METAC Workshop March 14-17, 2016 Beirut, Lebanon National Accounts Compilation Issues Session 11: Gross fixed capital formation

Topics Definition The assets boundary Time of recording Valuation Data sources and procedures

Definition the total value of a producer’s acquisitions, less disposals, of fixed assets during the accounting period, plus certain specified expenditure on services that adds to the value of non-produced assets: – Major improvement of tangible non- produced assets; – Cost of transfer of ownership of non- produced assets.

The asset boundary goods and services that are used in production for more than one year, with two exclusions: – consumer durables are not treated as fixed assets: … purchases of passenger cars to be used as taxis and as consumer goods for households; – small tools, treated as materials or supplies used for intermediate consumption.

The asset boundary New requirements of 2008 SNA: Extended assets boundary with inclusion of Research and Development – … the output of research and development should be capitalized as “intellectual property products”; Changes in classification of the non-financial fixed assets: – Classification of produced and non-produced assets is no longer distinguished between tangible and intangible assets. – Non-produced assets are split into three categories: natural resources, contracts leases and licenses, and purchase and sale of goodwill and marketing assets.

The asset boundary Other changes in classification of the non-financial fixed assets: – a category has been added for land improvements within buildings and structures; – information, computer and telecommunications (ICT) equipment has been included as a new category under machinery and equipment; – weapons systems are recognized as produced assets and classified separately; – mineral exploration has been renamed as “mineral exploration and evaluation” to emphasize that the coverage conforms to the international accounting standards; – Computer software has been modified to include databases.

Existing assets... whose value was included in the stock of fixed capital of at least one producer unit in the domestic economy at some earlier point in time either in the current period or in the immediately previous accounting period. The value of the existing asset sold, bartered or transferred is recorded as negative gross fixed capital formation by the former and as positive gross fixed capital formation by the latter; – The value of the positive gross fixed capital formation recorded for the purchaser exceeds the value of the negative gross fixed capital formation recorded for the seller by the value of the costs of ownership transfer incurred by the purchaser

Existing assets Some durable goods may be classified as fixed assets or as consumer durables depending upon the owner and the purpose for which they are used. If the ownership of such a good were transferred from an enterprise to a household to be used for final consumption, negative GFCF is recorded for the enterprise and positive consumption expenditure by the household. If a vehicle owned by a household were to be acquired by an enterprise, it would be recorded as an acquisition of a “new” fixed asset by the enterprise, even though it is an existing good, and as negative consumption expenditure by the household. A similar treatment is applied to imported investment goods acquired by resident producers as assets.

Existing assets Improvements vs current maintenance and repair: Improvements to existing fixed assets: increase their productive capacity, extend their service lives, or both form part of GFCF. Different treatment to improvements to land: the improvements are treated as creation of a new fixed asset and are not regarded as an increase in the value of the natural resource. Ordinary maintenance and repairs are activities that must be undertaken regularly in order to maintain a fixed asset in working order over its expected service life. – … no change the fixed asset’s performance, productive capacity or expected service life

Costs of acquisition/disposals of fixed assets … an integral part of the GFCF; … applies to both new and existing assets. The following items can be distinguished professional charges or commissions: fees paid to lawyers, architects, surveyors, engineers, and commissions paid to estate agents and auctioneers; trade and transport costs separately invoiced to the purchaser; taxes payable on the transfer of ownership or on the disposal of an asset; delivery and installation or uninstallation costs not included in the price of the asset; terminal costs incurred at the end of an asset’s life

Time of recording … when the ownership of the fixed assets is transferred. Exceptions, regarding construction projects and immature animals: – incomplete construction projects and immature animals and plantations are treated as work-in- progress – they are reclassified from inventories to fixed capital when complete and delivered to the unit intending to use them as fixed assets

Time of recording Two cases regarding unfinished construction: assets are developed under a contract of sale: – when stage payments are made: these are regarded as purchase of a fixed asset or as a trade advance if the value of the stage payment exceeds the value of the work put in place. no contract of sale agreed in advance: – the output produced by the enterprise must be recorded as work-in-progress or as additions to the producers’ inventories of finished goods, depending on whether the product is completed finished dwellings built speculatively remain as additions to the producers’ inventories of finished goods until sold or acquired by users.

Valuation At purchasers prices, plus any costs of ownership transfer: – Value of fixed assets purchased; – Value of fixed assets acquired through barter; At basic prices or by costs of production, when satisfactory estimates of their basic prices cannot be made: – Value of assets produced for own gross fixed capital; – Value of assets transferred in kind. In practice, neither taxes on products nor transportation costs may apply, in which case the purchasers’ prices will not differ from the basic prices of the product.

Data sources Economic surveys, investment in fixed assets; Enterprise balance sheets; Foreign trade statistics – imports of machines and equipment Construction statistics Agricultural statistics, productive plants and animals Households surveys, acquisition of dwellings: purchases and own account construction Administrative information – VAT files, when investment purchases are specified in the declarations – Big infrastructural projects; – Building permits Commodity flow method – at product level within the Supply and Use tables

Compilation procedures Direct estimates based on the available statistical and administrative data; – Economic census – Annual direct information from big companies and government infrastructural projects Indirect extrapolations, based on volume indicators: – Supply of building materials; – Building permit systems – Supply of machinery and equipment Commodity flow method – at product level within the Supply and Use tables Construction output reconciled for GFCF in buildings and other structures; Imports of machinery and equipment reconciled to GFCF

CFC and Depreciation Depreciation in commercial accounting: is often used in the context of writing off historic costs, – The “historic costs” of fixed assets, that is, the prices originally paid for them: irrelevant for the calculation of consumption of fixed capital as prices change over time … whereas in the SNA consumption of fixed capital is dependent on the current value of the asset. – In order to be consistent with the other entries in the production account, CFC must be valued with reference to the same overall set of current prices used to value output and intermediate consumption. – … using the actual or estimated value of fixed assets prevailing at the time of reporting period, not at the time the goods were originally acquired.

References 2008 SNA, Chapter

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