1.01

The European System of Accounts (hereinafter referred to as ‧the ESA 2010‧ or ‧the ESA‧) is an internationally compatible accounting framework for a systematic and detailed description of a total economy (that is, a region, country or group of countries), its components and its relations with other total economies.

1.02

The predecessor of the ESA 2010, the European System of Accounts 1995 (the ESA 95), was published in 1996 (1). The ESA 2010 methodology as set out in this Annex has the same structure as the ESA 95 publication for the first thirteen chapters, but then has eleven new chapters elaborating aspects of the system which reflect developments in measuring modern economies, or in the use of the ESA 95 in the European Union (the EU).

1.03

The structure of this manual is as follows. Chapter 1 covers the basic features of the system in terms of concepts, and sets out the principles of the ESA and describes the fundamental statistical units and their groupings. It gives an overview of the sequence of accounts, and a brief description of key aggregates and the role of supply and use tables and the input-output framework. Chapter 2 describes the institutional units used in measuring the economy, and how these units are classified into sectors and other groups to allow analysis. Chapter 3 describes all transactions with regard to products (goods and services), as well as non-produced assets, in the system. Chapter 4 describes all the transactions in the economy which distribute and re-distribute income and wealth in the economy. Chapter 5 describes the financial transactions in the economy. Chapter 6 describes the changes that can occur to the value of assets through non-economic events or price changes. Chapter 7 describes balance sheets, and the asset and liability classification scheme. Chapter 8 sets out the sequence of accounts, and the balancing items associated with each account. Chapter 9 describes supply and use tables, and their role in reconciling the measures of income, output and expenditure in the economy. It also describes the input-output tables that can be derived from the supply and use tables. Chapter 10 describes the conceptual basis for the price and volume measures associated with the nominal values found in the accounts. Chapter 11 describes the population and labour market measures which can be used with measures of the national accounts in economic analysis. Chapter 12 gives a brief description of quarterly national accounts, and how they differ in emphasis from the annual accounts.

1.04

Chapter 13 describes the purposes, concepts and compilation issues in drawing up a set of regional accounts. Chapter 14 covers the measurement of financial services provided by financial intermediaries and funded through net interest receipts, and reflects years of research and development by Member States in order to have a measure which is robust and harmonised across Member States. Chapter 15 on contracts, leases and licences is necessary to describe an area of increasing importance in the national accounts. Chapters 16 and 17 on insurance, social insurance and pensions describe how these arrangements are handled in the national accounts, as questions of redistribution become of increasing interest as populations age. Chapter 18 covers the rest of the world accounts, which are the national accounts equivalent to the accounts of the balance of payments measuring system. Chapter 19 on European Accounts is also new, covering aspects of the national accounts where European institutional and trading arrangements raise issues which require a harmonised approach. Chapter 20 describes the accounts for the government sector — an area of special interest as issues of fiscal prudence by Member States continue to be critical in the conduct of economic policy in the EU. Chapter 21 describes the links between business accounts and national accounts, an area of growing interest as multinational corporations become responsible for an increasing share in gross domestic product (GDP) for all countries. Chapter 22 describes the relationship of satellite accounts with the main national accounts. Chapters 23 and 24 are for reference purposes; Chapter 23 sets out the classifications used for sectors, activities and products in the ESA 2010, and Chapter 24 sets out the complete sequence of accounts for every sector.

1.05

The structure of the ESA 2010 is consistent with the worldwide guidelines on national accounting set out in the System of National Accounts 2008 (2008 SNA), apart from certain differences in presentation and the higher degree of precision of some of the ESA 2010 concepts which are used for specific EU purposes. Those guidelines were produced under the joint responsibility of the United Nations (UN), the International Monetary Fund (IMF), the Statistical Office of the European Union (Eurostat), the Organisation for Economic Cooperation and Development (OECD) and the World Bank. The ESA 2010 is focused on the circumstances and data needs in the EU. Like the 2008 SNA, the ESA 2010 is harmonised with the concepts and classifications used in many other social and economic statistics (for example, statistics on employment, statistics on manufacturing and statistics on external trade). The ESA 2010 therefore serves as the central framework of reference for the social and economic statistics of the EU and its Member States.

1.06

The ESA framework consists of two main sets of tables:

1.07

The sector accounts provide, by institutional sector, a systematic description of the different stages of the economic process: production, generation of income, distribution of income, redistribution of income, use of income and financial and non-financial accumulation. The sector accounts also include balance sheets to describe the stocks of assets, liabilities and net worth at the beginning and the end of the accounting period.

1.08

The input-output framework, through the supply and use tables, sets out in more detail the production process (cost structure, income generated and employment) and the flows of goods and services (output, imports, exports, final consumption, intermediate consumption and capital formation by product group). Two important accounting identities are reflected in this framework: the sum of incomes generated in an industry is equal to the value added produced by that industry; and, for any product or grouping of products, supply is equal to demand.

1.09

The ESA 2010 encompasses concepts of population and employment. Such concepts are relevant for the sector accounts, the accounts by industry and the supply and use framework.

1.10

The ESA 2010 is not restricted to annual national accounting, but applies also to quarterly and shorter or longer period accounts. It also applies to regional accounts.

1.11

The ESA 2010 exists alongside the 2008 SNA because of the uses of national accounts measures in the EU. The Member States are responsible for the collection and presentation of their own national accounts to describe the economic situation of their countries. Member States also compile a set of accounts which are submitted to the Commission (Eurostat) as part of a regulatory data transmission programme, for key social, economic and fiscal policy uses in the Union. Those uses include determination of Member State monetary contributions to the EU budget via the ‧fourth resource‧, aid to regions of the EU through the structural funds programme and surveillance of Member States' economic performance in the framework of the excessive deficit procedure and of the Stability and Growth Pact.

1.12

In order that levies and benefits are distributed according to measures compiled and presented in a strictly consistent manner, the economic statistics used for those purposes shall be compiled according to the same concepts and rules. The ESA 2010 is a regulation setting forth the rules, conventions, definitions and classifications to be applied in producing the national accounts in Member States which are to be part of the data transmission programme as set out in Annex B to this Regulation.

1.13

Given the very large sums of money involved in the contributions and benefits system operated in the EU, it is essential that the measurement system be applied consistently in each Member State. In such circumstances, it is important to adopt a cautious approach to estimates which cannot be observed directly in the market place, avoiding the use of model-based procedures for the estimation of measures in the national accounts.

1.14

The ESA 2010 concepts are in several instances more specific and precise than those of the 2008 SNA in order to ensure as much consistency as possible between Member States measures derived from the national accounts. This over-riding requirement for robust consistent estimates has resulted in the identification of a core set of national accounts in the EU. Where the level of consistency of measurement across Member States is insufficient, the latter estimates are generally included in so-called ‧non-core-accounts‧ covering supplementary tables and satellite accounts.

