THE TREATMENT OF ORIGINALS AND COPIES

Working Party on National Accounts

12-15 October 2004

Nadim Ahmad, Statistics Directorate, OECD

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The Current SNA

•Paragraphs 6.143 to 6.146 can be summarised as:

•A two stage process. First stage results in the production of an original and the second stage results in the production of copies. The original is an intangible fixed asset.

•The owner may use it directly in production or to produce copies, with both uses resulting in consumption of fixed capital of the original by the owner.

•The owner may also license other producers to make use of the original in production. In these cases, the owner provides services to the licensees, which are recorded as part of the intermediate consumption of the licensees, and as consumption of fixed capital of the original by the owner.

•Examples – books, recordings, films, software, tapes, disks etc

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Background

•OECD/Eurostat Task Force on Software (established 2001)

• Investigated country practices: established that large differences in software capitalisation reflected measurement differences.

•Not all countries capitalised software copies, some did not capitalise originals used solely for reproduction.

•Task Force concluded that

• (nearly) all copies should be capitalised (licenses-to-use).

• all originals should be capitalised; and

• payments made to reproduce originals (licenses-to-reproduce) should be treated as intermediate consumption (in most cases).

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Background

• TF report presented at NAEM 2002.

•Some countries expressed concern at the recommendations.

•In particular – it was felt the recommendations resulted in “double-counting” of investment (originals and copies).

• Some expressed a preference for no double-counting of investment and gross output.

•Others expressed a preference for no double-counting of investment (but double-counting of output).

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Background

• The Taskforce recommendations were in line with SNA93.

•So concerns about software, reflected the SNA sections on originals and copies more generally.

•Issue of originals and copies (especially software) was passed on to the Canberra II group.

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Background

• 3 proposals presented to the Canberra Group for consideration.

1. Payments for licenses-to-use and licenses-to-reproduce to be recorded as payments for part of the original

2. The Software Task Force recommendations (SNA93)

3. Payments for licenses should be treated as rental payments of the original idea.

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A few words on double-counting

• Double-counting is a normal feature of the accounts; which is why they refer to gross output and GDP.

• Built into the SNA are structures that allow double counting to be netted out. IC subtracted from gross output to obtain GVA, and CFC subtracted from GVA to obtain NVA. Applies to tangible and intangible production processes.

• Most assets reflect varying degrees of double-counting -assets (machines) are often used to create assets & so on.

• TF view was that originals & copies were little different in this respect; the original was a machine that produced the copy.

• In addition critics viewed double-counting mainly as a problem of investment not GDP necessarily. E.g. less concern that HHFC of copies increased GDP (just like investment).

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A few words on double-counting

• Issue really reflected characteristics of software production, namely that:

• copies commonly seen as having marginal reproduction costs – (which is not necessarily true: certainly not applicable to all types of originals).

• And that originals not “used up” in production – (but they depreciate all the same, through obsolescence, patent/copyright expiry).

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Proposal 1

• Pros: No double-counting of investment or output (or GDP).

• Cons:

• Implies that reproduction costs are zero (not necessarily the case, books, marketing costs). Or that reproduction costs could in some way be estimated separately.

• Difficult to record “bundled” transactions, or copies embodied in other products (would need to impute IC for owner-reproducers)

• Value of original in year of creation will rarely reflect actual sum of future discounted sales; implying continuous revaluation of original in year of creation.

• No consistency between tangible and intangible products. E.g some original software used exclusively in conventional production process (no copies).

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Proposal 3

• Pros: No double-counting of investment.

• Cons:

• Wholesale changes required, with significant measurement problems. Most assets embody an idea, and so, in theory, the rental payment for the idea would need to be estimated separately. HHFC on books for example would reflect part payment for the access device (book) and a rental payment for the idea. Bundled software, would need to be separately estimated and recorded as rental.

• Software copies not regarded as investment - Only originals are investment.

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Proposal 2

• Pros:

• Consistent with SNA.

• Easy to implement

• Treats tangible & intangible goods consistently

• Treats bundles/embodied goods simply & consistently

• Makes no assumptions on reproduction costs

• Records software copies as investment

Cons:

• Perception of double-counting

• Restrictions relating to ownership (on software copies, or copyright of books)

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Canberra Group Recommendation

• Group strongly in favour of Proposal 2.

• For licenses-to-use (copies).

• Licenses-to-use (or copies) are the result of a two-stage production process, beginning with the production of an original. The production of a copy results in output whose value should embody all reproduction costs, including the value of intellectual property tied-up in the license-to-use (copy). Where the license-to-use (copy) is expected to be used repeatedly in production for more than one year, and where expenditure is above the small-tools cut-off point, expenditure should be recorded as fixed capital formation. This applies to all one-off purchases and where the purchaser makes a series of payments over time, if it is the intention of the purchaser to use the copy until the end of its economic lifetime; which is usually the case. The conditions-of-sale relating to copyright and ownership, which are often attached to copies, should be interpreted as restricting the right-to make further copies and the owner of the copy, or license-to-use, is the purchaser.

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Canberra Group Recommendation

• But recommended a modification to licenses-to-use.

– Where the license is an operational lease, the owner is treated as providing services to the licensees that are recorded as part of their IC. The payments made by the licenses may be described in various ways, such as fees, commissions or royalties, but however they are described they are treated as payments for services rendered to the licensee by the owner. The use of the asset is then recorded as CFC in the production of services by the owner. These services are valued by the fees, commissions, royalties, etc. received from the licensees.

– Where the licence is not an operational lease, the sale of the licence should be considered as a sale of all or part of the original. The decline in the value of the original to the owner is recorded as negative GFCF and not as CFC. The eventual decline in the value of the licence in use will be recorded as CFC in the accounts of the licensee, now recorded as the owner (and user) of part of the asset.

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Production Sale Originals Production of original that is

capitalized The treatment is similar to sale of old fixed asset. Gross capital formation of the original owner declines, gross capital formation of the new owner increases.

No production takes place. Payment is treated as sales of part of the original. The treatment is similar to sale of old fixed asset. Gross capital formation of the original owner declines, gross capital formation of the new owner increases.

Licenses-to-reproduce (copies)

Production of services by the owner of original occurs. Original has to be depreciated.

Payment is treated as purchase of services and hence intermediate consumption if conditions of a capital good are not satisfied (payment is below a cut-off point, and use is only for one year or is purely an operational lease).

Production of services by the owner of original occurs. Original has to be depreciated.

Payment for license is treated as purchase of services and hence intermediate consumption if conditions of a capital good are not satisfied (payment is below a cut-off point, and use is for less than one year or is purely an operational lease)

Licenses-to-use and “licenses-to-use” copies

Production of copies by the owner of original/part of original occurs. Original has to be depreciated.

Payment for copy is treated as gross capital formation if conditions of a capital good are satisfied (payment is above a cut-off point, and the copy can be used repeatedly for more than one year by business).