Integration of natural resource wealth in the Canadian National Balance Sheet Accounts - Implementation challenges

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Integration of natural resource wealth in the
Canadian National Balance Sheet Accounts -
Implementation challenges

• Note by Canada

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Natural Resource Wealth

• Canada has substantial reserves of natural
  resources (NR)
• - Energy and minerals in the ground
• - Accessible stands of timber in forests
• In 2010, natural resource wealththe dollar value
  of selected resource reservesstood at 1.16
  trillion
• Important in terms of growth ... exports,
  employment and income ? economic accounts

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Current Partial Integration in CSNA

• Current treatment of NR in Canadian system of
  national accounts reflects a partial integration
  
• Specifically, NR are incorporated into annual
  estimates of national wealth ... At economy-wide
  level on Consolidated National Balance Sheet
• National wealth covers produced as well as
  non-produced assets - includes NR by major type
• Two issues ?Frequency of NR develop sectoral
  estimates for National Balance Sheet Accounts

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International standards' guidance - SNA08

• SNA08
• Assets appear on the balance sheet of the unit
  that is the economic owner of the asset (SNA08
  13.3) ? a key principle in the economic accounts
  ... But not always followed in SNA08
• ... In many cases this unit (the economic owner)
  will also be the legal owner but in the case of a
  financial lease, the leased asset appears on the
  balance sheet of the lessee, while the lessor has
  a financial asset of similar amount and a
  corresponding claim on the lessee (SNA08 13.3) ?
  But is it required to treat NR as a leased
  produced asset ?

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SNA 2008 (contd)

• ... On the other hand, when a natural
  resource is the subject of a resource lease, the
  asset continues to appear in the balance sheet of
  the lessor even though most of the economic risks
  and rewards of using the asset in production are
  assumed by the lessee (SNA08 13.3)
• No SNA08 guidance as to why in this case ... Why
  violate the key economic ownership principle?

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SNA 2008 (contd)

• Contracts, leases and licenses may be operating
  leases, licenses to use natural resources,
  permits to undertake specific activities and
  entitlement to future goods and services on an
  exclusive basis ... these sorts of contracts are
  regarded as assets only if the existence of the
  legal agreement confers benefits to the holder in
  excess of the price paid by the lessor, owner of
  the natural resource or permit issuer and the
  holder can realize these benefits legally and
  practically. It is recommended that such assets
  (the natural resource lease, permit or licenses)
  be recorded only when the value of the asset is
  significant and realized, in which case a
  suitable market price necessarily exists. (SNA08
  13.52)
• NR pass the significance and suitable market
  tests ? resource leases should be recorded ... As
  a non-financial intangible asset, following
  corporate accounting

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SNA 2008 (contd)

• ... Because there is no wholly satisfactory way
  in which to show the value of the asset split
  between the legal owner and the extractor, the
  whole of the resource is shown on the balance
  sheet of the legal owner and the payments by the
  extractor shown as rent (SNA08 13.50)
• Possible interpretation second-best solution
• An attempt at establishing a one approach fits
  all economies ... Realistic?
• For CSNA ? implementation issues

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SNA08 Issues in relation to sectoring natural
resource wealth

• Inconsistency with economic ownership principle
• Does not reflect economic reality in Canada and
  in a number of other economies ? no one approach
  applies to all economies
• Accounting standards for corporations and
  government
• Does not articulate impact on government accounts
  ... GFS?
• No clear distinction between value of NR and
  associated resource leases (rights to extract)

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SEEA031

• . The draft SEEA (2012) proposes that the value
  of mineral and energy resources is split between
  the two owners based on their share of the future
  stream of resource rent. The share accruing to
  the government should be based on the expected
  stream of payments of rent by the extractor to
  the government
• SEEA supports the partitioning of NR with options
• Can the physical assets be partitioned or is
  their an approach that shows claims based on rent
  shares?

1SEEA (2003). Integrated Environmental and
Economic Accounting, Handbook of National
Accounting, United Nations, New York
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Government Accounting

• Natural resource stocks are not included in
  government financial statements
• Not included in IMF GFS manual currently being
  updated
• Government holds assets in trust for the nation
• While stocks not necessarily recognized, revenues
  including royalties and resource rights are
  recognized
• Suggests a corresponding asset

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Corporate Accounting

• Usually carried as intangible asset (also some
  out-of-scope depletable assets)
• Carried at written-down acquisition cost rather
  than market value
• Can be sold (implies claim on the resources) and
  would be carried at transaction price
• Substantial revenues and profits (largest share
  of the rent) imply economic ownership
• Reflected in corporate share values

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Proposed CSNA treatment

• Issue of partitioning the physical assets
• Can physical assets be sectored? NO
• Issue of assets required to match income stream
• Assumptions related to future stream of earnings
  and royalties
• Assumptions related to return to capital
• Assumptions related to intangible assets (claims
  on the physical stock right to exploit the
  reserve) proportional to their respective shares
  of rent

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Proposed CSNA treatment, contd
Sectored NR assets ... sectoral net worth,
national wealth

• INSERT MATRIX HERE

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Sectoring Methodolgy

• Draft SEEA 2012 base the governments share of
  natural resource wealth on the NPV of the
  expected stream of government income paid by
  resource extractors to governments (i.e.,
  royalties and special taxes). The amount of
  royalties depends on a number of factors, such as
  resource price, quantity of production and
  government's policies

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Sectoring Methodology (contd)

• To arrive at the corresponding corporate sector
  asset, the NPV of the remaining resource rent
  (total resource rent less government royalties
  and special taxes) is allocated to the corporate
  sector as its share of resource wealth

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Summary

• Plan to implement sectored natural resources in
  2014 mini historical revision
• Based on the model described here
• Would be appreciative of feedback (now or later)
• Questions or Suggestions?
• Joe.Wilkinson_at_statcan.gc.ca