Compliance with International Standards with Minor Impact
Cost of Ownership Transfers
SNA93 recommended depreciating ownership transfer costs over the life of the associated asset. The ABS did not implement this methodology due to concerns that it would overstate balance sheet capital since assets such as buildings often change ownership numerous times during their lives. Instead the ABS adopted a treatment of writing off ownership transfer costs through consumption of fixed capital in the same period in which they arise. This means they are shown as gross fixed capital formation but do not accumulate in the balance sheet.
SNA93 Rev.1 alters the recommended methodology so that the cost of ownership transfer is written off over the period during which the acquirer expects to hold the asset. If the expectation is met, the costs of ownership transfers will be entirely depreciated when the asset is resold, thus resolving the issue raised of overestimating operating surplus. With the new recommendation for treatment of depreciation, the ABS plans to comply fully with suggested treatment of these costs.
The new treatment will not have an impact on the current level of gross fixed capital formation, but adopting the longer asset life will increase the size of the capital stock estimates in the balance sheet.
Mineral Exploration Expenditure
SNA93 Rev.1 provides clarification on the treatment of mineral exploration in that it affirms the treatment of mineral exploration as an asset and provides further guidance on the appropriate methodology. The current ABS treatment is in line with the recommendations with one exception - the treatment of mineral exploration expenditure in the balance sheet.
The SNA93 Rev.1 recommends that mineral exploration assets be separately identified in the balance sheet as a produced asset. As the ABS considers that mineral exploration assets are already implicitly included within the value of sub-soil assets, mineral exploration assets have not been separately included in order to avoid double counting. To align with the international standards the ABS proposes to adopt a new balance sheet treatment. The value of mineral exploration assets will be deducted from the value of the sub-soil asset and separately identified as a produced asset in the balance sheet.
This proposal will only involve changes to the place of recording mineral exploration in the balance sheet; it will not alter the aggregate values in the balance sheet. The proposal has no effect on GDP.
Financial Auxiliaries are corporations engaged primarily in activities closely related to financial intermediation but which do not themselves perform an intermediation role. They consist of corporations such as securities brokers, loan brokers, flotation corporations, insurance brokers, fund managers etc. Under SNA93 financial auxiliaries should have been moved from the non-financial corporations sector to the financial corporations sector.
The ABS always intended to fully implement this change. However due to time and resource constraints, this was not accomplished and only partial compliance in the financial accounts of the national accounts has been achieved. With the standards revision process the ABS intends to fully implement the recommended treatment and include financial auxiliaries in the financial corporations sector for all ABS statistics.
This will not result in any change to GDP, only a change in where the activity for these units is being recorded.
SNA93 states that growth of orchards should be valued and treated as gross fixed capital formation. Orchards are cultivated assets which are used repeatedly in the production process to provide output, for example grape vines, fruit trees etc.
Currently, due to a lack of data, this growth is not captured within the ABS macro-economic statistics. This has created concern that ABS is missing a potentially significant amount of capital formation, particularly considering the growth in vineyards over recent years. The ABS intends to undertake a review of available data sources with a view to developing estimates for inclusion in the national accounts.
The inclusion of orchard growth in the gross fixed capital formation would lead to a slight increase in the level of GDP and a more significant rise in the value of assets recorded on the balance sheet.
Software Originals and Copies
Following the SNA93 introduction of computer software as capital formation, it became evident that the SNA does not provide sufficient guidance on the treatment of originals and copies as distinct products. A number of clarifications have been provided with the SNA93 Rev.1. The most important of these confirms that licences to use are to be treated as capital formation if they are to be used for more than one year, regardless of payment arrangements.
The ABS intends to continue with its present treatment, which is substantially consistent with the new standard. All license to use payments made by government and businesses will continue to be treated as gross fixed capital formation. This treatment is a pragmatic one - ABS is unable to differentiate license to use payments according to the type of contract agreement associated with the licenses. There is a belief that most software is purchased with the intention to be used beyond one year (regardless of contractual arrangements).
