1. Non-Financial Corporations
Leonidas Akritidis
National Accounts in Practice – Advanced course
Luxembourg, 3-12 October 2016
THE CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE COMMISSION

2. Content Definition of Non-Financial Corporations (NFC)
Sub-sectors of NFC
Special units:
Quasi Corporations
Special Purpose Entities
Source data and bridge table (from business accounts to National Accounts)

3. Institutional Sectors
Domestic Economy
S.1
Rest
of the
World
S.2
Non-Financial
Corporations
S.11
Financial
Corporations
S.12
General
Government
S.13
Households
S.14
Non-Profit
Institutions
Serving
Households
S.15
Public
Non-financial
Corporations
(NFC)
S.11001
National
Private NFC
S.11002
Foreign
Controlled
NFC
S.1

4. Definition Non-Financial corporations (S.11)
Consists of institutional units which are independent legal entities and market producers, and whose principal activity is the production of goods and non-financial services. NFC units comprise of all corporations and quasi-corporations including:
private corporations
co-operatives and partnerships
public producers recognised as separate units
non-profit institutions serving NFC
head offices controlling a group of NFC
SPEs

5. Sub-Sectors of NFC NO YES Institutional units (market-producers)
producing financial services
No YES NO
YES
Non-Financial
Corporations
S.11
Financial
Corporations
S.12
Controlled by
government units
<
Controlled by
non-resident units
>
Public
Non-financial
Corporations
(NFC)
S.11001
National
Private NFC
S.11002
Foreign
Controlled
NFC
S.11003

6. Quasi Corporations

7. Quasi Corporations
There is practical difficulties in allocation of producer units between sectors S.11/S.12 and S.14,
Heterogeneous practices across countries to define QC, e.g. In France no QC are identified, contrary to Italy (see chart on the next slide);
Eurostat made a number of studies in order provide a harmonisation as much as possible given differences in structural differences between countries

8. Quasi Corporations

9. Quasi Corporations
ESA 2010 p (f): Quasi-corporations (QC) are entities which keep a complete set of accounts and have no legal status. They have an economic and financial behaviour that is different from that of their owners and similar to that of corporations. They are deemed to have autonomy of decision and are considered as distinct institutional units.
2008 SNA p.4.46: Experience has shown that countries have difficulty treating unincorporated enterprises owned by households as quasi-corporations. However, it is not useful to introduce additional criteria, such as size, into the definition of quasi-corporations owned by households. If an enterprise is not in fact operated like a corporation and does not have a complete set of accounts of its own, it cannot and should not be treated as a quasi-corporation however large it may be.

10. BUSINESS PRACTICE VS. NATIONAL ACCOUNTS
Independent legal status
ESA 2010: "… corporations sector consists of institutional units, which are independent legal entities and market producers …"
Business practice: legal recognition by registration in Business register
National accounts: legal separation from the owner = limited liability
Limited liability entities => legally separated from Households => incorporated entities => S.11 or S.12
Unlimited liability entities => owning Households liable for entities' debts => unincorporated entities => S.11 or S.12 for QC, S.14 for Households

11. BUSINESS PRACTICE VS. NATIONAL ACCOUNTS
Two types of unincorporated entities considered:
Sole proprietorships (SPs) - type of business entity that is owned by one individual (natural person) and in which there is no legal distinction between the owner and the business. The owner receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and debts.
Unlimited liability partnerships (UPs) - type of business entity in which two or more individuals manage the business collectively and who are personally liable for its debts.

