For a careful use of the intangible concept
Back to the issue of mobile phone licences
Introduction
This paper has been written as a kind of reaction about the “UMTS licences” story, and to the
tendancy of abusing of the concept of intangible.
As it was already noticed, large improvements were introduced in SNA93 in the field of
accounting for intangible fixed assets. However, because of the decision to continue to treat all
expenditures on R and D as current, some confusion still exists in the classification of assets
with regard of produced intangible ones.
Very useful clarifications were brought in various papers on this issue. See, for instance, P. Hill
(1997) and, for the specific case of software, E. Dalgaard (1999) and Eurostat (1997).
By contrast, the area of intangible non-produced assets is less explored. Proposals were made
to make use of this category for the treatment of the allocation of mobile phone licences (UMTS
licences). And it was more or less proposed to extend their scope to other kinds of
(government) permissions. This paper tries to show that this proposal is not in accordance with
SNA93, and proposes another solution.
Summary
The treatment of the allocation by government of mobile phone licences as a sale of an
intangible asset is not in conformity with the SNA93 definition of transferable leases.
This treatment, if extended for instance to the case of land leases, would have some
undesirable consequences.
Recognizing that the frequencies spectrum is a government’s non-produced tangible asset, two
possible treatments are relevant : to rent it or to sell it.
In fact, imputing rents is too hard in this case. The financial difficulties encountered by phone
operators and the revision of their expectations of profitability make the estimates of the
imputed rents which were previously made completely obsolete and fictitious.
So, the most logical solution is to record a sale of the underlying asset : the technical and
economical specifities of this asset make this treatment possible.
Background of the issue
1.
The situation which was addressed in the case of the attribution of the mobile phone licences
was the following one : phone operators are given by government the right to have access to
the use of the spectrum of frequencies. This use is granted for a rather long period of time. In
exchange, operators have to pay an important up-front payment.
From a legal point of view, this situation is similar to a lease arrangement in which the lessor
keeps the legal ownership of an asset and receives an upfront payment from a lessee in order
for the latter to have the use of this asset for several years.
2.
For the national accounts purpose, a proposed treatment was to record a transaction on a
licence/lease. According to this proposal, a lease may be described as an intangible asset that
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is substituted for the underlying asset - usually, a tangible one - which is covered by the lease
arrangement between the lessor and the lessee. There is in fact a transaction on a lease, and
not on the underlying asset, from the initial agreement between the original owner, who
becomes the lessor, and the first lessee : the value of this lease is a part of the value of the
underlying asset, and it is subtracted from the latter.
Leases in SNA93 : what they are not
3.
The above-mentionned treatment does not correspond to the lease as it is understood under
the heading AN.222 - Leases and other transferable contracts - of the assets classification of
SNA93.
The extension of the concept of a lease as an asset in the above sense was in fact addressed
as an issue prior to the SNA revision process. This was for instance the case in : Provisional
international guidelines on the national and sectoral balance-sheet and reconciliation accounts
of the system of national accounts (United Nations, Statistical papers-M60, 1977). In §§ 5.1316, this document proposes to introduce leases on land, buildings, etc. as non-financial
intangible assets when there is a once-and-for-all lump-sum payment at the time of
transaction : this would “ avoid the imputations of financial assets and liabilities in the form of
advances, and of rents and royalties ”. All the issues relating to the respective values of the
leases and of the underlying assets are also dealt with in this document.
Obviously, this approach was not followed in the SNA93 final version.
4.
Evidence that the SNA93 concept of a lease as an asset is not as extensive as above may be
found in the list of the underlying items covered by AN.222 : are considered here, among
others, contracts with athletes and authors, both of which are obviously not considered as
assets in SNA93. Thus, the mechanism of transfer of value between the underlying asset and
the lease, which is technically possible when land is the underlying asset, is impossible in such
a case.
Furthermore, this mechanism of transfer of value would be very questionable when a residential
building is the object of the lease arrangement, or more generally when the underlying asset
gives rise to rentals, and not to property income.
Leases in SNA93 : what they are
5.
The lease asset dealt with under AN.222 of SNA93 is not the lease arrangement as such,
understood as the right to use an underlying asset that is granted to a lessee by the legal
owner. It is an asset which comes in addition to the underlying asset which is the object of the
contract - and which may be an asset not recognised as such in the System -, and it is not
substituted for (part of) this underlying asset. The appearance of this asset is due to the
changing conditions which may affect the underlying asset, or incomes generated by it, during
the time of the lease contract, specially when prices change.
