Public sector accounting

UN STATISTICS DIVISION Economic Statistics Branch

National Accounts Section

UNSD/ECA National accounts workshop November 2005

IntroductionTaxes Transactions between government and public corporationsPrivatizationPrivate/Public/Government Sector DelineationTaxes on holding gainsPublic-Private Partnerships

Tax revenue and tax credits

The Task Force on the Harmonization of Public Sector Accounting (TFHPA)

The definition of tax revenue Suggested only minor changes

The accrual recording of taxes Gave more guidance on amounts and timing of

recording The recording of tax credits

Recommended a split of tax credits between reduction of tax and government expenditure

The AEG on tax issues: Tax definition and accrual recording:

- Broad agreement on the principlestime of recording, accruals, amounts of taxrevenue and to exclude uncollectible taxes- No precise recommendations in the SNA, no changes

Tax credits: - AEG disagrees with the TF

recommendation to split, and prefers to gross up the tax revenue for all payable tax credits

Transactions between government and public corporations

Due to lack of guidance the TFHPSA investigated capital injections and super dividends

Two approaches were proposed and opposed:

Transactions between government and public corporations

1. For an improved / amended SNA, to take on board some recommendations from the EMGDD and GFSM2001 (no fundamental change to the present conceptual framework, only more precise definitions)

2. To apply the treatment recommended for foreign direct investment using reinvested earnings (D.43); to accrue the profit or loss of the public corporation in the GG account.

Transactions between government and public corporations

The opinion of the task force members was shared between the two main options: no overwhelming majority in favour of one approach

It appeared during the discussion that some uncertainties were affecting the D.43 recording (only 100% owned corporations?, scope of financial transactions…); situation not mature

Orientation of TFHPSA: preference for the improved / amended SNA approach; the paper presented to the task force developing the D.43 proposal will be put on the « Research agenda »

Privatisation, restructuring

agencies and SPVs

PRIVATISATION Definition:1. Giving up of control by the general

government over a public corporation by the disposal of shares and other equity to private units (same basic definition in the EMGDD and GFSM 2001).

2. The typical case of privatisation is a sale of assets, and at first the sale of shares and other equity.

PRIVATISATION

The Sale of assets in the SNA1993 General principle: this transaction entails

a restructuring / reshuffling the assets in the balance sheets of the units involved (neutral on net worth).

The sale of assets generates no flow of income (in favour of the government)

The cost of using the service of a financial intermediary for achieving the sale is to be recorded as intermediate consumption

PRIVATISATIONThe sale of financial assets (shares and

other equity) Direct sale of financial assets:

The sale by the government of shares and other equity in a public enterprise is a financial transaction (in F.5, with a counterpart flow in F.2)

The associated cost of purchasing the service of a financial intermediary is recorded as intermediate consumption (P.2)

PRIVATISATION Indirect sale of financial assets:

Case where the sale of shares and other equity in a subsidiary is made by a public holding corporation – or any kind of public unit:

The sale itself is a financial transaction (F.5, counterpart in F.2)

The payment of all or part of the sale proceeds to the government is a financial transaction (F.2, counterpart in F.5)

PRIVATISATION

The sale of non-financial assets (buildings, land etc.)

Direct sale of non-financial assets:The sale of a non-financial asset is a transaction in goods and services (or in products) recorded in the capital account:

As P.5 if it is a produced asset (counterpart in F.2)

As K.2 if it is a non-produced asset

PRIVATISATION

Indirect sale of non-financial asset:Case where the sale of a non-financial asset is made by a public holding corporation – or any kind of public unit

The sale itself is a transaction in goods and services (P.5 or K.2)

The payment of all or part of the sale proceeds to the government is a financial transaction (F.2, with a counterpart in F.5).

Rationale: liquidation of assets, reflected in the equity.

PRIVATISATION Special case of a « restructuring

agency »:A public holding corporation (or any kind of public unit) sells assets but does not give the sale proceeds to the government: the funds are kept by the « restructuring agency » to inject capital in other enterprises in any possible way (grants, loans etc.)

PRIVATISATION Special case of a « restructuring agency »:Two main possibilities can be envisaged:1. The unit is a real holding corporation directing a

group of subsidiaries, and restructuring corporations is a minor part of its activity:Solution: to reroute the transactions made on behalf of the government through the government itself (SNA §3.24 or 3.31: « recognising the principal party to a transaction »)

2. The main function of the unit is to reorganise the public sector, redistributing income and wealth on behalf of GG:Solution: to classify the unit in the government sector

NATIONALISATIONDefinition:

nationalisation means the taking of control by the government over assets and over a corporation, by acquiring the majority or by acquiring the whole equity in the corporation.

Two forms of nationalisation are observed.

