Operating surplus and mixed income

Contents - Previous - Next

(see paragraphs 7.80 to 7.86 of the 1993 SNA)

3.46 Operating Surplus and Mixed Income are measures of the surplus accruing from the processes of production before deducting any explicit or implicit interest charges, rents or other property incomes payable on the financial assets, land or other tangible non-produced assets required to carry on production. Operating surplus or mixed income is the balancing item in the Generation of Income Account depending on the type of enterprises.

Operating surplus and mixed income
= value added minus compensation of employees payable minus taxes on production payable plus subsidies receivable.

3.47 The difference between operating surplus and mixed income is that the latter term has been reserved for the unincorporated enterprises owned by members of households, either individually or in partnership with others, in which the owners or other members of the households, work without receiving any wage or salary. An unincorporated enterprise is a producer unit that is not incorporated as a separate legal entity from its owner. The owner of an unincorporated household enterprise usually has a dual role to play: first as the entrepreneur who is responsible for the creation and management of the enterprise; and second as a worker who contributes labour inputs that could be provided by paid employees. The establishment of an unincorporated enterprise requires initiative, enterprise and capital equipment. To meet these requirements the owner has to raise the necessary finance at his or her own risk. Therefore the surplus arising from the productive activity of an unincorporated household enterprise usually represents a mixture of two different kinds of income, namely labour income and a return to capital. As a result of the basic structure of unincorporated enterprises, the income contains an unknown element of remuneration for work done by the owner of the enterprise or by other members of the same household, as well as the surplus accruing from production. For this reason it is described as "mixed income" instead of operating surplus.

3.48 In this context, it may also be mentioned that it is often not possible to draw a clear distinction between the assets, including financial assets and liabilities, of the unincorporated enterprise and those of the owner in a personal capacity. Many fixed assets, such as buildings and vehicles, may be used partly for business purposes and partly for purposes of household final consumption. In addition, some goods or services ostensibly purchased for intermediate consumption may in fact be consumed by members of the household. Some owners may deliberately overstate their costs of production in order to reduce their tax liabilities, and mixed income may sometimes not be very reliable for these kinds of reasons.

3.49 In many countries, most agricultural production activity takes place within the household sector. When members of households work as employees for corporations, quasi corporations or government, the production to which they contribute takes place outside the household sector.

Gross fixed capital formation

(see paragraphs 10.26 and 10.32 to 10.88 of the 1993 SNA)

3.50 Gross fixed capital formation is measured by the total value of a producer's acquisitions less disposals of new or existing fixed assets by way of purchase, barter, capital transfers in kind and own account production (even if not yet completed or fully matured) during the accounting period. Fixed assets consist of tangible or intangible assets that have come into existence as outputs from processes of production and that are themselves used repeatedly or continuously in other processes of production over periods of more than one year. Changes in assets may be either positive or negative and it is possible for the gross fixed capital formation of an individual institutional unit or sector to be negative if it sells off or transfers enough of its existing fixed assets to other units or sectors. There is substantial diversity in the different types of gross fixed capital formation that may take place (see Table 2.4 in Chapter 2 above). The following main types of assets may be distinguished as far as agricultural activities are concerned:

(1) Acquisitions, less disposals, of new or existing tangible fixed assets, subdivided by type of assets into: a) farm buildings and other structure, b) machinery and equipment, c) cultivated assets-plantations, trees and livestock - that are used repeatedly or continuously to produce products such as fruit, rubber or milk;
(2) Major improvements to tangible non-produced assets, including land;
(3) Costs associated with the transfer of ownership of non-produced assets.

3.51 The total of the three components given above constitutes gross fixed capital formation. Acquisitions of new assets include not only complete assets but also any renovations, reconstructions or enlargements that increase the productive capacity or extend the service life (or both) of an existing asset. In recognition of the newly increased capacity or newly extended service life, these improvements are treated as acquisitions of new assets even though, physically, they function as part of the existing assets.

3.52 Gross fixed capital formation is recorded when the ownership of the fixed assets is transferred to the institutional unit that intends to use them in production. However, assets produced for own account, including cultivated assets, are recorded as gross fixed capital formation as they are being produced, even if the assets are not completed or mature (see paragraphs 10.83 to 10.88 of the 1993 SNA).

3.53 Fixed assets acquired by the purchaser are valued at purchasers' prices, that is, including not only all transport and installation charges but also all costs incurred during the transfer of ownership in the form of fees paid to agents, technical consultants, surveyors, engineers, architects, lawyers, estate agents, etc. and any taxes payable on the transfer. In cases where such assets have been acquired by barter, they are valued similarly on the basis of estimated basic prices plus actual costs incurred in installation, transportation, consultations, etc. and taxes, if any. Own account produced assets are valued at basic prices or by their costs of production when basic prices are not available. Sales of existing fixed assets are valued after deducting any costs of ownership transfer incurred by the seller.

