Appendix 4. Some Cross-Cutting Issues
- Sage De Clerck, and Tobias Wickens
- Published Date:
- March 2015
This appendix applies government finance statistics principles to illustrate the recording of: leases, licenses, permits, and contracts; public-private partnerships; and insurance and standardized guarantee schemes.
A4.1 Some cross-cutting issues relate to the recording of the impact of specific events on revenue, expense, and flows and stock positions of assets and liabilities. Aspects of recording these events are described in various chapters of this Manual. However, bringing all of these together enhances the clarity of recording these events. This appendix deals with three such issues:1
Leases, licenses, permits, and contracts
Public-private partnerships (PPPs)
Insurance and standardized guarantee schemes.
Leases, Licenses, Permits, and Other Contracts
A4.2 Many transactions are specified in terms of a contract between two institutional units. The majority of contracts are such that one unit provides a good, service, or asset to the other unit for an agreed payment at an agreed time (possibly immediately after agreeing on the price). Such contracts may be written and legally binding or may be informal or even only implicit. However, these contracts are simply agreements about the terms under which goods, services, and assets are provided to the recipient along with the ownership of the item. In particular, these contracts can help to determine the point at which the transactions should be recorded in GFS in accordance with the accrual principles described in paragraphs 3.69–3.75.
A4.3 For certain types of contracts and legal agreements, variously described as leases and licenses (or permits), the terms of the agreement may affect not only the time of recording of transactions but also the classification of transactions and the ownership of the item subject to the agreement. The purpose of this section is to provide guidance on how transactions entered into under these more complex arrangements should be recorded in GFS.
A4.4 Three types of leases are recognized in macroeconomic statistics: operating leases, financial leases, and resource leases. Each of these leases relates to the use of a nonfinancial asset. Fundamental to the distinction between the different types of leases is the difference between legal and economic ownership. The legal owner of resources is the institutional unit entitled by law and sustainable under the law to claim the benefits associated with the asset. By contrast, the economic owner of resources is entitled to claim the benefits associated with the use of the asset in the course of an economic activity by virtue of accepting the associated risks. This distinction between legal and economic ownership is elaborated upon in paragraphs 3.37–3.41 and 7.5. The legal owner is often the economic owner as well. When they are different, the legal owner has divested itself of the majority of risks in return for agreed payments from the economic owner. Thus:
In the case of operating leases and resource leases, there is no change of economic ownership: the legal owner continues to be the economic owner. Resource leases are agreements for the use of natural resources, such as land and radio spectrum. Operating leases are agreements for the use of all other nonfinancial assets.
In the case of financial leases, there is a difference between economic ownership and legal ownership of the asset. Financial leases can apply to all nonfinancial assets, including natural resources under some circumstances.
A4.5 The following paragraphs discuss the treatment of operating leases, financial leases, and resource leases in detail.
A4.6 Operating leasing is the activity of renting out produced assets under arrangements that provide use of a tangible asset to the lessee, but do not involve the transfer of the bulk of risks and rewards of ownership to the lessee. The legal and economic owner is called the lessor. One indication that an operating lease exists is that the responsibility for repair and maintenance of the asset lies with the legal owner. Under an operating lease, the asset remains on the balance sheet of the lessor.
A4.7 Amounts payable under an operating lease for the use of the asset are referred to as rentals and are recorded as payments for a service. In principle, any fixed asset may be subject to an operating lease. The character of operating leases may most easily be described in relation to fixed assets since operating leases often concern vehicles, office equipment (e.g., photocopiers), construction equipment, buildings, etc. The service provided by the lessor to the lessee goes beyond the mere provision of the asset. It includes other elements, such as the convenience for the lessee that the lessor takes responsibility for the maintenance and security of the asset—an important point from the user’s view. In the case of equipment, the lessor, or owner, normally maintains a stock of equipment in good working order that can be hired on demand or at short notice. The lessor is normally a specialist in the operation of the equipment, a factor that may be important in the case of highly specialized equipment, where the lessee may not have the necessary expertise or facilities to maintain the equipment properly. The lessor may also undertake to replace the equipment in the event of a serious or prolonged breakdown. In the case of a building, the lessor is responsible for the structural integrity of the building, and would usually be responsible in the case of damage—for example, due to a natural disaster. The lessor is usually also responsible for ensuring that elevators, heating, and ventilation systems function adequately.
A4.8 Operating leases often aim at meeting the needs of users who require certain types of equipment only intermittently. Many operating leases are for short periods, although the lessee may renew the rental when the period expires and the same user may hire the same piece of equipment on several occasions. Because of the evolution of increasingly complicated types of machinery, especially in the electronics field, the servicing and backup facilities provided by a lessor are important factors that may influence a user to rent. Other factors that may persuade users to rent over long periods rather than purchase are considerations regarding the lessor’s balance sheet, cash flow, or tax liability.
A4.9 The service provided under an operating lease should be recorded as use of goods and services (22) for the lessee and sales of goods and services (142) for the lessor. Consumption of fixed capital (23) on the fixed asset involved is recorded in the accounts of the lessor.
A4.10 A financial lease is a contract under which the lessor, as legal owner of an asset, conveys substantially all risks and rewards of ownership of the asset to the lessee. The economic nature of the arrangement is such that the lessor is deemed to provide a loan to allow the lessee to acquire the majority of risk and rewards of ownership, but the lessor retains legal title (ownership) as collateral for the loan. In other words, the lessee becomes the economic owner of the asset. Under a financial lease, the lessor records a loan to the lessee with which the lessee acquires the asset. Thereafter, the leased asset is shown on the balance sheet of the lessee and not of the lessor; the corresponding loan is shown as an asset of the lessor and a liability of the lessee.
A4.11 Financial leases are distinguished from other types of leases because substantially all risks and rewards of ownership are transferred from the legal owner of the nonfinancial asset (the lessor) to the user of the nonfinancial asset (the lessee). The following provisions in the lease contract would normally lead to a lease being classified as a financial lease:
The lease contract transfers legal ownership of the asset to the lessee at the end of the lease term, or
The lease contract gives the lessee the option to acquire legal ownership of the asset at the end of the lease term at a price that is sufficiently low that the exercise of the option is reasonably certain, or
The lease term is for the major part of the economic life of the asset, or
At inception, the present value of the lease payment amounts to substantially all of the value of the asset, or
If the lessee can cancel the lease, the losses of the lessor are borne by the lessee, or
Gains or losses in the residual value of the asset accrue to the lessee, or
The lessee has the ability to continue the lease for a secondary period for a payment substantially lower than market value.
A4.12 These provisions in the lease contract may not be conclusive that substantially all of the risks have been conveyed. For example, if the asset is conveyed to the lessee at the end of the lease at its fair value at that time, the lessor holds substantial risks of ownership. The lease is then considered to be an operating lease. Financial leases are also called “finance leases” or “capital leases,” highlighting that the motivation (paragraphs A4.10–A4.11) is to finance the acquisition of a nonfinancial asset. Internationally accepted accounting practices generally recognize financial leases in the same manner as in GFS.2 A treatment akin to financial leases is also adopted for some public-private partnerships3 (PPPs) (see paragraphs A4.58–A4.65 and the 2008 SNA, paragraphs 22.154–22.163).
A4.13 The statistical treatment of financial leases is designed to capture the economic reality of such arrangements, by treating assets under a financial lease as if they were purchased and owned by the user. The lessee (economic owner) records the acquisition of the asset that is financed by an imputed loan. The loan is redeemed through payments during the contract (consisting of interest and original principal elements) and any residual payment at the end of the contract (or alternatively, by the return of the good to the lessor). If the lessor is a financial intermediary, part of the payment is also treated as a service charge (see paragraph 6.81).
A4.14 It is common, but not necessary, for a financial lease to cover the whole economic life of the asset. Regardless of whether the lease is for the whole economic life of the asset or for less, the value of the imputed loan, at inception, corresponds to the market value of the asset, and is valued at nominal value throughout its life, in the same way as other loans. The value of the loan consists of the present value of the future payments due to the legal owner plus the value of the asset at the end of the lease, as specified in the lease agreement.