SNA93 recommends that databases should be capitalised. As with software, there were concerns that the SNA did not provide sufficient guidance on databases. The following clarifications have been provided in SNA93 Rev.1:
- Valuation of databases created on own account - In the absence of a more satisfactory alternative, the value of a database should be estimated on a sum of costs basis. The value of the software component of databases, the database management system, is to be recorded elsewhere as a software asset. All updating costs for a database should be recorded as capital formation rather than maintenance. However, the costs of creating the information content are not to be capitalised.
- Valuation of databases for sale - Databases for sale should be valued at their market price which includes the value of the information content. If the value of a software component is available separately, it should be recorded as the sale of software.
The present ABS treatment is consistent with the new standard. However it is not clear that ABS is appropriately capturing the entire scope of database production, particularly the updating of databases. More work will need to be undertaken in order to ensure ABS is capturing as much activity as possible.
Employee Pension Schemes
SNA93 does not adequately reflect the responsibilities that employers, in particular government agencies, undertake by promising pensions to households. A compromise has been proposed for the treatment of employer retirement pension schemes, with the inclusion of defined benefit schemes in the core accounts and the creation of a supplementary table including social security schemes (of which there are none in Australia).
The Australian National Accounts already reflects the new recommended treatment, particularly in including unfunded pension schemes as a liability in the accounts. There may be small changes in treatment depending on the outcome of ongoing consultation surrounding, for example, the type of actuarial methodology recommended for use.
Employee Stock Options
SNA93 Rev.1 proposes including the value of employee stock options as a form of compensation of employees in kind. This will slightly modify the coverage of wages and salaries in kind since at present they are restricted to goods and services, and the value of interest foregone when an employer provides low interest loans to staff.
The ABS agrees that employee stock options should be recorded as compensation of employees (see Financial instrument classification, in Appendix 2). The financial accounts will not identify separately employee stock options, rather they will be included within the financial derivatives category.
The inclusion of employee stock options as a form of compensation of employees will be off-set by an equivalent decrease in Gross Operating Surplus and result in no change to the level of GDP.
Goodwill and Other Non-produced Intangibles
The SNA93 asset category of 'Purchased goodwill' will be changed to 'Purchased goodwill and marketing assets'. Entries will continue to be recorded only when the value of such entities is evidenced by a sale. For all enterprises, whether incorporated or quasi-corporate, the value of purchased goodwill and marketing assets will be valued as the takeover value of the enterprise less the value of other assets and liabilities identified for the enterprise.
This represents a change for incorporated enterprises and makes their treatment consistent with quasi-corporates and unincorporated enterprises. Although some of the value of purchased goodwill and marketing assets is due to productive activity, they will continue to appear under the heading of non-produced assets.
At present, the value of purchased goodwill is not included as an asset in the ASNA balance sheets. Work will be undertaken to assess the possibility of making estimates of this item using the revised definition. Any changes to the balance sheet due to the recognition of the appearance of goodwill will flow through as increases in both total assets and net worth.
BPM5 defines an economic territory of a country to consist of the geographic territory administered by the government within which persons, goods, and capital freely circulate. This includes islands belonging to the country where goods and persons may move freely to and from the islands without any customs or immigration formalities.
The ABS definition of economic territory is based on the 2001 Australian Standard Geographical Classification (ASGC) plus the Australian Antarctic Territory. There are some uncertainties about the treatment of parts of Australian territory where there are customs and/ or immigration controls between them and other parts of the territory, for example, Norfolk Island.
Merchandise trade statistics are based on Customs documentation and Customs jurisdiction does not extend to Christmas Island, Cocos (Keeling) Islands, the Australian Antarctic Territory or territorial enclaves abroad. No adjustments are included in the Balance of Payments for the imports and exports from these areas but an adjustment is included for exports from Zone A of the Joint Petroleum Development Area (JPDA). Norfolk Island is treated as a counterpart economy in the International Investment Position, Financial Account and Investment Income accounts.
With SNA93 Rev.1 and BPM6, the definition of economic territory no longer has the requirement that persons, goods, and capital circulate freely. Treatment of zones of joint jurisdiction / administration, based on strength of connection with a primary territory or as a multi-territory zone, is introduced.
The territories of Christmas Island, Cocos (Keeling) Islands and the Australian Antarctic Territory, will continue to be considered part of the Australian economy. In addition, Norfolk Island will now be considered part of the Australian economy.