3.54 The coverage of fixed assets as far as agricultural activities are concerned is mostly self explanatory. A few specific points which need attention while preparing the estimates and using them for analytical purposes follows:

(a) Improvements to land may involve the reclamation of land by i) the construction of dykes, walls or dams, ii) the draining of marshes or the irrigation of deserts (by the construction of dykes, ditches or irrigation channels) and iii) the prevention of flooding or erosion by the sea rivers through by the construction of breakwaters, walls or flood barriers. These activities may lead to the creation of substantial new structures that are not themselves used directly to produce other goods and services.
It is therefore, useful to classify them separately.

(b) Livestock classified as cultivated assets consists of those animals that are used in production year after year. These include, for example, breeding stock, dairy cattle, sheep reared for wool and draught animals. Animals raised for slaughter, including poultry, are not fixed assets. Similarly, trees (including shrubs) that are cultivated for the products they yield year after year, such as fruit trees, vines, rubber trees and palm trees, are fixed assets while trees grown for timber that yield a finished product only once -- when they are ultimately felled -- are not fixed assets, just as cereal or vegetable plants that produce only a single crop.

(c) Exceptional losses of animals as a result of major epidemics of disease, plagues of insects, contamination, exceptional drought, famine or other natural disasters are not recorded as disposals but as "catastrophic losses" (K.7) in the other changes in the volume of assets account (see paragraphs 12.35 to 12.37 of the 1993 SNA).

(d) Incidental, regularly recurring losses of animals caused by occasional deaths from natural causes form part of consumption of fixed capital. Consumption of fixed capital on an individual animal is measured by the change in its value as it gets older.

(e) Gross fixed capital formation in plantations, orchards etc. may be approximated by the value of costs incurred in their production during the period. These include the costs of preparing the ground, planting, staking and protecting from weather or disease until the tree reaches maturity and starts to yield a product. Disposals consist of assets sold or otherwise transferred to other units.

(f) A financial lease is a contract between lessor and lessee whereby the lessor, purchases the goods and the lessee pays rentals that enable the lessor, over the period of contract, to recover all or virtually all costs including interest. Financial leases may be distinguished by the fact that all the risks and rewards of ownership are, de facto, transferred from the legal owner of the good (the lessor) to the user of the good (the lessee). In order to capture the economic reality of such arrangements, the goods under a financial lease are treated in the system as if they were purchased by the user, that is, as if a change in ownership had occurred.


(see paragraphs 10.59, 10.60 and 10.121 to 10.125 of the 1993 SNA)

3.55 Land is defined in the system as the ground itself, including:

(a) the soil covering;
(b) associated surface water;

but excluding:

(a) building or other structures constructed on the land or through it such as roads and irrigation channels;
(b) vineyards, orchards or other plantations of trees and any growing crops etc.;
(c) subsoil assets;
(d) non-cultivated biological resources;
(e) water resources below the ground.

The associated surface water includes any inland waters-reservoirs, lakes, rivers, etc. -- over which ownership rights can be exercised and which can, therefore, be the subject of transactions between institutional units.

3.56 The total stock of land is not fixed. It may marginally increase or decrease due to reclamation or erosion by the sea or rivers. Similarly its quality can be improved or damaged, especially by appropriate or inappropriate methods of cultivation or other agricultural processes.

3.57 The cost of ownership transfer incurred on purchases and sales of land affect the values recorded in the same way as the cost of ownership transfer of other fixed assets. However, as land is not a produced asset, it is not possible to have gross fixed capital formation of land itself. The value of the costs of ownership transfer associated with purchases and sales of land must therefore be separated from purchases and sales themselves. They are recorded under separate headings in the classification of gross fixed capital formation. Consumption of fixed capital on this component may then be charged based on suitably long service life. However, as the land that has been sold disappears from the balance sheet of the seller, any acquisition costs previously incurred by the seller that have not already been written off as consumption of fixed capital together with the selling costs result in a holding loss for the seller. Furthermore, as purchases and sales of land between residents are recorded excluding the cost of ownership transfer for both buyers and sellers, the total value of the purchases and sales of land must be equal to each other at the level of the total economy, although not at the level of individual sectors or sub-sectors. This transaction is recorded separately under "Acquisitions less disposals of land and other tangible non-produced assets".

3.58 Buildings, or other structures, and plantations are often purchased or sold together with the land on which they are situated without separate valuations of the two components. In such cases it may be found that one of the two components accounts for greater share of the total cost and the total transaction may be classified accordingly.

Changes in inventories

(see paragraphs 6.57 to 6.68 and 10.96 to 10.109 of the 1993 SNA)

3.59 Inventories consist of stocks of output (i.e. finished and semi-finished products) that are still held by the units that produced them and stocks of products acquired from other units that are intended to be used for intermediate consumption or for resale without further processing. Transactions involving inventories are treated in exactly the same way as transactions involving other assets. The matter of valuation of inventories and estimation as well as the coverage of work-in-progress have already been discussed under measurement of production.