A4.15 At the inception of the lease, the value of the asset appearing on the balance sheet of the lessee should be equal to the value of the loan owed to the lessor at that time. At the end of the lease term, the asset may be returned to the lessor to cancel the loan, or a new arrangement, including the outright purchase of the asset, may be reached between the lessor and lessee. If the lease is for less than the expected economic life of the asset, the lease usually specifies the value to the lessor at the end of the lease or the terms under which the lease can be renewed. Any variation in the price of the asset from the value specified in the lease agreement is borne by the lessee.
A4.16 A resource lease is an agreement whereby the legal owner of a natural resource that macroeconomic statistics treat as having an infinite life makes it available to a lessee in return for a regular payment recorded as property income and described as rent. In the case of resource leases, there is no change of economic ownership and, therefore, the resource continues to be recorded on the balance sheet of the lessor, even though it is used by the lessee. Payments due under a resource lease are recorded as revenue or expense in the form of rent (1415 or 2814). By convention, no consumption of fixed capital is applied to natural resources. Depletion of a natural resource is instead recorded as an other change in the volume of assets (see paragraph 10.52).
A4.17 Land is the classic case of an asset subject to a resource lease, but all other natural resources are also treated this way. An exception, when a long-term lease of land may be recorded as the sale of land, is described in paragraph A4.26.4
Licenses and Permits to Use a Natural Resource
A4.18 In many countries, licenses and permits to use natural resources are issued by government because government claims ownership of the resources on behalf of the community. However, government could also issue these licenses and permits if the resources are privately owned.
A4.19 As illustrated in Figure A4.1, there are three different sets of conditions that may apply to the use of a natural resource:
The owner may permit the resource to be used to extinction. This option results in the sale (or possibly an expropriation) of the nonproduced resource asset itself.
The owner may permit the resource to be used for an extended period of time in such a way that, in effect, the user controls the use of the resource during this time with little if any intervention from the legal owner. This permit leads to the creation of an intangible nonproduced asset classified as contracts, leases, and licenses (31441) for the user, distinct from the resource itself; however, the value of the resource and the value of the nonproduced asset in the form of contracts, leases, and licenses are linked. An inverse relationship will exist between the value of the resource itself and the value of the intangible asset.5
The owner can extend or withhold permission to continued use of the asset from one year to the next. This option corresponds to a resource lease on which rent is payable/receivable (see paragraphs A4.16–A4.17).
Figure A4.1Illustrating the Treatment of Licenses and Permits to Use a Natural Resource
A4.20 The differences in treatment between the various options are not clear-cut.6 There is no single, universal, and clear-cut criterion to distinguish between rent and asset sales, so a range of criteria should be considered in making the decision (see Box A4.1).
A4.21 The considerations listed in Box A4.1 can be seen as a more specific parallel to the distinction of economic ownership from legal ownership used in distinguishing between operating and financial leases described earlier. The conditions for treatment of the payment as the acquisition of an asset or rent are indicative rather than prescriptive. A decision on the appropriate treatment when some of the conditions are not met will necessitate consideration of how to record those transactions. For example, if, on balance, the decision is to treat the payment as rent, but a large upfront payment was made, this should be treated as a prepayment, recorded on an accrual basis. However, if the recipient is not willing to consider a refund if the contract is suspended, this is indicative of the sale of an intangible nonproduced asset rather than the payment of rent.
A4.22 The application of these principles to the main types of natural resources is described in the following text.
A4.23 Payment for a mobile phone license constitutes the sale of an asset rather than a payment for rent when the licensee acquires effective economic ownership rights over the use of the spectrum.7
A4.24 If the sale of such a license constitutes the sale of an asset, two possible treatments may apply: the sale of the spectrum itself or the sale of a permit to use the spectrum.
When the life spans of the license and of the spectrum coincide, the payment for a license is treated as the sale of the spectrum itself (other natural resources: radio spectrum (314331)). The latter situation applies always when licenses are granted indefinitely.
When the life span of the license is different from the life span of the spectrum, the payment for a license is treated as the sale of an intangible non-produced asset classified as permits to use natural resources (314412) by the legal owner (licensor) to the economic owner (licensee).
A4.25 When the license agreement is treated as the sale of an intangible asset, in its own right, its value is established at the time of its sale. The value of the license declines with the remaining period of validity to a value of zero when the license expires. Symmetrically, the value of the spectrum to the lessor falls when the license acquires a value and progressively increases as the license expires. This reflects the potential for a further sale of the right to use the spectrum for another period.8
A4.26 Land may be sold outright (i.e., when the legal ownership is transferred from one institutional unit to another)9 or may be subject to a resource lease (e.g., tenant farmers usually pay regular rent to their landlord). A resource lease on land may instead be considered as a sale of the land (3141) if the lease satisfies most or all of the criteria to be considered a sale of an asset in Box A4.1. When the land is leased in other circumstances, the payments are recorded as rent (1415 or 2814) under a resource lease agreement.
Box A4.1Criteria to Determine Whether a License Represents an Asset Sale or Rent
Several criteria need to be considered:
Costs and benefits assumed by licensee—The greater the extent of the risks and benefits associated with the right to use an asset incurred by the licensee, the more likely the classification of a transaction as the sale of an asset as opposed to rent. Pre-agreement on the value of payments (whether by lump sum or by installments) effectively transfers all economic risks and benefits to the licensee and points, therefore, to the sale of an asset. If, on the other hand, the value of payment is contingent on the results from using the license, risks and benefits are only partially transferred to the licensee and the situation is more readily characterized as payment of rent. In the case of mobile phone licenses, the total amount payable is often pre-agreed. An additional indication of the degree to which commercial risks have been passed to the licensee is to examine the hypothetical case where a licensee goes bankrupt. If, in such a case, the licensor reimburses none of the upfront payment made by the licensee, this would constitute a strong case against a characterization of the transaction as rent, as apparently the licensee has incurred all the risks involved.
Upfront payment or installment—As with other indicators, the mode of payment is in itself not conclusive for a characterization as a transaction in assets or rent payment. Generally, the means of paying for a license is a financial issue and not a relevant factor in determining whether it is an asset. However, business practice shows that upfront payments of rent for long periods (15–25 years in the case of mobile phone licenses) are unusual and this favors an interpretation as sale of an asset.
Length of the license—Licenses granted for long periods suggest the transaction should be treated as the sale of an asset, and for shorter periods treated as payments for rent. The timeframe involved in mobile phone licensing (15–25 years) is considered rather unusual as a period for which to conclude a fixed payment of rent and therefore a further indication favoring an interpretation as sale of an asset.
Actual or de facto transferability—The possibility to sell the license is a strong indication of ownership and if transferability exists, this is considered a strong condition to characterize the licensing act as the sale of third-party property rights. In practice, mobile phone licenses are often transferable either directly (by the corporation selling the license to another corporation) or indirectly (through the corporation being acquired through a takeover).
Cancellation possibility—The stronger the restrictions on the issuer’s capacity to cancel the license at its discretion, the stronger the case for treatment as a sale of an asset. Conversely, when licenses can easily be cancelled at the discretion of the issuer, ownership over benefits and risks has not been fully transferred to the licensee and the transaction qualifies more readily as rent.
Conception in the business world and international accounting standards—Businesses, in accordance with international accounting standards, often treat a license to use the spectrum as an asset. Again, in itself this does not lead to treatment as an asset in the national accounts, and there are other areas where companies choose to present figures in their accounts in ways that are not consistent with the national accounts. But the treatment of the acquisition of mobile phone licenses as capital investment in company accounts provides an added incentive to treat them in a similar way in the national accounts.
