D.

GROSS CAPITAL FORMATION 2.115. Gross capital formation comprises: — GFCF, — changes in stocks, — acquisitions less disposals of items of value. 2.116. Since the EAA are accounts drawn up in order to depict flows generated by units within their production function, only GFCF and changes in stocks are dealt with below. 2.117. Gross capital formation means gross of fixed capital consumption. Net capital formation is obtained by deducting fixed capital consumption from gross capital formation. Fixed capital consumption is the value of the depreciation of fixed capital goods as a result of normal wear and tear in the course of the production process (cf. 3.099). 1. GFCF (a) Definition 2.118. GFCF consists of resident producers' acquisitions, less disposals, of fixed assets during a given period plus certain additions to the value of non-produced assets stemming from the productive activity of producer or institutional units. Fixed assets are tangible or intangible assets produced as outputs from production processes that are themselves used repeatedly, or continuously, in other production processes for more than one year (cf. ESA 95, 3.102). (b) Considerations for the national economy as a whole 2.119. The GFCF of a national economy is understood to mean the proportion of the gross domestic product (GDP) produced during the reference year which is intended to be used for a period of more than one year as a means of production in the production process (as distinct from the final consumption of private or public households, exports and changes in stocks). Consequently, goods which, although produced sometime in the past and therefore included in the national product, are put to a different use in the reference period, are not included in the GFCF of a national economy. A change of use or ownership does not imply that such goods become part of the domestic product a second time and in no way changes the total mass of fixed capital of the national economy as a whole. The inclusion of such transactions is, however, important in analyses by homogenous branch, industry or sector. 2.120. If a change in ownership results in a different use (i.e. no longer as capital assets), there is a reduction in the capital assets of the national economy. The commonest instances of this are motor vehicles which households buy secondhand from producer units, shipping vessels which are sold secondhand to other countries, and also capital goods which have been broken up and put to some intermediate use. Since the new use in these cases forms part of the national product (final consumption, export or any other use depending on the type of goods produced from the scrap), the GFCF must be reduced as a result. This is why the ESA 95 uses the concept of net acquisitions of existing produced goods for calculating GFCF: this heading allows capital disposals, i.e. reductions in fixed capital to be taken into account. 2.121. It is possible for net acquisitions of existing goods to be positive, in other words, to represent increases in the capital assets of the economy as a whole. This is the case, for example, when secondhand vehicles which have already been listed as final consumption in the national product are bought for use as fixed capital. Since sales of existing investment goods exceed purchases, net acquisitions are negative for the national economy as a whole. If, however, the GFCF is broken down by user branch, net acquisitions can be positive for some branches. (c) Transfer of ownership criterion 2.122. The determination of the GFCF of sectors or branches of the economy is based on the criterion of transfer of ownership (acquisition, disposal) and not on that of the use of the goods. It should be noted that fixed assets acquired by financial leasing (but not those simply on hire) are treated as assets of the lessee (if he is a producer) and not of the lessor, who keeps a financial asset equivalent to a notional claim (cf. 2.109(d) and Annex II of the ESA 95 on the distinction between the different forms of hire of durable goods) ( 25 ). 2.123. Application of the criterion of transfer of ownership depends on the statistical system on the basis of which the GFCF is calculated. If it is data from purchasers, there will in theory be no difficulties (apart from the practical difficulty of recording all the investors). Often, however, (and this is particularly true of agriculture), it is information from producers of capital goods on their output or sales that is used as the basis for calculations. Apart from those cases where it is not clear whether a product belongs under the capital goods heading or not, it is also difficult to determine the actual purchaser since the nature of the capital goods gives only an indication of who the user is. In agriculture, therefore, there is the risk that capital goods will also be recorded which have not been acquired by agricultural holdings but by commercial enterprises for the purpose of hiring without operating staff. (d) Acquisitions 2.124. Acquisitions of fixed assets comprise new or existing fixed assets which have been acquired (purchased, acquired in barter transactions, received as capital transfers in kind or acquired as a financial lease), fixed assets produced and retained for the producer's own use, major improvements to fixed assets and to non-produced tangible assets, natural growth in agricultural assets (livestock and plantations) and costs associated with the transfer of ownership of non-produced assets (cf. ESA 95, 3.103(a)). 2.125. It should be remembered that in order to qualify for recording as GFCF, acquired durable goods have to have a unit value (or total value if they have been obtained in large quantities) of over EUR 500 at 1995 prices (cf. 2.090). 2.126. The same applies to the purchase or production for own account of a set of durable goods needed for an initial installation. The stock of bottles of a brewery or wine-producing enterprise (excluding non-returnable bottles) for example, constitutes a mass of goods to be recorded as assets, although the value of each bottle is negligible. The same applies to seats and tables, crockery and cutlery of restaurants and the tools of an enterprise. The initial installation of these goods constitutes fixed capital formation: nevertheless, no fixed capital consumption is calculated in these cases because it is assumed that once this installation has been made, it will always keep the same value as a result of constant purchases of replacement items to make up for those which have been lost or become unusable. Current replacement purchases are recorded as intermediate consumption. This rule, which in theory is clear, is sometimes difficult to apply in practice as statistical data on production or sales do not give a clear idea of whether the goods in question have been bought for an initial installation or to replace existing items. 