Paragraphs 10.106 to 10.109 of the 1993 SNA, which refer directly to agriculture, are reproduced in full below:

"The natural growth of plants, trees and livestock, including farmed fish, is included within the production boundary when it is carried out under the direct control, responsibility and management of an institutional unit. In the present context it is necessary to distinguish single-use plants, trees and livestock that produce an output once only (when the plants or trees are cut down or uprooted or the livestock slaughtered) from trees (including vines and shrubs) and livestock that are used repeatedly or continuously for more than one year to produce outputs such as fruit, nuts, rubber, milk, wool, power, transportation and entertainment. Work-in-progress may need to be recorded for both types of crops or livestock.

In the case of single-use plants or livestock, any such crops or livestock that have not yet been harvested or slaughtered at the end of the accounting period constitute work-in-progress, as follows:

(a) When accounts are compiled quarterly, the value of the finished output of an annual crop -- i.e., the value of the grain or other crop actually harvested -- may be distributed over the quarters in which production has been taking place in proportion to the costs incurred each quarter. The value of the output produced in the quarter in which the crop is harvested is then equal to the value of the harvested crop less the value of the additions to work-in-progress produced in the previous quarters;

(b) If the accounts are compiled annually and if the crop year is contained within the accounting year, it will be unnecessary to calculate work-inprogress, except possibly under conditions of high inflation;

(c) If the accounts are compiled annually and if the accounting year ends in the middle of the crop year, it becomes necessary to calculate both additions to and reductions of work-in-progress during the accounting year. This does not imply, however, that the value of the additions to work-in-progress for the latest year covered must be estimated in advance of knowing the value of the harvested crop, as any annual crop sown in year t is likely to have been harvested by the time the annual accounts for year t are compiled and published. In any case, provisional estimates of additions to work-in-progress can always be calculated on the basis of costs plus a mark-up and revised when the value of the harvested crop becomes known.

Changes in work-in-progress for livestock reared for slaughter, including poultry, may be approximated by changes in the numbers of such livestock between the beginning and the end of the accounting period multiplied by the average price of the animals or poultry concerned.

In the case of trees and livestock that are intended for repeated or continuous use in production and are treated as fixed assets when they reach maturity, work-in-progress may have to be calculated in the case of specialist producers of such assets for example, breeders of racehorses or other special animals. However, when they are being cultivated or reared for own use -i.e., produced on own account -- the output produced is classified as gross fixed capital formation."

Property income

(see paragraphs 7.87 to 7.95 and 7.128 to 7.131 of the 1993 SNA)

3.60 Primary incomes are incomes that accrue to institutional units as a consequence of their involvement in processes of production or ownership of assets that may be needed for purposes of production. The primary incomes that accrue by lending or renting financial or tangible non-reproduced assets, including land, to other units for use in production are described as property incomes. Property incomes are classified in the following way in the system:

Interest; Rent;
Others (i.e distributed income of corporations: dividends, withdrawals from income of quasi-corporations; reinvested earnings on direct foreign investment; property income attributed to insurance policyholders).

In the following, only interest and rent are described. For the other items listed above reference may be made to the 1993 SNA.

3.61 Interest is a form of property income that is received by owners of certain kinds of financial assets, namely deposits, securities other than shares, loans and other accounts receivable. The interest is recorded on an accrual basis, i.e., interest is recorded as accruing continuously over time to the creditor on the amount of principal outstanding. This recorded interest may differ not only from the amount of interest actually paid during a given period but also the amount due to be paid within the period.

3.62 Owners of land and subsoil assets may put them at the disposal of other units by arranging contracts or leases under which the tenants or users of the assets agree to pay the owners property incomes in the form of rents. (Payments under operating leases are described as "rentals" and are treated as sales or purchases of services.) Rents are also recorded on an accrual basis. They may be paid in cash or kind. Under share-cropping or similar schemes the value of rent is not fixed in advance in monetary terms and is measured by the value at basic prices of the crops that the tenants are obliged to provide to the landowner under the contract between them. Rent on land may also include the rents payable to the owners of inland waters and rivers for the right to exploit such waters for various purposes, including fishing.

3.63 A landowner may be liable to pay land taxes or incur certain maintenance expenses solely as a consequence of owning the land. By convention, such taxes or expenses are treated as payable by the tenant who is deemed to deduct them from the rent that would otherwise be paid to the landowner. Rent reduced in this way by taxes or other expenses for which the landowner is liable is described as "net rent". By adopting this convention the income of the tenant does not change but there is no need to create a notional enterprise for the landowner if the landowner is not already engaged in some other kind of productive activity.

3.64 As already noted, the rental payable on buildings or other structures is treated as a purchase of services. In practice, however, a single payment may cover both rent and rental. For example, a farmer may rent a farmhouse, farm buildings and farmland in one contract. If there is no objective basis on which to split the payment between rent on land and rental on structure, it is recommended that, the whole amount be treated as rent or rental depending on which of the two is considered to be the larger.

Contents - Previous - Next