the treatment of provisions in the sna n.
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The Treatment of Provisions in the SNA. François Lequiller OECD. Objective of the paper : launch a discussion in the context of the SNA review Context of the paper : will be presented as an information point at the December 2004 AEG

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slide2
Objective of the paper: launch a discussion in the context of the SNA review
  • Context of the paper: will be presented as an information point at the December 2004 AEG
  • Proposal: include provisions and impairment of assets in the scope of the SNA
slide3
How?
    • Create a new table, just before the balance sheets, devoted to the recording of these quasi-assets/quasi liabiities
    • This table could be non symmetrical
    • Include, as additional items in the balance sheets, the stocks of provisions and impairments of assets (non symmetrical)
  • Advantages:
    • Include new and essential information in the SNA about the real situation of institutional sectors (impaired assets, guarantees, quasi pension liabilities,…)
    • Clarify certain operations on quasi-liabilities/quasi-assets

Without any revolution in the structure of the SNA !

sna and business accounting
SNA and Business Accounting
  • Business accounting standards (IAS) more international
  • SNA has the ambition to cover balance sheet
  • Both systems focus on the concept of net worth
  • It should be the same for a given entity (institutional unit)
  • Example: central government (S1311)
sna and business accounting1
SNA and Business Accounting
  • However, net worth is not equal in SNA and business accounting
  • First difference: market value vs historic value
    • Reason: the market value is economically more significant
  • Second difference: provisions and impaired assets are recognised in business accounts, but not in SNA
    • Reason: ????
  • Objective of the paper: to understand why they are excluded and discuss whether they should remain outside the scope of the SNA
provisions in business accounting
Provisions in Business Accounting
  • Subtle gradation between:
    • Liability
    • Provision
    • Contigent liability
  • Definition of liability: a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources
provisions in business accounting1
Provisions in Business Accounting
  • Definition of provision: a liability of uncertain timing or amount. It should be recognised when a reasonable estimate can be made of the obligation.
    • Further to this definition, a lot of effort is made in business accounting to specify what is a provision
    • It is therefore wrong to assume that provisions are only window dressing accounting entries
contingent liabilities and impaired assets
Contingent liabilities and impaired assets
  • Definition of contingent liability: a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non occurrence of uncertain future events
  • Deinition of impairment: IAS 36 requires to record impaired assets, and, in particular, impaired loans
business accounting
Business Accounting
  • Liabilities are included in the core accounts and affect the income statement
  • Provisions are included in the core accounts and affect the income statement
  • Contingent liabilities are outside the core accounts and do not affect the income statement
sna accounting
SNA Accounting
  • Does not make any difference between provisions and contingent liabilities
  • Exclude both categories from the core accounts and from the income statement
  • Exclude impaired loans from the core accounts and from the income statement

WHY?

  • Not because of the difference in nature between provisions and contingent liabilities
  • Why not recognize something recognised by the unit itself?
  • But because of need of symmetry…
the symmetry principle
The Symmetry « Principle »
  • SNA 2.67: following the quadruple entry principle, a transaction must be recorded at the same value through all the accounts of both sectors involved. The same principle applies to assets and liabilities.
  • Provisions and impairment of assets do not follow this principle:
  • They can be asymmetrical by construction
  • They reflect the point of view of one agent on others which do not have the same point of view
  • Consequence: not symmetrical => out of the SNA
conflicting principles
Conflicting principles?
  • On one hand, necessity for national accounts to reflect the information given by provisions and impaired assets on institutional units:
    • The balance sheet of banks is affected by non performing loans
    • Guarantees should be reported (in particular for general government)
    • Pension quasi-liabilities should appear in the macro-economic statistics
  • On the other hand, the principle of symmetry…
  • THERE SHOULD BE A PRAGMATIC SOLUTION TO RESOLVE THIS CONTRADICTION!
the aggregation issue
The aggregation issue
  • From the point of view of one single unit, it is difficult not to record provisions and impaired assets,
  • But national accounts deal with institutional sectors: the aggregation of many units
  • Is it appropriate to sum the net worth after provisions of many units?
  • Provisions that are internal to the aggregation should be consolidated
  • But total net worth after provisionstowards external units is a better indicator than total net worth excluding provisions
  • The principle of symmetry boils down to a consolidation issue
  • THERE SHOULD BE A PRAGMATIC SOLUTION !
provisions are not always asymmetrical
Provisions are not always asymmetrical
  • There are three situations:
    • Contractual provisions which have an identifiable counterpart and which can be reported as such in the accounts of the counterpart: example: pension obligations
    • Provisions or impaired assets which have an identifiable counterpart but which value cannot be reported as such in the accounts of the counterpart example: non performing loans
    • Legal or implicit provisions which do not have indentifiable counterparts
a pragmatic solution
A Pragmatic Solution
  • Create a table (or new lines in the « Other change in volume accounts) devoted to provisions and impairment of assets
  • Accept the principle that this table would not be systematically symmetrical
  • Record « symmetrical » provisions on both sides: no consolidation problem.
  • Record non symmetrical provisions and impaired assets on one side.
  • Try to consolidate the internal non symmetrical provisions and impaired assets
  • Show balance sheets with additional lines for provisions
is that memorandum items
Is that « memorandum items »?
  • The proposal is close from what one can imagine being « memorandum items »
  • In particular, none of the provisions would impact the main balancing items, in particular B9, net lending/borrowing would not be affected
  • However, it has two advantages compared to pure memorandum items:
    • First, it includes in the scope of the SNA the concepts of provisions and impaired assets
      • Quasi pension liabilities can be recognised as such
      • Loans can have another value than the nominal value
      • Guarantees can be estimated and shown
    • Second, it gives a chance that this important information will be reported in macro-economics accounts.
conclusion
Conclusion
  • Do delegates consider that macro-economic accounts should encompass provisions and impaired assets?
  • Do delegates agree that the principle of quadruple accounting is not a sufficient reason to exclude these items from the SNA?
  • Do delegates think that this issue should be part of the review of the SNA?