12. Practical delineation guidance on QC
ESA 2010 p.2.48: "The existence of a complete set of accounts, including balance sheets, is not a sufficient condition for market producers to be treated as institutional units such as quasi-corporations…if they do not enjoy autonomy of decision …" =>
Two QC criteria should be considered simultaneously:
ESA 2010:
Complete set of accounts +
Sufficient autonomy of decision/ similarity of behaviour to corporations
Practice:
Double entry bookkeeping (often required by law based on legal form and turnover threshold)
Has implicit relation to size of entity (e.g. may be defined by number of employees threshold). Bigger entities are more likely to be assumed to be sufficiently self-contained and to operate as corporations

13. Practical delineation guidance on QC
The following four possible cases could be considered based on theoretical criteria and practical experiences of countries:
No QC defined: applied only by the countries with low importance of unincorporated enterprises;
Thus, all unincorporated enterprises ->S.14
QC defined by legal form : applied only by countries with low importance of unincorporated enterprises, low importance of large sole proprietorships (SP) and higher importance of large unlimited partnerships (UP) provided that the latter are likely to keep complete set of accounts; Thus, SPs -> S.14
UPs -> S.11/S.12

14. Practical delineation guidance on QC
3.a. QC defined on the basis of combination of legal form and ESA 2010/2008 SNA QC criteria: applied only by countries with high importance of unincorporated enterprises, low importance of large SPs and high importance of any size UPs; Thus, SPs -> S.14
UPs -> S.11/S.12, if full set of accounts & sufficient autonomy of decision
3.b. QC defined as above: applied only by countries with high importance of unincorporated enterprises, high importance of large SPs and low importance of any size UPs; Thus, SPs -> S.11/S.12, if full set of accounts & sufficient autonomy of decision, else -> S.14
UPs -> S.11/S.12

15. Practical delineation guidance on QC
QC defined on the basis of ESA 2010/2008 SNA for QC criteria - both SPs and UPs are examined for their compliance with QC criteria (availability of full set of accounts and sufficient autonomy of decision) and allocated to relevant sectors accordingly.
This is the best approach from theoretical point of view, but the most challenging to implement.

16. Practical delineation guidance on QC
QC owner working for the company as a manager, should receive salary recorded in the accounts as employee of the S.11 (ESA 2010 p e and 11.15). Owner not involved in daily management of QC, should not be counted as employee, but receive withdrawals from profits of corporations. Unincorporated units with no employees should rather not be considered as QC.
In practice, QCs may have non-salaried workers that are reordered as self-employed in the corporate sectors. In such cases, operating surplus estimated for QCs covers also labour input and withdrawals from income of quasi-corporations include elements of compensation of employees. Such recording may have an effect on cross-country comparability of profit shares of the corporate sectors.

17. Practical delineation guidance on QC
Proposed delineation cases by Eurostat:
combine theoretical criteria and practical considerations
lead to more transparent choices and sufficiently comparable results as importance criteria are respected
Case 4 should be used whenever possible; cases 1-3 are practical simplifications to be used if consistent application of case 4 is not considered practically possible
The individual delineation decisions should be based on careful analysis of national situation in terms of validity of essential QCs criteria, importance and size structure of unincorporated units
Consistent treatment must be ensured throughout the accounts
Countries found the proposed delineation cases useful

18. Special Purpose Entities

19. Special Purpose Entities
Although, there is no precise definition of SPE, the TF on Head Offices, Holding Companies and SPE and TF on Task Force on Statistical Units provided the following:
The legal entity
The entity is ultimately controlled by a non-resident parent;
The entity has no or few employees, little or no production in the host economy and little or no physical presence in the economy in which it is created by its parent which is typically located in another country;
Almost all the assets and liabilities of the entity represent investments in or from other countries;
The core business of the entity consists of group financing or holding activities, i.e. channelling of funds from non-residents to other non-residents. However, in its daily activities, managing and directing play only a minor role.

20. Special Purpose Entities
Some practical considerations on SPE:
It has limited presence in the country, where it is registered ;
It wholly owned by a parent company;
It provide services to the parent company, or other corporations in the same group;
It is created for certain fiscal or legal reasons (bankruptcy, tax legislation, etc.), assuming that the unit itself is “passive”, and does not actively, on its own initiative, engage in transactions..

21. Special Purpose Entities
SPE must meet the criteria for an institutional unit
SPE owned by non-residents are considered institutional units.
SPE wholly owned by a single resident unit, ”no employees and no compensation of employees” is a not a sufficient criterion for lack of institutional independence; however it can be used as an indicator to consider units for further investigation on its lack of independence .
SPE having multiple parents/shareholders is a sufficient qualification for being an institutional unit (see point 1).

