Data quality, concepts and methodology: Concepts
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Definitions
Capital expenditures
Capital expenditures include the cost of procuring, constructing and installing new buildings, engineering structures and machinery and equipment, whether for replacement of worn or obsolete assets, as additions to existing assets or for lease or rent to others. Also included are all capitalized costs such as feasibility studies, architectural, legal, installation and engineering fees, the value of capital assets put in place by firms either by contract or with their own labour force, as well as the capitalized interest charges on loans with which capital projects are financed. Gross outlays have been reported without any deduction for scrap, trade-in value of old assets and include any grants and/or subsidies received.
Capital expenditures by government departments exclude grants and/or subsidies to outside entities (for example, municipalities, agencies, institutions or businesses) and budgetary items pertaining to any departmental agency and proprietary crown corporation as they are surveyed separately. Federal department expenditures on capital include expenditures paid for by each department, regardless of which department awarded the contract. Provincial department expenditures include any capital expenditures on construction and/or machinery and equipment, for use in Canada, financed through revolving funds, loans attached to revolving funds, other loans, the Consolidated Revenue Fund or special accounts.
The intention is to include the cost of all new buildings, engineering structures and machinery and equipment which normally have a life of more than one year. For this reason respondents are asked to report, as capital expenditures, all purchases to be charged to fixed asset accounts. This method of reporting omits certain types of equipment which are bought and charged to current accounts.
Capital Construction
Expenditures on construction represent a process of human endeavour resulting in the erection, assembly, completion of free standing, static buildings or other types of structures, generally on a permanent foundation, bedding or location. Construction expenditures excludes the purchase price of land but includes outlays for land servicing and site preparation. Construction also includes modifications, additions and major renovations, conversions and alterations where either a structural change takes place or the life of an existing asset is extended beyond its normal life expectancy. Such structures may be above or below the surface of the earth for the passage or storage of materials and/or people. A structure, not classified as machinery, in the form of a building or "other structure" may be defined as an output of construction activity. Such outputs are produced to shelter, support, retain or convey something to someone. All construction activity can be categorized as either building construction or engineering construction.
Building construction represents any permanent structure with walls and a roof affording protection and shelter from and for a social and/or physical environment for people and/or materials. Such structures may also include portable or temporary shelters intended to remain in a particular location for a significant length of time, any subordinate or ancillary attachments to the structures needed to contain, to provide support, access or protection, and the component machinery and equipment which form a part of the structure with functions such as plumbing, electrical wiring, air conditioning, or elevators. For example, building construction represents expenditures on aircraft hangars, factories, hospitals, hotels, office buildings, railway stations, schools and shopping centres.
Engineering construction encompasses the direct or indirect conveyance of people, machinery, materials, gases, and/or electrical impulses. It also includes free standing structures which contain or restrain such objects either as part of such conveyance or separately and independently. Free standing structures erected for the transmission of electrical impulses may also include structures designed to provide light as static illumination of an area or as periodic signalling from a static location. In addition, the cost associated with significantly altering any terrain in the preparation for specialized use of that terrain will fall under engineering construction. Engineering construction includes such items as bridges, roads, highways, waterworks, sewage systems, dams, street lighting, railway tracks and pipelines.
This represents a comprehensive definition of capital construction, however, several industries operate under unique conditions which warrant special consideration. Apart from the above definition, the mining industry incurs expenditures for mine-site exploration, mine-site development, mineral lease rental, field expenditures and general overhead which are included under capital construction. The petroleum and natural gas industry's expenditures on exploration drilling, development drilling, production facilities, enhanced recovery projects and natural gas processing plants are also included under capital construction. For utilities, capital construction encompasses expenditures for transformation, switching stations, production plants and general plant expenditures.
Although housing is not considered a capital expenditure in the sense mentioned above, it has been included in this report because it forms a large proportion of construction expenditures and has cyclical fluctuations similar to those which characterize business, institutional and government capital expenditures.
Capital machinery and equipment
Machinery and equipment corresponds to any combination of interrelated parts which are physically or electro-magnetically dynamic, which use or apply pressure, heat, mechanical, electrical or other energy to do work or where not dynamic, to complete a work environment for people.
