Chapter 4. Use of annual financial statements of non-financial companies for national accounts

1. Chapter 4. Use of annual financial statements of non-financial companies for national accounts EN/ADM/2014/Pres/10 Clementina Ivan-Ungureanu Expert Group Meeting on the Use of Administrative Data in National Accounts 23-27 June 2014 Kigali, Rwanda

2. Content of the presentation • Accounting system • National accounts and company accounts • Compilation of national accounts from company accounts

3. Accounting system • National accounts are virtually standardized worldwide, while business accounting (financial statements) is still in the process of international harmonization. • The International Accounting Standards Committee (IASC) was created in 1973 to establish basic accounting standards referred to as IAS (International Accounting Standards) and then International Financial Reporting Standards (IFRS) . • In general, the main rules and methods for business accounting (IAS/IFRS) are consistent with those of the SNA. Examples are: recording transactions in accounts using the accrual principle, double-entry principle and use of balances, monetary valuation, and internal consistency of the accounts system

4. Accounting system ( cont.) • Elements: • Income statement: group the transactions accounts corresponding to income and costs • Balance sheet- presents the stock accounts, corresponding to assets and liabilities. Income statements- flow accounts Balance sheets – stock accounts

5. Accounting system ( cont.)- Use of financial statements • Use of financial statements : - access to companies' accounts - minimum degree of standardisation of the accounting documents

6. Accounting system ( cont.) • Direct relations business accounts (IAS/IFRS) and SNA

7. National accounts and company accounts • Practical issues: - Accounting year start and end dates • Currencies • Estimation of profit and loses • Fixed assets • Consumption of fixed capital • Provisions • Holding gains/loses

8. National accounts and company accounts (cont.) • Mergers and acquisitions • Fines and penalties • Contracts • Globalization

9. Compilation of national accounts from company accounts The procedure for compiling SNA accounts from company accounts is as follows: • classifying the items in the income statement into SNA transactions; • assembling the reclassified items into intermediate accounts ( elaboration of bridge tables) that are conceptually quite close to the SNA; • adjusting the items in the intermediate accounts to make them fully compatible with the SNA.

10. 1.. Classifying the items of the income statement into SNA transactions • Output (SNA)= Output sold + Output held as inventory + Capitalized output + Sales of goods bought for resale - Purchases of goods bought for resale + Changes in stocks of goods bought for resale + Other operating income • Intermediate consumption (SNA) = Purchases of raw materials and supplies - Changes in stocks of raw materials and supplies + Other purchases and external charges + Other operating costs • Compensation of employees (SNA) corresponds to the expenses incurred by an enterprise in relation to its employees

11. 1. Classifying the items of the income statement into SNA transactions ( cont.) Other indicators: • Taxes and subsidies (SNA) on product and production • Property income (SNA) includes interests, dividends, rents on non-produced assets and equity earning • Current transfers include charitable contributions, insurance premiums, insurance claims, fines and penalties. Current transfers may be classified in business accounts as operating expenses, other income and extraordinary gains and loss.

12. 2. Elaborating the bridge tables • The intermediate accounts derived from income statements are based on the bridge tables realised and include mainly, production account and generation of income account and provide information for the compilation of other accounts up to the use of disposable income account.

13. 3. Adjustments Conceptual Adjustments • Conceptual adjustments required for the calculation of output • transition to basic price valuation in SNA • deliveries between establishments of the same enterprise; • margin earned on distribution type activity • own account output of software and other intellectual products • own account output of research and development, software and data bases • sales of land • inventory (stock) valuation • capitalised output • ownership transfer costs

14. 3. Adjustments ( cont.) • Conceptual adjustments required for the calculation of intermediate consumption: -Insurance premiums • Leasing • FISIM • Land purchase • Stock valuation adjustment • Costs associated with the acquisition of assets • Bad debts

15. 3. Adjustments ( cont.) • Adjustments to achieve coherence with the accounts of other sectors • Taxes and subsidies • Property income • Adjustments for exhaustiveness • Evasion regarding output sold and sale of goods for resale • Income earned-in-kind • Tips • Evasion on purchases intended for intermediate consumption • Undeclared employment

16. Calculations From the numerical example, the main indicators can be estimated: Output = 32 200 (1) + 500 (2) + 80 (3) + 300 (4) - 100 (5) = 32 980 Intermediate consumption = 15 000 (6) +10 000 (7) – 300 (8) = 24 700 Gross value added = Output (32 980) – Intermediate consumption (24 700) = 8 280

20. Summary • The use of company accounts to compile national accounts is not new, actually they are considered one of the main sources used for compiling national accounts. • In spite of the many differences between company accounts and national accounts the capacity of using directly company accounts to compile national accounts is obviously large. It is possible to compose of national accounts for non-financial companies as being the result of aggregation of the individual company records, naturally with a number of adjustments.

21. Points for discussions • Use of financial statements for NA compilation • Elaboration of bridge tables • Adjustments made to the indicators from financial statements for NA compilation