Leases, licences, permissions and permits GFS/EDP-course 2014 Leases, licences, permissions and permits Chapter 11.11: A general introduction Chapter 11.11: Leases, licences & permissions Chapter 11.11: Leases, licences and permissions

Chapter 11.11: Leases, licences & permissions GFS/EDP-course 2014 Overview of the issue Government are involved in: Leases e.g. Issuing a lease to operate assets Issuing a lease to exploit natural resources Using a financial lease rather than purchasing assets Or, the ‘sale’ of a permission or the issue of a permit e.g. Issuing a permit or licence to exploit natural resources Issuing a permit or licence to operate a taxi Chapter 11.11: Leases, licences & permissions 2 Chapter 11.11: Leases, licences and permissions

Chapter 11.11: Leases, licences & permissions GFS/EDP-course 2014 So… in overview A lease or a licence could result in the payment of rent A lease could relate to the repayment of a loan A licence or a permit could be recorded as tax A lease, licence or a permit could result in the purchase of an asset NB Beware of the terminology Consider the economic reality over the legal form See ESA10 Chapter 15 and MGDD Part VI Chapter 11.11: Leases, licences & permissions 3 Chapter 11.11: Leases, licences and permissions

Overview of the session GFS/EDP-course 2014 Overview of the session Brief reminder: the borderline issues in chapter 8 week 1 Contracts and licences for the use of an asset: a produced asset a non produced asset Widening the analysis further in later sessions PPPs & concessions, Sale & lease back Mobile phones Chapter 11.11: Leases, licences & permissions 4 Chapter 11.11: Leases, licences and permissions

Government receipts: a brief reminder of borderline cases in chapter 8 GFS/EDP-course 2014 Government receipts: a brief reminder of borderline cases in chapter 8 Tax or sale of a service? Receipt in return for permission to undertake an activity Receipt for a product Receipt for use of a government asset Receipt for using a non-produced asset Chapter 8 in week 1 and MGDD part VI.1 covers these Here we widen the analysis Chapter 11.11: Leases, licences & permissions 5 Chapter 11.11: Leases, licences and permissions

A brief reminder: Tax or service/sale? GFS/EDP-course 2014 A brief reminder: Tax or service/sale? Service/sale if: Work involved is ‘individually requited’ Cost of work done by government is in proportion to the fee paid i.e. the fee reflects the cost (‘something’ for ‘something’) E.g. Issue of an identity card sale of a service Cost paid reflects the cost to produce the card Government performs a function by checking identity Fee is excessive or issue is automatic tax Chapter 11.11: Leases, licences & permissions 6 Chapter 11.11: Leases, licences and permissions

A brief reminder: Permission / licence to undertake an activity GFS/EDP-course 2014 A brief reminder: Permission / licence to undertake an activity The permission can only be granted by government. Permission to drive a car on the road? An annual fee paid by all motorists Permission to sell alcohol? Regulated individuals need to complete a course and demonstrate their understanding of the relevant law Permission to operate a taxi One permission or license required for each taxi Use the previous analysis for tax or sale of a service Chapter 11.11: Leases, licences & permissions 7 Chapter 11.11: Leases, licences and permissions

A brief reminder: Permission / licence to undertake an activity cont GFS/EDP-course 2014 A brief reminder: Permission / licence to undertake an activity cont Where: (e.g. licence to operate a taxi) The permission can only be granted by government The permission does not utilise a government asset The permission is issued to a restricted number of units and government enforces the restriction The permission is not subject to qualifying criteria The units can transfer the permission / permit. creates monopoly profits for holder / operator government receipt (the fee) is a tax (accrue it) This permit can give rise to an AN.223 asset Chapter 11.11: Leases, licences & permissions 8 Chapter 11.11: Leases, licences and permissions

Contracts & licences for the use of a government asset GFS/EDP-course 2014 Contracts & licences for the use of a government asset Payment for use of a government produced asset Payment per use, or for use for a time period ≤ 1 year E.g. Receipt for use of a swimming pool or a toll bridge Treatment: P.1 (sale of output by government) Payment for use of a government asset for the rest of its economic life E.g. Contract to sell the swimming pool or toll bridge Treatment: P.51 (GFCF, sale of asset by government) Payment for use of a government asset for > year but less than its economic life more complex, more anaysis… 2nd and 3rd bullets – Payment for use of a government asset for the rest of its economic life be could presented as a ‘sale’ or a ‘lease’ or as a permission to operate: Sale of the pool ; sale of a licence to operate the pool : permission to operate the pool Chapter 11.11: Leases, licences & permissions 9 Chapter 11.11: Leases, licences and permissions

