Title: Public sector accounting
1 Public sector accounting
UN STATISTICS DIVISION Economic Statistics
Branch National Accounts Section
UNSD/ECA National accounts workshop November 2005
2 - Introduction
- Taxes
- Transactions between government and public
corporations - Privatization
- Private/Public/Government Sector Delineation
- Taxes on holding gains
- Public-Private Partnerships
3Tax 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
4The 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
5Transactions between government and public
corporations
- Due to lack of guidance the TFHPSA investigated
capital injections and super dividends - Two approaches were proposed and opposed
-
6Transactions 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.
7Transactions 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 agendaÂ
8 - Privatisation, restructuring agencies and SPVs
9PRIVATISATION
- 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.
10PRIVATISATION
- 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
11PRIVATISATION
- 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) -
12PRIVATISATION
- 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)
13PRIVATISATION
- 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
14PRIVATISATION
- 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.
15PRIVATISATION
- Special case of a  restructuring agencyÂ
- 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.)
16PRIVATISATION
- Special case of a  restructuring agencyÂ
- 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 Â 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
17NATIONALISATION
- 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.
18NATIONALISATION
- 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)
19Restructuring 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)?
20Restructuring 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.
21Special 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)
22Special 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
23Privatisation, 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
24 - Private/Public/Government Sector Delineation
25Government / 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)
26Government/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
27Public sector boundary Use a decision tree
28Government 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
29Government 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
30Market 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
31Public 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
32Control 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
33Control of NPI
- Definition of control
- Current ability to determine the general
corporate policy and largely financed - Proposed ability to determine the general
corporate policy
34Economically 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.
35Economically significant prices
- ESA95  50 rule not taken into account as a
rule - Recommendation 4 Â 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.Â
36Economically 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.
37Definition 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
38Definition of production costs
- Cost is measured as the sum of
- Intermediate consumption
- Cost of capital services
- Other taxes on production
39Indicators 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
40Market Non-market producers
Control
ESP
41AEG 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.
42Taxes on holding gains
42
43Background
- 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.
44Possible 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
45Possible 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)
46Possible 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.
47AEG 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.
48Public-Private Partnerships
49Conclusions 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.
50First 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.
51First 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.
52Second 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.
53Accounting Standards
- The Interpretations Committee (IFRIC) of the
International Accounting Standards Board is
developing financial accounting standards for
PPPs concurrently with the Canberra Group.
54Accounting 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.
55Recommendations
- 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.
56Recommendations (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.
57Recommendations (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.
58Recommendations (4)
- Evaluate IASB/IFRIC standards for consistency
with SNA principles.
59Recommendations (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.
60Recommendations (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.
61