2.127. Goods and services incorporated into existing fixed capital goods for the purpose of improving them, rebuilding or reconstructing them, prolonging their useful life or increasing their productivity, are recorded with the capital goods into which they are incorporated. This work is considered to be acquisition of new fixed assets. In principle, this heading includes all goods and services incorporated into fixed capital goods which go well beyond the scope of current maintenance and repair. Current maintenance is taken to mean all services which, in comparison with the normal lifetime of the capital goods, must be repeatedly provided at relatively short intervals in order to maintain the goods in serviceable condition. It covers, for example, the replacement of fast-wearing components of capital goods, external and internal painting, etc. 2.128. The size of the sums spent on this maintenance is in no way a criterion for determining whether a service creates an asset or represents current maintenance, since in the case of high-value capital items, even services for current maintenance may be very costly (cf. 2.109(e)). Strictly speaking, the allocation of services performed on existing fixed capital goods either to the ‘current maintenance’ or ‘GFCF’ category should be determined by the interval which will elapse before the service has to be repeated, e.g. the replacement of parts which normally wear out within one year, such as the tyres of a truck, counts as current maintenance, whereas the replacement of an engine constitutes fixed capital formation, not because the value is higher but because an engine does not normally have to be replaced annually but only after several years. Recording a service of this kind under the assets heading (i.e. treatment as fixed capital formation and not as current maintenance) makes it possible to distribute the value uniformly over the entire period of use through the device of fixed capital consumption. 2.129. The SNA 93 specifies that improvements made to fixed assets should be determined either by the magnitude of the changes in the characteristics of the fixed assets — i.e. by major changes in their size, shape, performance, capacity or anticipated service life — or by the fact that improvements are not the kinds of changes that are observed to take place routinely in other fixed assets of the same kind, as part of ordinary maintenance and repair programmes (cf. SNA 93, 10.49). (e) Disposals 2.130. Disposals of fixed assets comprise the sale, demolition, scrapping or destruction of fixed assets by their owner, or their surrender in barter or as capital transfers in kind (cf. ESA 95, 3.103(b) and 3.104). These disposals should normally lead to a change in ownership and have a direct economic purpose (therefore fixed assets which are demolished, scrapped or destroyed by their owner in order to be put to no further economic use are not included in these disposals) (cf. SNA 93, 10.35 and 10.39). However, some disposals may be kept within the same institutional unit, as in the case of animals slaughtered by a farmer and consumed by his family. (f) Valuation of gross fixed capital formation 2.131. GFCF is valued at purchaser prices (including the costs of transferring ownership, installation and other transfer charges) or, when produced on own account, it is valued at the basic prices of similar fixed assets (the basic price can be obtained from the sum of the costs incurred). Disposals should be recorded at the sales price, which should correspond to the purchaser price less the costs incurred in the transfer of ownership of assets, installation and transfer charges (cf. 2.130). (g) Costs of transfer of ownership 2.132. The costs of transfer of ownership of assets constitute GFCF by the acquirer, even if some of the costs are paid by the seller. They comprise the expenditure incurred in order to take possession of the assets (installation and transport charges, etc.), fees and commissions of intermediaries (solicitors, experts, etc.) and taxes to be paid on intermediary services used in the transfer of ownership of assets. 2.133. The GFCF of the acquirer comprises the value of the goods acquired (exclusive of transfer costs) plus the total transfer costs involved in the acquisition. Conversely, the GFCF of the seller only includes the value of the goods sold (exclusive of transfer costs) ( 26 ). In the case of non-produced assets (such as land, or patented assets such as production rights) which are not included in GFCF, these costs must be separated from the acquisition/disposal of these assets and recorded under a different heading as GFCF of the acquirer. (h) GFCF and change in the value of assets 2.134. The balance sheet, which provides an itemised list of the values of the assets held and commitments entered into, provides information on the different components of the change in the value of assets. As defined in the balance sheets (cf. ESA 95, 7.08) the change in the value of an asset between the end and beginning of an accounting period can be described as follows:



Value of assets at the end of the accounting period – Value of assets at the beginning of the accounting period = GFCF – Consumption of fixed capital + Other volume changes + Nominal holding gains (net of losses) 2.135. Nominal holding gains (net of losses) correspond to holding gains (net of losses) accumulated during the period considered and resulting from a change in the price of the asset whose economic and physical (quantitative and qualitative) characteristics remain unchanged over the period concerned. These changes are recorded in the revaluation account. 