In fact, it is a kind of windfall.
6.
The way the lease covered by AN.222 works may be described by reference to land leases.
It is absolutely not necessary to assume that there is an up-front payment ; nor it is necessary
to assume that there is any kind of transfer of risks and benefits between the owner and the
lessee, which would be more than usual between a landowner and a tenant.
7.
A lease on a land appears as an asset, in the SNA93 sense, because the tenant being granted
the use of the land for several periods by the lease contract, he may derive some economic
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benefits from this situation : in particular, if rents on similar land increase over the level of the
rent as it is fixed in the lease contract, the tenant is in a position to get a premium if he is
allowed to transfer the lease contract to another tenant. The premium is precisely the value of
the asset.
What happens is that the potential increase of wealth which, in absence of a lease contract,
would accrue to the landowner following the increase of the value of land stemming from the
change in market rents is in fact captured by the tenant, because of the existence of the lease
contract. And only this increase of wealth is considered an asset.
8.
This is why transferability of the lease contract is a necessary condition for a lease being
treated as an asset, in the AN.222 sense. If the lease is not transferable, the tenant cannot get
any benefit from the opportunity offered by the movement of rents 1.
This is also why SNA93 underlines, in § 10.130, that there are acquisitions/disposals of lease
only between original and/or subsequent tenants. There is no transfer of lease, in the AN.222
sense, between the landowner and the first tenant.
In fact, to record a transaction on a lease is the only accounting possibility to account for a
payment which occurs between two successive tenants of a land, and which obviously is of a
capital nature. The involved asset does not generate any income : its value changes in parallel
with prices, and it disappears at the end of the lease contract.
9.
A contract with an athlete, a football player for instance, works a bit differently, but it follows
similar rules. For the football club in which a player is employed, there is an appearance of a
AN.222 type asset when the player seems likely to provide, to the club with which he is under
contract, more revenues than previously foreseen. If another club wants to enter in a contract
with the player before the end of the present one, the former club will be in a position to require
a compensation from the new employing club. Of course, there is no compensation if the new
contract is taken after the end of the previous one.
Some problems raised by a treatment of the licences as assets
10.
Let us now examine some of the consequences which would result from a treatment of the
licence itself as an intangible asset, as suggested above in § 2. It may be more convenient to
examine some consequences of this treatment in more usual cases, such as licences on land :
it is all the more justified that the parallel between land and the phone frequencies spectrum is
generally considered as relevant.
11.
Let us take the example of a lease arrangement on a piece of land, with an up-front payment
taking place for the use of the piece of land for several periods.
This implies the recording of two opposite flows of the same value in the other changes in
volume of assets account :
- a disappearance of land,
- an appearance of a non-produced intangible asset, the licence.
The disappearance of land stems from the fact that a part of the value of the rents which are
expected from its ownership are transferred to the licence asset. This is a volume effect. In
practice, this leads to an implicit “ shrinkage ” of the involved country, which may be seen as an
undesirable effect of the proposed treatment.
1. Sub-renting may also be an opportunity of benefit for the tenant.
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12.
The same would occur if mineral deposits were the objects of lease arrangements. If this kind
of arrangement was the most common one between government and oil companies in a
country with large oil reserves, it might happen that, in extreme cases, no figure would be
shown under the Subsoil assets heading in this country balance sheet !
The use of this treatment for lease arrangements on commercial buildings would also lead to
undesirable consequences. The licence asset would then be substituted for several periods of
rentals : production of the subsequent periods would thus be reduced.
13.
From a more theoretical point of view, the introduction of such licence types as intangible nonproduced assets in the scope of assets in national accounts would put some confusion in the
SNA93 assets classification.
It has to be noticed that, for the time being, SNA93 does not recognise as an asset the right to
use an asset. The introduction of such a kind of asset may be seen highly desirable by
someones. Some others could, on the contrary, find this initiative as questionable, and not very
useful from an analytical point of view. Anyway, this kind of asset does not exist in the present
SNA.
It would be inappropriate to introduce a source of confusion by treating an intangible nonproduced asset as a production factor, in the same way as land. The land is the actual
production factor, not the lease on land 2.
