1 Task Force on Harmonization of Public Sector Accounting Guarantee SNA Advisory Expert Group Bangkok, July 2005

2 Context Guarantees have a significant impact on the economic behavior of transactors: Influence decisions on production, income, investment and saving Modify the lending and borrowing in financial markets Particularly significant for government and other public sector

3 Current macroeconomic treatments SNA 1993 view guarantees as contingency ESA recognize that counterpart of insurance technical reserves and pension funds are contingent assets in most cases. GFSM 2001 record as memo items possible revenues/expenses (gross amount of guarantees) and also expected revenues/expenses, recognizing that they can be quantifiable.

4 Rationale for changes –Memorandum item is not reported –Need to distinguish among guarantees to reflect the differences among economic events that give rise to guarantees –Convergence with accounting standards that distinguish guarantees from contingencies Maintaining status quo is criticized since it is at the time guarantees are given that the economic behavior is influenced, creating potential costs/benefits for the units involved

5 Proposed solutions Based on: Typology of guarantees Diversity of recording

6 Proposed solutions Standardized guarantees One-off guarantees Tradable (or offsettable guarantees ) Financial derivatives (e.g. credit default swaps Non tradable guarantees Insurance technical reserves/ provisions Memo or supplementary accounts Tradability Types

7 Rec. 1: Guarantees viewed according to types. Tradable or offsettable guarantees : recorded as financial derivatives Standardized guarantees (e.g., export credits or student loans): recorded as part of insurance technical reserves) One-off guarantees: recorded as memo items or supplementary accounts

8 Rec. 2: Tradable or offettable treated as financial derivatives. Tradable guarantees are similar to derivatives as the issuer takes the risk of the deterioration in the credit worthiness of an entity. Conditions: When there is a market for similar instruments When there are observable market prices. Not a change in SNA but only a clarification For the time being, only credit derivatives would meet the conditions for this treatment. recorded as financial derivatives

9 Rec. 3: Standardized guarantees treated as “insurance technical reserves”. Standardized guarantees are similar to insurance technical reserves as they involve pooling of risks. Conditions: Given their large number, very likely that some of them will be called Accordingly, it is possible to make a good estimate of the average loss by considering statistics on claims, or other means. Treatment: liab. of guarantor equal to npv of expected payments, equivalent to the asset of the sector receiving the guarantees, Rec. 4: Create a sub-category under “insurance thechinical reserve called “standardized guarantees”.

10 Rec. 5: Sector of the counterpart asset is the sector receiving the guarantees (e.g., the lender for a guarantee on borrowing) Rec. 6: If the guarantor sells the guarantee for a premium that does not cover the expected loss and administration costs, a subsidy/capital transfer to the lender should be imputed.

11 Rec. 7: One-off guarantees recorded outside core accounts (either c or d). Usually not standardized and not tradable. Four modalities have been considered: a. Liability in the core accounts (for the expected loss) b. Re-routing c. Memorandum items d. Supplementary system of accounts Rec. 8: A sufficiently prominent status to be given to ensure that it is recorded in practice (as for non-performing loans)