2.136. The other changes in the volume of assets are flows which make it possible to record the discovery, deterioration or depletion of natural assets as well as the consequences of exceptional events which may modify the benefit drawn from assets. As far as the assets of the agricultural industry are concerned, changes in volume may be put into three main categories: — exceptional losses or catastrophic losses (earthquakes, wars, drought, epidemics, etc.), — the margin between the anticipated depreciation of the assets (measured by the consumption of fixed capital) and the depreciation actually determined (due to unforeseen obsolescence, damage, deterioration and accidental events leading to higher depreciation than anticipated), — changes in classification or structure of fixed assets: e.g. changes in the economic purpose of agricultural land, dairy livestock intended for meat production (cf. 2.149, footnote 1) or agricultural buildings which have been altered for private or other economic use. 2.137. GFCF and consumption of fixed capital (cf. 3.098 to 3.106) are therefore not the only elements to take into account when analysing the change in the value of assets. (i) Elements of GFCF 2.138. The ESA 95 distinguishes between four types of elements which should be recorded as GFCF (cf. ESA 95, 3.105): — acquisitions less disposals of new or existing tangible fixed assets (dwellings, other buildings and structures, machines and equipment, cultivated assets), — acquisitions less disposals of new or existing intangible fixed assets (mineral exploration, computer software, artists' and other works), — major improvements to tangible non-produced assets, including land, — costs associated with the transfer of ownership of non-produced assets such as land and patented assets. 2.139. For the EAA, a distinction is made between five types of elements of GFCF: — plantations yielding repeat products, — livestock, — tangible and intangible fixed assets: — — machines and other capital goods, — transport equipment, — farm buildings (non-residential), — other structures with the exception of land improvement (other buildings and structures, etc.), — other (computer software, etc.), — land improvement, — costs associated with the transfer of ownership of non-produced assets such as land and production rights. 2.140. GFCF in agricultural assets concerns two types of assets (plantations and animals) which are used repeatedly and continually for the production of products such as fruit, rubber, milk, etc.: fruit trees, vines, hop fields, soft fruit plantations and asparagus beds. Christmas tree plantations (which only provide a finished product once) are not fixed assets, just as cereals and vegetables are not. Animals which serve as fixed assets include, for example, breeding animals, dairy cattle, sheep reared for their wool and draught animals (animals for slaughter, including poultry, are not fixed assets). (j) Plantations 2.141. According to ESA 95 (3.103) GFCF in plantations corresponds to the value of acquisitions less disposals of natural assets yielding repeat products (such as fruit trees) which have reached maturity, plus the natural growth of such natural assets until they reach maturity (i.e. generate a product), during the accounting period concerned. 2.142. This definition of GFCF corresponds to: — expenditure on new plantations (new or renewed) during the accounting period, including amounts spent on maintaining young plantations during the accounting period (during the first three years), — the increase in the intrinsic value of plantations up to their maturity, — the costs associated with transfer of ownership in exchanges, between agricultural units, of plantations which have reached maturity. 2.143. The first two elements of GFCF in plantations represent own-account agricultural output of GFCF. 2.144. Disposals of plantations (recorded as negative GFCF) may take two forms: they may be sales of standing plantations to other (agricultural) units, in which case only the costs associated with the transfer of ownership are entered in the EAA. The other possibility is for the plantations to have been felled before the end of their normal growing life. In this case, however, according to the general definition of disposals, felled plantations must have a direct economic use; in other words, a counter-entry is required in the form of a use in goods and services (such as a sale to an enterprise specialising in the sale of timber ( 27 )). In this second case, disposals of plantations to be recorded as negative GFCF should represent a modest amount. 2.145. Consequently, in the majority of cases (i.e. except in the second case set out in 2.144), the value of the grubbings must not be deducted from the value of the investments in plantations. Investments intended for renewing existing plantations should be treated as investments and not as routine maintenance costs. 2.146. The treatment of grubbings of plantations should be analysed in relation to the calculation of consumption of fixed capital. In accordance with the ESA 95, there is consumption of fixed capital in the case of plantations corresponding to the depreciation of the plantations when they have reached maturity. Plantation grubbings ( 28 ) should therefore be interpreted as follows: — grubbings carried out at the end of the normal growing life of plantations correspond to plantations withdrawn from assets. These grubbings are taken into account in the consumption of fixed capital throughout the productive life of the plantations, — ‘exceptional’ grubbings are grubbings carried out before the end of the normal growing life of plantations for various (economic, strategic, etc.) reasons. They should be interpreted as the difference between the real (effective) depreciation and normal depreciation measured by the consumption of fixed capital. This depreciation surplus should be recorded in the ‘other changes in volume of assets’ account (accumulation accounts) which is not included in EAA. 2.147. The change in the value of plantations over the accounting period therefore comprises the following four components (cf. 2.134): — GFCF, which corresponds to the difference in value between acquisitions and disposals during the reference period, as defined in 2.141 to 2.145, — consumption of fixed capital, which measures the depreciation of plantations, as defined in 2.146, — other changes in ‘volume’ which take account of the effects of unforeseen events on plantations (such as exceptional grubbings) and which are recorded in the ‘other changes in volume of assets’ account (cf. the definition in 2.136 and 2.146), — holding gains (net of losses), which measure the changes in value due to changes in price during the accounting period and which are recorded in the revaluation account of the ESA 95 accumulation accounts (cf. the definition in 2.135). 