1.15

An example of where it has been considered necessary to be cautious in the design of the ESA 2010 lies in the field of pension liabilities. The case for measuring these to assist in economic analyses is a strong one, but the critical requirement in the EU to produce accounts which are consistent across time and space has obliged a cautious approach.

1.16

The increasingly global nature of economic activity has increased international trade in all its forms, and increased the challenges to countries of recording their domestic economies in the national accounts. Globalisation is the dynamic and multidimensional process whereby national resources become more internationally mobile, while national economies become increasingly interdependent. The feature of globalisation which potentially causes most measurement problems for national accounts is the increasing share of international transactions undertaken by multinational companies, where the transactions across borders are between parents, subsidiaries and affiliates. However other challenges exist, and a more exhaustive list of data issues is as follows:

1.17

All of these increasingly common aspects of globalisation make the capture and accurate measurement of cross-border flows a growing challenge for national statisticians. Even with a comprehensive and robust collection and measurement system for the entries in the rest of the world sector (and thus also in the international accounts found in the balance of payments), globalisation will increase the need for extra efforts to maintain the quality of national accounts for all economies and groupings of economies.

1.18

The ESA framework can be used to analyse and evaluate:

1.19

For the EU and its Member States, the figures from the ESA framework play a major role in formulating and monitoring their social and economic policies.

The following examples demonstrate uses of the ESA framework:

1.20

In order to establish a balance between data needs and data possibilities, the concepts in the ESA 2010 have several important characteristics. The characteristics are that the accounts are:

1.21

The concepts in the ESA 2010 are internationally compatible because:

1.22

The concepts in the ESA 2010 are harmonised with those in other social and economic statistics because the ESA 2010 employs concepts and classifications (e.g. Statistical classification of economic activities in the European Union ‧NACE rev. 2‧ (2)) that are used for other social and economic statistics of Member States, e.g. in statistics on manufacturing, statistics on external trade and statistics on employment; conceptual differences have been kept to a minimum. Furthermore, the concepts and classifications in the ESA 2010 are harmonised with those of the United Nations.

This harmonisation with social and economic statistics helps the linkage to and comparison with these figures, so that the quality of the national accounts figures can be assured. Furthermore, the information contained in these specific statistics can be better related to the general statistics on the national economy.

1.23

The shared concepts used throughout the national accounting framework and the other social and economic statistical systems enable consistent measures to be derived. For example, the following ratios can be calculated:

The internal consistency of concepts allows estimates to be derived by residual, e.g. saving can be estimated as the difference between disposable income and final consumption expenditure.

1.24

The concepts in the ESA 2010 are applied with data collection and measurement in mind. The operational character is revealed in several ways in the guidance for drawing up the accounts.

1.25

However, the data needed for national accounts statistics may not be easy to collect directly, as the underlying concepts usually diverge from the concepts underlying administrative data sources. Examples of the administrative sources are business accounts, records for various types of taxes (VAT, personal income tax, import levies, etc.), social security data and data from supervisory boards on banking and insurance. These administrative data serve as inputs for compiling the national accounts. In general, they are transformed in order to comply with the ESA.

The concepts in the ESA usually differ from their administrative counterparts in that:

1.26

Nevertheless, administrative data sources meet the data needs of national accounts and other statistics very well, because:

1.27

The main concepts in the ESA are well-established and fixed over a long period, because:

This conceptual continuity reduces the need to recalculate time series. Furthermore, it limits the vulnerability of the concepts to national and international political pressure. For these reasons, the national accounts figures have been able to serve as an objective database for economic policy and analysis.

1.28

The concepts in the ESA 2010 are focused on describing the economic process in monetary and readily observable terms. Stocks and flows that are not readily observable in monetary terms, or that do not have a clear monetary counterpart, are not recorded in the ESA.

This principle has not been applied strictly, because account should also be taken of the requirement of consistency and the needs of users. For example, consistency requires that the value of collective services produced by government is recorded as output, because the payment of compensation of employees and the purchase of all kinds of goods and services by government are readily observable in monetary terms. Furthermore, for the purposes of economic analysis and policy, describing the collective services of government in relation to the rest of the national economy increases the usefulness of the national accounts as a whole.

1.29

The scope of the concepts in the ESA can be illustrated by considering some important borderline issues.

The following shall be recorded within the production boundary of the ESA (see paragraphs 3.07 to 3.09):

1.30

The following fall outside the production boundary, and shall not be recorded in the ESA:

1.31

The ESA records all outputs that result from production within the production boundary. However, the outputs of ancillary activities shall not be recorded. All inputs consumed by an ancillary activity shall be treated as inputs to the activity it supports. If an establishment undertaking only ancillary activities is statistically observable, in that separate accounts for the production it undertakes are readily available, or if it is in a geographically different location from the establishments it serves, it has to be recorded as a separate unit and allocated to the industrial classification corresponding to its principal activity, in both national and regional accounts. In the absence of suitable basic data being available, the output of the ancillary activity may be estimated by summing costs.

1.32

If activities are regarded as production and their output is recorded, then the concomitant income, employment, final consumption, etc. are also recorded. For example, as the own-account production of housing services by owner-occupiers is recorded as production, so the income and final consumption expenditure it generates for these owner-occupiers are also recorded. As there is, by definition, no labour input to the production of the services of owner-occupied dwellings, no employment is recorded. This maintains consistency with the system of labour statistics, where no employment is recorded for ownership of dwellings. The reverse holds when activities are not recorded as production: domestic services produced and consumed within the same household do not generate income and final consumption expenditure and no employment is involved.

1.33

The ESA also lays down conventions, concerning:

1.34

Sector accounts are created by allocating units to sectors and this enables transactions and balancing items of the accounts to be presented by sector. The presentation by sector reveals many key measures for economic and fiscal policy purposes. The main sectors are households, government, corporations (financial and non-financial), non-profit institutions serving households (NPISHs) and the rest of the world.

The distinction between market and non-market activity is an important one. An entity controlled by government, which is shown to be a market corporation, is classified in the corporation sector, outside the general government sector. Thus, the deficit and debt levels of the corporation will not be part of the general government deficit and debt.

1.35

It is important that clear and robust criteria for allocating entities to sectors are set out.

The public sector consists of all institutional units resident in the economy that are controlled by government. The private sector consists of all other resident units.

Table 1.1 sets out the criteria used to distinguish between public and private sector, and in the public sector between the government sector and public corporations sector, and in the private sector between the NPISH sector and the private corporations sector.

Table 1.1

1.36

Control is defined as the ability to determine the general policy or programme of an institutional unit. Further details in relation to the definition of control are given in paragraphs 2.35 to 2.39.

