Integration of natural resource wealth in the Canadian National Balance Sheet Accounts Implementation challenges Note by Canada

Integration of natural resource wealth in the Canadian National

Balance Sheet Accounts ─ Implementation challenges

Note by Canada

23-04-10Statistics Canada • Statistique Canada2

Natural Resource Wealth

Canada has substantial reserves of natural resources (NR)

- Energy and minerals in the ground

- Accessible stands of timber in forests In 2010, natural resource wealth—the dollar

value of selected resource reserves—stood at $1.16 trillion

Important in terms of growth ... exports, employment and income → economic accounts

Current Partial Integration in CSNA

Current treatment of NR in Canadian system of national accounts reflects a partial integration

Specifically, NR are incorporated into annual estimates of national wealth ... At economy-wide level on Consolidated National Balance Sheet

National wealth covers produced as well as non-produced assets ─ includes NR by major type

Two issues: ↑Frequency of NR; develop sectoral estimates for National Balance Sheet Accounts


International standards' guidance - SNA08

SNA08• “Assets appear on the balance sheet of the unit that is the

economic owner of the asset`` (SNA08 13.3) → a key principle in the economic accounts ... But not always followed in SNA08

• “... In many cases this unit (the economic owner) will also be the legal owner but in the case of a financial lease, the leased asset appears on the balance sheet of the lessee, while the lessor has a financial asset of similar amount and a corresponding claim on

the lessee” (SNA08 13.3) → But is it required to treat NR as a leased produced asset ?


: “... On the other hand, when a natural resource is the subject of a resource lease, the asset continues to appear in the balance sheet of the lessor even though most of the economic risks and rewards of using the asset in production are assumed by the lessee” (SNA08 13.3)

No SNA08 guidance as to why in this case ... Why violate the key economic ownership principle?


SNA 2008 (cont’d)

SNA 2008 (cont’d) “Contracts, leases and licenses may be operating leases, licenses to

use natural resources, permits to undertake specific activities and entitlement to future goods and services on an exclusive basis ... these sorts of contracts are regarded as assets only if the existence of the legal agreement confers benefits to the holder in excess of the price paid by the lessor, owner of the natural resource or permit issuer and the holder can realize these benefits legally and practically. It is recommended that such assets (the natural resource lease, permit or licenses) be recorded only when the value of the asset is significant and realized, in which case a suitable market price necessarily exists.” (SNA08 13.52)

NR pass the significance and suitable market tests → resource leases should be recorded ... As a non-financial intangible asset, following corporate accounting


SNA 2008 (cont’d)

“... Because there is no wholly satisfactory way in which to show the value of the asset split between the legal owner and the extractor, the whole of the resource is shown on the balance sheet of the legal owner and the payments by the extractor shown as rent” (SNA08 13.50)

Possible interpretation: second-best solution An attempt at establishing a one approach fits all

economies ... Realistic? For CSNA → implementation issues


SNA08 Issues in relation to sectoring natural resource wealth Inconsistency with economic ownership principle Does not reflect economic reality in Canada and

in a number of other economies → no one approach applies to all economies

Accounting standards for corporations and government

Does not articulate impact on government accounts ... GFS?

No clear distinction between value of NR and associated resource leases (rights to extract)


SEEA031

. The draft SEEA (2012) proposes that “the value of mineral and energy resources is split between the two owners based on their share of the future stream of resource rent. The share accruing to the government should be based on the expected stream of payments of rent by the extractor to the government ”

SEEA supports the partitioning of NR with options

Can the physical assets be partitioned or is their an approach that shows claims based on rent shares?


1SEEA (2003). “Integrated Environmental and Economic Accounting, Handbook of National Accounting”, United Nations, New York

Government Accounting

Natural resource stocks are not included in government financial statements• Not included in IMF GFS manual currently being updated

Government holds assets “in trust for the nation” While stocks not necessarily recognized, revenues

including royalties and resource rights are recognized• Suggests a corresponding asset


Corporate Accounting

Usually carried as intangible asset (also some out-of-scope depletable assets)

Carried at written-down acquisition cost rather than market value

Can be sold (implies claim on the resources) and would be carried at transaction price

Substantial revenues and profits (largest share of the rent) imply economic ownership

Reflected in corporate share values


Proposed CSNA treatment Issue of partitioning the physical assets

• Can physical assets be sectored? NO Issue of assets required to match income stream

• Assumptions related to future stream of earnings and royalties

• Assumptions related to return to capital Assumptions related to intangible assets (claims on the

physical stock – right to exploit the reserve) proportional to their respective shares of rent


Proposed CSNA treatment, cont`d


INSERT MATRIX HERE

NBSA sectors/assets

Households Corporations Government Reclass: Sector accounts to NW

CNBS

Total assets 5500 7300 1900 Non-financial assets 2000 4300 1400 7700 Produced assets 2000 3300 1000 6300 Non-produced assets 1000 400 1400 --Natural resources (NR) +1400 1400 --Intangible assets related to NR

1000 (derived)

400 (calculated)

-1400

Financial assets 7000 3000 500 n/a Liabilities and net worth

5500 7300 1900

Liabilities 1000 7500 2000 n/a Debt 1000 4000 2000 n/a Equity at market value

3500 n/a n/a

Net worth 8000 -200* -100 7700 Net worth (excluding intangible assets)

-1200* -500

MEMO ITEM n/a Corporate net worth as a net asset value

3300 n/a n/a

• Residual corporate net worth

Sectored NR assets ... sectoral net worth, national wealth

Sectoring Methodolgy

Draft SEEA 2012 — base the government’s share of natural resource wealth on the NPV of the expected stream of government income paid by resource extractors to governments (i.e., royalties and special taxes). The amount of royalties depends on a number of factors, such as resource price, quantity of production and government's policies


Sectoring Methodology (cont’d)

To arrive at the corresponding corporate sector asset, the NPV of the remaining resource rent (total resource rent less government royalties and special taxes) is allocated to the corporate sector as its share of resource wealth


Summary

Plan to implement sectored natural resources in 2014 mini historical revision• Based on the model described here

Would be appreciative of feedback (now or later) Questions or Suggestions?

• [email protected]


Documents

Integration of natural resource wealth in the Canadian National Balance Sheet Accounts Implementation challenges Note by Canada