2.148. Investments in cultivated crop assets, i.e. plantations, are recorded either as sales, by enterprises specialising in such kind of agricultural contract work (with soil preparation, supply of machines, plant, labour, etc.), or as output of own-account produced fixed capital goods (cf. 1.75). In the case of own-account plantation output, the following should be recorded: (a) for calculating the value of output: for own-account produced fixed capital goods in plantations, either the value of similar plantations valued using the basic price and pro rata production costs incurred over the period, or the value of the materials consumed (including nursery plants) and services rendered over the period; (b) in the calculation of intermediate consumption, the values of the different intermediate consumption goods used (including nursery plants); (c) for GFCF, under the ‘plantations’ heading, the value obtained by adding up the value of own-account produced fixed capital goods in plantations (i.e. the entry mentioned in (a)) and the plantation output of units specialising in such kind of contract work. (k) Fixed asset livestock 2.149. GFCF for livestock corresponds to the following elements: — the annual growth of livestock (until they reach maturity); — livestock acquisitions (imports) less disposals (slaughterings ( 29 ) and exports); — the costs associated with the transfer of ownership incurred in trade between agricultural units ( 30 ). 2.150. In accordance with the ESA 95, GFCF for livestock is a measure of the difference between livestock acquisitions (natural growth and imports) over the year, including those resulting from own-account production, and livestock disposals (for slaughter ( 31 ), export or any other final use), to which is added the cost of transfer of ownership ( 32 ). GFCF for livestock occurs throughout the animal's life. To begin with, the GFCF mainly consists of the natural growth of the animal. When it reaches the age of maturity, the GFCF is mainly measured by way of disposals (sales for slaughter or export). Imports, exports and costs associated with the transfer of ownership are components of GFCF for livestock which are likely to occur throughout the animal's useful life. The natural growth of livestock (and not the GFCF as a whole) constitutes own-account agricultural production of fixed assets in livestock. 2.151. As shown in 2.134, measuring the GFCF for livestock only constitutes one element of the change in the value of assets. In fact, GFCF for livestock can only be measured via the change in the number of livestock valued at the average price for the calendar year for each livestock category (quantitative method), if three conditions are met: — no nominal holding gains or losses (i.e. a regular trend in prices and livestock population numbers), — no other changes in volume (i.e. no losses due to natural disasters and no changes in classification, etc.), — no consumption of fixed capital (i.e. no foreseeable depreciation in the value of livestock). Another method of calculation (direct method) consists of measuring the flows of entries and withdrawals for each livestock category, at the corresponding prices: apart from acquisitions and disposals, this method has to take into account entries (in particular births) and withdrawals on the holdings. 2.152. As a general rule, therefore, GFCF for livestock cannot be measured via the difference between the livestock values at the end and beginning of the accounting period. The rule for calculating the GFCF for livestock depends directly on the method adopted for recording and measuring the three elements of the change in the value of livestock (other than GFCF), and in particular the consumption of fixed capital element. 2.153. In theory, consumption of fixed capital should be calculated for livestock ( 33 ). In actual fact, consumption of fixed capital for livestock corresponds to a measurement of the anticipated decline in productivity of livestock when used for production purposes, a reduction which in turn is reflected in the updated value of future income from this livestock. However, in view of the practical difficulties in evaluating consumption of fixed capital (the definition of the calculation parameters are very complex, cf. 3.105 and 3.106), no consumption of fixed capital should be calculated for productive livestock. 2.154. GFCF for livestock may be measured by various methods. By using the perpetual inventory method, each of the GFCF elements defined in 2.149 (natural growth of livestock, imports, sales for slaughter and exports, costs associated with the transfer of ownership) can be valued very strictly. Nevertheless, it requires numerous data (such as the prices of productive livestock throughout their useful life). The same is true of methods based on the livestock production cycle. A simpler method therefore needs to be adopted, even if it is less strict. 2.155. The recommended method employs an indirect calculation approach ( 34 ). It is based on calculating the change in the number of livestock and on the following two assumptions: — livestock prices are regular and normally predictable, so that the average annual price can be used for valuing quantities whilst excluding from them holding gains/losses, — exceptional losses can be estimated (in quantities and prices). 2.156. The measurement of GFCF is made up of the sum of the following elements:



GFCF = Change in the number of livestock between the end and beginning of the accounting period valued at the average annual price P + Culling discount + Other productive livestock losses + Costs associated with the transfer of ownership 2.157. The term ‘culling discount’ refers to the difference, at the time of their withdrawal from productive livestock, between the value of the livestock valued as productive animals (at what could be called a ‘capital’ price) and the value of the same livestock valued as animals intended for slaughter (i.e. at the slaughterhouse selling price). 2.158. The term ‘other losses of productive livestock’ comprises two types of losses: — exceptional losses in productive livestock which have become mature, — the value of livestock kept in production until the end of their life (natural death). 2.159. The value of losses to be recorded in the calculation of GFCF corresponds to the difference between the value of livestock at the price prevailing at the start of the period and the disposal value of the animals. These disposals are valued at the selling price of animals which are slaughtered (i.e. for sale or own final consumption) or can have a zero value if they have no economic use (e.g. if they are disposed of, etc.). 2.160. The terms ‘other losses of productive livestock’ and ‘culling discount’ correspond to flows which are recorded in the ‘other changes in the volume of assets’ account of the balance sheet. They provide a link between the different components of the change in the value of assets and the GFCF, and ensure conformity with the ESA 95. Ignoring them would result in the real level of GFCF for livestock being underestimated. 