1.37

Differentiating between market and non-market, and so, for public sector entities, classifying them into the general government sector or the corporations sector, is decided by the following rule:

An activity shall be considered as a market activity when the corresponding goods and services are traded under the following conditions:

1.38

The detail in the conceptual framework of the ESA offers the opportunity for flexibility: some concepts are not explicitly present in the ESA but can nevertheless easily be derived from it. An example is the creation of new sectors by rearranging the subsectors defined in the ESA.

1.39

Flexibility exists also through the possibility to introduce additional criteria that do not conflict with the logic of the system. For example, these criteria can allow subsector accounts to be drawn up by the scale of employment for producer units or the size of income for households. For employment, subclassification by level of education, age and gender can be introduced.

1.40

For some data needs, separate satellite accounts should be drawn up.

Examples are:

1.41

Satellite accounts serve such data needs by:

1.42

A social accounting matrix (SAM) is a matrix presentation that elaborates the linkages between supply and use tables and the sector accounts. A SAM provides additional information on the level and composition of employment, via a subdivision of compensation of employees by type of person employed. This subdivision applies to both the use of labour by industry, as shown in the use tables, and the supply of labour by socio-economic subgroup, as shown in the allocation of primary income account for subsectors of the sector households. In this way, the supply and use of various categories of labour is shown systematically.

1.43

In satellite accounts, all basic concepts and classifications of the central framework of the ESA 2010 shall be retained. Changes in the concepts shall only be introduced when this is the purpose of the satellite account. In such instances, the satellite account shall also contain a table showing the link between the major aggregates in the satellite account and those in the central framework. In this way, the central framework retains its role as a framework of reference and at the same time more specific needs are addressed.

1.44

In general terms, the central framework does not include measures of stocks and flows that are not readily observable in monetary terms (or without a clear monetary counterpart). By their nature, the analysis of such stocks and flows is usually also well served by compiling statistics in non-monetary terms, e.g.:

1.45

Satellite accounts enable such statistics in non-monetary units to be linked to the national accounts in the central framework. Using the classifications employed in the central framework for such non-monetary statistics enables the link to be made, e.g. the classification by type of household or the classification by industry. In this way, a consistent extended framework is drawn up. This framework can then serve as a database for the analysis and evaluation of interactions between the variables in the central framework and those in the extended part.

1.46

The central framework and its major aggregates do not describe changes in welfare. Extended accounts can be drawn up which include also the imputed monetary values of, for example:

1.47

The extended accounts can also reclassify the final expenditure on regrettable necessities (e.g. defence) as intermediate consumption, i.e. as not contributing to welfare. Similarly, the damage due to floods and other natural disasters may be classified as intermediate consumption, i.e. as a reduction in (absolute) welfare. In this way, one could try to construct a very rough and very imperfect indicator of changes in welfare. However, welfare has many dimensions, most of which are not best expressed in monetary terms. A better solution for measuring welfare is therefore to use, for each dimension, separate indicators and units of measurement. The indicators could be, for example, infant mortality, life expectancy, adult literacy and national income per capita. These indicators could be incorporated into a satellite account.

1.48

In order to attain a consistent, internationally compatible framework, administrative concepts are not employed in the ESA. However, for all kinds of national purposes, obtaining figures based on administrative concepts can be very useful. For example, for estimating tax revenues, statistics of taxable income are required. Such statistics can be provided by making some modifications to the national accounts statistics.

1.49

A similar approach could be taken for concepts used in national economic policy, e.g. for:

Satellite accounts or supplementary tables can meet such data needs.

1.50

The ESA 2010 is based on the concepts of the 2008 SNA, which provides guidelines on national accounting for all countries throughout the world. Nevertheless, there are several differences between the ESA 2010 and the 2008 SNA:

1.51

The ESA 2010 differs in scope as well as in concepts from the ESA 95. Most of the differences correspond to differences between the 1993 SNA and the 2008 SNA. The major differences are:

1.52

The changes in the ESA 2010 in comparison with the ESA 95 are not restricted to conceptual changes. There are major differences in scope, with new chapters on satellite accounts, government accounts and the rest of the world accounts. There are also significant extensions to the chapters on quarterly accounts and regional accounts.

1.53

The main characteristics of the system are:

1.54

The ESA 2010 system uses two types of unit and two corresponding ways of subdividing the economy, which are quite different and serve separate analytical purposes.

1.55

The first purpose of describing income, expenditure and financial flows, and balance sheets, is met by grouping institutional units into sectors on the basis of their principal functions, behaviour and objectives.

1.56

The second purpose of describing processes of production and for input-output analysis is met by the system grouping local kind-of-activity units (local KAUs) into industries on the basis of their type of activity. An activity is characterised by an input of products, a production process and an output of products.

1.57

Institutional units are economic entities that are capable of owning goods and assets, of incurring liabilities and of engaging in economic activities and transactions with other units in their own right. For the purposes of the ESA 2010 system, the institutional units are grouped together into five mutually exclusive domestic institutional sectors:

The five sectors together make up the total domestic economy. Each sector is also divided into subsectors. The ESA 2010 system enables a complete set of flow accounts and balance sheets to be compiled for each sector, and subsector, as well as for the total economy. Non-resident units can interact with these five domestic sectors, and the interactions are shown between the five domestic sectors and a sixth institutional sector: the rest of the world sector.

1.58

When institutional units carry out more than one activity, they shall be partitioned with regard to the type of activity. Local KAUs enable this presentation to be made.

A local KAU groups all the parts of an institutional unit in its capacity as producer which are located in a single site or in closely located sites, and which contribute to the performance of an activity at the class level (four digits) of the NACE Rev. 2.

1.59

Local KAUs are registered for each secondary activity; however, if the accounting documents necessary to separately describe such activities are not available, a local KAU will combine several secondary activities. The group of all local KAUs engaged on the same, or similar, kind-of-activity constitutes an industry.

An institutional unit comprises one or more local KAUs; a local KAU belongs to one and only one institutional unit.

1.60

For analysis of the production process, use is made of an analytical unit of production. This unit is only observable when a local KAU produces one type of product, with no secondary activities. This unit is known as a unit of homogeneous production. Groupings of such units constitute homogeneous branches.

1.61

The total economy is defined in terms of resident units. A unit is a resident unit of a country when it has a centre of predominant economic interest on the economic territory of that country — that is, when it engages for an extended period (one year or more) in economic activities on this territory. The institutional sectors referred to in paragraph 1.57 are groups of resident institutional units.

1.62

Resident units engage in transactions with non-resident units (that is, units which are resident in other economies). These transactions are the external transactions of the economy and are grouped in the rest of the world account. So the rest of the world plays a role similar to that of an institutional sector, although non-resident units are included only in so far as they are engaged in transactions with resident institutional units.

1.63

Notional resident units, treated in the ESA 2010 system as institutional units, are defined as:

1.64

Two basic kinds of information are recorded: flows and stocks.

Flows refer to actions and effects of events that take place within a given period of time, while stocks refer to positions at a point of time.