Capital expenditures on machinery and equipment represent the total capitalized cost of machinery such as automobiles, boilers, compressors, earth moving and materials handling machines, generators, motors, office and store furniture, professional and scientific equipment, pumps, tools, and transformers.
In addition, machinery and equipment expenditures encompass the cost of any other machinery and equipment not already reported as part of building or engineering construction, exploration or development work (non-production facilities), items that may be termed manufacturing or mining equipment and other related capital goods, whether for the firms own use or for lease or rent to others. Also included are capitalized costs associated with tooling, progress payments paid out before delivery and any balance owing or holdbacks incurred during the survey year. Gross outlays have been reported without any deduction for receipts from the sale of fixed assets or allowance for scrap or trade-in value of old equipment.
Leases
In accordance with the recommendations of the Canadian Institute of Chartered Accountants, leases are divided into two types, operating and capital. Fixed assets purchased for own use or for lease to others, either as a capital lease or as an operating lease are categorized as new capital expenditure. The Canadian Institute of Chartered Accountants recommends that assets acquired through capital (financial) lease be accounted for by the lessee. However, for survey considerations, the assets are reported by the lessor.
Used assets
Used assets are defined as existing buildings, structures or machinery and equipment which have been previously used by another organization. Outlays for used Canadian assets are excluded since they constitute a transfer of assets within Canada and have no effect on the aggregates of our domestic inventory. On the other hand, all expenditures for assets imported from outside Canada increase our domestic inventory and are, therefore, included in the capital expenditures series.
Work in progress
Included in the capital expenditures series are expenditures on work in progress, which represents accumulated or accrued costs on capital projects not completed and which are intended to be capitalized upon completion.
Repair and maintenance expenditures
Repair and maintenance expenditures on structures and machinery and equipment are also given in the report and are shown separately. These expenditures are not considered capital.
Repair and maintenance activity is that portion of current or operating expenditures which is charged against revenue in the year incurred and made for the purpose of keeping the stock of fixed assets or productive capacity in good working condition (preventive function) during the life originally intended. Repair and maintenance allow such fixed assets to operate at output producing capacity during the asset life without undue amounts of down time. A second purpose is the returning of any portion of the stock of fixed assets into a state of good working condition after any malfunctioning or reduced efficiency for whatever reason (curative function) short of replacement of such fixed assets or adding significantly to their life or productive efficiency. These outlays give a more complete picture of all demands likely to be made on labour and materials.
Repair construction
Repair and maintenance expenditures on construction include expenditures which do not extend the expected useful life of the structure, increase its capacity or otherwise raise its capacity. Maintenance expenditures on buildings and other structures may include the routine care of assets such as janitorial services, snow removal and/or salting and sanding by the firm's own employees or persons outside the firm's employ.
Repair machinery and equipment
Repair and maintenance expenditures on machinery and equipment include expenditures which do not extend the expected useful life of the structure, increase its capacity or otherwise raise its capacity. Maintenance expenditures on machinery and equipment may include oil change and lubrication of vehicles and machinery.
Accumulated depreciation
The sum total of the annual capital consumption allowance (depreciation charge) since the purchase of the asset is referred to as the accumulated depreciation.
Capacity utilization
Capacity utilization is calculated by taking the actual production level for an establishment (production can be measured in dollars or units) and dividing by the establishment's maximum production level under normal conditions.
Contract work or own account
Contract work refers to work put in place by construction contractors. Own account consists of construction work done by any organization's own work force.
Disposal/sales/write-downs of fixed assets
These are defined as the Gross Book Value of fixed assets which were disposed, sold, retired, destroyed, or otherwise discarded (including write-downs) and/or traded in for credit in the acquisition or purchase of new fixed assets. Accumulated capital cost should represent total capital expenditures for an asset at and since the time of construction or purchase.
Expected useful life
Expected useful life of an asset refers to the expected useful life for new assets regardless of their lives reported for income tax purposes. With respect to mines, expected useful life of an asset is defined as the expected productive life of the mine. This relates to amortized expenditures (or expensed in some cases) for mine-site exploration and /or mine-site development. The expected life is based on the company's original commitment to go into production for a number of years (for example, unit of production method) assuming no significant decrease (increase) in the price of minerals to lengthen (shorten) the life. The number of years of operating or productive life may not be the same as the life used for income tax purposes or measures of mineral deposits.
