e-training on compilation of sut in africaecastats.uneca.org/acsweb/portals/0/etraining_sut/session...

E-TRAINING ON COMPILATION OF SUT IN AFRICA

ACS/ESNA2017

Session 6: Accounts of non-financial corporations to

national accounts

Economic Commission for Africa

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Content of the presentation

• Introduction

• Accounting system

• National accounts and company accounts: practical issues

• Compilation of national accounts from company accounts


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Introduction

• Financial data of enterprises is a major data source for national accounts

– However, there are many conceptual differences between company accounts and national accounts, and linking them requires many adjustments

– Therefore, it is essential for national accountants to have a clear understanding of the links between the two systems, so as to establish standardised formats for converting business accounts to national accounts

– Unfortunately, business accounting standards, both in format and content vary not only from one country to another but also from one business to another; this makes it impossible to develop such a standardized format.

– National accountants, as a consequence, have to use their judgement and understanding of the accounting practices in their countries to link company accounts data to national accounts with appropriate adjustments.

– In this case, it is necessary that information from business accounts should first be rearranged in the formats of national accounts - which are called intermediate accounts, based on specific “bridge tables”.


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Accounting system (1/5)

• National accounts are virtually standardized worldwide, while business accounting (financial statements) is still in the process of international harmonization.

• The International Accounting Standards Committee (IASC) was created in 1973 to establish basic accounting standards referred to as IAS (International Accounting Standards) and then International Financial Reporting Standards (IFRS) .

• In general, the main rules and methods for business accounting (IAS/IFRS) are consistent with those of the SNA. Examples are: recording transactions in accounts using the accrual principle, double-entry principle and use of balances, monetary valuation, and internal consistency of the accounts system


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• The financial statements of enterprises consist of a number of separate statements or accounts;

– Income statement (includes the flow of revenues and outlays during the accounting period) (flow accounts)

– Balance sheet (describes the financial position of a corporation, including its assets, liabilities and its net equity) (stock accounts)

– Statement describing the changes in the net equity (provides more details on the equity included in the balance sheets, with regard to changes in the paid-up capital, accumulation of profits and/or losses, revaluations, accumulated depreciation and other reserves)

– Explanatory notes (EN) providing details on some of the statements, both in descriptive and quantitative formats.


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• For using financial statements of companies, it is

– Necessary for national accountants to have access to companies' accounts

• They are normally public documents

• Databases of company accounts are maintained by public bodies

• Some private agencies also maintain and sell company accounts databases

– The accounting documents should have a minimum degree of standardisation


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Accounting system (4/5): Principles and rules of accounting

Item Business accounts National accounts

Double entry

and quadruple

entry

Follows double entry principle. Each transaction

of the company is recorded in two different

accounts, once in the debit side of one account,

and once in the credit side of another account.

Double entry principle is applied in the

same way in national accounts for a

unit or institutional sector.

Concept of quadruple entry is applied;

each transaction is recorded twice by

the two transactors involved (in their

debit and credit side)

Time of

recording

Accrual principle: Record operations when they

take place, giving rise to claims and obligations,

independently of the payment.

Conceptually, national accounts follow

the same principle

Valuation Accounting transactions are recorded at their

historical costs.

Accounting standard setters (IASB and FASB)

recommend fair value as a relevant measure. IFRS

13 defines fair value as the price that would be

received to sell an asset or paid to transfer a

liability in an orderly transaction between market

participants at the measurement date.

Fair value concept is close to the SNA

valuation principle for balance sheet

items.