1.65

Flows reflect the creation, transformation, exchange, transfer or extinction of economic value. They involve changes in the value of an institutional unit's assets or liabilities. Economic flows are of two kinds: transactions, and other changes in assets.

Transactions appear in all accounts and tables where flows appear, except the other changes in volume of assets account and the revaluation account. Other changes in assets are recorded only in those two accounts.

Elementary transactions and other flows are grouped into a relatively small number of types according to their nature.

1.66

A transaction is an economic flow that is an interaction between institutional units by mutual agreement or an action within an institutional unit that it is useful to treat as a transaction, because the unit is operating in two different capacities. Transactions are split into four main groups:

1.67

Most transactions are interactions between two or more institutional units. However, the ESA 2010 system records some actions within institutional units as transactions. The purpose of recording these intra-unit transactions is to give a more analytically useful picture of output, final uses and costs.

1.68

Consumption of fixed capital, which is recorded as a cost by the ESA 2010 system, is an intra-unit transaction. Most of the other intra-unit transactions are transactions in products, typically recorded when institutional units operating as both producers and final consumers, choose to consume some of the output they have produced. This is often the case for households and general government.

1.69

All own-produced output used for final uses within the same institutional unit shall be recorded. Own-produced output used for intermediate consumption within the same institutional unit shall be recorded only when production and intermediate consumption take place in different local KAUs within the same institutional unit. Output produced and used as intermediate consumption within the same local KAU shall not be recorded.

1.70

Transactions are monetary transactions when the units involved make or receive payments, or incur liabilities or receive assets denominated in units of currency.

Transactions that do not involve the exchange of cash, or assets or liabilities denominated in units of currency, are non-monetary transactions. Intra-unit transactions are non-monetary transactions. Non-monetary transactions involving more than one institutional unit occur among transactions in products (barter of products), distributive transactions (remuneration in kind, transfers in kind, etc.) and other transactions (barter of non-produced non-financial assets). The ESA 2010 system records all transactions in monetary terms. The values to be recorded for non-monetary transactions must therefore be measured indirectly or otherwise estimated.

1.71

Transactions involving more than one unit are of two kinds. They can be ‧something for something‧, i.e. requited transactions, or they can be ‧something for nothing‧, i.e. unrequited transactions. Requited transactions are exchanges between institutional units, i.e. provision of goods, services or assets in return for a counterpart, e.g. money. Unrequited transactions are payments in cash or in kind from one institutional unit to another without counterpart. Requited transactions occur in all four transaction groups, while unrequited transactions are mainly distributive transactions, for example, taxes, social assistance benefits or gifts. Such unrequited transactions are called transfers.

1.72

The transactions are recorded in the same way as they appear to the institutional units involved. However, some transactions are rearranged in order to bring out the underlying economic relationships more clearly. Transactions can be rearranged in three ways: rerouting, partitioning and recognising the principal party to a transaction.

1.73

A transaction that appears to the units involved as taking place directly between units A and C may be recorded in the accounts as taking place indirectly through a third unit B. Thus, the single transaction between A and C is recorded as two transactions: one between A and B, and one between B and C. In this case the transaction is rerouted.

1.74

An example of rerouting is the way in which employers' social contributions paid directly by employers to social insurance funds are recorded in the accounts. The system records these payments as two transactions: employers pay employers' social contributions to their employees, and employees pay the same contributions to social insurance funds. As with all rerouting, the purpose is to bring out the economic substance behind the transaction, which in this case is to show employers' social contributions as contributions paid for the benefit of employees.

1.75

Another type of rerouting is that of transactions recorded as taking place between two or more institutional units, even though, according to the parties involved, no transaction takes place at all. An example is the treatment of property income earned on certain insurance funds, which is retained by insurance enterprises. The system records this property income as being paid by insurance enterprises to policyholders, who then pay the same amount back to the insurance enterprises as premium supplements.

1.76

When a transaction appearing to the parties involved as a single transaction is recorded as two or more differently classified transactions, the transaction is partitioned. Partitioning does not imply including additional units in the transactions.

1.77

The payment of non-life insurance premiums is a typical partitioned transaction. Although policyholders and insurers regard these payments as one transaction, the ESA 2010 system divides them into two quite different transactions: payments in return for non-life insurance services provided, and net non-life insurance premiums. Recording the sale of a product as the sale of the product and the sale of a trade margin is another example of partitioning.

1.78

When a unit carries out a transaction on behalf of another unit (the principal) and is funded by that unit, the transaction is recorded exclusively in the accounts of the principal. As a rule, one should not go beyond this principle by trying, for instance, to allocate taxes or subsidies to ultimate payers or ultimate beneficiaries under the adoption of assumptions.

An example is the collection of taxes by one government unit on behalf of another. A tax is attributed to the government unit that exercises the authority to impose the tax (either as a principal or through the delegated authority of the principal) and has final discretion to set and vary the rate of the tax.

1.79

The definition of a transaction implies that an interaction between institutional units be by mutual agreement. When a transaction is undertaken by mutual agreement, the prior knowledge and consent of the institutional units is implied. The payments of taxes, fines and penalties are by mutual agreement, in that the payer is a citizen subject to the law of the land. However, uncompensated seizure of assets is not regarded as a transaction, even when imposed by law.

Illegal economic actions shall be considered as transactions when all units involved enter the actions by mutual agreement. Thus, purchases, sales or barters of illegal drugs or stolen property are transactions, while theft is not.

1.80

Other changes in assets record changes that are not the result of transactions. They are either:

1.81

Other changes in the volume of assets and liabilities records changes divided into three main categories:

1.82

Examples of changes within the category referred to in point (a) of paragraph 1.81 are discovery or depletion of subsoil assets, and natural growth of non-cultivated biological resources. Examples of changes within the category referred to in point (b) of paragraph 1.81 are losses in assets due to natural disasters, war or severe acts of crime. Unilateral cancellation of debt and uncompensated seizure of assets also belong to category (b). An example of a change within the category referred to in point (c) of paragraph 1.81 is the reclassification of an institutional unit from one sector to another.

1.83

Holding gains and losses occur when there are changes in the prices of assets. They occur on all kinds of financial and non-financial assets, and on liabilities. Holding gains and losses accrue to the owners of assets and liabilities purely as a result of holding the assets or liabilities over time, without transforming them in any way.

1.84

Holding gains and losses measured on the basis of current market prices are called nominal holding gains and losses. These may be decomposed into neutral holding gains and losses, reflecting changes in the general price level, and real holding gains and losses, reflecting changes in the prices of assets beyond that of the general price change.

1.85

Stocks are the holdings of assets and liabilities at a point in time. Stocks are recorded at the beginning and end of each accounting period. The accounts that show stocks are called balance sheets.