2.161. The estimation of own-account production of fixed capital in livestock, which corresponds to the natural growth of animals, is derived from the definition of the GFCF for livestock set out in 2.149 applied to categories of animals which are not yet fully mature: Own-account production = GFCF + disposals (slaughterings and exports) — acquisitions (imports) ( 35 ) — (cost of transfer of ownership). (l) Tangible and intangible fixed assets (other than agricultural assets) 2.162. Tangible and intangible fixed assets other than agricultural assets (plantations and livestock) comprise the following elements: — machines and other capital goods, — transport equipment, — farm buildings (non-residential), — other (computer software, etc.). 2.163. GFCF corresponds to the acquisition of these assets (new assets produced or imported during the accounting period, or existing assets) less transfers to other units (of the agricultural industry or other industries). It should be recalled that if this transaction concerns two units of the agricultural industry during the same accounting period, the two flows cancel each other out and only the costs associated with the transfer of ownership are recorded under the corresponding fixed asset heading. 2.164. In the case of construction or capital goods (intended for sale) whose production is spread over several periods, the value of the work performed in the period of production is to be recorded in the change of stocks of the producer in the form of work in progress. These goods (whether movable or immovable) are not recorded in GFCF until the ownership has been transferred. By contrast, when this production is own-account, this work is recorded as GFCF during the entire production period (cf. 2.025). 2.165. Assets whose economic use changes without any change in ownership taking place (e.g. when a farm building is used for purposes other than an agricultural production activity) are not recorded as disposals of assets. These changes are recorded in the ‘other changes in the volume of assets’ account. (m) Land improvement 2.166. Major improvements in non-produced tangible assets correspond mainly to land improvement (better quality of land and higher yield through irrigation, drainage and flood prevention measures, etc.) and should be treated like any other GFCF. Since land acquisitions and withdrawals are not recorded as GFCF (being non-produced assets), investments in land improvement are listed separately under a special GFCF heading. 2.167. These investments correspond to expenditure on the improvement of land and its preparation for other productive uses, with the exception of expenditure on routine maintenance (cf. 2.127 to 2.129). This expenditure has to be made by holders or the result of this expenditure has to become their property. This concerns in particular expenditure on infrastructure works such as clearance, levelling, drainage, irrigation and consolidation (cf. ESA 95, 3.106 and SNA 93, 10.51 to 10.54). (n) Costs associated with the transfer of ownership of non-produced assets 2.168. Costs associated with the transfer of ownership of non-produced assets refer to acquisitions of land and non-produced intangible assets (such as patented assets, production rights, etc.) by agricultural units. These acquisitions are not recorded as GFCF (but under another heading of the capital account, because they are non-produced assets) and only the costs associated with the transfer of ownership are recorded as GFCF (for the acquirer, but not for the seller). (o) Goods and services excluded from GFCF 2.169. The following goods and services are not included in GFCF: (a) small tools, working clothes, spare parts and equipment of a low value (less than EUR 500 at 1995 prices), even if these goods have a normal useful life of over one year (cf., however, 2.125 and 2.126); because they are renewed regularly, and to conform with business accounting practice, these purchases of goods are considered to be intermediate consumption (cf. 2.105 and 2.106); (b) ongoing maintenance and repairs (cf. 2.127 to 2.129) are classed as intermediate consumption); (c) services of scientific research, advertising, market research, etc. Purchases of these services are included in intermediate consumption (cf. 2.108(d)); (d) durable goods acquired by households to satisfy their domestic needs; as these goods are not used for production purposes, they are treated as final consumption; (e) animals which serve as stocks: fattening animals reared for slaughter, including poultry; (f) holding gains and losses on fixed assets (to be recorded in the revaluation account, cf. 2.135); (g) losses of fixed assets due to catastrophic events (cattle diseases, etc.) or force majeure (floods, gales, etc.) (cf. 2.045 and 2.136). 2.170. The value of fixed capital goods used simultaneously for professional and private purposes (motor vehicles, for example) is recorded in accordance with their two possible types of use; partly as GFCF and partly, as final consumption. 2. Change in stocks (a) Definition of stocks and change in stocks 2.171. Stocks comprise all goods which do not form part of fixed capital and are held by producer units at a given moment. A distinction is made between two types of stocks: input stocks and output stocks: — Input stocks are made up of raw materials and supplies which will be used at a later date as intermediate inputs in production processes. Normally, the consumption of these products is calculated by offsetting purchases (or other forms of acquisitions) with a change in stocks in the course of the reference period (cf. 2.021). — Output stocks represent the stocks of finished products and work in progress of the producer. They are taken into account in the calculation of output. Output stocks comprise: — — finished products from the industry: these are goods which producers have no intention of further processing before sending them for other economic purposes. In the case of agriculture, they include crop products, olive oil, grape must, livestock products and non-agricultural goods produced in inseparable secondary activities, — work in progress: this is output which is not quite finished. For the EAA, it includes wine, livestock for slaughter, all chickens and other poultry (including breeding poultry) and other animals except those regarded as fixed capital. It should be noted that growing crops (cf. 2.012) are not regarded as work in progress stocks in the annual economic accounts. 