Balance of Payments Goods and Services Account
SNA93 Rev.1 and BPM6 introduce a number of changes to the treatment and classification of goods and services in the Balance of Payments (BoP). The main changes are described below.
Goods procured in ports is currently reported separately under Goods in the BoP. The new manuals propose that Goods procured in ports by carriers are to be included in the General Merchandise component rather than as a separate item, which is a classification change only.
Merchanting services are separately identified under Services in BoP on a net basis. With SNA93 Rev.1 and BPM6, Merchanting will be included in Goods on a gross basis. Goods acquired by way of merchanting should be recorded as negative exports on acquisition and positive exports on disposal. The difference between the two is shown as net exports of goods by the merchant. The merchant's output is recorded as a wholesale/retail service within the national accounts, exclusive of holding gains/losses while the goods are held (in inventory) by the merchant. When goods are acquired in one period and not disposed of until a subsequent period, they will appear in changes in inventories of the merchant, even though these inventories are held abroad. Any impact is not expected to be significant.
Goods for repair and goods for processing not involving a change of ownership are currently included in merchandise trade statistics and in Goods on a gross basis. The revised standard treats the repairs and processing as services; the goods are no longer recorded in the BoP as there is no change of ownership.
Unlike BPM5, BPM6 recommends that Financial Intermediation Services Indirectly Measured (FISIM) be recorded as a service. The ABS currently estimates FISIM using a model and includes FISIM in Financial Services in the BoP. The contra-entry appears in the Financial Account under either loans or deposits. The offsetting adjustments are not currently deducted from investment income, thus causing FISIM to be double-counted. With the implementation of the updated standards, FISIM will be removed from investment income in the BoP, resulting in a minor impact on investment income.
BPM6 has also introduced changes to the measurement of insurance services, particularly to the measurement of expected claims and premium supplements. The current ABS method of modelling insurance services removes claim volatility in the estimation of expected claims and takes account of premium supplements in measuring insurance services. As such, the current model complies with the recommendations in BPM6. Investigation is underway into extending the model to cover the requirements for separately recording technical reserves assets and liabilities in the international investment position and financial account.
The remainder of the changes to the goods and services account are mainly reclassifications within services shown in the BoP:
- Postal and courier services are included currently in Communications services. Under the new treatment Postal and courier services are removed from Communications and included under Transport services.
- Currently telecommunication services are reported in Communication services and Computing and information services are reported as a separate item. The new treatment will see Telecommunication, computing and information services grouped together and included under Communication services.
- Library and archive services currently reported under Personal, cultural and recreational services, will be reclassified to Other information services.
- Construction services which are reported as a separate item in Services, may be split into construction abroad / construction in the compiling country, as in the Extended Balance of Payments System (EBOPS). This is being investigated.
- Expenditure on education and health are reported currently within the component Travel services, Personal under the items Education-related and Other. Further detail may be presented with these expenditures to be reported under Education-related and Health-related services.
The flows of goods, and changes in the Financial Account arising from a change in residence of individuals, are treated as imputed transactions in the BPM5. These flows are offset in the Capital Account by capital transfers called migrant transfers. The ABS currently captures only cash transactions in the Financial Account with an offset in capital transfers. The amounts involved in migrant transfers of goods are generally not large and no attempt is made to measure such transfers. Transfers of other assets and liabilities are also not currently measured.
Since no change in ownership occurs, the changes in financial claims and liabilities due to change in residence of individuals are to be treated as reclassification in the Other changes in volume account. With the BPM6, migrants' transfers will be removed from the Capital Account, and only appear as volume changes in the International Investment Position (IIP) for financial instruments.
The impact of this change is not significant. The estimates remain unchanged but will be presented in a different account.
Activation of Guarantees
No guidance on the recommended treatment of debt guarantees was provided in SNA93 or BPM5. With the update to BPM recommendations on treatment were introduced. These recommendations require that clear, functional definitions be agreed, to allow decisions to be made as to which treatment to apply. There are three types of guarantee: (i) guarantees as financial derivatives - guarantees that meet the definition of financial derivatives should be treated as financial derivatives; (ii) standardised guarantees - guarantees that are not provided by means of a financial derivative, but where the probability of default can be well established, are classified as standardised guarantees; and (iii) one-off guarantees - guarantees where the loan or the security are so particular that it is not possible for the degree of risk associated with the loan to be calculated with any degree of accuracy.