Not all or a majority of these considerations have to be satisfied to characterize the license as a sale of an asset. However, to qualify as rent (1415 or 2814) of a natural resource asset (rather than the sale of an asset), at least some of the following conditions should hold:
The contract is of short-term duration, or renegotiable at short-term intervals. Such contracts do not provide the lessee with a benefit when market prices for the leased asset go up in the way that a fixed, long-term contract would. Such benefits are holding gains that typically accrue to owners of assets.
The contract is nontransferable. Nontransferability is a strong but not a sufficient criterion for the treatment of license payments as rent, because, although it precludes the lessee from cashing in on holding gains, it does not preclude the lessee from reaping comparable economic benefits (e.g., using the license in a business).
The contract contains detailed stipulations on how the lessee should make use of the asset. Such stipulations are often seen in cases of rent of land, in which the owner wishes to retain control over the usage of the land. In the case of licenses, examples of such stipulations would be that the contract states what regions or types of customers should be served, or that it sets limits on the prices that the lessee may charge.
The contract includes conditions that give the lessor the unilateral right to terminate the lease without compensation—for instance, for underuse of the underlying asset by the lessee.
The contract requires payments over the duration of the contract, rather than a large, upfront payment. Although this condition is essentially financial in character and thus cannot be decisive on the type of the lease, it may indicate a degree of control for the lessor to direct the use of the nonproduced asset. The case for a treatment as rent is further supported if the payments are related to the revenue the lessee derives from the license.
A4.27 In some jurisdictions, the land under buildings remains in the legal ownership of a landlord other than the owner of the buildings. If regular payments are made to the landlord, these are recorded as rent (1415 or 2814). However, it is sometimes the case that, even though the land legally belongs to another unit, the right to occupy it for an extended period is payable in a single upfront payment often when the building is acquired. In such a case the payment is recorded as the acquisition of a nonproduced asset, classified as land (3141) if the value of the land can be established separately from that of the building. If not, the composite asset should be classified in the category representing the greater part of the value (see paragraphs 7.94 and 8.51). In such a case, when the building changes ownership, the purchase price includes an element representing the present value of future rent payments. Therefore, the land is recorded as if the ownership is transferred along with the building above the land. If, at the end of the land lease, a further payment is liable for extension of the lease for another long-term period, this should be recorded as an acquisition of another nonproduced asset, as described earlier.
A4.28 For timber, four possibilities are distinguished: the sale of a natural resource asset, the sale of a permit, rent of a natural resource asset, or sale of forests that are produced assets.
Sale of a natural resource asset—If government gives a unit permission to clear an area of natural forest, or to fell at its discretion without any restriction in perpetuity, the payments made to government (the owner) constitute the sale of the natural resource asset, classified as noncultivated biological resources (31431).10
Sale of a permit—When licenses or permits issued to use the natural resource, such as timber, satisfy the criteria to be a separate asset, the assets are classified as contracts, leases, and licenses (31441).
Rent of a natural resource asset—It is common for timber felling to be allowed, subject to strict limits with a fee payable per unit volume of timber felled (stumpage). The limits are usually such that the harvest of timber is sustainable and so the payments are recorded as rent (1415 or 2814) in the case of a natural forest. The option to have a lease permitting felling at the lessee’s discretion but subject to the restoration of the land, in an acceptable forested state, at some time in the future is improbable.
Sale of goods and services—When cultivated forests are produced assets in the form of inventories, the extraction of timber is treated as the sale of goods and services (142).
A4.29 Illegal logging is prevalent in some countries. In such cases, the quantity of timber extracted should be recorded as other changes in the volume of assets (i.e., uncompensated seizure).
A4.30 Natural stocks of fish with an economic value are an asset, and the same considerations apply to them as to other natural resources.11 Two possibilities exist for commercial fishing:
Fishing quotas are permits that may be allocated in perpetuity or for extended periods to particular institutional units—for example, where fishing is an established way of life and there may be little alternative economic employment. In such circumstances, the quotas may be transferable and, if so, there may be a well-developed market for them. Fishing quotas may, therefore, be considered as transferable permits to use a natural resource. Such permits are assets in macroeconomic statistics and classified as permits to use natural resources (614412) in the balance sheet.
An alternative regime is to issue a permit for a strictly limited period of time, less than a year, to a nominated institutional unit, often a nonresident. This is a common practice in some islands in the South Pacific, for example. In these cases, the revenue from the licenses should be recorded as rent (1415) because it is a resource lease.
A4.31 A license for recreational fishing has long been considered, by convention, as payment of a tax under other taxes on the use of goods and on permission to use goods or perform activities (11452). This treatment is not changed by the wider considerations for commercial fishing.
A4.32 A natural body of water with an economic value can be sold in its entirety either as part of the land that surrounds it or as a separate entity.
A4.33 As is the case for fish, it is unlikely that economic ownership would be ceded under a long lease with no preconditions on the quantity and state in which a similar amount of water should be returned to the owner. However, it is possible that surface water could be leased under a long lease for recreational purposes, for example. The treatment of such leases should be the same as for land (see paragraphs A4.26–A4.27).
A4.34 Regular payments for the extraction of water from natural water bodies (as opposed to the delivery of it) should be treated as rent (1415 or 2814). However, extraction of water as a produced commodity (e.g., purchases from a reservoir) should be recorded as the sale of goods and services.
Mineral and energy resources
A4.35 Mineral and energy resources differ from land, timber, and fish in that, although they also constitute a natural resource, they cannot be used sustainably. All extraction necessarily reduces the amount of the resource available for the future. This consideration necessitates a different set of recommendations for how transactions relating to their use should be recorded.
When a unit, such as government, owning a mineral or energy resource cedes all rights over it to another unit, this constitutes the sale of the resource classified as mineral and energy resources (3142). Like land, mineral resources can be owned only by resident units; if necessary, a notional resident unit must be established to preserve this convention.
When a unit extracts a mineral or energy resource under an agreement where the payments made each year are dependent on the amount extracted, the payments (sometimes described as royalties) are recorded as rent (1415 or 2814). The depletion of the resource itself is recorded as other changes in the volume of assets.12
A4.36 There are two ways in which assets may be shared, and the two cases require different treatments:
The asset may be wholly legally owned by two or more units, each at different points in time.
Alternatively, the risks of and benefits from the asset may be shared by two or more units at a single point in time.
A4.37 In macroeconomic statistics, even though the asset may be owned by different units at different times, when a balance sheet is drawn up, the whole of the value of the asset is attributed to one unit.
For an asset subject to an operating lease, there is no ambiguity. The legal owner is also the economic owner and is the unit that shows the asset on its balance sheet.
An asset subject to a financial lease is shown on the balance sheet of the economic owner. This is consistent with the views that the value of the asset represents the stream of future benefits coming from the asset and the economic owner is the unit entitled to receive these benefits in return for accepting the risks associated with using the asset in production.
For an asset subject to a resource lease, the value is shown on the balance sheet of the legal owner.
A4.38 When licenses to use natural resources such as radio spectrum, land, timber, and fish satisfy the criteria to be classified as intangible assets under permits to use natural resources (314412), they are part of the subclass of nonfinancial assets in the form of contracts, leases, and licenses (31441) and are shown on the balance sheet of the licensee.
A4.39 Sharing the risks and rewards of an asset between different units at a point in time is unusual. The most common occurrence is that a single unit undertakes the activity in which the asset is used and that unit shares the returns among the owners in the form of distributed property income. However, occasionally it is possible that such a single unit does not exist and it is not meaningful to try to create it statistically. This is most common when the participating units are resident in different economies, as may be the case with an airline, or in the case of some unincorporated joint ventures. The terms under which unincorporated joint ventures are established are diverse, but one form allows that all members share the assets equally. In such cases, macroeconomic statistics record the assets shared between the owners in proportion to their ownership shares.
A4.40 In some joint ventures that are recognized as institutional units, one party may contribute an asset as its share of the costs. If this happens, an injection of equity equal to the value of the asset should be recorded along with the acquisition of the asset in question by the joint venture.