2.172. Not recording growing crops as work in progress is justified for European agriculture by the fact that a very large majority of crops have a production cycle which is shorter than an accounting period. It is also felt that recording them at the time of harvesting allows sufficient consistency with production costs to be maintained in the analysis of income from the activity (cf. 2.012). When the harvest, soil preparation and sowing operations are carried out in different accounting periods, the accounts of the period in which the costs occurred show an accounting loss and those of the harvest period an accounting profit. This accounting method may, however, be accepted because if the conditions remain the same from one year to another an approximate balance is established in that expenditure is offset in the same period by the profit from the sale of the previous harvest. Only in the event of a substantial change in production or in cases of very poor harvests does this compensation not occur. Under such circumstances, the recording of output as work in progress might be indicated (see also 2.013). 2.173. It should be noted that services are not entered as stocks except for those included in the purchase value of goods placed into stock. 2.174. According to the ESA 95, changes in stocks are measured by deducting from the value of stock entries the value of stock withdrawals and any recurrent losses of goods in stock. (b) Time of recording and valuation of changes in stocks 2.175. Stock entries should be valued at the date of entry into stock and withdrawals should be valued at the prices prevailing when withdrawn from stocks. The time of recording (and valuation) of stock entries and withdrawals should be consistent with that of other transactions in products (output and intermediate consumption). 2.176. The basic price is the price to be used for valuing changes in stocks (entries, withdrawals or recurrent losses of finished products or work in progress). As regards entries of work in progress, the price used should be estimated by applying the fraction of the total production cost incurred by the end of the period to the basic price of a similar finished product. Alternatively, the value of the entries of work in progress can be estimated by the value of the production cost with a mark-up for expected operating surplus or (estimated) mixed income (cf. ESA 95, 3.51 and 3.52). 2.177. The method recommended in the ESA 95 for recording stock entries and withdrawals is the perpetual inventory method. However, this solution is not generally applicable in view of the difficulty in obtaining information on entries and withdrawals. In an attempt to get into line with the perpetual inventory method, the ESA 95 recommends a ‘quantitative’ method which consists in measuring changes in stocks as the difference in volume between the stocks at the opening and closing of the accounting period, valued at the average prices in force during the period concerned. However, this method is only applicable if prices remain stable over the period under consideration or if the prices and quantities stocked increase or decline at a constant rate during the accounting period. 2.178. This ‘quantitative method’ cannot be applied to crop production because of the fluctuation in prices and quantities resulting from the production process and the structure of supply and demand. This problem which is specific to agriculture is recognised by the ESA 95 (cf. 3.124 (c)). 2.179. It should also be considered that a change in stocks, as defined in 2.174, is only one of the components of the change in the value of stocks between the start and end of the accounting period. There is in fact a basic accounting equation which connects the opening and closing figures for stock assets:



Value of closing stocks at the prices applicable at the end of the accounting period - Value of opening stocks at the prices applicable at the start of the accounting period = Change in stocks (entries - withdrawals - recurrent losses) + nominal holding gains (net of losses) + other changes in volume 2.180. These nominal holding gains and losses and other changes in volume ( 36 ) should not be included in the measurement of output, but in the account of other changes in assets (respectively, in the revaluation account and in the other changes in the volume of assets account). 2.181. The main difficulty in valuing the change in stocks in the EAA concerns crop products. These products are in fact seasonal products whose entries into stocks only occur after the harvest and whose withdrawals are spread over several months after the harvest and often continues into the next accounting year. Their price may also be subject to substantial fluctuations from one period to another, or even within the same period. (c) Change in stocks of livestock and animal products 2.182. When valuing changes in stocks of livestock, it is not very important whether the animals were reared from birth within the country or were imported when young and then reared and fattened in the country. When the imported animals are taken over by the holding which continues rearing them on the national territory, the animals are ‘nationalised’ and consequently assimilated to domestic production. 2.183. To evaluate changes in the herd at the end of the reference period, a distinction has to be drawn between the ‘stocks’ herd and the ‘fixed assets’ herd (cf. 2.140 and 2.202). The value at basic prices for the first category of animal should be considered to be the sum of the production costs throughout the life of the average animal in the different livestock classes up to and including the reference year, plus a mark-up for the estimated operating surplus or an estimate of mixed income (cf. 2.176). If an animal was originally imported before its period in the national territory, the purchaser price at the time of import can be regarded as representing the sum of the production costs up to that date. 2.184. Because of the generally regular changes in the prices of animals, it is possible to evaluate the change in livestock stocks by a simple approximation method which excludes nominal holding gains (net of losses). For each category of animal, the change in population between the end and the start of the accounting year is multiplied by the average price observed over the reference period. (d) Change in stocks of seasonal products 2.185. Seasonal products (cf. 2.178 and 2.181) are products for which the quantitative method does not constitute a good approximation of the perpetual inventory in view of the irregular change in prices and quantities. The application of the quantitative method could lead to the inclusion of nominal holding gains or losses in the measurement of the change in stocks. One solution could consist in measuring the change in stocks over shorter periods than the reference period (for example, each quarter), subperiods which would have more even price and quantity trends. Nevertheless, this