyholders. It is not easy to disentangle the different elements involved in the transactions between insurance enterprises and their policyholders and to record them appropriately in the System. Accordingly, a comprehensive explanation of insurance and pensions and the ways in which the various elements interact is given in annex IV at the end of this manual. The purpose of the present section is to explain how the output of the services produced by insurance enterprises is calculated and valued in the System. |
| 6.136. | Typically, insurance enterprises do not make a separate charge for the service of arranging the financial protection or security which insurance is intended to provide. Whenever insurance enterprises do make explicit charges to their policyholders or others, these are treated as payments for services rendered in the normal way. For those services for which no explicit charges are made the value of the services they provide has to be estimated indirectly, however, from the total receivables and payables of insurance enterprises, including the income accruing from the investment of their reserves. |
| 6.137. | Insurance enterprises build up technical reserves for several reasons. One is that insurance premiums are payable in advance at the start of each period covered by the policy so that insurance enterprises typically hold funds for a period of time before an eventuality giving rise to a payment occurs. This applies to non-life insurance as well as to life insurance. Another reason is that there is sometimes an important time-lag between the eventuality occurring and the payment of the subsequent claim taking place. In addition, insurance enterprises must hold considerable reserves in the form of actuarial reserves, including reserves on "with-profits" life policies, in respect of life insurance. The technical reserves built up for those reasons are invested in financial or non-financial assets, including real estate. The income generated by these investments in the form of the property income or net operating surpluses earned by renting residential or non-residential buildings has a considerable influence on the level of premiums insurance enterprises need to charge. The management of its investment portfolio is an integral part of the business of insurance which has a considerable bearing on the profitability and competitiveness of the enterprise. |
| 6.138. | The value of the total output of insurance services is obtained residually from an accounting relationship in which the following elements are involved:
(a) Actual premiums earned: these refer to those parts of the premiums payable in the current or previous periods which cover the risks incurred during the accounting period in question. They are not equal to the premiums actually payable during the accounting period, as only part of the period covered by an individual premium may fall within the accounting period in which it is payable. The prepayments of premiums, which refer to those parts of the premiums which cover risks in the subsequent accounting period or periods, form part of the technical reserves. Thus, total premiums earned are equal to premiums receivable less the value of the changes in the reserves due to prepayments of premiums;
(b) Income from investment of the insurance technical reserves, as described above. Although the reserves are held and managed by the insurance enterprises, they are treated in the System as assets of the policyholders. The income earned on the investment of the reserves is, therefore, attributed to the policyholders for whose benefit the reserves are held. The income is recorded as receivable by the policyholders who pay it all back again to the insurance enterprises as premium supplements. These premium supplements must therefore always be equal in value to the corresponding income from the investment of the technical reserves;
(c) Claims which become due for payment during the accounting period: claims become due when the eventuality takes place which gives rise to a valid claim; they are equal to claims actually payable within the accounting period plus changes in the reserves against outstanding claims;
(d) Changes in the actuarial reserves and reserves for with-profits insurance. These changes consist of allocations to the actuarial reserves and reserves for with-profits insurance policies to build up the capital sums guaranteed under these policies. Most of these reserves relate to life insurance but they may be needed in the case of non-life insurance when claims are paid out as annuities instead of lump sums.
All changes in insurance technical reserves referred to (a), (c) and (d) are measured excluding any nominal holding gains or losses. |
| 6.139. | Items (a) and (b), i.e.:
Actual premiums earned; and
Premium supplements (= income from investments)
determine the total resources of an insurance enterprise arising from its insurance activities. Items (c) and (d), i.e.:
Claims due; and
Changes in actuarial reserves and reserves for with-profits insurance
determine the total technical charges to be met out of these resources. The difference between the total resources and total technical charges represents the amount available to an insurance enterprise to cover its costs and provide for an operating surplus. It is therefore taken as measuring the value of the output of services produced by the enterprise. Insurance enterprises take all the items (b) to (d) into consideration when fixing the levels of the premiums they charge in order to ensure that the excess of total resources over total charges provides sufficient remuneration for their own services. |
| 6.140. | Thus, the basic accounting used to estimate the value of the output of insurance services is as follows:
Total claims due
plus Changes in actuarial and reserves for with-profits insurance
plus Value of the output of insurance services
=
Total actual premiums earned
plus Total premium supplements
The value of the output of insurance services is determined residually as the item that balances both sides of the above account. The outputs of both life and non-life insurance services are estimated by means of this identity. |
9. Autonomous pension funds
| 6.141. | Autonomous pension funds are separate funds (i.e., separate institutional units) established for purposes of providing incomes on retirement for specific groups of employees which are organized, and directed, by private or public employers or jointly by the employers and their employees. These funds engage in financial transactions on their own account on financial markets and make investments by acquiring financial and non-financial assets. They do not include social security schemes organized for large sections of the community which are imposed, controlled or financed by general government. The output produced by pension funds is measured in the same way as that of insurance enterprises, as described above, except that in the case of pension funds, "premiums" are generally described as "contributions", while "claims" are generally described as "benefits". |
10. Research and development
| 6.142. | Research and development by a market producer is an activity undertaken 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 sub-contracted commercially, but is likely to have to be valued on the basis of the total production costs, in practice. 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. |
11. The production of originals and copies
| 6.143. | 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. |
| 6.144. | The output of the first stage is an intangible 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 could 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. |
| 6.145. | The owner of the asset may use it directly or to produce copies in subsequent periods. Consumption of fixed capital is recorded in respect of the use of the asset in the same way as for any other fixed asset used in production. |
| 6.146. | 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. In these cases, the owner is treated as providing services to the licensees that are recorded as part of their intermediate consumption. The payments made by the licenses 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. The use of the asset is then recorded as consumption of fixed capital in the production of services by the owner. These services are valued by the fees, commissions, royalties, etc. received from the licensees. |
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