22. Special Purpose Entities
They do not belong to one particular sector, thus may be classified into all sectors.
Based on activities, the following SPEs are classified into NFC:
Royalty and license company: concetrating group receipts concerning royalties and similar flows received from intellectual property rights and trademarks ; ISIC N 7740
Operational lease company: providing operational lease for the group; ISIC N 7730

23. Special Purpose Entities
Based on activities, the following SPEs are classified into NFC:
Merchanting company: Purchasing goods from a non-resident country and re-selling the goods to another non-resident country (key feature: they acquire the ownership of the goods traded); ISIC G74600
Most types of SPEs are classified in the Financial Corporations sector.
They have large balance sheets; usually with no non-financial assets. Therefore, investment income and holding gains are major elements of their accounts.
The production of SPEs is very limited. Usually fees are charged from the parent company.

24. Transition from business accounts to national accounts
Data sources
and
Transition from business accounts to national accounts

25. Sequence of Accounts Typical source data Non-Financial Account (NFA)
Current Accounts
Non-Financial Account (NFA)
*admin/surveys
Source data:, e.g.
->Profits and Loss Accounts,
->Income Statements
->Income and Expenditure
-> Non-financial balances
Accumu-
Accounts
lation
Financial Account (FA), e.g.
*Financial assets/Liab. balances

26. MEMO: ENTREPRENEURIAL INCOME ACCOUNT
Sequence of Accounts
Important
MEMO: ENTREPRENEURIAL INCOME ACCOUNT
Uses
B.2g
Gross operating surplus
Resources
D.41
Interest
D.42
Distributed income of corporations
D.43
Reinvested earnings on FDI
D.44
Other investment income
D.45
Rent
B.4g
Entrepreneurial income, gross
Entrepreneurial income (B4g) = B2g
+ net (D.41 & D.44 & D.45)
+ receivable (D.42 & D.43)

27. Source data Public NFC: company accounts data Private/Foreign C. NFC:
Continental shelf (e.g. UK): from accounts covering the oil+ gas industry;
Non-continental shelf: surveys of companies, company accounts, fiscal data, further source data for the financial account from Stock Exchanges, Centralised Security Data Base & Security Holding Statistics

28. A simple illustration of Profit and Loss Account (business accounting)
Turnover (= sales)
Other operating income
Operating expenses (salaries, rental, admin costs, etc.)
Operating profit
Interest Payable/Receivable
Taxation (i.e. corporation tax)
Profit after tax
Dividends Payable/Receivable
Retained profit for the year

29. A simple illustration of income and expenditure items included in the Profit and Loss Account
The following items that need further explanation including within Operating Surplus:
Operating Profit
Provisions
Depreciation/Amortisation
Impairment charges
Profits/Losses on disposals of fixed assets
Exceptional items

30. A simple illustration of income and expenditure items (business accounting)
Operating Profit:
turnover less [cost of sales + operating expenses] plus other operating income;
generally it represents profits from the normal, day-to-day operations of the business;
after depreciation, amortisation, impairment charges and losses/(gains) on disposals have been deducted (unless these items are exceptional);
includes smaller exceptional items except where these are stated separately in the profit & loss account, below operating profit.

31. A simple illustration of income and expenditure items (business accounting)
Provisions:
are amounts ‘put aside’ out of profits to allow for future expenditure arising from events that have already occurred. They may (or may not) be exceptional in nature.
Depreciation/Amortisation:
wearing out or other reduction in economic life of a fixed asset through use, passage of time, or obsolescence;
may be seen is linear matching of the cost of a fixed asset with the periods in which the asset is used;
An alternative name for depreciation is amortisation - from the French verb amortir (meaning ‘to reduce to the point of death’). This term is usually reserved to apply to intangible fixed assets (i.e. non-physical assets such as patent rights, licences, etc).