Contracts & licences for the use of a government asset GFS/EDP-course 2014 Contracts & licences for the use of a government asset Payment to use a government non produced asset Payment to use a natural resource for a limited time E.g. Receipt for exploitation of water or oil for a specified time Treatment: D.45 (rent of a natural asset) Payment to use a natural resource for the rest of its economic life (i.e. until extinction) E.g. Receipt for the sale of natural resource Treatment: NP.1 (sale of a non produced) Payment to use a natural resource for an extended time with other criteria more complex, more analysis… Chapter 11.11: Leases, licences & permissions 10 Chapter 11.11: Leases, licences and permissions

More complex contracts & licences for the use of an asset GFS/EDP-course 2014 More complex contracts & licences for the use of an asset Payment by for use of an asset for > year but less than its economic life….. 3 types of leases are distinguished in ESA10 for non financial assets: An operating lease; A finance lease; or A resource lease (e.g. for land or radio spectra) Look beyond the legal form at economic reality NB. Economic owner has risks and rewards of ownership Within ESA10 the terms these 3 types of leases have particular associated treatments BUT in the accounting world the name given to a contract may not coincide with the treatment required in national accounts. National accounts is focussed on economic ownership and economic reality – remember lots of our analyses of complex issues come back to these basics Chapter 11.11: Leases, licences & permissions 11 Chapter 11.11: Leases, licences and permissions

More complex contracts & licences for the use of an asset GFS/EDP-course 2014 More complex contracts & licences for the use of an asset An operating lease; This is close to rental for the lessee Risk of ownership remains with the lessor (legal owner is economic owner) Lessee (user) is not the economic owner A finance lease; This is close to ownership for the lessee Risk of ownership is with the lessee (legal owner is not economic owner) Lessee (user) is the economic owner A resource lease (e.g. for land or radio spectra) In its simple form, like an operation lease and close to rental Chapter 11.11: Leases, licences & permissions 12 Chapter 11.11: Leases, licences and permissions

More complex contracts & licences for the use of an asset: GFS/EDP-course 2014 More complex contracts & licences for the use of an asset: An operating lease; Lessor allows the lessee to use the asset for a contracted period Asset is not fully used up, so can be leased out again Asset is on lessor’s balance sheet Capital consumption is also with lessor Accrue rental payments from lessee (P.2, purchase of a service) to lessor (P.1, sale of a service) Payment could involve F.8 if all rental is paid up front Risks and rewards of ownership are with the lessor e.g. operating lease for government airport: Lessor (government) owns the airport, lessee pays to use (i.e. operate) the airport Chapter 11.11: Leases, licences & permissions 13 Chapter 11.11: Leases, licences and permissions

More complex contracts & licences for the use of an asset GFS/EDP-course 2014 More complex contracts & licences for the use of an asset A finance lease; Legal form: Bank buys aircraft and leases it to airline company. Airline makes monthly payments to bank Airline maintains aircraft and has option to buy it at end of lease period for a nominal fee. Economic reality: a finance lease, the bank is effectively making a loan so that the airline can buy the aircraft Aircraft should appear on airline company balance sheet and the airline records capital consumption Impute F.4 loan, interest payments & a management fee Airline effectively purchases aircraft with a loan which it pays off over time. Risks and rewards of ownership are with the lessee Chapter 11.11: Leases, licences & permissions 14 Chapter 11.11: Leases, licences and permissions

More complex contracts & licences for the use of an asset GFS/EDP-course 2014 More complex contracts & licences for the use of an asset A resource lease (e.g. land or water); Lessor allows the lessee to use the asset for a contract period Asset is on lessor’s (owner’s) balance sheet Any decline in value is also with lessor (K.21 depletion) Accrue D.45, rent payments, from lessee to lessor Payment could involve F.8 if all rental is paid up front But lessor (owner) may allow extended use of the asset that, in effect, gives control of the asset to the lessee (user) with little or no intervention from the owner.. See next slide.. Could lead to user recording rent payment and creation of an asset We will take this analsis further in a later session.. Chapter 11.11: Leases, licences & permissions 15 Chapter 11.11: Leases, licences and permissions

More complex contracts & licenses for the use of an asset GFS/EDP-course 2014 More complex contracts & licenses for the use of an asset If both: Market price > contract price; and User can transfer the contract; Consequence: The increase in the market price above the original price creates an asset that appears on the balance sheet e.g. If you rent land for 4 years at €100 per year and the market price rises to €120 at end of year 1, if you can transfer the contract, the balance sheet would record €60 at this point. This could also relate to a contract to operate assets Chapter 11.11: Leases, licences & permissions 16 Chapter 11.11: Leases, licences and permissions