How to record the case of a lease arrangement on a land involving an up-front payment ?
14.
If the solution consisting in treating the licence itself as an asset is rejected, it is however
necessary to find a solution for the treatment of the case where there is a lease-type
arrangement including an up-front payment from the lessee, for the right to use the leased
asset for more than one accounting period. Once more, it is useful to take the example of land :
the relations between the value of assets and the value of incomes generated by assets - i.e.
rents - are simple and, in practice, rather easy to establish.
In fact, it is not sure that such a case, i.e. including an up-front payment, be very frequent. It is
however worthwhile to examine it.
15.
It is sometimes argued that conditions of payment cannot be a decisive criterion for deciding on
a treatment. However the presence of an up-front payment, provided that it is not a pure
financial advance but that it is linked to an engagement from the owner to give to the tenant the
right to use the land for the corresponding length of time, seems to be a sign that a capital
transaction may be recorded.
In fact, as usually with non-produced tangible assets, there are two ways to use a land : to rent
it, or to buy it. The two alternatives are first examined in turn.
16.
The first possible solution consists in recording a financial advance from the lessee to the
lessor as a counterpart of the up-front payment, and in imputing rents in each period during the
length of the lease contract, each rent "payment" being offset by a reduction of the financial
advance.
Because of the assumed infinite life of land, and under an assumption of constancy of rents,
this type of imputation is very easy, and there is no problem of consistency between the
imputed rents and the value of the land asset.
17.
An alternative solution would be to record the sale of an asset, the asset being a part of the
piece of land : this part would not be a spatial part, but a kind of temporal part. The lessee
2. For cattle, the grass of a land is better than the grass of a lease !
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would thus buy some kind of slice of time of (use of) land. Of course, in order to record such a
sale, it may be that some conditions - such as the transfer of risks and benefits - should be
required.
This solution is actually not explicitly foreseen as such in SNA93, where a sale of land is
generally understood as the sale of full ownership on the land. However its rationale and
accounting consequences are not in contradiction with SNA93 general principles and rules.
National accounts are not (too much) tied by legal aspects of economic life : from an ownership
point of view, the situation is not so far as the one created by a financial lease with a residual
value.
18.
The calculation secures that there is a full consistency between the original value of land and
the values of the two pieces of land created by recording the sale of an asset. This solution
would thus avoid the “ shrinkage ” of the land underlying the economy. Moreover, this solution
is fully equivalent with the rent imputation one.
19.
This solution implies that, at each period, a transfer of value from the lessee to the lessor be
recorded, in such a way that, at the end of the contract, the full value of the land should be
recorded in the balance sheet of the owner/lessor, and nothing in the lessee’s one. The value
which is transferred in this way is equal to the present value of the rent paid in the period which
follows the end of the lease.
This transfer can be recorded, according to the present SNA, by using the two entries
Economic appearance/disappearance of non-produced assets (K.3 and K.6). This may be seen
as an extension of the content of these entries, but it is in accordance with their spirit.
Some particularities of the electromagnetic spectrum
20.
There is a general agreement for considering that the electromagnetic spectrum of phone
frequencies - in short, the spectrum - has to be classified as a tangible non-produced asset.
The analogy with land is also frequently made. It is nevertheless useful to examine the limits of
this analogy.
21.
With land, the spectrum shares the fact that, being non produced and thus not reproducible, the
number of its users is necessarily limited. So, somebody has to organise its use and takes
some economic benefit from this position. For land, it is the role of the legal owner. For the
spectrum, it is generally admitted that the government has authority to do so, at least because,
prior to its commercial uses, the spectrum used to have military purposes, and is still important
for security functions.
However, when allocating the spectrum, the government is not acting in its regulatory function,
but as its legal owner, as a landowner does.
22.
There are, however, some differences between the spectrum and land which may have some
economic importance.
The issue of the assumed infinite life of the spectrum may first be addressed. Technically, this
is true. But, the scope of the possible uses of land has been known for a long time, and looking
ahead towards an horizon economically significant - say, 50 years - all uses of land are more or
less known.
