322 Government Finance Statistics Manual 2014
Box A4.2 Statistical Treatment of Permits Issued by Government: ExamplesSuppose unit A contracts with government to buy a permit to operate a casino for three years at a total cost of 12. A
expects to make monopoly profi ts of 7 per year because the permit excludes other casinos from operating. The govern-
ment may or may not be prepared to make a refund if A relinquishes the permit. A may utilize the permit for the three
years for which it is valid or may sell it to unit B at the end of year 1. The recordings under these four possibilities are
examined as follows.Case 1: Government does not offer a refund and A keeps the permit for three years
At the start of year 1, A pays tax of 12 and through an other change in the volume of assets recognizes an asset worth
21 initially. Government records only tax revenue of 12. Assuming no market price changes or discount factor, by the
end of the year the value of the asset has reduced by 7 as an other volume change, because one of the three years for
which the permit was initially valid has expired. At this point the asset is contributing 14 to A’s net worth. By the end of
the second year A writes off an additional 7 as an other volume change, leaving a contribution to net worth of 7. By the
end of the third year the asset is worth zero.Case 2: Government does not offer a refund and A sells the permit to B after one year
At the start of year 1, A pays tax of 12 and through an other change in the volume of assets recognizes an asset worth
21 initially. Government records only tax revenue of 12. Assuming no market price changes or discount factor, by the
end of the year the value of the asset has reduced by 7 as an other volume change, because one of the three years for
which the permit was initially valid has expired. At this point, the value of the asset is 14. However, B is prepared to
pay only 13 for the asset and A accepts this offer. A therefore reduces the value of the asset by 1 through a holding loss
(revaluation change), before selling it for 13. B acquires the asset for 13 and, assuming no further market price changes,
its value reduces by 6.5 in the other change in volume of assets account in each of the two following years.Case 3: Government offers a possibility to refund and A keeps the permit for three years
At the start of year 1, A makes a payment of 12 to government, which is recorded as a payment of tax of 4 for the year.
The remainder of the amount is a prepayment of a tax and, therefore, at the end of the year government has an other-
account payable to A of 8. The value of the permit to A is only the excess of the monopoly profi t over the total amount
that A will have to pay to government. At the start of year 1, A recognizes an asset with a value of 9 (the difference
between 7 and 4 for three years) through an other change in the volume of assets. Assuming no market price changes
or discount factor, by the end of year 1 this permit asset is worth only 6. At the end of that year, A’s net worth includes
an other account receivable from government of 8 and the remaining value of the permit of 6. The total value of A’s
assets is 14 as in case 1. During the second year, A’s other account receivable from government reduces by 4 which is used
to pay the accrued tax in year 2. In that year, the value of the permit also reduces by 3 from 6 to 3. At the end of the
second year, A’s net worth includes an other account receivable from government of 4 and, assuming no further market
price changes, a permit worth 3, bringing A’s total assets to 7 as in case 1. At the end of year 3, A’s other account receiv-
able and the value of the permit are reduced to zero.Case 4: Government offers a possibility to refund and A sells the permit to B after one year
At the start of year 1, A makes a payment of 12 to government which is recorded as a payment of tax of 4 for the year.
The remainder of the amount is a prepayment of a tax and, therefore, at the end of the year government has an other
account payable to A of 8. The value of the permit to A is only the excess of the monopoly profi t over the other account
payable. At the start of year 1, A recognizes an asset with a value of 9 (the difference between 7 and 4 for three years)
through an other change in the volume of assets. Assuming no market price changes or discount factor, by the end of
the year, this permit asset is worth only 6. At the end of the year, A’s net worth includes an other account receivable from
government of 8 and the remaining value of the permit of 6. The total value of A’s assets is 14, as in case 1. However,
B is prepared to pay only 13 for the asset and A accepts this offer. As in case 2, A has to reduce the value of the permit
by 1 through a holding loss (revaluation change) before selling the asset to B for 13. The other account receivable from
government of 8 is transferred to B and the asset (permit) is sold for 5. B’s net worth is unchanged because B has paid A
13 but received the other account receivable of 8 and an asset (permit) valued at 5 in return. In year 2, B’s other account
receivable is reduced by 4 due to the tax payment of 4 that accrued and, assuming no further market price changes, the
permit declines in value from 5 to 2.5. At the end of year 3, B’s other account receivable and the value of the permit are
reduced to zero.