Public sector accounting
UN STATISTICS DIVISION
Economic Statistics Branch
National Accounts Section
UNSD/ECA National accounts workshop November 2005
Introduction
Taxes
Transactions between government and public corporations
Privatization
Private/Public/Government Sector Delineation
Taxes on holding gains
Public-Private Partnerships
Tax revenue and tax credits

The Task Force on the Harmonization of Public
Sector Accounting (TFHPA)

The definition of tax revenue


The accrual recording of taxes


Suggested only minor changes
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 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
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

1.
2.
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.
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
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)
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

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.
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)
Restructuring agencies



Context: government rescues some banks in
order to prevent a collapse of the financial
system. Case of defeasance of bad assets. Setup 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 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.
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 subsector 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
YES
Step 1:
Institutional
unit?
YES
Step 2:
controlled by
government?
Step 3:
ESP?
Unit C
NO:
Government
sector
YES: public
corporation
NO
YES: private
sector
Government control of
corporations:
1.
2.
3.
4.
Ownership of the
majority of voting
interest
Control of the board or
other governing body
5.
6.
Control of the
appointment and
removal of key personnel
7.
Control of key
committees of the entity
8.
Golden shares and
options
Regulation and
control
Control by a
dominant
customer
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 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
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
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 multiyear 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
Purchasing units
Supplying public sector units
Corporations and
households primarily
only supplier
Govern
ment
Public
corp.
COST normally
covered by
SALES (CCS)
no
yes
Other private
tender
no
yes
no
yes
no
yes
no
yes
Government only
one of several
suppliers
Government and
others
only supplier
Competes
Other private
tender or CCS
one of several Competes
suppliers
Market & Non-market producers
Control
Public
Private
ESP
Producer
units
Market
Non
Market
Government Public
(incl. NPI)
Corporations
(incl. quasi)
Private
corporations
(incl. quasi
and NPI)
NPISH
Hous.
Enterpri
ses
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.
Recommendations
1.
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