The Treatment of Provisions in the SNA

1. The Treatment of Provisions in the SNA François Lequiller OECD

2. 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

3. 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 !

4. 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)

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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…

11. 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

12. 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!

13. 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 !

14. 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

15. 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

16. 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.

17. 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?