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Special Article - Treatment of 3G Spectrum licences
In the recognition of an economic asset and hence the enforcement of ownership rights the following factors are relevant considerations:
Application of the general definition and the factors listed above to the spectrum licence question identifies two possible assets-the spectrum itself and the licence. International discussion on this topic has concluded that the spectrum itself is an asset which should be recognised as being of economic value from the time at which the licence is issued. The spectrum is classified as a tangible, non-produced asset along with assets such as land and subsoil assets. Although the spectrum itself has no physical substance, it is naturally occurring which is the primary criterion for being a tangible asset. Intangible non-produced assets, as will be explained, are different in character.
The value of the spectrum should be based on net present value considerations-that is, valuation will involve estimating the discounted future stream of income that the asset is expected to generate. In general this will be at least the value of licences but to the extent that the spectrum will be used beyond the lifetime of the licences then additional income flows will need to be considered. The recognition of the spectrum as an asset means that an existing phenomenon has demonstrable value. Consequently, the recognition of this value is recorded in the other changes in the volume of assets account and not as a transaction between economic agents.
THE SPECTRUM LICENCE
The treatment of the payments to governments for the rights to use the spectrum has been the subject of more debate internationally. Two primary alternatives have been identified:
Intangible non-produced assets are defined in SNA93 as constructs of society. Examples include patented entities, some leases and purchased goodwill. The key aspects from the perspective of the spectrum licence are that the purchaser takes over the risks and benefits of operation of the licence and that the licence is issued for a considerable period of time. In the Australian context the licence agreements fulfil the considerations outlined above and thus, in the ASNA, the payments for the licences will be shown as the purchase and sale of an intangible non-produced asset, the spectrum licence. This treatment has no impact on measures of saving or GDP.
The alternative treatment impacts on measures of saving but, like the first treatment, it has no impact on the measurement of GDP since rent on tangible non-produced assets is treated as property income and not as intermediate consumption. However, under the second treatment it is not possible to recognise that the operating business-the licence holder-has an asset. To the extent that risks and benefits are not transferred from the government to purchaser, this treatment may be appropriate but it is not applicable in the Australian situation.
Recognition of the payments as the purchase of an asset has the following implications:
The value of the licence must be linked to the auction price. As noted, the value of the spectrum is also linked to this price but may be higher due to a longer expected asset life. However, an offset is required in the accounts to limit the total value that is added to net worth. In effect, the sum of the value of the two assets cannot be greater than the value of the spectrum. In practice this requires that the initial value of the spectrum be reduced by the purchase value of the licence. However, as the licence declines in value over time, and assuming no change in the overall value of the spectrum, a transfer of value between the licence and the spectrum must be recorded to ensure that overall net worth is unaffected. To the extent that market conditions and expectations change following the issue of the licence both the value of the spectrum and the licence may change. All of these changes will be reflected in the other changes in volume of assetscount and are shown in the example below.
TIME OF RECORDING
Under an accrual based system such as the ASNA, transactions in the licences are recorded when the licences are issued, even if the licences may take effect some time after their issue. For example, the licences auctioned in March 2001 will be issued in May 2001, with the licence taking effect from October 2002. Using the date of issue as the key date the required entries in the capital account and the other changes in volume of assets account will take place in the June quarter 2001. The financial transactions relating to the issue of the licences are recorded in the financial account in the period of issue as either cash flows or accounts payable and receivable, depending on the timing of the cash payments.
The auction of the licences in March 2001 generated almost $1.2 billion for the Commonwealth Government. This will be recorded in the June quarter 2001 capital accounts.1 Other licence sales that took place in earlier periods have not previously been included in the capital accounts but will be included from now on. In 2000 these amounts were $1.3 billion in June quarter 2000 (auctioned in March 2000) and $0.15 billion in December quarter 2000 (auctioned in September and November 2000).2
These sale values represent the amounts paid for the licences but do not reflect the overall value of the spectrum which underlies the licences. Using net present value techniques it is possible to determine the return per year over the life of the licences. The June quarter 2001 licences have a life of 15 years starting in October 2002. Using a 16 year expected life and assuming a real discount rate of 4% (approximately the real long term 10 year government bond rate), the market price of $1.2 billion equates to a net present value return per year of $103 million over the life of the licence at June quarter 2001 prices. By setting the expected life of the spectrum to be infinite, the overall value of the spectrum itself can be estimated at $2.7 billion. This technique can be applied to the earlier licence sales in a similar manner.
One issue is the extent to which possible future licence sales should be incorporated in the current valuation of the underlying spectrum. Given the difficulties in determining future valuations of licence sales, the recognition of the value of the spectrum will occur on an ongoing basis following receipt of information regarding licence sales. Thus, assuming no previous or future licence sales, the balance sheet as at 30 June 2001 would recognise $2.7 billion in assets. It will however be necessary to investigate, on an ongoing basis, the value of the spectrum and the assumptions used in its derivation. For example, market conditions may change such that revaluations are required.
Valuation of the licences and the spectrum are also complicated by the need to recognise both general increases in price levels and the amortisation of the licences. All other things being equal the value of the spectrum and the licences will change as a result of general price changes. The indicator that will be used to measure these changes will be the chain price index of domestic final demand. Offsetting this likely increase in value of the licences will be the amortisation which reflects the decline in value over time of the licences as they move towards their expiry date. Amortisation amounts can be estimated using net present value techniques. They are estimated in real terms and then inflated to provide current price estimates. Using the discount rates and asset life assumptions from above, the amortisation amount for the first year of the June quarter 2001 licences is $55 million at June quarter 2001 prices. Similar calculations will be made for the licences issued in earlier periods.
The compilation of these estimates will form part of the balance sheet compilation program. The spectrum assets will be reflected in the next publication of balance sheets. This will be in the 2000-2001 issue of Australian System of National Accounts (Cat. no. 5204.0), due for release in November 2001.
1 Quarterly sectoral capital accounts are not shown in this publication. They are provided in Australian National Accounts: Financial Accounts (Cat. no. 5232.0).
2 Transactions in spectrum licences have previously been shown as sales of non-financial assets in Government Financial Estimates (Cat. no. 5501.0), which is consistent with the national accounts treatment described in this article.
EXAMPLE OF THE ACCOUNTING ENTRIES
Using the valuations above for the June quarter 2001 licence sale the following entries, in billions of dollars, are applicable. (Rounding has been used to facilitate presentation.)
ACCOUNTING ENTRIES FOR THE JUNE QUARTER 2001 LICENCE SALE
Since sectoral capital accounts are only published annually in the national accounts, the complete set of flows and balance sheet entries described above will not be seen in the national accounts until the release of the annual publication Australian System of National Accounts, 2000-2001 (Cat. no. 5204.0) in November 2001. However, quarterly capital accounts are shown in the flow of funds tables published in Australian National Accounts, Financial Accounts (Cat. no. 5232.0). The flow of funds tables will not show the complete set of entries relating to the spectrum and the licences but will identify the capital and financial account flows and the implications on the financial balance sheet.
Further information on conceptual issues can be found on the OECD Statistics website (http://www.oecd.org/std/mobphon.htm) where an international discussion group on this topic is located. Queries on the Australian treatment should be directed to Carl Obst on 02 6252 6713 or email email@example.com.
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