Currently the ABS considers all guarantees to be contingent liabilities of the guarantor and therefore outside the asset boundary. They are only included in the Financial Accounts if they are invoked. The liability, which was the subject of the guarantee, is then extinguished and a new liability is created. With the implementation of the new standards the ABS will adopt a new treatment. For types (i) and (ii) the ABS intends to record the guarantee as a liability and the activation as a transaction. One-off guarantees will be treated as contingent, and hence extinguishing the guaranteed liability and creating a new liability will be recorded as Other changes in the volume of assets. The impact is expected to be minor as the activation of guarantees is a rare occurrence in the Australian economy.
Financial corporations classification (investment funds)
Modifications have been made to the financial corporations classifications so that the BPM classifications are more aligned with SNA93 classifications. The current, SNA Rev.1/BPM6 and proposed ABS sector classifications are summarised below.
The proposed subsectoring will result in new categories requiring detailed data. The ABS may not be able to provide data at such a detailed level for confidentiality reasons. For the most part the subsectoring will be presented, except in cases where this is not feasible, in which case some subsectors may be combined. The ABS intends to continue publishing a separate State central borrowing authority (CBA) category and the other financial intermediaries category will include primarily securitisers. As money market funds can be classified as deposit-taking corporations or investment funds, their appropriate subsectoring will be determined in collaboration with the Reserve Bank of Australia (RBA) and other industry bodies.
The key change concerning the above classification proposal is the separate identification of money market funds and other investment funds. In determining which institutions should be included in the separate other investment funds subsector, it is proposed that those institutions exhibit the following characteristics:
- pooling of investors' monies to purchase assets;
- assets are owned by a separate legal entity, such as a trust or company, which issues shares/units to investors on a proportional ownership basis;
- the fund/company must be open to the public, either via a prospectus or a distribution channel (eg. a platform); and
- the investors are able to dispose of their units/shares within a reasonable period of time, on a well developed secondary market, such as a stock exchange or readily accessible redemption facilities offered in association with the fund.
As a result of these characteristics, several institutions which pool investor funds will be excluded, because they are either not open to the public (eg. property syndicates) or do not have a sufficiently active secondary market for their units/shares (eg. agricultural, film and timeshare trusts and venture capital/development funds).
For investment funds, only those investing predominantly in financial assets will be treated as financial corporations. Those investing in non-financial assets, such as direct property, will be treated as non-financial corporations. This distinction will be based on whether the institution's primary income is obtained from rentals, or dividends and interest. The further classification is given below. This classification of investment funds creates a minor non-compliance with the international standards.
* Pending further discussions.
With the exception of reversible transactions, the ABS currently aligns with the BPM5 on the treatment of reserve assets. Australia's official reserve assets include monetary gold, Special Drawing Rights (SDRs), reserve position in the IMF, and foreign exchange held by the Reserve Bank of Australia (RBA).
BPM6 recommends that each country's SDR allocations be classified as debt under Other Investment. Reserve-related liabilities (RRL) are introduced as a memorandum item as short term:- Use of fund credit, Debt securities, Currency and deposits, Loans (Repo loans and Other), including allocations of SDRs. Supplementary items are also encouraged on various selected items.
The ABS will adopt the BPM6 treatment of recording SDR allocations as a liability. However, the ABS will not comply with the proposed BPM6 presentation, as ABS will present international reserves as a new 'functional' category for both assets and reserve related liabilities (both short-term and long-term), with assets and liabilities shown separately.
Unallocated Gold Accounts
SNA93 Rev.1 proposes unallocated gold accounts be recorded as financial assets (equivalent to assets denominated in a foreign currency) rather than constituting ownership of physical gold so that transactions are covered in the Financial Account. SNA93 Rev.1 also proposes that the treatment of unallocated gold accounts should be extended to other unallocated metal accounts.
In the treatment of unallocated gold, the ABS presents gold deposits as denominated in foreign currencies which is consistent with new standards. Following the proposed treatment will have no impact on current estimates as this is consistent with the current treatment. ABS will continue to present the deposits as denominated in foreign currencies but is undecided on the currency of denomination of the deposits.
This page last updated 12 September 2007