The Accounting/Financial Balance Sheet

According to the Government Finance Statistics Manual of the International Monetary Fund (2001), assets on the balance sheet can be understood to be economic assets which are entities over which ownership rights are enforced by institutional units, individually or collectively, and from which economic benefits may be derived by their owners by holding them or using them over a period of time.  The value of an asset at any given time is its current market value, which is defined as the amount that would have to be paid to acquire the asset on the valuation date, taking into account its age, condition, and other relevant factors.  This amount depends on the economic benefits that the owner of the asset can derive by holding or using it.  The remaining benefits expected to be received from some assets diminish with the passage of time, which will reduce the value of the asset, and the value of the remaining benefits may increase or decrease because of changes in prices.

Financial assets: financial claims, monetary gold, and Special Drawing Rights (SDRs)⁽¹⁾allocated by the IMF.  Financial claims are assets that entitle one unit, the owner of the asset (i.e. the creditor), to receive one or more payments from a second unit, the debtor, according to the terms and conditions specified in a contract between the two units.  A financial claim is an asset because it provides benefits to the creditor by acting as a store of value.  The creditor may receive additional benefits in the form of interest or other property income payments and/or holding capital gains.  Typical types of financial claims are cash, deposits, loans, bonds, financial derivatives, and accounts receivable.

Nonfinancial assets: all economic assets other than financial assets. By implication, nonfinancial assets do not represent claims on other units.  As with financial assets, nonfinancial assets are stores of value.  In addition, most financial assets provide benefits either through their use in the production of good and services or in the form of property income.

Within the context of the balance sheet, liabilities can be understood as obligations to provide economic benefits to the units holding the corresponding financial claims.  When a financial claim is created, a liability of equal value is simultaneously incurred by the debtor as the counterpart of the financial asset.  That is, the payment of payments that the creditor has a contractual right to receive are also the payment or payments that the debtor is contractually obligated to provide.

 ⁽¹⁾  Monetary gold and SDRs are not financial claims, which means that they are not the liability of any other unit.  They do, however, provide economic benefits by serving as a store of value and they are used as a means of payment to settle financial claims and finance other types of transactions.  As a result, they are, by convention, treated as financial assets.

The purpose of the financial balance sheet is to gain a greater understanding of the net worth of the sovereign and the value of assets and liabilities at a given point in time.  The financial balance sheet provides a snapshot of the sovereign’s current financial position and is more of a tactical in nature.  The conceptual or economic balance sheet is a strategic device with a longer time horizon.  Due to these different objectives, the items included in each are not the same.  Nonfinancial assets are included on the financial balance sheet because they contribute to the net worth of the sovereign and need to be valued.  However, as they generally do not produce cash flows and are not subject to economic variability, they are excluded from the conceptual balance sheet.  The value of nonfinancial assets is often unknown or inaccurate due to estimation problems or lack of resources.  Knowing the value of nonfinancial assets can be of great benefit to a sovereign as unneeded nonfinancial assets can be liquidated or privatized to reduce debt or achieve other policy objectives.  In this way, the financial and conceptual balance sheets can be used in conjunction with one another to deepen policymakers’ understanding of the financial position of the sovereign and make appropriate decisions based on this knowledge.