1.86

Stocks are also recorded for population and employment. However, such stocks are recorded as mean values over the accounting period. Stocks are recorded for all assets within the system's boundaries; that is, for financial assets and liabilities and for non-financial assets, both produced and non-produced. However, the coverage is limited to those assets that are used in economic activity and that are subject to ownership rights.

1.87

Thus, stocks are not recorded for assets such as human capital and natural resources that are not owned.

Within its boundaries, the ESA 2010 system is exhaustive in respect of both flows and stocks. This implies that all changes in stocks can be fully explained by recorded flows.

1.88

An account records changes in value accruing to a unit or sector according to the nature of the economic flows shown in the account. It is a table with two columns. The current accounts are those which show production, generation and allocation of income, distribution and redistribution of income, and its use. The accumulation accounts are the capital and financial accounts, and the other changes in volume accounts.

1.89

The ESA 2010 system shows ‧resources‧ on the right side of the current accounts where transactions appear which add to the economic value of a unit or a sector. The left side of the accounts shows ‧uses‧ — transactions that reduce the economic value. The right side of the accumulation accounts show ‧changes in liabilities and net worth‧ and the left side shows ‧changes in assets‧. Balance sheets are presented with ‧liabilities and net worth‧ (the difference between assets and liabilities) on the right side and ‧assets‧ on the left. Comparison of two successive balance sheets shows changes in liabilities and net worth and changes in assets.

1.90

A distinction is made in the ESA between legal ownership and economic ownership. The criterion for recording the transfer of goods from one unit to another is that the economic ownership passes from one to the other. The legal owner is the unit entitled in law to the benefits of possession. However, a legal owner can contract with another unit for the latter to accept the risks and rewards of using the goods in production, in return for an agreed payment. The nature of the agreement is a financial lease, where the payments reflect only the placing of the asset at the disposal of the borrower by the provider. For example, when a bank legally owns a plane, but enters into a financial lease arrangement with an airline to operate the plane, then the airline is held to be the owner of the plane as far as transactions in the accounts are concerned. At the same time as the airline is shown as purchasing the plane, a loan is imputed from the bank to the airline reflecting the amounts due in the future for use of the plane.

1.91

For a unit or sector, national accounting is based on the principle of double entry. Each transaction shall be recorded twice, once as a resource (or a change in liabilities) and once as a use (or a change in assets). The total of transactions recorded as resources or changes in liabilities and the total of transactions recorded as uses or changes in assets must be equal, thus permitting a check on the consistency of the accounts.

1.92

National accounts — with all units and all sectors — shall be based on a principle of quadruple entry, since most transactions involve two institutional units. Each transaction shall be recorded twice by the two transactors involved. For example, a social benefit in cash paid by a government unit to a household is recorded in the accounts of government as a use under transfers and a negative acquisition of assets under currency and deposits; in the accounts of the households sector it is recorded as a resource under transfers and an acquisition of assets under currency and deposits.

1.93

Transactions within a single unit (such as the consumption of output by the same unit that produced it) shall require only two entries, whose values have to be estimated.

1.94

With the exception of some variables concerning population and labour, the ESA 2010 system shows all flows and stocks in monetary terms. Flows and stocks shall be measured according to their exchange value, i.e. the value at which flows and stocks are in fact, or could be, exchanged for cash. Market prices are, thus, the ESA's reference for valuation.

1.95

In the case of monetary transactions and cash holdings and liabilities, the values required are directly available. In most other cases, the best method of valuation is by reference to market prices for analogous goods, services or assets. This method is used for e.g. barter and the services of owner-occupied dwellings. When no market prices for analogous products are available, for instance in the case of non-market services produced by government, valuation is made by summing production costs. If there is no market price to refer to, and costs are not available, then flows and stocks may be valued at the discounted present value of expected future returns. This last method is only to be used as a last resort.

1.96

Stocks are valued at current prices at the time to which the balance sheet relates, not at the time of production or acquisition of the goods or assets that form the stocks. It is necessary to value stocks at their estimated written-down current acquisition values or production costs.

1.97

As a result of transport costs, trade margins and taxes less subsidies on products, the producer and the user of a given product usually perceive its value differently. In order to keep as close as possible to the views of the transactors, the ESA 2010 system records all uses at purchaser's prices, which include transport costs, trade margins and taxes less subsidies on products, while output is recorded at basic prices, which exclude those elements.

1.98

Imports and exports of products shall be recorded at border values. Total imports and exports are valued at the exporter's customs frontier, or free on board (FOB). Foreign transport and insurance services between the importer's and the exporter's frontiers are not included in the value of goods but are recorded under services. As it may not be possible to obtain FOB values for detailed product breakdowns, the tables containing details on foreign trade show imports valued at the importer's customs frontier (CIF value). All transport and insurance services to the importer's frontier are included in the value of imported goods. As far as these services concern domestic services, a global FOB/CIF adjustment is made in this presentation.

1.99

Valuation at constant prices means valuing the flows and stocks in an accounting period at the prices of a previous period. The purpose of valuation at constant prices is to decompose changes over time in the values of flows and stocks into changes in price and changes in volume. Flows and stocks at constant prices are described as being in volume terms.

1.100

Many flows and stocks, e.g. income, do not have price and quantity dimensions of their own. However, the purchasing power of such variables can be obtained by deflating the current values with a suitable price index, e.g. the price index for final national uses, excluding changes in inventories. Deflated flows and stocks are also described as being in real terms. An example is real disposable income.

1.101

Flows shall be recorded on an accrual basis; that is, when economic value is created, transformed or extinguished, or when claims and obligations arise, are transformed or are cancelled.

1.102

Output is recorded when produced and not when paid for by a purchaser. The sale of an asset is recorded when the asset changes hands, not when the corresponding payment is made. Interest is recorded in the accounting period when it accrues, regardless of whether or not it is paid in that period. Recording on an accrual basis applies to all flows, monetary as well as non-monetary and intra-unit as well as flows between units.

1.103

It may be necessary to relax this approach for taxes and other flows concerning general government, which are often recorded on a cash basis in government accounts. It may be difficult to carry out an exact transformation of such flows from cash basis to accrual basis, and so an approximate method may be used.

1.104

As an exception to the general rules governing the recording of taxes and social contributions payable to the general government, they can either be recorded net of the part unlikely to be collected or, if this part is included, it is neutralised in the same accounting period by a capital transfer from the general government to the relevant sectors.

1.105

Flows shall be recorded at the same point of time for all institutional units involved and in all accounts. Institutional units do not always apply the same accounting rules. Even when they do, differences in actual recording may occur for practical reasons such as delays in communication. Consequently, transactions may be recorded at different times by the transactors involved. Such discrepancies shall be eliminated by adjustments.

1.106

Consolidation refers to the elimination, from both uses and resources, of transactions that occur between units when units are grouped, and to the elimination of reciprocal financial assets and liabilities. This occurs commonly when the accounts of subsectors of general government are combined.