32. A simple illustration of income and expenditure items (business accounting)
Impairment charges:
An alternative approach to depreciation/amortisation is to carry out periodic reviews of assets to ascertain their values;
Should this result in a downward valuation then an impairment charge will be recorded within the profit & loss account;
These charges may either be included within the operating profits calculation (if they are small) or shown separately, below operating profits, if considered sufficiently exceptional.

33. A simple illustration of income and expenditure items (business accounting)
Losses/profits on disposals of fixed assets:
When a fixed asset is disposed, a profit or loss may be made. Such a profit/loss is only an adjustment to the depreciation allowed to date and so it may be reported either as:
a normal, routine part of the operating profit calculation, and hence not shown separately in the P&L account;
an exceptional item, which may itself be reported in a number of ways (see below).

34. A simple illustration of income and expenditure items (business accounting)
Exceptional items:
Any item within the profit & loss account can be exceptional, by virtue of its size or nature;
Exceptional items can appear in three different ways:
within the operating profit calculation and shown as a separate item within the profit & loss account;
within the operating profit calculation but not shown as a separate item within the profit & loss account (but merely disclosed in the notes to the accounts);
as separate items below the operating profit line if:
there is a requirement to do so under FRS3 (see below); or
the item is exceptional enough to justify such a treatment.

35. A simple illustration of income and expenditure items (business accounting)
Exceptional items:
Financial Reporting Standard 3 (FRS3) requires that certain items are reported below operating profits within the Profit and Loss Account:
profits or losses on the sale or termination of an operation (e.g. closing down a part of the business);
costs of a fundamental reorganisation or restructuring having a material effect on the nature and focus of the reporting entity’s operations;
profits or losses on the disposals of fixed assets.

36. A simple illustration of income and expenditure items (business accounting)
Exceptional items:
Often, these will be the only exceptional items of a business but they may not be, for the following reasons:
Fundamentally, these items are reported separately because they are non-operating items. In many cases though, they will also be exceptional in nature;
Profits/losses on disposals of fixed assets occur on a routine basis as well as in respect of significant exceptional events. Only profits/losses relating to the latter type of disposal should be included within the ‘non-operating’ items;
Other exceptional items may exist and will have been reported within the operating profit calculation.

37. Business accounting standards
National GAAP (e.g. UK GAAP):
refers to the ways in which accountants deal with items in the accounts, based on a mixture of company law and accounting rules (standards);
can often only describe best approaches rather than ‘correct’ ones and keeps changing!
IAS (International Accounting Standards, also called IFRS):
accounting rules promoted by the International Accounting Standards Board (IASB);
compulsory for the consolidated accounts of EU-listed companies, but optional for other companies;
differ in some respects from National GAAPs;

38. Business accounts and National Accounts
Accounting rules are sometimes unclear, so different businesses may account for similar items differently;
Accounting rules sometimes give options regarding treatments of items (see exceptional items, National GAAP v IAS/IFRS) and this will also lead to variations in practice
Not all contacts will be accountants, so there may be different degrees of understanding regarding what data we need for National Accounts.
Published accounts are often not available until the year end and so complete/accurate data will not always be available on a quarterly basis;
Smaller businesses’ accounting systems tend to be much less sophisticated and will often rely on external accountants, so such business may have more problems reporting accurately/punctually.

39. Business accounts and National Accounts
Companies data may not always be in line with National Accounts standards, this includes in particular:
Valuation aspects: output must be at basis prices, thus in National Account, output must include taxes on production (but not on products, e.g. VAT) and include subsidies on products (but not on production);
The above most be consistent with fiscal data;
Any insurance entries must be eliminated, as these are modelled and added by national accountants;

40. Business accounts and National Accounts
Data must cover activities of solo resident companies and not group (some being multinational) companies;
Small companies are usually not well covered by the source data, thus a cut-off adjustment is required to ensure exhaustiveness;
There are also other aspects important for national Accounts, like re-numeration in kind, tips, evasion by ghosts & moonlighters, illegal activities, etc;
Holding gains and losses must be eliminated from National Accounts;

41. Exercise