type of method is often difficult to apply because of a lack of basic data. 2.186. Another method of evaluating stocks of seasonal products is that of examining the trend in the prices of stocked goods. The price of a good may change during storage for at least three reasons (SNA 93, 6.105): — its physical qualities may improve or deteriorate with time, — there may be seasonal factors influencing its supply or demand, thus resulting in regular and predictable changes in its price over the year, even though its physical qualities may not otherwise change, — there may be factors such as general inflation or other general factors which may lead to a change in price even though its physical or economic characteristics are not changed over time. 2.187. The difference between the price at which products are put into stock and the price at which they are withdrawn, in the first two cases, should reflect the additional output value produced during storage (SNA 93, 6.106), since products withdrawn from storage several months after harvest are different, in economic terms, from those which have been stored. This type of increase in the value of products should not be counted as a nominal holding gain (SNA 93, 12.70). 2.188. On the basis of the different components of the change in the value of stocks and factors determining changes in the prices of products held in stock, and in view of the difficulty in fully excluding the recording of holding gains or losses from the valuation of seasonal output, two methods are recommended. They differ in their interpretation of the storage activity and the time for recording the change in the value of the goods resulting from their stay in stocks. The first method constitutes the reference method to be applied in valuing output and changes in stocks of seasonal agricultural production. The second method may be used for more specific cases (mainly products whose prices are difficult to predict). 2.189. The reference method consists in determining the change in stocks as the difference between the value of output for the year and the value of sales (and other uses) for the same year ( 37 ). It is founded on the assumption that there are no stocks left over at the end of the marketing year (the end of the first half of the following calendar year). It involves directly evaluating total output harvested during year n using the weighted average price for the marketing year (n/n + 1) and deducting from this the value of all sales (and other uses) made during calendar year n corresponding to the year of harvest ( 38 ) at the prices applicable at the time of sale (or other uses). 2.190. The reference method treats the storage activity as a factor for raising the prices of goods during storage. It thus makes a distinction between the storage activity and its effects on product prices. The increase in value resulting from the stay in storage is ‘anticipated’ since it is allocated to the output of year n (i.e. the year of harvest, even though the sales are spread over two calendar years), it being possible to anticipate price trends without too much uncertainty because they result from fairly regular and predictable changes (cf. 2.186). 2.191. The application of this method makes it possible to minimise the inclusion of holding gains or losses in the measurement of output. It ensures consistency between the calculations of output in value and quantity and avoids the recording of output on the basis of work in progress (requiring data on the level of stocks at the start and end of the calendar year, with corresponding prices). It also facilitates the elaboration of accounts in constant prices. 2.192. A second method is recommended in the specific case of products whose prices are difficult to predict (such as fruit, vegetables, potatoes and olive oil) and whose storage on agricultural holdings reaches economically significant levels. This method is less strict than the reference method in excluding holding gains and losses from the measurement of output; it considers the storage activity to be an extension of the production process in time. The inclusion of the increase in prices of stored goods is delayed and allocated to the year in which the storage took place. 2.193. By this second method, seasonal output is calculated directly as the sum of sales, other uses and changes in stocks. Stock changes are estimated by valuing the stocks at the end and start of the accounting period on the basis of their current prices. 2.194. It should be noted that these two methods differ in the way they measure the change in stocks but not in the valuation of sales (which are valued at the basic prices applicable on withdrawal from stocks). (e) Changes in stocks of wine (from grapes produced by the same holding) 2.195. Wine is a product which is generally stocked for several years for ageing and maturing. During this storage period, the quality changes. This storage activity at the holding can be regarded as an extension of the wine production process since the wine leaving storage is different from the wine which entered. Stored wine should therefore be treated as work in progress and the increase in value which is then determined should be regarded as an increase in output to be measured continuously over time. 2.196. The change in the value of wine may result from three factors: the change in its quality, changes in the structure of supply and demand (i.e. relative prices between young and aged wines), and a general increase in prices. Whilst the change in the value of wine due to the first two factors should be included in the measurement of output, any increase in the price of wine due to a general increase in wine prices should not be reflected in the value of output but treated as a holding gain (recorded in the revaluation account). 2.197. Recording the increase in the value of wine in the value of output should be done throughout the course of the ageing process. However, this would mean having a large amount of data available on the structure of wine stocks based on their production year, quality and production area, as well as on the development of their respective prices. As these data are not generally available in the Member States, two practical methods have been developed which allow the increase in the value of wine due to ageing to be calculated approximately for the EAA. Although not so strict from the conceptual point of view, these two methods nonetheless appear to be acceptable in the current situation regarding availability of data. The choice of each Member State will depend on the structure of its wine-growing industry and statistical system. 