1.107

As a matter of principle, flows and stocks between constituent units within subsectors or sectors must not be consolidated.

1.108

However, consolidated accounts may be built up for complementary presentations and analyses. Information on the transactions of such (sub)sectors with other sectors and the corresponding ‧external‧ financial position may be more significant than overall gross figures.

1.109

Moreover, the accounts and tables showing the creditor/debtor relationship provide a detailed picture of financing of the economy and are considered very useful for understanding the channels through which the financing surpluses move from final lenders to final borrowers.

1.110

Individual units or sectors may have the same kind of transaction both as a use and as a resource (e.g. they both pay and receive interest) and the same kind of financial instrument both as an asset and as a liability. The approach in the ESA is gross recording, apart from the degree of netting which is inherent in the classifications themselves.

1.111

Netting is implicit in various transaction categories, the most outstanding example being ‧changes in inventories‧, which underlines the analytically significant aspect of overall capital formation rather than tracking daily additions and withdrawals. Similarly, with few exceptions, the financial account and other changes in assets accounts record increases in assets and in liabilities on a net basis, bringing out the final consequences of those types of flows at the end of the accounting period.

1.112

For units or groups of units, different accounts record transactions which are connected to an aspect of economic life (for instance, production). For the production account, the transactions will not show a balance between uses and resources without the introduction of a balancing item. Similarly, a balancing item (net worth) must be introduced between the total of assets and the total of liabilities of an institutional unit or sector. Balancing items are meaningful measures of economic performance in themselves. When summed for the whole economy, they are significant aggregates.

1.113

The ESA 2010 system is built around a sequence of interconnected accounts. The full sequence of accounts for the institutional units and sectors is composed of current accounts, accumulation accounts and balance sheets.

1.114

Current accounts deal with the production, generation, distribution and redistribution of income and the use of such income in the form of final consumption. Accumulation accounts cover changes in assets and liabilities and changes in net worth (the difference for any institutional unit or group of units between its assets and liabilities). Balance sheets present stocks of assets and liabilities and net worth.

1.115

The sequence of accounts for local KAUs and industries is shortened to the first current accounts: production account and generation of income account, the balancing item of which is the operating surplus.

1.116

The goods and services account shows, for the economy as a whole or for groups of products, the total resources (output and imports) and uses of goods and services (intermediate consumption, final consumption, changes in inventories, gross fixed capital formation, acquisitions less disposals of valuables, and exports). This account is not an account in the same sense as the others in the sequence, and does not generate a balancing item which is passed on to the next account in the sequence. It is rather the presentation in table form of an accounting identity, according to which supply is equal to demand for all products and groups of products in the economy.

1.117

The rest of the world account covers transactions between resident and non-resident institutional units and the related stocks of assets and liabilities.

As the rest of the world plays a role in the accounting structure similar to that of an institutional sector, the rest of the world account is established from the point of view of the rest of the world. A resource for the rest of the world is a use for the total economy and vice versa. If a balancing item is positive, it means a surplus of the rest of the world and a deficit of the total economy, and vice versa if the balancing item is negative.

The rest of the world account is unlike the other sector accounts in that it does not show all the accounting transactions in the rest of the world, but only those which have a counterparty in the domestic economy being measured.

1.118

A balancing item is obtained by subtracting the total value of the entries on one side of an account from the total value on the other side.

Balancing items embody a great deal of information and include some of the most important entries in the accounts, as can be seen from the following examples of balancing items: value added, operating surplus, disposable income, saving, net lending/net borrowing.

The following diagram shows the sequence of accounts in flow form — each balancing item is shown in bold.

A diagram of the sequence of accounts

1.119

The first account in the sequence is the production account, which records the output and inputs of the production process, leaving value added as the balancing item.

1.120

The value added is taken forward to the next account which is the generation of income account. Here the compensation of employees in the production process is recorded, as well as taxes due to government because of the production, so that the operating surplus (or mixed income from the self-employed of the households sector) can be derived as the balancing item for each sector. This step is necessary so that the amount of value added retained in the producing sector as operating surplus or mixed income can be measured.

1.121

Then the value added, broken down between compensation of employees, taxes and operating surplus/mixed income, is taken forward with this breakdown to the allocation of primary income account. The breakdown allows the allocation of each factor income to the receiving sector, as opposed to the producing sector. For example, all compensation of employees is allocated between the households sector and the rest of the world sector, whereas operating surplus remains in the corporations sector where it was generated. Also recorded in this account are the property income flows into the sector, and those out of the sector, so that the balancing item is the balance of primary incomes flowing into the sector.

1.122

The next account records redistribution of these incomes through transfers — the secondary distribution of income account. The major instruments of redistribution are government taxes on, and social benefits for, the households sector. The balancing item is disposable income.

1.123

The main sequence of core accounts carries on to the use of disposable income account; an account relevant to the households sector, as it is here that household final expenditure is recorded, leaving household saving as the balancing item.

1.124

At the same time a parallel account is created, the redistribution of income in kind account. This account has the specific purpose of showing social transfers in kind as an imputed transfer from government to the households sector, so that household income can rise by the value of individual government services. In the next account (use of adjusted disposable income account), the household use of disposable income is increased by the same amount, as if the households sector were buying the individual services provided by government. Those two imputations cancel out, so that the balancing item is saving, identical to saving in the main sequence of accounts.

1.125

Saving is taken on to the capital account where it is used to fund capital formation, allowing for capital transfers in and out of the sectors. Underspend or overspend on the acquisition of real assets results in the balancing item net lending or borrowing. Net lending is a surplus loaned out, and net borrowing is the financing of a deficit.

1.126

Finally, the financial accounts are met, where the detailed lending and borrowing of each sector is laid out so that a balancing item of net lending or borrowing is observed. This should exactly match the net lending/borrowing balancing item of the capital account, and any difference must be a measurement discrepancy between the real and financial recordings of economic activity.

1.127

Considering the bottom row of the diagram, the left-hand account is the opening balance sheet, showing the level of all assets and liabilities, both real and financial, at the start of a specified period. The wealth of an economy is measured by its net worth (assets less liabilities) and this is shown at the bottom of the balance sheet.

1.128

Moving from left to right from the opening balances, the various changes to assets and liabilities that occur in the period of account are recorded. The capital account and financial account show the changes due to transactions in real assets and financial assets and liabilities respectively. In the absence of other effects, this would enable the immediate calculation of the closing position, by adding the changes to the opening position.

