Issue 13 : Recording of natural resource depletion

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Issue 13 Recording of natural resource depletion
Report on depletion-related outcomes in the
current SEEA update
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SEEA Chapter 10 Making environmental
adjustments to the flow accounts

• Presents five sets of treatment options on
  depletion
• Identifying the income element of resource rent
  (for both renewable and non-renewable natural
  resource (LG March 07, UNCEEA July 07)).
• Recording mineral exploration and mineral
  deposits. (LG March 07, UNCEEA July 07)
• Recording the additions to and subtractions from
  the stock of environmental assets.
• Recording ownership of mineral-related assets.
• Recording depletion-asset recorded in the legal
  owner's balance sheet.

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Adjustment i. Income element of resource rent

• Resolved at London Group meeting in Johannesburg,
  March 2007
• Option A3 - 'Part of resource rent represents a
  decline in the value of the asset and part is
  income'
• LG agreed this applied to non-renewable resources
• However, its application to renewable resources
  needed clarification

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Adjustment i. Income element of resource rent

• Issues Paper presented at London Group Meeting,
  Rome, December 2007
• 'Depletion of Renewable Environmental Resources'
• The paper clarified application of Option A3 to
  renewable resources

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Two issues required resolution

• When accounting for depletion of renewable
  resources used in production in SEEA accounts,
• Is natural growth of renewable natural resources
  used in production a form of production?
• Should depletion of such resources through use in
  production be treated as a form of capital
  consumption (as a charge against income)?

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Proposed response to issues

• Natural growth (net of natural mortality) of
  renewables used in production be treated as a
  form of non-market output in the SEEA Production
  account
• Depletion of renewables used in production be
  treated as a form of capital consumption
  (consumption of natural capital) in the SEEA
  Production account

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LG response to the issues
The London Group unanimously accepted these
proposals at its meeting in Rome, December
2007
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Adjustment iii. Recording changes to the stock
of natural resources
Following the London Group endorsement of the
recommended treatment of accounting for depletion
of renewable resources used in production,
consideration was given to recording changes to
the stock of natural resources. Issues Paper
presented at London Group Meeting, Rome, December
2007
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Proposed response to issues

• SEEA presents 3 options for recording changes to
  the stock of environmental assets (SEEA, Chapter
  10, Box 10.4).
• None of the options in box 10.4 were considered
  appropriate for recording changes to both
  renewable and non-renewable environmental assets.
• A fourth option, applicable to both renewable and
  non-renewable environmental assets, was proposed.

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Proposed Option C4

• For non-renewable natural resources the
  consequences of extraction are recorded in the
  extended generation of income account leading to
  a depletion-adjusted operating surplus, but
  corresponding increases in these resources are
  shown in the other changes in volume of assets
  account.
• For renewable natural resources, both the
  consequences of extraction and net natural growth
  are recorded in the extended generation of income
  account leading to a depletion-adjusted operating
  surplus.

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LG response to the issue
The London Group unanimously accepted Option C4
at its meeting in Rome, December 2007.
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Adjustment iv. Recording ownership of
mineral-related assets

• Typical conditions of mineral extraction legal
  owner establishes agreement with extractive
  enterprise so that the latter extracts the
  resource, earns resource rent, and pays rentals
  to the legal owner.
• Agreement typically covers an extended period of
  time.

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Options to record ownership

• On the balance sheet of legal owner (SEEA option
  D2)
• On the balance sheet of extractorPartition the
  ownership
• On the basis of relative share of expected
  resource rent receipts (SEEA option D1)
• Financial lease approach

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London Group meeting December 2007

• Agreed that the financial lease approach best
  describes the ownership arrangements under
  typical resource extraction conditions- and best
  explains related rentals and depletion flows
• Depletion charge should impact on the production
  account and balance sheet of the same entity

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Financial lease approach

• Is a complex solution
• Is not the approach suggested by 1993 SNA Rev.1
  (legal owner)
• But SEEA requires a depletion charge against its
  production account, while SNA doesnt allow this
• SNA solution works for SNA but not ideal for SEEA

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Current status of this work

• London Group meetings were unanimous in their
  support for preferred outcomes

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Current status of this work

• But concerns recently raised by a London Group
  member during development of SEEA-E publication
• Treatment of new discoveries of non-renewable
  natural resources
• Holding gain/form of income rather than other
  volume change or as the output of a process of
  economic production
• Affects LG support for (i), (iii) and (iv)
• Affects UNCEEA support for (i)

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Current status of this work

• Also, LG decisions depart from SNA
• Income element treatment for renewables extends
  the production boundary
• In SNA, purely natural growth is part of
  production but only if that growth is under the
  direct ownership and control of a producing unit.
  eg fish growth in a fish farm, or timber growth
  in a plantation forest is SNA production. Timber
  growth in a native forest is not SNA production.
• Ownership treatment is contrary to SNA

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Current status of this work

• Discussions will continue to allow response to
  these concerns

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SEEA Chapter 10 Making environmental
adjustments to the flow accounts

1. Identifying the income element of resource rent
   (for both renewable and non-renewable natural
   resource (LG March 07, Dec 07, Decision point
   UNCEEA July 07, Progress report UNCEEA July 08)
2. Recording mineral exploration and mineral
   deposits. (LG March 07, UNCEEA July 07)
3. Recording the additions to and subtractions from
   the stock of environmental assets. (LG Dec 07,
   Progress report UNCEEA July 08)
4. Recording ownership of mineral-related assets.
   (LG Dec 07, Progress report UNCEEA July 08)
5. Recording depletion-asset recorded in the legal
   owner's balance sheet.