THE DISTINCTION AND LINKS BETWEEN BALANCE SHEETS OF NON-FINANCIAL CORPORATIONS IN THE SNA AND BUSINESS ACCOUNTING

Peter van de VenHead of National Accounts, OECD

NBS-OECD Workshop on National AccountsGuangzhou, December 2 – 5, 2014

Introduction

• Main data sources for compiling institutional sector accounts for corporations

• Business Accounting Standards

• Similarities and differences between SNA and business/tax accounting

• Multinational enterprises

Data sources for corporations

• Data sources may of course differ across countries

• Supply and Use Tables: specific production statistics

• For institutional sector accounts, data are needed from profit and loss accounts and balance sheets:– Specific surveys

• General Statistics on Income and Finance

• Specific statistics or information for certain groups of companies (e.g. hospitals, public corporations, etc.)

• FDI and FATS

– Annual reports of companies

– More and more data used from administrative sources, e.g. tax data or registers with data from annual reports

– Often combination of various sources

Business Accounting Standards

• Sources usually based on business accounting standards and/or tax rules

• Business Accounting Standards published by International Accounting Standards Board (IASB) gaining growing importance => International Financial Reporting Standards (IFRS): http://www.ifrs.org/IFRSs/Pages/IFRS.aspx (also available in Chinese)

• Many countries (intend to) apply the relevant standards in law or otherwise, especially for larger corporations

• Note: Development of International Public Sector Accounting Standards (IPSAS), but not yet that much applied

Similarities with SNA 2008

• Main principles the same as the SNA:

– Economic substance takes precedence over legal form

– Conceptually preferred approach versus practical possibilities

• Both based on double entry bookkeeping: consistency between balance of non-financial transactions and balance of financial transactions (budget identity) => Jane Gleeson – White: “Double Entry”

• Both based on accrual accounting, not cash accounting

• Breakdowns of transactions and balance sheet positions rather similar

Main differences with SNA 2008 (1)

• Definition of income: SNA 2008 excludes holding gains/losses from income, it also excludes capital transfers and other changes in the volume of assets from income

• Provisions and contingent liabilities not recognised in the SNA 2008

• Asset boundary of the SNA 2008 is larger than usual practice in business accounting: SNA 2008 treats much more expenditures as investments, adding to the capital stock of non-financial assets, e.g. various intangible assets

• Service lives of assets in business accounting usually based on tax rules

Main differences with SNA 2008 (2)

• Valuation principles:

– Business accounting: “historic valuation” of non-financial assets (assets valued at the original purchase price)

– SNA 2008: “current replacement costs” or “opportunity costs”

– Under inflationary conditions:• Operating surplus/ profits cf. SNA < Operating surplus cf.

business accounting: withdrawals from inventories and depreciation in business accounting based on lower prices (note: service lives!)

• Value of non-financial assets will also be smaller, also because service lives according to tax rules then to be shorter

Multinational Enterprises

• For multinational enterprises (MNEs), data according to IFRS primarily available in a consolidated form

• For purposes of taxes and also statistics, data are needed for the national part of the MNE => however, recording also influenced by IFRS and other business accounting standards

• Additional difference between SNA and business accounting: reinvested earnings on foreign direct investment:– Undistributed profits of subsidiaries recorded as distributed income

– In financial accounts: the relevant income is recorded as reinvestment in equity

– Savings and net worth of subsidiaries basically equal to zero

Multinational Enterprises: allocation of Value Added to countries

• Allocation of Value Added and profits by MNEs mainly driven by minimisation of global tax burden through:

– Transfer pricing

– Channelling funds through SPEs

– Optimisation of recording economic ownership and use of IPPs

– Optimisation of the organisation of global production arrangements

• Economic rationale, but it hampers analysis and policy from an economic substance point of view

• Lots of discussion, also in the area of national accounts => main conclusion: impossible to change the recording and impute alternative transactions

• Note: may affect GDP, but does not have an impact on GNI (as a consequence of treatment reinvested earnings)

Multinational Enterprises: allocation of Value Added to countries

Example of profit shifting affecting value added (and GDP), not affecting primary income (and GNI)

Country A

Country B Country A Country B

Output 100 250 125 250Intermediate consumption -25 -100 -25 -125Value Added 75 150 100 125Compensation of employees -50 -100 -50 -100Operating surplus 25 50 50 25Dividends -10 +10 -10 +10Reinvested earnings -15 +15 -40 +40Balance (non-financial transactions)

0 75 0 75

Cash and deposits (assets) +15 +60 +40 +35Equity (assets) +15 +40Equity (liabilities) +15 +40Balance (financial transactions) 0 75 0 75

Multinational Enterprises: need for subsectoring

• Breakdown of corporations by ownership/control:– Public corporations

– National private corporations

– Foreign controlled corporations

• Can substantially add to the understanding of the behaviour of corporations and its impact on the domestic economy

Multinational Enterprises: more information

More information, also on recording of global value chains, goods for processing, merchanting, etc., can be found at the following links:

•“The Impact of Globalization on National Accounts”: http://www.unece.org/fileadmin/DAM/stats/publications/Guide_on_Impact_of_globalization_on_national_accounts__web_.pdf

•“Task Force on Global Production”:

http://www.unece.org/statistics/about-us/statstos/task-force-on-global-production.html

Thank you for your attention!

13