Expected remaining life of assets
The expected remaining life of assets represents the number of years remaining in the life of a used asset at the time of acquisition.
Gross book value
This refers to the cost of the asset in terms of the original purchase price.
Classification
The establishment is used by the capital expenditures survey as the primary statistical unit in its measurement of capital and repair expenditures. By definition, the establishment is the smallest operating entity which produces as homogenous a set of goods and services as possible and for which records provide data on the value of output together with the cost of materials used and the cost and quality of labour resources employed to produce the output, and for which records or estimated allocations can provide the full range of production account variables to calculate value added.
The term establishment refers to an organized capacity of production with some degree of specialization. To compensate for diversified production, the North American Industry Classification System (NAICS, catalogue no. 12-501-X) is used to distinguish between primary, secondary and ancillary activities; ultimately grouping individual establishments by primary activity. Under this NAICS version, establishments are grouped into industries, major groups and sectors according to the production of homogenous goods or services and/or participation in similar economic activity. Grouping of establishments in this manner applies to all private and public establishments as well as government owned enterprises. All other government operations are categorized as federal, provincial or municipal services within the government services division. In addition, the concepts and definitions employed by the capital expenditures series are those outlined in the United Nations Concepts and Definitions of Capital Stock and Capital Formation Series F No. 3 of 1953.
Since establishments may have operations in several provinces, the Standard Geographical Classification (SGC, catalogue no. 12-571-X) has been integrated into the capital expenditures survey. The SGC has been designed to subdivide Canada into areas based on provinces, census divisions and census subdivisions as well as separating the census metropolitan areas. The capital expenditures survey has adopted geographical classification at the provincial level, which provides the basis for the stratified sampling of establishments. Extending the geographic breakdown to include census divisions and census subdivisions would require an increased sample for many industries.
Comparability
Although the capital expenditures series complies with the standards set fourth by Statistics Canada for the classification of geographic location and industry, there are cases whereby differences exist in the value of capital expenditures being reported by the capital expenditures series and other data sources.
New investment as surveyed by the Investment, Science and Technology Division (ISTD) of Statistics Canada includes all capital outlays of private organizations and governmental agencies acquiring durable physical assets. The totals do not, however, correspond exactly with the details published for gross fixed capital formation in the National Income and Expenditure Accounts because of further adjustments made for the purpose of the national accounting system. These adjustments comprise deductions for defence construction, net sales of used motor vehicles, scrap and salvage and an addition for transfer costs of land and existing buildings.
The totals for capital expenditure published by Industrial Organization and Finance Division (IOFD) will not correspond exactly to this report as a result of IOFD's concentration on company level data for the private sector. Also in contrast to the capital expenditures series, IOFD includes the purchase price of land and used buildings.
The present report by ISTD differs in several ways from related upstream expenditures published by Natural Resources Canada (NRCan), Energy Policy Sector and the Manufacturing and Energy Division of Statistics Canada. First, the comparability of exploration and development statistics in the petroleum and natural gas industry is restricted because the Manufacturing and Energy Division of Statistics Canada includes in its presentation land sites purchased for construction purposes, as well as land acquisition and rentals. In the non-conventional sector, the Manufacturing and Energy Division also includes the acquisition of housing. The Energy Policy Sector of Natural Resources Canada, and Manufacturing and Energy Division in its presentation, include expenditures for geological and geophysical activities. These expenditures are not considered as part of "Capital Formation" for National Accounts purposes and are not included in this report. Further, NRCan and Manufacturing and Energy Division collect "Other Capital Expenditures" at a national level while ISTD requests them provincially. Finally, Manufacturing and Energy Division collects its data for the calender year, where feasible, and not by fiscal year, in contrast with NRCan and ISTD. Impact of this difference, however, should be minimal.
When possible, the capital expenditures survey complies with the practices of the Canadian Institute of Chartered Accountants (CICA), however, the data reported by establishments often reflects the expensed cost of items which should be capitalized. Leased assets are reported by the lessor for the capital expenditures survey, whereas the CICA recommends that assets acquired through capital (financial) lease be accounted for by the lessee.
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