Permits to Undertake a Specific Activity
A4.41 In addition to leases and licenses to use an asset as described in the previous sections, permission may be granted by government to engage in a particular activity, independently of any assets involved in the activity. Permission to extract minerals in return for the payment of rent, for example, is not covered by this type of permit because the permit derives from the government’s ownership of the assets. The permits that give permission to engage in a particular activity are designed to limit the number of individual units entitled to engage in the activity. Such permits may be issued by government or by private institutional units and different treatments apply to the two cases. This section deals only with permits issued by government. Permits issued by units other than government are not discussed here because their treatment does not affect the government accounts.13
Permits issued by government
A4.42 When governments restrict, for example, the number of cars entitled to operate as taxis or limit the number of casinos permitted by issuing licenses, they are, in effect, creating monopoly profits for the approved operators and recovering some of these profits as the “permission fee.” Such fees are recorded as other taxes on the use of goods and on permission to use goods or perform activities (11452). This principle applies to all cases where government issues licenses to limit the number of units operating in a particular field where the limit is fixed arbitrarily and is not dependent only on qualifying criteria.
A4.43 In principle, if the license is valid for several reporting periods, the payment should be recorded on an accrual basis with an entry in other accounts receivable (3208) or other accounts payable (3308) for the amount of the license fee covering future reporting periods. However, if government does not recognize a liability to repay the licensee in the case of a cancellation, the whole of the fee payable should be recorded as a single tax payment at the time it is paid.
A4.44 The incentive to acquire such a license is the licensees’ expectation that they acquire the right to make monopoly profits at least equal to the amount payable for the license. For the license holder, this stream of future income is treated as an asset if the licensee can realize this by on-selling the asset. The asset first appears in the accounts of the licensee as an other change in the volume of assets. Subsequent increases and decreases in its value are recorded as holding gains or losses. These types of assets are described as permits to undertake a specific activity (614413). The value of the asset is determined by the value at which it can be sold or, if no such information is available, is estimated at the present value of the future stream of monopoly profits.
A4.45 If the payment for the license is being recorded on an accrual basis, the licensee has in the balance sheet an asset under other accounts receivable equal to the value of the license fee covering future reporting periods and an asset recorded as permits to undertake specific activities (614413) for the value of the license covering the excess of the monopoly profits over the cost. If the license is on-sold, the price paid by the new owner reflects both the value of the right to receive a refund from the government if the license is cancelled and the present value of the future stream of monopoly profits. If the license was recorded as a single reporting period tax payment, the value of the asset for the licensee is the value at which it can be sold or, if no such information is available, is estimated as the present value of the future stream of monopoly profits. Box A4.2 outlines the statistical treatment of permits issued by government using four examples.
Conditions for government permits recognized as assets
A4.46 A permit issued by government to undertake a specific activity may be treated as an asset (permits to undertake specific activities (614413)) only when all the following conditions are satisfied:
The activity concerned does not utilize an asset belonging to government; if it does, the permission to use the asset is treated as an operating lease, a financial lease, a resource lease, or possibly the acquisition of an asset representing permission to use the asset at the discretion of the licensee over an extended period.
The permit holder must be legally and practically able to sell the permit to a third party.
The number of permits is limited, thereby allowing the holder to make monopoly profits when undertaking the activity concerned.
The permit is not issued subject to a qualifying criterion. Revenue raised from the issuance of permits that are subject to qualifying criteria are treated as either taxes on the use of goods and on permission to use goods, or perform activities (11452) or payments for services under administrative fees (1422).
A4.47 Even if all these conditions are satisfied, if in practice the permits are not on-sold, it is not relevant to record the permits as assets. If any of the conditions is not satisfied, the payments are treated as taxes on the use of goods and on permission to use goods or perform activities (11452)—that is, without the creation of an asset in the form of permits to undertake specific activities (614413). (There may be an account payable in cases when the permit holders make payments that will accrue over more than one reporting period.)
Permits to use natural resources as sinks
A4.48 Governments may issue emission permits as a means of controlling total emissions. These permits do not involve the use of a natural asset (there is no economic value placed on the atmosphere so it cannot be considered an economic asset). However, it is inherent in the concept that these permits will be tradable and that there will be an active market for them.
A4.49 The payments for emission permits issued by government are treated as taxes on the use of goods and on permission to use goods or perform activities (11452), at the time the emissions occur. The timing difference between the payments received by government for the permits and the time the emission occurs gives rise to a transaction in financial liabilities classified as other accounts payable (3308) for government and a financial asset classified as other accounts receivable (3208) for the holder. The difference between the prepaid tax value of the permit and the market value of the permit represents a marketable contract (nonproduced nonfinancial asset) for the holder. The creation and disappearance of the non-produced nonfinancial asset are recorded as an other change in volume of assets.
A4.50 The case of payments for discharging water may be considered as an example of the different possible ways of treating the payments:
If a payment to discharge water is a fine imposed by government intended to inhibit discharge, the fine should be treated as revenue for government classified as fines, penalties, and forfeits (143). If such a fine is imposed on government or public sector units by another institutional unit, the fine is included in expense, classified as current transfers not elsewhere classified (2821).
If a limited number of permits are issued with the intent to restrict discharges, the payment should be treated as taxes on the use of goods and on permission to use goods or perform activities (11452) if the medium into which the water is discharged is not regarded as an asset in macro-economic statistics.
If the medium into which the water is discharged is an asset and the necessary conditions are met concerning the terms on which the discharge is permitted, then the payment for the permit should be treated in the same way as the payment for a license to use the radio spectrum for mobile phones. If the payment is linked to remedial action, the payment is a payment for a service, unless the amount levied is out of proportion to the costs involved in subsequent water treatment, in which case the payment should be treated as other taxes on the use of goods and on permission to use goods or perform activities (11452).
Box A4.2Statistical Treatment of Permits Issued by Government: Examples
Suppose unit A contracts with government to buy a permit to operate a casino for three years at a total cost of 12. A expects to make monopoly profits of 7 per year because the permit excludes other casinos from operating. The government may or may not be prepared to make a refund if A relinquishes the permit. A may utilize the permit for the three years for which it is valid or may sell it to unit B at the end of year 1. The recordings under these four possibilities are examined as follows.
Case 1: Government does not offer a refund and A keeps the permit for three years
At the start of year 1, A pays tax of 12 and through an other change in the volume of assets recognizes an asset worth 21 initially. Government records only tax revenue of 12. Assuming no market price changes or discount factor, by the end of the year the value of the asset has reduced by 7 as an other volume change, because one of the three years for which the permit was initially valid has expired. At this point the asset is contributing 14 to A’s net worth. By the end of the second year A writes off an additional 7 as an other volume change, leaving a contribution to net worth of 7. By the end of the third year the asset is worth zero.
Case 2: Government does not offer a refund and A sells the permit to B after one year
At the start of year 1, A pays tax of 12 and through an other change in the volume of assets recognizes an asset worth 21 initially. Government records only tax revenue of 12. Assuming no market price changes or discount factor, by the end of the year the value of the asset has reduced by 7 as an other volume change, because one of the three years for which the permit was initially valid has expired. At this point, the value of the asset is 14. However, B is prepared to pay only 13 for the asset and A accepts this offer. A therefore reduces the value of the asset by 1 through a holding loss (revaluation change), before selling it for 13. B acquires the asset for 13 and, assuming no further market price changes, its value reduces by 6.5 in the other change in volume of assets account in each of the two following years.