On the contrary, very few uses of the spectrum have been experienced up to now. There was
two generations of mobile phones to use the spectrum, a third one is now close to be
introduced, while research work is engaged for a fourth one, some specialists predicting its
introduction in 10 years. Each generation has a different technological context, in such a way
that the possible uses of the 3rd generation are, from a technical point of view, far larger than
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those of the 2nd generation. In this respect, analogy can be better made with mineral deposits
than with land : each generation of mobile phone technology is different from the previous one,
and there is no way back. Each generation may be seen as something separate from the other.
Anyway, by contrast with mineral deposits, the spectrum itself cannot be exhausted.
23.
These technical differences have economic repercussions. As many possible uses of land exist,
there is a true competition between users, in such a way that active markets exist for land.
Prices are well established, and reliable expectations may be made on their future movements.
By contrast, may be because of their novelty, returns which may be anticipated from the use of
the spectrum for mobile phones are not known with precision. This is why auctions were
organised for the attribution of frequencies for the 3rd generation 3 : in absence of a knowledge
of any objective price for them that government could have proposed, it was thought that phone
operators were in the best position to propose such price.
24.
This has important consequences for economic analysis and for national accounts. Economic
benefits which may be derived from the various uses of land being known with rather good
reliability, and infinite lifetime of land being assumed, prices may be established for land.
On the contrary, even if the spectrum has potentially an infinite technical lifetime, it would be of
little sense to attribute a value to the spectrum after the current generation. It is not only a
practical issue. Given the uncertainties about the economic perspectives of the present
generation, it would have no economic meaning to attribute values to the spectrum after this
generation.
Mobile phone licences : why a treatment as a financial advance of rents is irrelevant
25.
As it is commonly accepted that the spectrum dedicated to the mobile phone technology is a
tangible non-produced asset, it would be logical to conclude that payments made for its use are
to be treated as rents (see, for instance, SNA93 § 7.87). In this context, if payments are
aggregated in a single up-front payment, it has to be treated as a financial advance on future
rents.
This line of reasoning seems however irrelevant for the UMTS case.
26.
A set of conditions have to be fulfilled for a financial advance treatment be considered having
an economic signification.
When such an arrangement takes place for a land, there is usually an actual agreement on the
level of rents, which have an objective value because of the existence of active markets.
Moreover, both parties in the arrangement may have some knowledge on the level of rents
which is expected in the future, and there may have some clauses for a revision in the case of
unexpected changes.
Technically, land prices and rents on similar land being known, the up-front payment is derived
easily. This payment is thus an advance assessed with objectivity.
27.
All these conditions are not fulfilled in the UMTS case. First, it is not common practice for
national accounts to make imputations for so long duration as for UMTS licences.
Large up-front payments for UMTS licences were encountered in situations in which auctions
were organised, or they were assessed on the basis of auctions made in neighbour countries.
This was the case because there was no objective "external" value to attribute to the use of the
spectrum, because expectations about the benefits it may provide are not reliable. Under these
3. There is an abundant economic literature on this topic.
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conditions, it was considered that telephone operators were in the best position to estimate the
price of the licence.
In fact, the profile of the returns which may be expected by operators from the use of the
spectrum in the provision of mobile phone services is largely unknown and volatile. In this
context, it seems very hazardous to assume a profile for the imputed rents.
The profile which was retained in some numerical examples was based on an assumption of a
constant rent. It is very improbable to accept such a profile for UMTS licences.
28.
The recent actuality provides further arguments against the (imputed) rent treatment. The
collapse of the so-called "New economy" has largely changed the expectations of operators,
and the public, about the future of mobile phone services.
In France, for instance, because their allocation takes place in 2001, and not in 2000, only two
of the four UMTS licences which were previously foreseen are going to be allocated according
to the pre-established price, because of the defaulting of other operators. This means that the
value of the licence, as estimated by operators, has been more or less divided by two, and such
is also the case for the expected returns of the activity allowed by the licences. If licences were
offered nowadays, their price would probably fall far below their previous price, and the relating
imputed rent also.
Facing this situation, the rent treatment can hardly continue to seem relevant since, by
construction, it assumes a constancy of the imputed rents whereas the contribution of the
spectrum to operators' income is decreasing. In fact, the rent profile reflects the conditions of
the operators' financing of their purchase of licences, and not the contribution of the
licence/spectrum.
In other words, would it be meaningful to continue to record the same figure for rents, whereas
the value of the rented asset has considerably decreased ?
29.
