Public sector accounting

1
Public sector accounting
UN STATISTICS DIVISION Economic Statistics
Branch National Accounts Section
UNSD/ECA National accounts workshop November 2005
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• Introduction
• Taxes
• Transactions between government and public
  corporations
• Privatization
• Private/Public/Government Sector Delineation
• Taxes on holding gains
• Public-Private Partnerships

3
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

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The AEG on tax issues

• Tax definition and accrual recording
• - Broad agreement on the principles
• time of recording, accruals, amounts of tax
• revenue 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

5
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

6
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.

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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 

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• Privatisation, restructuring agencies and SPVs

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PRIVATISATION

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

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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

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PRIVATISATION

• The 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)

12
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)

13
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

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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.

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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.)

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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

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NATIONALISATION

• Definition
• 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.

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NATIONALISATION

• 1. 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)

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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)?

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Restructuring agencies

• Possible 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.

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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)

22
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

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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

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• Private/Public/Government Sector Delineation

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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)

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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

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Public sector boundary Use a decision tree
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Government control of corporations

• Golden shares and options
• Regulation and control
• Control by a dominant customer
• Control attached to borrowing from the government

• Ownership of the majority of voting interest
• Control of the board or other governing body
• Control of the appointment and removal of key
  personnel
• Control of key committees of the entity

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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

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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

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Public sector

• Composition
• 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

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Control of Corporations

• Definition 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

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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

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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.

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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. 

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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.

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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

38
Definition of production costs

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

39
Indicators to classify public producers
Supplying public sector units
Purchasing units
COST normally covered by SALES (CCS)
Corporations and households primarily
Other private tender
only supplier
Government only
Competes
one of several suppliers
Other private tender or CCS
Government and others
only supplier
Competes
one of several suppliers
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Market Non-market producers
Control
ESP
41
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.

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Taxes on holding gains
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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.

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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

45
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)

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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.

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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.

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Public-Private Partnerships
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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.

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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.

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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.

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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.

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Accounting Standards

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

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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.

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Recommendations

• 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.

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Recommendations (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.

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Recommendations (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.

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Recommendations (4)

• Evaluate IASB/IFRIC standards for consistency
  with SNA principles.

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Recommendations (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.

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Recommendations (6)

• The appropriate accounting treatment needs to
  reflect a governments 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.

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• Thank You