NATIONALISATION1. Nationalisation by confiscation:

This is not recorded as a transaction, made by mutual agreement, but as an other flow:

K.8: uncompensated seizure (in OCV account)2. Nationalisation by purchase of shares:There is a payment, in a legal context that

normally guarantees some mutual agreement: this is a financial transaction (F.5, counterpart in F.2)

NB: A combination of both treatments is possible if the price is too low (SNA, §12.39)

Restructuring agencies Context: government rescues some banks

in order to prevent a collapse of the financial system. Case of defeasance of bad assets. Set-up of special units, sometimes called « bad banks ».

Issue: how and when to record losses that will affect government expenditure? Government guarantees are often involved.

Sectorisation: is the created entity a financial corporation (putting itself at risk) or a government unit (acting on behalf of government)?

Restructuring agenciesPossible options of recording: A: the restructuring unit is a

government unit. A capital transfer is recorded at time of acquisition of the bad assets (or granting of guarantees)

B: the restructuring unit is classified outside the government. Capital transfers of government are recorded when losses are realised, at time of liquidation of assets.

Special purpose entities Context: financial function, often the securitisation of

assets Main issue: sector classification, in S.12 or in S.13

First step: as for any entity, national accountants must assess if the SPE meets the criteria for being an institutional unit. Assessment is on a case by case basis.

SPEs involved in securitisation, if they are institutional units, are to be classified in S.123 (OFI)

Case of ancillary units (New York meeting, Sept 05)

Special purpose entities The case of non-resident SPEs created by the

government to outsource some borrowing and expenditure, through securitisation for instance, has been discussed in a few instances

TFHPSA in March 2005 and Eurostat in April asked for a classification inside the government (similarly to embassies)

BOPCOM opposed this point of view (no exception for government except embassies and military)

New-York and Washington proposal: possibility to consolidate some flows with the government

Privatisation, restructuring agencies and SPVs

Non-controversial issue of privatisation and nationalisation: for clarification of SNA only

More complicated cases and issues: securitisation and SPEs, restructuring agencies (defeasance etc.), Public Private Partnerships

Case of SPEs, often created for the purpose of securitisation of assets: - mostly financial institutions, classified in sub-sector S.123 (if institutional units)- but may be ancillary units, or consolidated with the government

Private/Public/Government Sector

Delineation

Government / public / private sector

TFHPA

The identification and delineation of public and private sector statistical units

Whether public sector units are Non-market producers (general government) Market producers (corporations)

Government/public/private sectors

Delineation of public and private sector units: based on control

Delineation of non market (government) versus market units (corporations) within the public sector: based on economically significant prices (ESP)

Issue: Clarify what control and ESP entail

Public sector boundary: Use a decision tree

Unit A Unit B Unit C

Step 1: Institutional unit?

YES

Step 2: controlled by government?

YES NO

Step 3:ESP?

NO: Government sector

YES: public corporation

YES: private sector

Government control of corporations:

1. Ownership of the majority of voting interest

2. Control of the board or other governing body

3. Control of the appointment and removal of key personnel

4. Control of key committees of the entity

5. Golden shares and options

6. Regulation and control

7. Control by a dominant customer

8. Control attached to borrowing from the government

Government control of NPI

1. Appointment of officers

2. Other provisions of enabling instrument

3. Existence of contractual agreements

4. Degree of financing by government

5. Level of risk exposure

Market and nonmarket producers

ESP: Criterion to classify output, and thus producers as market or nonmarket

Market producers: output sold at ESP Nonmarket producers: output free or

at non ESP

Public sectorComposition: Government units Corporations controlled by government units,

and Nonprofit institutions (NPI) controlled by

government units.Government control entails: Corporations: a source of financial gain Nonprofit institutions (NPI): not a source of

financial gain

Control of CorporationsDefinition of control:

Current: ability to determine the general corporate policy

Proposed: power to govern financial and operating policies so as to benefit from activities of corporations

Control of NPI

Definition of control: Current: ability to determine the

general corporate policy and largely financed

Proposed: ability to determine the general corporate policy

Economically significant prices

Definitions: ESP are prices that have a significant

influence on the amounts the producers are willing to supply and on the amounts purchasers wish to buy.

Market producers: production offered for sale (on the market) at economically significant prices

Non-market producers are only in the government or NPISH sectors.

Economically significant prices

ESA95 « 50% rule » not taken into account as a rule

Recommendation 4: « although there is no prescriptive numerical relationship between the value of output and the production costs, one would normally expect the value of output to average at least half of the production costs over a sustained multi-year period. »

Economically significant prices

Case of production sold only to govt:

The public producer is the only supplier: it is non-market unless it competes with a private producer in tendering for contract

It is one of several producers: it is a market producer if it competes with other producers on the market.

