Working Party on National Accounts, October 2005 Amortisation of Non-produced Assets

Amortisation of intangible non- produced assets Carl Obst Canberra II Group Geneva Meeting September 2005

Background  Canberra II Meeting (March) --Two papers, by Lequiller (OECD) and Dipplesman and Mahle (IMF Working Paper) were unable to be discussed at length due to time constraints  Carl Obst (ABS) and Brent Moulton (BEA) were nominated to prepare a discussion paper considering any proposals for changing the current treatment for the next meeting

Previous work and decisions  The (physical) spectrum is a tangible non-produced asset  Recognition of the licence representing an asset (under certain circumstances) was made by the following bodies:  ISWGNA; June 2000, December 2001  Eurostat; July 2000  Lequiller (OECD) provided a background paper for discussion at Canberra II group in March 2005 with a range of possible areas for investigation  One of these, the creation of a new property income category, had been developed by Dipplesman and Mahle (IMF Working paper, Feb.2001)

Spectrum Licences as an Asset  If the spectrum licence is recognised as an intangible non- produced asset, it is different from others because of the existence of an underlying tangible non-produced asset (the spectrum itself)  This relationship is such that the net worth of the two assets must be held constant from period to period  Therefore the amortisation of the licence must be balanced by a corresponding increase in the value of the spectrum representing the ability of the spectrum holder to re-sell the licence in the future  The value of the spectrum is based upon the value of the licence

Current SNA93 Treatment  Record both the amortisation of the licence asset and the reappearance of the spectrum asset in the other changes in volume account  Consistent with other intangible non-produced assets (eg. copyrights)  No effect on key aggregates: NVA,NOS, Net Saving  NOS may be considered overstated for licence holder (flows through to Net Saving)  Purpose of the other changes in volume account (one-off, unpredictable events)

Dipplesman and Mahle (IMF) approach  Record both the amortisation and reappearance in a new line item within the primary allocation of income account under property income  Major advantage is that the method brings the flows into the transaction accounts, without affecting National Net Saving  Potential overstatement of NOS for licence holder is not alleviated  Complicated treatment for ensuring no overstatement of Net Lending/Borrowing by sector

Alternative Amortisation Approach  Record amortisation of licence in a new line within the production account underneath COFC, and reappearance of spectrum within the other changes in assets account  Advantage is a simpler approach to reappearance, whilst bringing the amortisation into production account without disturbing the production boundary  Deals with potential overstatement of NOS for licence holder  There is an implied fall in NVA that may not exist as there is no using up of available capital, there is simply a transfer of value from licence to spectrum.

Financial Lease Approach  An alternative approach would be to recognise the transactions as a special type of Financial Lease arrangement as opposed to the sale/purchase of an asset  There would be no payment of principal, as the asset would return to the lessor at the end of the lease, and the payment for the licence would constitute prepaid interest which would be allocated over the life of the lease, representing the amortisation  Analytical interprability of the financial accounts may be affected, and the transfer of ownership issues around the lease are unusual

Canberra II Conclusion Is there a preference to change from the current SNA93 treatment for amortisation for spectrum licenses? Some members of the Canberra II Group thought that the financial lease approach had some attractions, but it was acknowledged that it too had its weaknesses, and it was agreed that there was insufficient time to examine the issue further. Accordingly, the Group recommended maintenance of the status quo.