Case 3: Government offers a possibility to refund and A keeps the permit for three years
At the start of year 1, A makes a payment of 12 to government, which is recorded as a payment of tax of 4 for the year. The remainder of the amount is a prepayment of a tax and, therefore, at the end of the year government has an other-account payable to A of 8. The value of the permit to A is only the excess of the monopoly profit over the total amount that A will have to pay to government. At the start of year 1, A recognizes an asset with a value of 9 (the difference between 7 and 4 for three years) through an other change in the volume of assets. Assuming no market price changes or discount factor, by the end of year 1 this permit asset is worth only 6. At the end of that year, A’s net worth includes an other account receivable from government of 8 and the remaining value of the permit of 6. The total value of A’s assets is 14 as in case 1. During the second year, A’s other account receivable from government reduces by 4 which is used to pay the accrued tax in year 2. In that year, the value of the permit also reduces by 3 from 6 to 3. At the end of the second year, A’s net worth includes an other account receivable from government of 4 and, assuming no further market price changes, a permit worth 3, bringing A’s total assets to 7 as in case 1. At the end of year 3, A’s other account receivable and the value of the permit are reduced to zero.
Case 4: Government offers a possibility to refund and A sells the permit to B after one year
At the start of year 1, A makes a payment of 12 to government which is recorded as a payment of tax of 4 for the year. The remainder of the amount is a prepayment of a tax and, therefore, at the end of the year government has an other account payable to A of 8. The value of the permit to A is only the excess of the monopoly profit over the other account payable. At the start of year 1, A recognizes an asset with a value of 9 (the difference between 7 and 4 for three years) through an other change in the volume of assets. Assuming no market price changes or discount factor, by the end of the year, this permit asset is worth only 6. At the end of the year, A’s net worth includes an other account receivable from government of 8 and the remaining value of the permit of 6. The total value of A’s assets is 14, as in case 1. However, B is prepared to pay only 13 for the asset and A accepts this offer. As in case 2, A has to reduce the value of the permit by 1 through a holding loss (revaluation change) before selling the asset to B for 13. The other account receivable from government of 8 is transferred to B and the asset (permit) is sold for 5. B’s net worth is unchanged because B has paid A 13 but received the other account receivable of 8 and an asset (permit) valued at 5 in return. In year 2, B’s other account receivable is reduced by 4 due to the tax payment of 4 that accrued and, assuming no further market price changes, the permit declines in value from 5 to 2.5. At the end of year 3, B’s other account receivable and the value of the permit are reduced to zero.
Contracts for future production
A4.51 Although human capital is not recognized as an economic asset, there are cases where a contract that entitles the holder to limit the ability of a named individual to work for others may be regarded as an asset. Prolific and lucrative contracts may be for sports players where, for example, one football club can “sell” a player to another. In fact, the club is not selling the person, but rather the exclusive rights to have that person working for it. Similar contracts exist for the rights to publish literary works or musical performances. Such contracts are treated as assets, classified as entitlement to future goods and services on an exclusive basis (614414) within the asset class of contracts, leases, and licenses.
A4.52 Similar contracts may exist for the production of nonfinancial assets in future. An examination of the practice of purchasing the options of future aircraft production revealed, however, that in this case there is no transferable asset and a change of mind on the part of the potential purchaser or failure to deliver on the part of the supplier is settled by a change in the arrangements between the two parties and does not lead to the sale of the option to a third party. If an instance arises where the option to purchase nonfinancial assets is treated in the same way as a contract for a named individual’s performance, the same classification would apply.
Leases as Assets
A4.53 As stated in paragraph A4.2, contracts underlie many transactions recorded in macroeconomic statistics and it is important to understand what the implications are for the time of recording and classification of transactions arising from a contract. Permits or licenses to use natural resources may constitute an asset, as may permits to undertake specific activities and contracts for future production.
A4.54 As indicated in paragraphs 7.105–7.106, a contract may be considered an asset when it is transferable to a third party (i.e., a unit other than the two specified in the original contract)—for example, a marketable operating lease acquiring a value as an asset. An example is given in Box A4.3. Assets reflecting such third-party property rights are always transitory: they exist only for the length of the lease and where there is a difference between the encumbered and unencumbered values.
A4.55 Permits to use natural resources and contracts for future production may also give rise to these types of third-party property rights assets. Similarly, permits to undertake specific activities may give rise to these types of assets even though the original payment, if payable to government, was treated as a tax. Financial leases do not give rise to these types of assets. If the value of the asset being leased increases by more than the payments due under the financial lease, the lessee may have the option of selling the asset, repaying the loan, and keeping the difference.
A4.56 In the case of marketable operating leases, the lease may be treated as an asset only when the two following conditions are satisfied:
The lease specifies a predetermined price for the use of an asset that differs from the price the asset could be leased for at the current time.
The lessee is able legally and practically to realize this price difference by subcontracting the lease to a third party.
A4.57 In practice, it is recommended that such assets should be recorded only when the value of the asset is significant and the lessee can actually exercise the right to realize the price difference.
Box A4.3Practical Example of Leases as Assets
Suppose a lease on an apartment agreed some time ago specifies the rental at 100 per month but its current market rent is 120 per month. From the lessor’s point of view, the apartment is “encumbered” by the existing lease; that is, it carries a penalty (in this case of 20 per month) because of the existence of the lease. The encumbered value of the apartment is based on the present value of future rental payments taking the existence of the lease into account; that is, the future income stream is 100 for the remaining period of the lease and 120 thereafter (ignoring any allowance for inflation). The unencumbered value of the apartment is a present value based on an income stream of 120 per month from the current period forward. The value to be entered in the landlord’s balance sheet is the encumbered value, which is also all the landlord (lessor) can hope to realize if he sold the apartment while the tenant has the right to maintain the lease. To realize the unencumbered value, the lessor would have to pay the tenant the difference between the unencumbered value and the encumbered value to be free of the lease. This amount, the encumbrance, can in some circumstances be treated as an asset of the tenant. The circumstances are that it is both legally possible and is practicable for the tenant to sublet the apartment to a third party. Because of the difficulty of identifying when such assets may exist, it is recommended that in practice these assets be recorded only when there is evidence that they have been realized.
The encumbered value of the apartment may be higher than the unencumbered value if rentals have fallen since the lease was agreed. In this case, it is the landlord who benefits from the discrepancy between the contract price and the market price because the value of the apartment in his balance sheet is still the encumbered value. If the tenant wishes to cancel the lease, he may have to pay the landlord the difference between the encumbered value and the unencumbered value. Only in the exceptional case where the tenant pays a third party to assume the lease at the price specified in the lease does this payment represent an asset of negative value to the tenant. Once the lease expires or is cancelled, the value of the apartment returns to its unencumbered value.
A4.58 Public-private partnerships (PPPs) are long-term contracts between two units, whereby one unit acquires or builds an asset or set of assets, operates it for a period, and then hands the asset over to a second unit. Governments engage in PPPs for a variety of reasons, including the expectation that private management may lead to more efficient production and that access to a broader range of financial sources can be obtained. Such arrangements are usually between a private corporation and government, but other combinations are possible, with a public corporation as either party or a private nonprofit institution as the second unit. For ease of reference, the second unit will be referred to as the private corporation. These schemes are referred to by different names depending on the type of contracts that are in place. Examples are: private finance initiatives (PFIs); design, build, operate, and transfer schemes (DBOT); build, own, and transfer schemes (BOTs); or build, own, operate, and transfer schemes (BOOTs). For ease of reference, the remainder of this section will refer to PPPs.
A4.59 The nature of activities that PPPs are involved with varies greatly. Generally, the private corporations construct and operate assets of a kind that are usually the responsibility of the general government or public corporations. These commonly include roads, bridges, water supply and sewerage treatment works, hospitals, prison facilities, electricity generation and distribution facilities, and pipelines.
A4.60 The private corporation expects to recover its costs and to earn an adequate rate of return on its investment. The government may make periodic payments during the contract period,14 or, alternatively, the private corporation may sell the services to the public (e.g., a toll road), or a combination of the two. The price is often regulated by the government and set at a level that will allow the private corporation to recover its costs and earn a return on its investment (benchmark price). If the regulated price is set at a level below such a benchmark price, the government will have to compensate the private partner, usually through subsidies or other transfers. There can be many variations in PPP contracts regarding aspects such as the disposition of the assets at the end of the contract, the required operation and maintenance of the assets during the contract, and the price, quality, and volume of services produced. At the end of the contract period, the government may gain legal and economic ownership of the assets, possibly without payment.