Definition of sales

Output is measured as equal to the business notion of sales (plus

change in inventories as required) Excluding taxes on products and

subsidies on products (except for subsidies granted to all private producers for this type of activities

Excluding own account production

Definition of production costs

Cost is measured as the sum of: Intermediate consumption Cost of capital services Other taxes on production

Indicators to classify public producers

Corporations and households primarily

Government onlyonly supplier

one of several suppliers

Supplying public sector unitsSupplying public sector units

Government and others

only supplier

one of several suppliers

COST normally covered by SALES (CCS)

Competes

Other private tender

Other private tender or CCS

Government

Public corp.

no yes

no yes

no yes

no yes

no yes

Purchasing unitsPurchasing units

Competes

Market & Non-market producers

Public Private

Producer units

Government (incl. NPI)

Public Corporations (incl. quasi)

Private corporations(incl. quasi and NPI)

NPISH Hous. Enterprises

Market Non Market

Control

ESP

AEG Decisions: There was a broad level of support to

the proposals

There are still a number of questions requiring further clarifications before final decisions can be made.

Taxes on holding gains

42

Background Contradiction in the 1993 SNA in the treatment

of holding gains: The holding gains are not treated as part of the

income concept; but the taxes on the realized holding gain are

classified as part of the taxes on income. This affects the disposable income and the savings

rate.

Possible solutions

(a) Reclassify holding gains and losses as part of income (all gains or only realized gains?)

(b) Reclassify taxes on holding gains as capital taxes (no impact on income)

(c) Do nothing, live with the contradiction, specify holding gains taxes

Possible solutions Classification of holding gains and losses as part of

income was seen as too ambitious.

Why? It would modify significantly the income concept

in the 1993 SNA and introduce more volatility into the income concept. More difficult to explain private consumption expenditure?

Holding gains are not a result of production, GDP (production approach) ≠ GDP (income

approach)

Possible solutions Classification of taxes on holding gains as capital

taxes would be consistent with the fact that many households see both holding gains and taxes on them as exceptional.

However, the governments see these taxes as current.

And, the main problem may be practical. A majority of countries consulted by the OECD found it difficult to distinguish taxes on holding gains from ‘other taxes on income’.

AEG Recommendations The AEG agreed to continue treating taxes on

holding gains as current taxes on income and wealth (D51).

As far as possible, taxes on holding gains should be shown as a special sub-category within D51.

The possibility was considered to develop alternative concepts of household income. However, this is potentially a big endeavor and is not a priority for the present SNA review.

Public-Private Partnerships

Conclusions from Canberra II meeting in April, 2005 Public-Private Partnerships (PPPs)

have become sufficiently important that they should be mentioned in the SNA.

There are two major problems to solve.

First Problem Is the private unit or the public unit

the economic owner of the fixed assets acquired for use in the PPP?

The private unit is the legal owner and user of the assets in its production. The public unit often has a substantial residual interest and can prescribe the design, quality, capacity, maintenance, etc. of the assets.

First Problem (2) Several proposals on the risks and

rewards and their importance should be considered.

A decision on how to decide which unit is the economic owner of the assets was not reach.

Second Problem Depending on which unit is the

economic owner and other terms of the PPP contract, there are several difficult accounting decisions, possibly involving imputing leases and other transactions.

A decision was not reach on how any of these specialized situations should be treated.

Accounting Standards The Interpretations Committee

(IFRIC) of the International Accounting Standards Board is developing financial accounting standards for PPPs concurrently with the Canberra Group.

Accounting Standards (2) The complexity of PPPs and the

dependence of national accountants on government financial accounting data makes it highly desirable to have a common treatment of PPPs in the SNA and in the accounting standards.

Recommendations1. A description of PPPs and the

general principles for their accounting treatment should be added to the SNA.

This recommendation is not as trivial as it appears.

Recommendations (2)2. Determine the economic owner using

the same principles as for any other asset.

Statistical offices may not have the resources to evaluate each PPP.Recognize dependence on financial accountants, but be sure SNA principles are followed.

Recommendations (3)3. Discuss the types of risks and rewards

(or control) likely to be relevant when deciding economic ownership.

Each contract is different.There are no general rules.However, SNA should provide a list of indicative criteria for assessing risk.

Subject of written consultation.

Recommendations (4)4. Evaluate IASB/IFRIC standards for

consistency with SNA principles.

Recommendations (5)5. Detailed rules for the transactions

resulting from a PPP are not possible.

Consider all of the facts and circumstances.

Use a treatment that brings out the underlying economic relationships.

Recommendations (6)6. The appropriate accounting

treatment needs to reflect a government’s residual interest in assets owned by the private unit, the acquisition of operational assets taken into use by a government as economic owner and the measurement of production.

Thank You