1. Item II. Background on general introduction to the ESA 2010
Training on general introduction to ESA 2010
Luxembourg, December Eurostat, JMO M4

2. Introduction 2003 – The UN agreed an update to SNA 1993
The Intersecretariat Working Group on National Accounts (ISWGNA) put in charge
UN, IMF, OECD, Eurostat and World Bank appointed editor

3. Introduction
A list of 44 issues and 30 clarifications agreed on as basis for revision
an Advisory Expert Group (AEG) of 20 national accountants from NSIs, plus 5 ISWGNA representatives, set up
Issues discussed in topic groups e.g. Canberra II on the asset boundary

4. Introduction
Other topic groups on Pensions, FISIM, and Goods for Processing (BoPCOM)
Papers and proposals submitted to AEG
Recommendations to ISWGNA and editor
Consistency sought between BoP and NA

5. Introduction Pension schemes
Research and Development as a capital asset
Military expenditure on weapon systems
Goods exported for processing

6. Introduction SNA finished in 2008
Europe starts update of ESA 95 to ESA 2010
Authors on contract, and Eurostat staff, updated the ESA 95 text, or wrote new chapters e.g. Rest of the World

7. Introduction
A Eurostat Review Group was set up, consisting of members of
Financial Accounts Working Group (FAWG), and
National Accounts Working Group (NAWG)
ECB and OECD attended meetings

8. Introduction An overall editor was appointed in 2008
The manual was complete in draft end 2009
It became part of a European regulation in June 2013
Transmission programme on ESA 2010 basis in September 2014

9. Introduction To help NSIs, four implementation guides
1. Changes ESA 95 to ESA 2010
2. Update of the Prices and Volume handbook
3. Goods sent abroad for processing
4. Capitalisation of R&D

10. Introduction This course is based on
Manual on the Changes between ESA 95 and ESA 2010
Special role – identify changes which affect the level of GNI
Important - Level of GNI sets budget for Europe and MS contributions

11. 1. Capitalisation of R&D Research and development is capital formation
Change that has biggest effect on level of GNI
Not easy!
Measured through sum of costs approach

12. 1. Capitalisation of R&D
R&D is an (intangible) IPP– Intellectual Property Product
R&D is performed in-house ,most of the time
Each R&D product is unique – no market comparisons possible
R&D is measured through Frascati Manual surveys

13. 1. Capitalisation of R&D - issues
1. FM surveys are not for national accounts – the results have to be transformed
2. FM surveys have detail only every second year
3. Lack of market transactions means that we must measure R&D output through sum of costs approach

14. 2. Valuation of own account output for final use
For market enterprises, we have to add a mark-up reflecting the net operating surplus observed for units which are operating in the market
If no such market units observable, use parent industry typical mark-up

15. 3. Non-life insurance and reinsurance
Premium – payment to insurance company
Claim – amount payable to insured in the event of an event covered by the policy
The excess of premium over claims is invested and this provides an extra source of income to meet claims
Output of insurance is premiums plus property income less claims

16. 3. Non-life insurance and reinsurance
The output is measured according to the same principles as the company
Property income is earned on reserves (excess of premiums over claims)
This property income is assigned to policy holders, and recorded in the secondary distribution of income account

17. 3. Non-life insurance and reinsurance
Claims may be volatile –use a trend estimate rather than actual claims observed in any period
This trend estimate should reflect actual and expected claims
Output = premiums plus premiums supplement (property income on reserves) less adjusted claims
For catastrophes, part of claims may be recorded as capital transfers rather than current transfers

18. 3. Non-life insurance and reinsurance
Excessive claims can result in negative output, leading to negative value added
So smooth the claims, replacing claims by “adjusted claims” in the calculation
This takes account of how the company meets the claims in practice (e.g. raiding reserves)

19. 3. Non-life insurance and reinsurance
Treat same way as direct insurance.
But separate out transactions from direct insurance (previously consolidated).
Separate premiums and claims (no netting)

20. 3. Non-life insurance and reinsurance

21. 3. Non-life insurance and reinsurance

22. 3. Non-life insurance and reinsurance
When a catastrophe strikes – adjusted claims approach is essential
Excess claims in year of catastrophe are met through capital transfers
This reflects the nature of the spending on rebuilding etc.