Box A4.4Determining the Economic Ownership of PPP-Related Assets
The economic owner of the assets related to a PPP is determined by assessing which unit bears the majority of the risks and which unit is expected to receive a majority of the rewards of the asset.
The factors that need to be considered in assessing economic ownership of PPP-related assets include those associated with acquiring the asset and those associated with using the asset.
Some of the risks associated with acquiring the asset are:
The degree to which the government controls the design, quality, size, and maintenance of the assets
Construction risk, which includes the possibility of additional costs resulting from late delivery, not meeting specifications, or building codes, and environmental and other risks requiring payments to third parties.
Some of the risks associated with operating the asset are:
Supply risk, which covers the degree to which the government is able to control the services produced, the units to which the services are provided, and the prices of the services produced
Demand risk, which includes the possibility that the demand for the services, either from government or from the public at large in the case of a paying service, is higher or lower than expected
Residual value and obsolescence risk, which includes the risk that the value of the asset will differ from any price agreed for the transfer of the asset to government at the end of the contract period
Availability risk, which includes the possibility of additional costs or the incurrence of penalties because the volume and/or quality of the services do not meet the standards specified in the contract.
The relative importance of each factor is likely to vary with each PPP. It is not possible to state prescriptive rules that will be applicable to every situation. The provisions of each PPP arrangement must be evaluated to decide which unit is the economic owner.
A4.61 The decision about economic ownership of the asset and whether to record PPP-related assets and liabilities in the government’s or the private corporation’s balance sheet is not straightforward. The private corporation is responsible for acquiring/constructing the fixed assets, although the acquisition/construction is often supported by the backing of the government. The contract often allows government to specify the design, quality, capacity use, and maintenance of the asset in accordance with government standards. Typically, the assets have service lives much longer than the contract period so that, for this reason alone, the government will control the assets, bear the risks, and receive the rewards for a major portion of the assets’ service lives. Thus, it is frequently not obvious whether the private corporation or the government controls the assets over their service lives or which party bears the majority of the risks and benefits from the majority of the rewards.15
Determining Economic Ownership of PPP-Related Assets
A4.62 The statistical treatment depends on the economic ownership of the asset(s) involved. In macroeconomic statistics, a distinction is made between legal ownership and economic ownership (see paragraphs 3.38–3.41) based on risks and benefits. With a PPP, the legal and economic owner may be different parties. Box A4.4 summarizes the associated risks to be considered.
A4.63 The macroeconomic statistics approach is broadly consistent with considerations listed by the International Public Sector Accounting Standards Board (IPSASB) for the recognition and measurement of a service concession asset.16 While it is not possible to prescribe rules applicable to every PPP type of arrangement, the considerations presented in Box A4.4 should guide the decision on which party is the economic owner of the asset(s) during and at the end of the PPP contract period. The International Public Sector Accounting Standards (IPSASs) considerations of control of the asset include aspects of risks and rewards, and should, in principle, lead to the same conclusions on economic ownership. Box A4.5 presents a brief discussion on how some countries apply, in practice, the concept of economic ownership related to PPPs.
Box A4.5Practical Applications of the Economic Ownership Concept
To operationalize the criteria for economic ownership—that is, whether the majority of risks and rewards accrue to government or to the private corporation—countries have followed different approaches.
Under Eurostat’s guidelines to its member states, a sufficient condition for a PPP to be excluded from government’s accounts has been that the private corporation bears the construction risk in the project and either the availability or the demand risks in using the asset in production. In 2010, Eurostat clarified how other elements, in addition to these three principal risk categories, should be analyzed to determine the distribution of risks between the public and private sectors—notably: the existence and scope of grantor guarantees; majority financing by the grantor of capital cost during the construction phase; and financial aspects of termination clauses (see Manual on Government Deficit and Debt – Implementation of ESA 95, 2012 Edition, section VI.5).
Some countries are following internationally accepted accounting standards (e.g., IPSAS) applicable to financial leases (see paragraphs A4.10–A4.15). If a PPP contract is deemed to be a financial lease, an asset and liability are recorded on the public sector unit’s balance sheet, interest and depreciation are recorded as operating expenses, and amortization is recorded as a transaction in financial assets and liabilities. IPSASs treat a lease as a financial lease to the extent that the following criteria are met: (i) the contract period covers most of the useful life of the asset; (ii) the asset is transferred to the lessee (the public sector unit in this case) at the end of the contract; (iii) the lessee can purchase the asset at a bargain price at the end of the contract; (iv) the present value of payments prescribed in the contract is close to the fair market value of the asset; and (v) the asset is useful mainly to the lessee.
A4.64 The following description of the statistical treatment of PPPs is based on the guidelines prescribed in the 2008 SNA.17 If the government is considered the economic owner of the asset(s) during the contract period but does not make any explicit payment at the beginning of the contract, a transaction must be imputed to cover the acquisition of the asset(s). The recording of these depends on the specific contract provisions, how they are interpreted, and possibly other factors. Most frequently, these contracts will be recorded as the acquisition of the asset through an imputed financial lease because of the similarity with actual financial leases. In other cases, for example, a loan that equals the market value of the asset at acquisition could be imputed, the actual government payments to the private corporation could be partitioned, so that a portion of each payment represents the repayment of the loan (see paragraphs A4.10–A4.15), and the remainder could represent an expense for use of goods or services, subsidies, etc., in accordance with the contract.
A4.65 If the private corporation is considered the economic owner of the asset(s) during the contract period, any debt associated with the acquisition of the asset(s) should be attributed to the private corporation. Normally, the government obtains legal and economic ownership of the assets at the end of the contract without any significant payment. However, two approaches are possible to account for the acquisition of the asset(s) by government:
Over the contract period, government gradually builds up a financial claim (e.g., other accounts receivable) and the private corporation gradually accrues a corresponding liability (e.g., other accounts payable), such that both values are equal to the residual value of the assets at the end of the contract period. At the end of the contract period, government records the acquisition of the asset, with a reduction in the financial claim (other accounts receivable) as the counterpart entry. The other unit records the disposal of the asset, with a reduction in the liability (other accounts payable) as the counterpart entry. Implementing this approach may be difficult because it requires new transactions to be constructed using assumptions about expected asset values and interest rates.
An alternative approach is to record the change of legal and economic ownership from the private unit to government as a capital transfer at the end of the contract period. At the end of the contract period, government records revenue in the form of a capital transfer that finances the acquisition of the asset and the private unit records an expense in the form of a capital transfer payable to government, financed by the disposal of the asset. The capital transfer approach does not reflect the underlying economic reality as well as the first alternative, but data limitations, uncertainty about the expected residual value of the assets, and contract provisions allowing various options to be exercised by either party make recording a capital transfer in GFS acceptable on pragmatic grounds.
Insurance and Standardized Guarantee Schemes
A4.66 An insurance policy is an agreement between an insurer and another institutional unit, the policy-holder. Under the agreement, the policyholder makes a payment (premium) to the insurance corporation, which makes a payment (claim) to the policyholder if or when a specified event occurs. The policyholder protects itself against certain forms of risk. By pooling the risks, the insurer aims to receive more from the receipt of premiums than it has to pay out as claims to the insured.
A4.67 This section describes types of insurance and standardized guarantee schemes. It first defines some terminology and then provides statistical guidance on the recording of the relevant flows and stock positions related to nonlife insurance and standardized guarantee schemes.
Types of Insurance and Standardized Guarantee Schemes
A4.68 The most common form of insurance is called direct insurance, whereby the policy is issued by an insurer to another type of institutional unit.18 There are two types of direct insurance—namely, life and nonlife insurance. Both types of insurance involve pooling risks. Insurers receive many (relatively) small regular payments of premiums from policy-holders and pay much larger sums to claimants when the contingencies covered by the policy occur. During the interval between the receipt of premiums and the payment of claims, the insurance corporation earns income from investing the premiums received. This investment income affects the levels of premiums and benefits set by the insurer.