1.129

However, changes can occur outside the economic cycle of production and consumption, and such changes will affect the values of assets and liabilities at the closing period. One type of change is a change in volume of assets — real changes to fixed capital brought about by events which are not part of the economy. An example would be a catastrophic loss — a large earthquake, when a significant amount of assets were destroyed not through an economic transaction of exchange or transfer. This loss must be recorded in the other changes in volume account, to account for the lower level of assets than expected purely by looking at economic events. A second way in which assets (and liabilities) can change in value, other than as the result of an economic transaction, is through a change in price resulting in holding gains and losses in the stock of assets held. This change is recorded in the revaluation accounts. Allowing for these two extra effects on the values of the stock of assets and liabilities enables the closing balance sheet values to be estimated as the opening position adjusted for the changes in the flow accounts of the bottom row of the figure.

1.130

The aggregates are composite values which measure the result of the activity of the total economy; for example, output, value added, disposable income, final consumption, saving, capital formation, etc. Although the calculation of the aggregates is not the sole purpose of the ESA, they are important as summary indicators for purposes of macroeconomic analysis and comparisons over time and space.

1.131

Two types of aggregates are distinguished:

1.132

There are important uses for national accounts measures per head of population. For broad aggregates such as GDP or national income or household final consumption, the denominator commonly used is the total (resident) population. When subsectoring the accounts or part of the accounts of the households sector, data on the number of households and the number of persons belonging to each subsector are used.

1.133

GDP is one of the key aggregates in the ESA. GDP is a measure of the total economic activity taking place on an economic territory which leads to output meeting the final demands of the economy. There are three ways of measuring GDP at market prices:

1.134

These three approaches to measuring GDP also reflect the different ways in which GDP can be considered in terms of components. Value added can be broken down by institutional sector, and by the type of activity or industry which is contributing to the total, e.g. agriculture, manufacturing, construction, services, etc.

Final expenditures can be broken down by type: household expenditure, NPISH final expenditure, government final expenditure, change in inventories, fixed capital formation and exports, less the cost of imports.

Total incomes earned can be broken down by type of income — compensation of employment, and operating surplus.

1.135

In order to achieve the best estimate of GDP, it is good practice to feed the elements of these three approaches into a supply and use framework. This enables value added and income estimates by industry to be reconciled, and supply and demand for products to be balanced. This integrated approach ensures consistency between the components of GDP, and a better estimate of the level of GDP than from only one of the three approaches. By deducting consumption of fixed capital from GDP, net domestic product at market prices (NDP) is obtained.

1.136

The input-output (I-O) framework brings together components of Gross Value Added (GVA), industry inputs and outputs, product supply and demand, and the composition of uses and resources across institutional sectors for the economy. This framework breaks the economy down to display transactions of all goods and services between industries and final consumers for a single period (for example, a quarter or a year). Information may be presented in two ways:

1.137

Supply and use tables show the whole economy by industry (e.g. motor vehicles industry) and products (e.g. sports goods). The tables show links between components of GVA, industry inputs and outputs, and product supply and demand. Supply and use tables link different institutional sectors of the economy (e.g. public corporations) together with detail of imports and exports of goods and services, government expenditure, household and NPISHs expenditure and capital formation.

1.138

Producing supply and use tables allows an examination of consistency and coherence of national accounts components within a single detailed framework and, by incorporating the components of the three approaches to measuring GDP (i.e. production, income and expenditure), enables a single estimate of GDP to be determined.

1.139

When balanced in an integrated manner, supply and use tables also provide coherence and consistency in linking the components of the following three accounts:

1.140

Symmetric input-output tables are derived from the data in supply and use tables and other additional sources to form the theoretical basis for subsequent analyses.

1.141

These tables contain symmetric (product by product or industry by industry) tables, the Leontief Inverse and other diagnostic analyses such as output multipliers. These tables show separately the consumption of domestically produced and imported goods and services, providing a theoretical framework for further structural analysis of the economy, including the composition as well as the effect of changes in final demand on the economy.

2.01

The economy of a country is a system whereby institutions and people interact through exchanges and transfers of goods, services and means of payment (e.g. money) for the production and consumption of goods and services.

In the economy, the units interacting are economic entities that are capable of owning assets, incurring liabilities and engaging in economic activities and in transactions with other entities. They are known as institutional units.

Defining the units used in national accounts serves various purposes. First, units are the essential building blocks in defining economies in geographical terms, e.g. nations, regions, and nation groupings such as monetary or political unions. Second, they are the essential building blocks for grouping units into institutional sectors. Third, they are essential for defining which flows and stocks are recorded. Transactions between various parts of the same institutional unit are, in principle, not recorded in the national accounts.

2.02

The units and groupings of units used in national accounts shall be defined with reference to the kind of economic analysis for which they are intended, and not in terms of the types of unit usually employed in statistical inquiries. The latter units (e.g. enterprises, holding companies, kind-of-activity units, local units, government departments, non-profit institutions, households, etc.) may not be satisfactory for the purposes of national accounts, since they are based on criteria of a legal, administrative or accounting nature.

Statisticians shall take into account the definitions of units of analysis as laid down in the ESA 2010, in order to ensure that, in the surveys in which data are collected, all the elements of information needed to compile data based on the units of analysis used in the ESA 2010 are gradually introduced.

2.03

A feature of the ESA 2010 system is the use of types of unit corresponding to three ways of subdividing the economy:

Institutional units are defined to meet the first of these objectives. Behavioural relationships, as described in point (1), require units reflecting all of their institutional economic activity.

The production processes, technico-economic relationships and regional analyses referred to in points (2) and (3) require units such as local KAUs. These units are described later in this chapter.

Before giving definitions of the units used in the ESA 2010, it is necessary to define the limits of the national economy.

2.04

The units which constitute the economy of a country and whose flows and stocks are recorded in the ESA 2010 are those which are resident. An institutional unit is resident in a country when it has its centre of predominant economic interest in the economic territory of that country. Such units are known as resident units, irrespective of nationality, legal form or presence on the economic territory at the time they carry out a transaction.

2.05

Economic territory consists of the following:

Fishing boats, other ships, floating platforms and aircraft are treated in the ESA as mobile equipment, whether owned and/or operated by units resident in the country, or owned by non-residents and operated by resident units. Transactions involving the ownership (gross fixed capital formation) and use (renting, insurance, etc.) of mobile equipment are attributed to the economy of the country of which the owner and/or operator respectively are residents. In cases of financial leasing, a change of ownership is assumed.

Economic territory may be an area larger or smaller than that defined above. An example of a larger area is a currency union such as the European Monetary Union; an example of a smaller area is a part of a country such as a region.

2.06

Economic territory excludes extraterritorial enclaves.

Also excluded are the parts of the country's own geographic territory used by the following organisations:

The territories used by the institutions and bodies of the European Union and international organisations are separate economic territories. A feature of such territories is that the only residents are the institutions.

2.07

Centre of predominant economic interest indicates that a location exists within the economic territory of a country where a unit engages in economic activities and transactions on a significant scale, either indefinitely or over a finite but long period of time (a year or more). The ownership of land and buildings within the economic territory is deemed to be sufficient for the owner to have a centre of predominant economic interest there.