There may be some secondary arguments against the financial advance, because of some
unsolved issues. Two of them are worth being quoted : what to do in case of a bankruptcy of an
operator, whose licence would not be repurchased by another one (to continue to impute
rents ? or to make a debt forgiveness from the operator to government ?). What to do in the
case of an unforeseen obsolescence of the 3rd generation technology 4?
The best treatment : the sale of the spectrum itself, as an asset
30.
It is worth using the criterion of transfer of the "risks and benefits of ownership" to decide who is
the owner - in an economic sense - of an asset, and consequently in whose balance sheet the
asset has to be recorded. This criterion is already used in national accounts, for financial
leasing for instance.
It is proposed here, to treat the attribution of UMTS licences, when there is a large up-front
payment and when the above-mentioned risks and benefits are deemed to be transferred, as
the sale of the asset which underlies the licence, i.e. the "spectrum".
31.
There may be two arguments against the treatment as the sale of the spectrum, which consists
in the transfer of full ownership over the spectrum.
The first one is the legal situation. In fact, governments usually do not leave their legal
ownership on the spectrum, and this abandonment is sometimes forbidden by law. National
accounts are not, however, too much tied by legal aspects, and a distinction is usually accepted
between legal ownership and economic ownership. The treatment of financial leasing in SNA93
4. This could have as a consequence to impute two different streams of rents - one for the 3rd generation, one for
the 4th generation - to the same operator, whereas the former one would have been left.
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provides a good example of such a distinction. In this context, the "risks and benefits" criterion
is perfectly relevant.
Another argument is inspired by the business accounting rules and practice; it is true that, in
their own bookkeeping, operators will record the licence in their balance sheets. But once
again, this is because business accounting is tied by legal constraints : it is impossible to record
as asset in an enterprise balance sheet an item of which it is not the legal owner.
32.
More important, in a national accounting context, is the argument according to which “the
licence does not transfer full ownership over the spectrum … and government still retain the
right to sell its remaining interest". In other words, it would not be possible to sell the spectrum
when allocating the UMTS licences, since this would imply the sale of the whole spectrum,
government withdrawing its future interest in the spectrum development.
This argument seems finally not relevant. It was shown in the present paper that, even in the
case of land, it was possible to split the ownership along time, the same land appearing twice in
balance sheets of different economic owners, but for different periods. Applied to the spectrum,
this treatment would show that government keeps an interest in the spectrum.
33.
It is however necessary to wonder if it is meaningful to record something in respect of the
spectrum in the government's balance sheet, after the allocation of the 3rd generation. First, it
has to be noticed that no value was generally recorded for that purpose before this generation,
because no value was anticipated before. For the next future, except the military uses,
government does not have alternative uses of the spectrum.
It is more useful to think of the spectrum as a succession of separate technological
generations. Like mineral deposits, each one would have its own value, largely independent
from each other. As it was perfectly said : "No value can reasonably be placed on the spectrum
before its commercial potential has been established".
34.
Under these conditions, which are reinforced by the uncertainties revealed by the recent
developments of actuality on this issue, it would be irrelevant :
- to assume that the amortisation of the operators' asset leads to a symmetric increase of
the government's remaining part of the spectrum, because it is not realistic to assume
that implicit rents will be constant in the next generation,
- in general, to assume by now a value for the spectrum for its use in a 4th generation.
In practice, this means that the residual value to be recorded for the spectrum in the
government's balance sheet would better be nil. A new value will be attributed when the 4th
generation is allocated, if it is made according to the same method.
If, in the future, because of a kind of normalisation of this technology, good estimations may be
made by operators about the possible returns expected from the use of the spectrum, it will be
possible to attribute a value to it.
These arguments are not really of a practical nature. It is a theoretical issue : it is not in general
meaningful to attribute values which are very uncertain because of the economic reality.
References
E. Dalgaard
Estimating gross fixed capital formation in software, Workshop on the
implementation of ESA95 – Copenhagen, 7-9 June 1999.
Eurostat
Report from the Task Force on intangibles. Eurostat document B1/CN351 e,
1997
9
P. Hill
Intangible assets, patents and copyrights in the 1993 SNA. SNA News and
Notes, Issue 6, July 1997
IMF
Treatment of mobile phone licenses in the national accounts, by R. J.
Dippelsman and N. O. Malhe . IMF working paper, March 2001