A4.69 Life insurance is an activity whereby a policyholder makes regular payments to an insurer, in return for which the insurer guarantees to provide the policyholder (or in some cases another nominated person) with an agreed sum, or an annuity, at a given date or earlier if the policyholder dies beforehand. For life insurance, an important relationship exists between premiums and benefits during the policy period. For policyholders, the benefits receivable are expected to be at least as great as the premiums payable, and this type of insurance can be seen as a form of saving. The insurer combines this aspect of a single policy with the actuarial calculations about the insured population concerning life expectancy (including the risks of fatal accidents) when determining the relationship between the levels of premiums and benefits. Life insurance mainly redistributes premiums payable over a period of time as benefits payable later to the policyholders or his/her beneficiaries. Essentially, life insurance premiums and benefits are transactions in financial assets and liabilities and not transactions in revenue and expense. Public sector units’ involvement in life insurance is most often provided in the context of social protection in the form of employment-related pension schemes and other social protection schemes, such as compulsory saving schemes. The GFS treatment of these types of schemes is elaborated in Appendix 2.
A4.70 Nonlife insurance is an activity similar to life insurance except that it covers all other risks, accidents, sickness, fire, etc. For nonlife insurance, the risks are spread over all policyholders, and the number of claimants is typically much smaller than the number of policyholders. Nonlife insurance includes policies that provide a benefit in the case of death within a given period but in no other circumstances, usually called term insurance. With nonlife insurance, a claim is payable only if a specified contingency occurs and not otherwise. This type of insurance consists of redistribution in the current period between all policyholders and a few claimants. While public corporations may be involved in various types of insurance schemes, general government units are usually not involved in nonlife insurance other than social insurance, as discussed in Appendix 2.
A4.71 Standardized guarantees are those kinds of guarantees that are issued in large numbers, usually for fairly small amounts, along identical lines. There are three parties involved in these arrangements, the borrower (debtor), the lender (creditor), and the guarantor. Either the borrower or lender may contract with the guarantor to repay the creditor if the debtor defaults. Similar to nonlife insurance, it is not possible to determine the likelihood of any particular debtor de faulting. Nevertheless, because the guarantees are very similar and numerous, it is possible to estimate the general likelihood of defaults the guarantor will have to cover. It is standard practice to estimate how many out of a batch of similar debts will default.19 Therefore, standardized guarantees are based on the same paradigm as that for nonlife insurance, and a similar treatment is adopted for these guarantees. Standardized guarantees are distinguished from one-off guarantees based on two criteria:
They are characterized by often repeated transactions with similar features and pooling of risks.
Guarantors are able to estimate the average loss based on available statistics by using probability-weighted concepts.
A4.72 Standardized guarantees may be provided by a financial institution, including, but not limited to, insurance corporations. It is possible (but unlikely) that nonfinancial corporations provide these kinds of guarantees. However, government units are often involved as the guarantor in standardized guarantee schemes. The most common examples are export credit guarantees, deposit insurance schemes,20 and student loan guarantees. Specifically, when a government unit provides standardized guarantees without fees or at such low rates that the fees are significantly less than the calls and administrative costs, the unit should be treated as a nonmarket producer within the general government. If government recognizes the probability of having to finance some of the calls under the guarantee scheme to the extent of including a provision in its accounts, a transfer of this size from government to the units concerned and a liability of this amount (under provisions for calls under standardized guarantee schemes) should be recorded. If a standardized guarantee scheme is operated by a corporation or quasi-corporation on behalf of government, any transfers to cover recurrent losses are classified as subsidies (see paragraph 6.89) and any transfers to cover large operating deficits accumulating over two or more years or exceptional losses due to factors outside the control of the corporation/quasi-corporation are recorded as capital transfers (see paragraphs 6.91–6.124).
Defining Terminology Used in Insurance
A4.73 Defining some of the terms peculiar to the insurance industry is helpful in clarifying the discussion on the statistical treatment of insurance and standardized guarantees. The term “premiums” is used for payment to the insurer, while the term “fees” is used to describe the payment to the guarantor in the case of standardized guarantees. Payments by the insurer are called “claims” in the case of nonlife insurance policies and “benefits” in the case of life insurance policies. In the case of standardized guarantees, “calls” relate to expected defaults on the guarantees.
A4.74 The actual premium (fee) is the amount payable to the insurer (guarantor) to secure insurance coverage for a specific event over a stated time period. Coverage is frequently provided for one year at a time, with the premium payable at the outset, though coverage may be provided for shorter (or longer) periods and the premium (fee) may be payable in installments—for example, monthly.
A4.75 The premium earned is the part of the actual premium that relates to coverage provided in the reporting period. For example, if a new annual policy with a premium of 120 units comes into force on April 1, and GFS are being prepared for a calendar year, the premium earned in the calendar year is 90. The unearned premium is the amount of the actual premium received that relates to the period past the reporting period. In the example just given, at the end of the reporting period there will be an unearned premium of 30, intended to provide coverage for the first three months of the next reporting period.
A4.76Net premiums are defined as actual premiums plus premium supplements minus the insurance service charge payable by the policyholders. Premiums are usually payable regularly, often at the start of an insurance period, whereas claims fall due later, in the case of life insurance, often many years later. The amounts accumulating between the periods the premiums were payable and when a claim becomes payable create a liability (reserves) for the insurer. These amounts are at the disposal of the insurer to invest in assets and earn income from it. The income allows the insurance corporation to charge lower premiums than would be the case otherwise. The property income earned in this way is attributed to the policyholders and is subsequently recorded as premium supplements from the policyholders.
A4.77 A claim (benefit or call) is the amount payable to the policyholder by the insurer in respect of an event covered by the policy occurring in the period for which the policy is valid. Claims generally become due when the event occurs, even if the payment is made some time later. An exception is made in cases where making a claim is possible only long after the event has happened.21 In such a case, the claim is recorded at the time the insurance company accepts the liability. Claims that become due are described as claims incurred. In some contested cases, the time between the occurrence of the event giving rise to the claim and the settlement of the claim may be several years. Claims on an accrual basis are recognized as due when an event takes place that gives rise to a valid claim, regardless of whether paid, settled, or reported during that period.
Statistical Treatment of Nonlife Insurance and Standardized Guarantees
A4.78 Under a nonlife insurance policy (or standardized guarantee), the insurer (or guarantor) accepts a premium (or fee) from a client and holds it in reserve (liability) until a claim (or call) is made or the period of the insurance expires. In the meantime, the insurer (guarantor) invests the amounts available due to pre-payments of premiums, reserves held against outstanding claims, and actuarial reserves held against outstanding risks. These assets generate investment income. The property income represents income forgone by the client, and so is treated as property expense attributed to the policyholders. It is therefore rerouted and subsequently recorded as an implicit supplement to the actual premiums. The insurer (guarantor) sets the level of the actual premiums (fees) to be such that the sum of the actual premiums plus the property income earned on assets, minus the expected outstanding claims will leave a margin that the insurer can retain. As an insurer or guarantor, the general government or public sector unit incurs liabilities equal to the present value of the expected claims or calls on outstanding guarantees, net of any recoveries.22 The statistical treatment of nonlife insurance and standardized guarantee schemes in GFS will depend on whether the general government or public sector unit acts as the insurer (guarantor), or whether they are policyholders.
Flows and stock positions recorded by public sector units as nonlife insurers or guarantors
A4.79 General government units are not likely to operate an insurance scheme, but if they do and if they maintain separate reserves, they would record transactions related to the nonlife insurance in the same way as other insurers. On the other hand, general government units are often involved as the guarantor in standardized guarantee schemes. For general government or public sector institutional units acting as an insurer or guarantor of standardized guarantees, recording these events would require recording the following entries in GFS:
Actual premiums (fees) receivable—The amount of actual premiums (fees) receivable represents premiums earned and prepayment of premiums.23 The portion of actual premiums (fees) receivable representing premiums (fees) earned for the reporting period represents revenue, classified as premiums (14511) or fees for standardized guarantees (14512), respectively. Prepaid premiums (fees) represent a transaction in financial asset and liabilities, and are recorded as an increase in liabilities for nonlife insurance technical reserves (33061) or provisions for calls under standardized guarantee schemes (33065).