Enterprises are almost always connected to only a single economy. Taxation and other legal requirements tend to result in the use of a separate legal entity for operations in each legal jurisdiction. In addition, a separate institutional unit is identified for statistical purposes where a single legal entity has substantial operations in two or more territories (e.g. for branches, land ownership, and multi-territory enterprises). As a result of splitting such legal entities, the residence of each of the subsequently identified enterprises is clear. Centre of predominant economic interest does not mean that entities with substantial operations in two or more territories should not be split.

In the absence of any physical dimension to an enterprise, its residence is determined according to the economic territory under whose laws the enterprise is incorporated or registered.

2.08

Units deemed to be residents of a country can be subdivided into:

2.09

For units other than households, in respect of all their transactions except those relating to ownership of land and buildings, the following two cases may be distinguished:

A resident institutional unit may be a notional resident unit, in respect of the activity conducted in the country for a year or more by a unit which is resident in another country. When the activity is carried on for less than a year, the activity remains part of the activities of the producer institutional unit and no separate institutional unit is recognised. When the activity is insignificant, even though lasting longer than a year, and for the installation of equipment abroad, no separate unit is recognised and the activities are recorded as that of the producing institutional unit.

2.10

Households, except in their capacity as owners of land and buildings, are resident units of the economic territory where they have a centre of predominant economic interest. They are resident irrespective of periods spent abroad of less than one year. They shall include, in particular, the following:

Students are always treated as residents, irrespective of the length of their studies abroad.

2.11

All units, in their capacity as owners of land and/or buildings forming part of the economic territory, are resident units or notional resident units of the country in which that land or those buildings in question are located.

2.12

Definition: an institutional unit is an economic entity characterised by decision-making autonomy in the exercise of its principal function. A resident unit is regarded as constituting an institutional unit in the economic territory where it has its centre of predominant economic interest if it has decision-making autonomy and either keeps a complete set of accounts, or is able to compile a complete set of accounts.

To have autonomy of decision in respect of its principal function, an entity must be:

2.13

The following principles apply whenever an entity does not possess the characteristics of an institutional unit:

2.14

Head offices and holding companies are institutional units. The two types are:

2.15

Large groups of corporations are created when a parent controls several subsidiaries, which may in turn control their own subsidiaries, and so on. Each member of the group is treated as a separate institutional unit if it satisfies the definition of an institutional unit.

2.16

An advantage of not treating groups of corporations as single institutional units is that groups are not always stable over time, nor easily identifiable in practice. It can be difficult to obtain data on groups whose activities are not closely integrated. Many groups are too large and heterogeneous to be treated as single units, and their size and composition can change over time as a result of mergers and takeovers.

2.17

A special purpose entity (SPE) or special purpose vehicle (SPV) is usually a limited company or a limited partnership, created to fulfil narrow, specific or temporary objectives and to isolate a financial risk, a specific taxation or a regulatory risk.

2.18

There is no common definition of an SPE, but the following characteristics are typical:

2.19

Whether a unit has all or none of these characteristics, and whether it is described as an SPE or some similar designation or not, it shall be treated in the same way as any other institutional unit by being allocated to sector and industry according to its principal activity unless the SPE has no independent rights of action.

2.20

So captive financial institutions, artificial subsidiaries and special purpose units of general government with no independence of action are allocated to the sector of their controlling body. The exception occurs when they are non-resident, in which case they are recognised separately from their controlling body. But in the case of government, the activities of the subsidiary shall be reflected in the government accounts.

2.21

A holding company that simply owns the assets of subsidiaries is one example of a captive financial institution. Examples of other units that are also treated as captive financial institutions are units with the characteristics of SPEs as described above, including investment and pension funds and units used for holding and managing wealth for individuals or families, issuing debt securities on behalf of related companies (such a company may be called a conduit), and carrying out other financial functions.

2.22

The degree of independence from its parent may be demonstrated by exercising some substantive control over its assets and liabilities to the extent of carrying the risks and reaping the rewards associated with the assets and liabilities. Such units are classified in the financial corporations sector.

2.23

An entity of this type that cannot act independently of its parent and is simply a passive holder of assets and liabilities (sometimes described as being on autopilot) is not treated as a separate institutional unit unless it is resident in an economy different from that of its parent. If it is resident in the same economy as its parent, it is treated as an ‧artificial subsidiary‧ as described below.

2.24

A subsidiary, wholly owned by a parent corporation, may be created to provide services to the parent corporation, or other corporations in the same group, in order to avoid taxes, to minimise liabilities in the event of bankruptcy, or to secure other technical advantages under the tax or corporation legislation in force in a particular country.

2.25

In general, such types of entities do not satisfy the definition of an institutional unit because they lack the ability to act independently from their parent corporation and may be subject to restrictions on their ability to hold or transact assets held on their balance sheets. Their level of output and the price they receive for it are determined by the parent that (possibly with other corporations in the same group) is their sole client. They are, thus, not treated as separate institutional units, but are treated as an integral part of the parent, and their accounts are consolidated with those of the parent, unless they are resident in an economic territory different from that where the parent is resident.

2.26

A distinction must be made between artificial subsidiaries as just described and a unit undertaking only ancillary activities. Ancillary activities are limited in scope to the type of service functions that virtually all enterprises need to some extent or another such as cleaning premises, running the staff payroll or providing the information technology infrastructure for the enterprise (see Chapter 1, paragraph 1.31).

2.27

General government may also set up special purpose units, with characteristics and functions similar to the captive financial institutions and artificial subsidiaries. Such units do not have the power to act independently and are restricted in the range of transactions they can engage in. They do not carry the risks and rewards associated with the assets and liabilities they hold. Such units, if they are resident, shall be treated as an integral part of general government and not as separate units. If they are non-resident, they shall be treated as separate units. Any transactions carried out by them abroad shall be reflected in corresponding transactions with government. Thus, a unit that borrows abroad is then regarded as lending the same amount to general government, and on the same terms, as the original borrowing.

2.28

In summary, the accounts of SPEs with no independent rights of action are consolidated with the parent corporation, unless they are resident in a different economy from that of the parent. There is one exception to this general rule, and that is when a non-resident SPE is set up by government.

2.29

Notional resident units shall be defined as:

Notional resident units, irrespective of only keeping partial accounts and irrespective of autonomy of decision, shall be treated as institutional units.

2.30

The following shall be considered as institutional units:

2.31

Macroeconomic analysis does not consider the actions of each institutional unit separately — it considers the aggregate activities of similar institutions. So units are combined into groups called institutional sectors, some of which are divided into subsectors.

Table 2.1 —   Sectors and subsectors

2.32

Each sector and subsector groups together the institutional units which have a similar type of economic behaviour.

Diagram 2.1 —   Allocation of units to sectors