Joint meeting on national accounts

Geneva, April 2006Update of the 1993 SNA

Leases and licenses

Summary

• Scope comprises leases, licences, permits and other contracts.

• Pervasive in the SNA, but not dealt with in a completely coherent and comprehensive way. The primary goal is to rectify this situation.

• It is a broad topic with a number of conceptually difficult issues and while the AEG has made a number of important recommendations, there remain some outstanding matters.

Scope

• There are many points: most in Issue 21 Leases and licences, but also touched on in other “issues”, such as– #11 Originals and copies– #18 Right to use/exploit natural resources

between residents and non-residents– #28 Amortization of tangible and intangible

non-produced assets– #31 Valuation of water– #35 Tax revenue, etc.

Points being addressed

• Use of assets– Fixed assets

• Distinction between operating and financial leases• Recording repayments for a financial lease• Operating leases as assets• Originals and copies (dealt with at earlier meeting)

– Natural resources (non-produced, tangible assets)– Sharing ownership of assets

• Permission to engage in specified activities or actions• Future provisions

– Goods– Services

• Prepayments and non-refundable deposits

Distinction between operating and financial leases

• AEG has accepted:– draft text in the issues paper to clarify the distinction

between operating and financial leases, but with some modifications.

• And agreed that– the length of time of a lease relative to the life of the

asset does not determine its treatment as either an operating or a financial lease, but it will tend to be the case that operating leases are for shorter periods and financial leases may cover the whole of the life of the asset.

Recording payments for a financial lease

• The AEG agreed with the thrust of the draft text in the issues paper but wanted a little further elaboration. In summary it concluded:

– The breakdown between repayment of principal and interest should be estimated in a manner similar to determining CFC and net operating surplus/return to capital in the case of a fixed asset.

– A financial service may be provided by the lessor if the lessor is a financial institution; and if this is so, that the service is reflected in FISIM.

Operating leases as assets

• The AEG reached agreement on the following:– The contract price represents the market price even

if a newly leased identical asset would command a different price.

– If the lessee is able legally and practically to sub-contract a lease and if the prevailing rental price differs from the contract price, then this represents an asset for the lessee. It is positive if the prevailing rental price is higher than the contract price and negative otherwise.

Operating leases as assets –cont.

– The lessee would have an asset, valued as the difference between the unencumbered and encumbered values, to be included under the heading "contracts, leases and licences".

– The value of the object of the lease should always appear on the lessor's balance sheet at the market price which is the encumbered value, irrespective of whether the lessee has an asset.

Use of natural resources

• The AEG agreed that a new type of lease should be introduced:

• A resource lease is an agreement whereby the legal owner of a natural resource which has an infinite life makes it available to a lessee in return for a regular payment, recorded as property income and described as rent. The resource is recorded on the balance sheet of the lessor. No consumption of fixed capital is recorded in respect of the resource in the SNA in the accounts of either the lessor or lessee.

Use of natural resources cont.

• There remain some unresolved issues:– Do fishing quotas represent assets to the

holders? Can this be generalised to quotas, licences, etc. for all protected plant and animal species?

– Should emission permits be recorded as taxes in the first instance and assets when they are traded in secondary markets or as assets from inception? Does this generalise to all assets used as sinks?

Sharing the ownership of assets

• When the economic but not legal ownership of an asset changes between the lessee and lessor over its life how should this be recorded in the accounts?– To be further considered by the AEG using

worked examples that show how different options would be recorded in the accounts.

Permissions to engage in specific activities

• These are permissions to undertake a specific activity and do NOT relate to the use of an asset belonging to the issuer of the permit.

• A dichotomy has been made between those permits which are restricted (e.g. casino licences, taxi licences) and those which are not (e.g. recreational hunting and fishing permits).

Permissions to engage in specific activities cont.

• For unrestricted permits there is agreement that the current 1993 SNA treatment is OK.

– If the fee paid represents a commensurate amount of work for the government to issue the permit or provide services, then the fee is treated as a fee for a service. Otherwise the fee paid is a tax.

Permissions to engage in specific activities cont.

• AEG has not yet reached agreement on the treatment of restricted permits:

– Is it a tax or the sale of an asset?– If the payment is treated as a tax and the permit is

valid for several years, should it be recorded as• a prepayment of taxes on the balance sheet of the permit

holder with a corresponding liability on the government’s balance sheet, or

• a non-produced, non-financial asset on the balance sheet of the permit holder?

– Does the choice depend on whether the payment for the permit is refundable?

Future provision of goods

• The AEG has agreed that:– In most cases agreements to provide goods

are not assets, but for the future provision of goods if a gap opens between the contract price and the prevailing market price and the contract is tradable then there is an asset.

Future provision of services

• The AEG agreed that if a gap opens between the contract price and the prevailing market price for the provision of a service in the future and the contract is tradable then there is a non-produced, non-financial asset in the group “contracts, leases and licences”. Examples include the contracts of footballers.

Prepayments and non-refundable deposits

• The AEG agreed that:– prepayments may be a prepayment for a service in

the case of an operating lease, property income in the case of a resource lease, the acquisition of an asset in the case of a financial lease and possibly the prepayment of a tax - depending on the nature of the agreement.

– if a party to a collective project contributes an asset in lieu of a financial payment, the SNA treatment should be to impute a financial transaction and acquisition of an asset in a similar way to the treatment of wages in kind.

Prepayments and non-refundable deposits – cont.

• How to treat non-refundable deposits is unresolved.

Next step

• The outstanding points will be addressed by the AEG shortly via electronic communication.