Property income earned on the investment of reserves—Usually, the reserves related to insurance or standardized guarantees are invested in financial assets and the revenue generated by these investments is generally in the form of interest (1411) or dividends (1412). Sometimes, however, the reserves may be used to generate net operating surpluses either in a separate establishment or as a secondary activity. The most common example is rent (1415) generated from real estate assets.
Property income attributed to policyholders—Property income generated by the investment of reserves is deemed to be an implicit premium supplement.24 Therefore, the insurer or guarantor should attribute the property income to the policyholders25 by recording an expense, classified as property expense for investment income disbursements (2813). The counterpart entry to this expense is a transaction resulting in an increase in liabilities for nonlife insurance technical reserves (33061) or provisions for calls under standardized guarantee schemes (33065).
Claims (calls) payable—An expense for expected claims (calls) should be recognized in premiums, fees, and current claims (2831) or capital claims (2832), as relevant, and with a counterpart entry as an increase in the liability related to nonlife insurance technical reserves (33061) or provisions for calls under standardized guarantee schemes (33065). For standardized guarantee schemes, the expense recorded is the expected level of calls (minus any expected asset recoveries) on the standardized guarantees provided in the recording period. When claims (calls) are paid, transactions are recorded reducing liabilities related to nonlife insurance technical reserves or provisions for calls under standardized guarantees with a corresponding reduction in assets or an increase in other liabilities.
Holdings gains and losses—In some exceptions, if an amount for a claim outstanding has been agreed upon and it has been agreed that it will be indexed pending payment, there may be a holding gain or loss recorded for it.
Other changes in volume of assets and liabilities— Changes to provisions for calls under standardized guarantee schemes not resulting from transactions and holding gains and losses are shown as other changes in volume of assets—for example, whenever a significant change to the expected level of calls is recognized, beyond any asset recovery.
Flows and stock positions recorded by public sector units as nonlife policyholders and holders of standardized guarantees
A4.80 The recording of flows and stock positions related to standardized guarantees differs from the recording of one-off guarantees (see paragraph 7.256). For general government or public sector institutional units as nonlife insurance policyholders, or holders of standardized guarantees, the recording of their activities would require the following entries in GFS:
Actual premiums (fees) payable—The amount of actual premiums payable represents premiums incurred, prepayment of premiums, and an implicit services charge payable. Because the implicit service charge can be calculated only in the context of an analysis of the whole of the economy, it is not recognized in GFS as an expense. The portion of actual premiums payable representing premiums incurred for the reporting period is an expense, classified as premiums (28311) or fees for standardized guarantees (28312), respectively. Prepaid premiums represent a transaction in financial assets and liabilities, and should be recorded as an increase in the financial assets in the form of nonlife insurance technical reserves (32061) or provisions for calls under standardized guarantee schemes (32065).
Property income attributed to policyholders—As explained in paragraph A4.78, property income generated by insurers (guarantors) on the investment of reserves is deemed to be an implicit premium supplement, attributed to the policyholders. Conceptually, general government or public sector institutional units as policyholders might potentially record property income revenue, classified as property income from investment income disbursements (1414). The counterpart entry to this revenue is an increase in the financial asset for nonlife insurance technical reserves (32061) or provisions for calls under standardized guarantee schemes (32065). However, the revenue related to this item is not always known to GFS compilers. Therefore, this revenue is not recorded in GFS and remains an adjustment item between GFS and national accounts.
Claims receivable—Claims become due when the event that gives rise to a valid claim occurs, regardless of whether paid, settled, or reported during the reporting period. The policyholder recognizes revenue for the claim at the time an event giving rise to a claim occurred, or in the case of a standardized guarantee, at the time a call can be made in terms of the contract. These claims receivable should be recognized as revenue classified as premiums, fees, and current claims (1451) or capital claims (1452), as relevant, and with a counterpart entry as an increase in a financial asset in the form of nonlife insurance technical reserves (32061) or provisions for calls under standardized guarantee schemes (32065). Upon actual payment of the claims, a decrease is recorded in the relevant insurance reserve, with a corresponding increase in cash or other financial assets.
At the time of publication of this Manual, the treatment of financial and operating leases is under review by international accounting standard setters.
For example, a build, own, operate, transfer scheme could be established to assign the risks and rewards of ownership to the government, and the private partner would be treated as the provider of a financial lease.
Further discussions of natural resources in the next section also indicate other cases where the use of a resource should be taken as the sale of the resource.
The encumbered value of the resource is based on the present value of future rental payments taking the existence of the lease into account. The value of the resource increases as the contract winds down, while the value of the contract decreases over the same period. Also see Box A4.3.
Also see this issue articulated in the context of the case of mobile phone licenses in SNA News and Notes, Volume 14, United Nations, 2002.
To decide whether ownership is effectively transferred, the six criteria presented in Box A4.1 are to be considered.
This recording ensures a neutral effect on the net worth of the overall economy during the life of the license.
As described in paragraph 2.13, land may not be recorded as being sold to a nonresident unit. In such cases, a notional resident unit is created that holds title to the land; the nonresident unit then owns the equity in the notional resident unit.
The sale of forested land may be recorded as the sale of the timber and the land separately, depending on the intended use of each.
It is not realistic to consider that permission would be given to exhaust fish stocks, but illegal fishing may either reduce the stock position below the point of sustainability or exhaust it altogether. In these cases, an other volume change in the stock position should be recorded.
The reasons for recommending the simple recording of payments each year from the extractor to the owner as rent and changes in the size and value of the resource as other changes in the volume of assets of the legal owner are given in the 2008 SNA, paragraph 17.343.
See the 2008 SNA, paragraphs 17.360–17.362. Similarly, contracts for time share arrangements are not discussed in this Manual (see the 2008 SNA, paragraphs 17.344–17.348).
The contract period refers to the length of the contractual agreement between the parties involved in the PPP.
“Majority” should be assessed from an economic point of view. A single risk and reward may imply the “majority” in some cases, while in other cases, a number of separate risks and rewards combined may do so.
IPSAS 32 spells out some guidelines for recognizing and measuring assets and liabilities relating to service concession assets (i.e., PPP-related assets).
The PSDS Guide presents examples of the recording of financial leases (see Box 4.11) and the recording of debt and flows arising from PPPs (see Box 4.16).
Another form of insurance is provided by one insurer to another insurer, which is referred to as reinsurance.
This default risk establishes the liability arising from standardized guarantees.
If participation in such a deposit insurance or other guarantees is compulsory—that is, if beneficiaries cannot opt out of the scheme and the payment is clearly out of proportion to the service provided—it will not constitute a standardized guarantee scheme, but should be recorded as taxes on use of goods and on permission to use goods or perform activities (1145) as described in paragraphs 5.73–5.76.
For example, an important series of claims were recognized only when exposure to asbestos was established as a cause of serious illness and was judged to give rise to claims under an insurance policy valid at the time of the exposure.
These recoveries could include recoveries from the insured, reinsurance, defaulting borrowers, or third parties.
An implicit service charge is implied by nonlife premiums. However, these charges can be calculated only in the context of an analysis of the whole of the economy. Therefore, the implicit service charge is not recognized in GFS.
The attribution should, in principle, be made according to the proportion of reserves (stock of reserves) attributed to the different classes of insurance and policyholders. In practice, the usual method is to distribute the investment income in proportion to the actual premiums.
In the case of standardized guarantees, the institutional unit that benefits from the guarantee may not be the same as the unit paying the fee for the guarantee. In this case, the property income is distributed to the unit paying the fee. The distributed property income is treated as a supplementary fee.