2.198. Anticipation of the increase in value from wine-ageing: the first method is to value stock entries of wines to be aged by the producer, using the selling prices of wines which have already been aged, as observed in the second half of the year. The expected increase in value is anticipated in the output of the year of harvest. This increase is only partial since these wines are not valued at their real selling prices but at the prices of other wines of the same type but older. The difference between their real selling price and that used for evaluating stock entries is not counted in the value of output, since it is interpreted as holding gain (NB: this difference includes the effects of inflation). Since it makes no distinction depending on the harvest year of the stocked or sold wine, it assumes that the quality wine market is even in terms of age of the wine. 2.199. Delay in taking into account wine ageing: the second method is to value stock entries at the price of ‘unaged’ wines at the time of harvesting and not to record an addition to the wine work in progress (i.e. the increase in price due to ageing, irrespective of the effect of the general change in the price of wine) until the aged wine is sold. Since sales are valued at the average price for the year, any increase in value between the harvest year and the year of sale is recorded in the output of the year of sale (and is therefore not distributed over time). This method requires more data on the structure of wine stocks as it assumes that the distribution of stocks (and stock withdrawals) is known for each harvest year. Nevertheless, it can provide a more accurate idea of sales and stocks of different vintages. 2.200. Neither of these two practical methods allows the increase in the value of wine from ageing to be distributed over time: one records it in advance and the other after a delay. This disadvantage can be regarded as a relatively minor one in both cases if it is assumed that there is a certain stability over time in the production of ‘aged’ wine. The first method appears to be preferable when the average ageing period is short. 3. Recording of livestock as ‘GFCF’ or ‘changes in stocks’‘changes in stocks’ 2.201. As mentioned in 2.140 and 2.151, changes in the number of livestock (for agricultural statistical purposes) are entered either as GFCF or as changes in stocks depending on the type of animal. (a) Definition 2.202. GFCF of livestock concerns animals, i.e. fixed assets, used repeatedly and continuously in production processes. They are reared for the output they regularly provide and include, for example, breeding livestock, dairy livestock, draught animals, sheep and other animals reared for their wool. By contrast, animals serving as stocks are animals produced during the current or a previous period which are kept in order to be sold or used for other production purposes at a later date. These include animals reared for their meat such as animals for slaughter and poultry. (b) Recording of animal imports 1. Animals identifiable as fixed assets: 2.203. If, at the time of import, the animals were able to be clearly identified as a fixed asset, they would be recorded exclusively as acquisitions in the GFCF (cf. 2.149 and 2.150). Of course, only animals bought by the agricultural industry are to be recorded as GFCF of agriculture, and therefore not, for example, saddle horses for private use or animals acquired for other purposes. 2. Animals identifiable as stocks: 2.204. By contrast, if at the time of import the animals were able to be clearly identified as stocks (e.g. animals for slaughter) their import would be considered as an entry into stocks of work in progress and therefore, deducted from sales (negative sales) in the calculation of output (cf. 2.069). 3. Treatment to be adopted: 2.205. It is often difficult, on the basis of the sources of data available, to draw pertinent distinctions between these two different categories of animals. This is why the value of all imported animals (animals classed as fixed assets or stocks, but with the exception of those imported animals for immediate slaughter) should be deducted from sales in the output calculation. If at any time they are transferred to the herd of productive livestock (i.e. fixed assets), they will be recorded as own-account produced fixed capital goods during the reference period when the transfer takes place (as for animals which are produced and reared in the country and which are then transferred to herds of productive livestock) (cf. 2.069 and 2.070). 2.206. It should be noted that animals imported for immediate slaughter are entered as imports of the national abattoirs and are not recorded in the EAA since the latter are restricted to depicting the output of national agriculture. (c) Recording of livestock trade between agricultural units 2.207. Animals classed as fixed assets: trade in these animals is recorded in GFCF as acquisitions and disposals of fixed assets (services associated with the transfer of ownership are recorded in the purchaser price). When sales and purchases occur in the same accounting period, these flows offset each other and only services associated with the transfer of ownership are recorded as GFCF (cf. 2.068). 2.208. Animals classed as stocks: these sales and purchases are only recorded if they occur in two different accounting periods. Services associated with this trade, which are included in the purchaser price, should be deducted from the output total when trade occurs in the same accounting period (cf. 2.067). 2.209. Because of the special treatment of livestock trade between agricultural units and imports, there is no intermediate consumption for ‘Livestock and animal products’. (d) Non-agricultural animals 2.210. The rearing of race-horses, saddle horses, dogs, cats, cage birds, zoo and circus animals and bulls for bullfights is included in the activities defining the agricultural industry, whether it is for breeding, meat production, recreation or sports events (cf. 1.78). The use of these animals for service activities is included in the agricultural industry, only when such activities are performed by agricultural units as inseparable secondary activities. The rearing of non-agricultural animals by units for which the agricultural activity represents solely a leisure activity is not considered as part of the EAA (cf. 1.24). 2.211. Such animals may be sold to: — households: in which case any subsequent operations involving these animals are of no concern to the EAA, — other branches: a guard dog, circus animal or racing horse, for example; these form part of the formation of fixed capital of the purchasing branch.