23. 4. Weapon systems are capital assets
Weapon systems deliver capital services through capability and deterrence
Acquisition of weapon systems is capital formation
No change to government output in year of acquisition, but output increases during economic life of systems due to extra CFC

24. 5. Decommissioning costs
These costs occur at end of assets life
In theory, they are part of acquisition costs
The estimates of consumption of fixed capital should allow for the final asset value

25. 5. Decommissioning costs
In practice, GFCF of asset purchase price recognised on acquisition
Value depreciated to negative through full allowance of depreciation
Decommissioning scored as GFCF, and written off in same year

26. 6. Sector classifications
Market activity for government controlled unit classifies unit to private corporation
Non-market activity classification is government sector
ESA 2010 sets out more clearly qualitative criteria for the market / non-market split
50% rule modified, remains key in classification

27. 6. Sector classifications
50% rule is
“If sales greater than 50% of costs, activity is market”
The definition of costs has been expanded to include interest payments on loans

28. 7. Small tools
ESA95 – value of small tools must be greater than 500 ECU at 1995 prices, to be recognised as capital formation
ESA 2010 – just use the normal rule (used in production for more than one year)
Ignore the small stuff

29. 8. VAT-based third EU own resource
Used to be shown in European accounts as a tax paid to the European Union institutions
ESA 2010 shows it now as a current transfer

30. 9. Index-linked debt instruments
New estimate of interest paid for debt linked to “narrow” indices
Interest is difference between issue price and expected price movement of narrow index
Difference between expected price and observed price is scored as holding gains or losses

31. 10. Allocation of output of Central Bank
The output of the Central Bank is measured as the sum of costs
ESA 95 – output is intermediate consumption of other financial intermediaries
ESA 2010 – as ESA 95, but fees and commissions directly charged are recorded separately
Where these fees and commissions are exports or increase final domestic consumption, GDP and GNI rise

32. 11. Land improvements as a separate asset
ESA 95 recognised major improvements to land as capital formation, but there was no corresponding asset recognised in the system – they were scored under “Other structures”
This could cause a mismatch between opening and closing balances of the asset category land
ESA 2010 has a new asset AN.1123 “Land improvements”

33. 12. Employee stock options
An employee stock option is when an employee is awarded an option on stock (shares) in the company at the current price, but it can be realised at some time in the future.
If the current price is 100 and in three years time it rises to 200, the employee can exercise his option and instead of receiving 100 as income from employment, they receive 200.

34. 12. Employee stock options
The 200 will be scored as compensation of employees, over the period between grant and vesting date
Grant date is when the option is offered
Vesting date is first opportunity for the employee to take up the option
Exercise date is when the option is taken up (or it lapses)

35. 12. Employee stock options
International Accounting Standards Board (IASB) accounting recommendation is that the enterprise calculates a “fair value” for the options at grant date
The recording of income should be spread over the period between grant and vesting

36. 12. Employee stock options
Between vesting and exercise date, increase in value is recorded as a holding gain for the employee and a holding loss of the employer
Before the option is exercised, the arrangement is a financial derivative and scored as such in the financial accounts

37. 12. Employee stock options
NA treatment in line with IASB standards
Data should therefore be available in company accounts
Introduction resulted in higher levels of compensation of employees (Probably already captured under ESA95)

38. 13. Super dividends
Super dividends are unusually high dividends paid to owners They are treated as withdrawal of equity – a financial transaction - rather than property income So although the owners get the extra cash in hand, they are also shown as having a liability to the unit of the excess dividend

39. 14. Special Purpose Entities and government borrowing
What is a typical SPE?
No employees, no non-financial assets
Little physical presence apart from a “brass plate”
A non-resident subsidiary of parent
Local production is only that reflected in payments for local services

40. 14. Special Purpose Entities and government borrowing
Often government SPEs are securitisation vehicles – units that securitise assets
Securitisation based on a future flow of revenue is not the sale of an asset, but borrowing.
If a non-resident government unit borrows, that borrowing is fully reflected in the government accounts

41. 15. Head offices and holding companies
In the 1993 SNA, a holding company was taken to be “a corporation [without significant production of its own]. . . whose principal function was to control and direct a group of subsidiaries”
These companies are classified to the pre-dominant activity of its subsidiaries
1993 SNA holding companies would have been better called head offices

42. 15. Head offices and holding companies
In SNA 1993, there is no mention of companies who do not control, but simply manage assets on behalf of the enterprise group.
It is possible that such companies, known confusingly in business as “holding companies”, would be classified under the SNA 1993 to the pre-dominant activity of the group

43. 15. Head offices and holding companies
IN SNA 2008, the labelling is changed, and the 1993 SNA holding companies are re-labelled Head offices. They are classified in the same way, to the pre-dominant activity of the group
Now in the SNA 2008, holding companies are recognised as just owners of assets rather than controllers, and so classified as financial corporations

44. 15. Head offices and holding companies
Result – SNA 2008 “corrects” the sector classification of holding companies, but the result is a switch of financial assets and liabilities from the non-financial sector to the financial sector.
The situation for ESA 95 to ESA 2010 is less serious because of a clearer distinction in ESA 95

45. 16. Sub-sectors of financial corporations sector
More detailed to meet needs of ECB IMF etc.
9 subsectors compared with 5 in ESA95
S.127 consists of all fin corps and quasi-corps which are neither engaged in financial intermediation nor providing financial auxiliary services and where most of their assets or liabilities are not transacted on open markets.

