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The Treatment of Provisions in the SNA

François Lequiller

OECD

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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

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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 !

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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)

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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

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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

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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

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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

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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

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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…

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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

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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!

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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 provisions towards 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 !

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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

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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

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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.

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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?