46. ESA 95 Financial corporations sub-sectors
ESA 2010 Financial corporations sub-sectors
Central Bank
S.121
Other Monetary and Financial Institutions
S.122
S.123
Money market funds
Other financial intermediaries
S.124
Non-Money-Market Investment Funds
S.125
Financial auxiliaries
S.126
S.127
Captive financial institutions
Insurance corporations and pension funds
S.128
Insurance corporations
S.129
Pension Funds
Non-financial corporations
S.11

47. 16. Sub-sectors of financial corporations sector

48. 16. Sub-sectors of financial corporations sector
In practice, many units assigned to S.127 will be only recognised as institutional units because their residence is different from that of the parent.
A range of units previously classified under S.123, S.124 and S.11 (holding companies for non-financial corporations) can be classified to S.127 because of their relationship to the parent rather than the nature of their activity

49. 17. Guarantees Three main types
Guarantee through a credit default swap (CDS)
Standardised guarantees, large number for small amounts – give rise to financial assets and liabilities
One-off guarantees – contingent asset or liability, so not recorded in financial accounts

50. 18. Special Drawing Rights
SDRs are international reserve assets created by the IMF
These assets can be allocated to member countries of the IMF
The corresponding liabilities are collectively against all members of the IMF

51. 19. Payable tax credits
Two kinds of tax credit systems – payable and non-payable (wastable)
Non-payable tax credits systems pay out credits which can only be used to reduce tax liability – they are never paid out as benefits
A payable tax credit system can be credited against a tax liability, and any surplus paid direct to the recipient.

52. 19. Payable tax credits
For payable tax credit systems only, the whole of the payable tax credits should be registered as a subsidy for business, or social benefit for households
This recording as a benefit is independent of how much is used to reduce tax liability, and how much is paid direct to recipients
The OECD Table D now shows tax burden on a gross and net basis

53. 20. Goods sent abroad for processing
Big change – from gross recording of the flow of goods for processing to a net basis
Previously goods sent abroad and returned after processing = trade in goods, even if no change of ownership.

54. 20. Goods sent abroad for processing
Now, follow strict change of ownership principle.
Only record processing fee – manufacturing services on physical inputs owned by others.
Goods flows = supplementary items.

55. 20. Goods sent abroad for processing
If the change is also applied internally in the domestic economy, there will be reclassification of flow of goods to the delivery of a service only, with no associated movement of goods
Difficulties – International Trade in Goods will retain gross flows
The net flow will not necessarily equal the service provided

56. 21. Merchanting Change of ownership, so goods (previously services).
New category “goods under merchanting”.
Purchases by merchant = negative exports, sales = positive exports

57. 21. Merchanting
Net recorded as goods under merchanting in compiling country (exports and imports in other countries)
Do not enter economy so not in IMTS.

58. 22. Employers’ pension schemes
ESA 95 recognised pension liabilities only where there were funds available to meet these liabilities
ESA 2010 retains this position for the main or core accounts
But – pension liabilities for funded and unfunded schemes are shown in a supplementary table.
Included are unfunded Civil Servant schemes, and general social security schemes

59. 23. Fees payable on securities lending and gold loans
All fees payable to owners of securities and gold used for lending are recorded as interest (D.41)
This is a clarification – it may cause a change in some MS accounts

60. 24. Construction activities abroad
ESA 95 says construction abroad in country B, even for less that a year, implies unit is resident in B
ESA 2010 says no exceptions – activity abroad for less than a year remains part of unit resident in home country A

61. 24. Construction activities abroad
Change is that under ESA 2010, output of construction occurs in home country A, increasing GDP of A
Construction services are exported to B
Income from services and employment in B remitted to A will score as income transfers
So GNI will be unaffected

62. 25. FISIM between resident and non-resident Financial Institutions
ESA 95 as amended by regulations, said measure FISIM between resident and non-resident FIs, and record as imports and exports of services
ESA 2010 says No interbank FIUSIM is recorded between resident FIs and non-resident FIs
GDP is changed by very small amounts, and GNI is unchanged