• Direct relations business accounts (IAS/IFRS) and SNA

National accounts Business accounts

Production account, Income

accounts

Income statement (Profit and

loss account)

Financial account Change in financial position and

statement of cash-flows

Capital account, Balance

sheet

Balance sheet


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National accounts and company accounts: Practical issues

• Accounting year start and end dates may differ in the two systems (adjustments have to be made on proportionate basis using two successive years’ business accounts)

• Currencies (Some global companies may report in their accounts all or some transactions in foreign currencies. These need to be converted to local currency)

• Estimation of profit and loses (The closest entry that corresponds to profits in business accounts is net operating surplus in SNA)

• Fixed assets (business accounts may show some expenses (like software) as current expenditure, which are treated as capital expenditures in SNA)

• Consumption of fixed capital (business accounts show depreciation while SNA uses the concept of CFC to reflect the cost of fixed capital used up in production)

• Provisions (business accounts show provisions for expenses which the enterprise is certain to incur. In general, Provisions do not appear in the SNA.

• Holding gains/loses (business accounts show withdrawals from stock at historical cost. For SNA, withdrawal from stock must be valued at market price at the time it takes place. The difference between the two prices is considered in national accounts as a holding gain or a holding loss)


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Compilation of national accounts from company accounts:

A. Classifying the items in the income statement into SNA transactions (1/3)

The procedure for compiling SNA accounts from company accounts involves:

• assembling the reclassified items into intermediate accounts ( elaboration of bridge tables) that are conceptually quite close to the SNA;

• adjusting the items in the intermediate accounts to make them fully compatible with the SNA.


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• Output (SNA)= Output sold + Output held as inventory + Capitalized output + Sales of goods bought for resale - Purchases of goods bought for resale + Changes in stocks of goods bought for resale + Other operating income + subsidies received from government

• Intermediate consumption (SNA) = Purchases of raw materials and supplies - Changes in stocks of raw materials and supplies + Other purchases and external charges + Other operating costs– Depreciation and depletion must be identified since they are not

treated as intermediate consumption in SNA• Compensation of employees (SNA) corresponds to the expenses

incurred by an enterprise in relation to its employees



Other indicators:

• Taxes and subsidies (SNA) on product and production and tax on profits

• Property income (SNA) includes interests, dividends, rents on non-produced assets and equity earning.

– Interest received and paid must be adjusted for FISIM.

– Income from investment must be increased by commission deducted at source.

– Dividends received appears in the income statement, but information on dividends paid may be available in the sources and uses of funds statement.

– Reinvested earnings on direct foreign investment can only be estimated on the basis of supplementary information about company shareholders.

– Property income allocated to policyholders is deducted from insurance premiums paid by applying a ratio calculated from the accounts of insurance companies.

• Current transfers include charitable contributions, insurance premiums, insurance claims, fines and penalties.

• Capital transfers rarely appear in business accounts.


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B. Elaborating the bridge tables • The intermediate accounts derived from financial statements are based

on the bridge tables realised to link data from business accounts to national accounts indicators.

• The format for the intermediate accounts of a non-financial corporation presented here as example has the following characteristics:

– The corporation is involved in the production (or manufacturing) of goods and the marketing and selling of its own products as well as products produced by others. Because of the activity of reselling products produced by other producers, the output of this corporation must include trade margins, which are calculated together with manufactured output by deducting the cost of goods bought for resale from the net sales.

– Only the output of the corporation as a whole is of concern here and no attempt was made to separate out its discrete outputs.


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C. Adjustments

• After establishing the rough ‘bridge table’, the transition from business accounting to national accounts may be completed by making some adjustments to base data.

• These adjustments are categorised as follows:

– Conceptual adjustments;

– Adjustments to allow coherence with the accounts of other sectors; and

– Adjustments for exhaustiveness

Conceptual adjustments: A. Calculation of output (1/4)

• Transition to basic price valuation in SNA

– Turnover is generally net of VAT but may include some taxes on products. Conversely, subsidies on products are rarely included in the turnover. It is necessary to make adjustments to the turnover data by deducting taxes on products and adding subsidies on products, to arrive at basic price

• Deliveries between establishments of the same enterprise

– Generally not shown in business accounts. For SNA, data is recorded establishment-wise

• Margin earned on distribution type activity

– Besides trade activity, certain activities such as travel agencies have their output calculated in national accounts using a margin concept. In this case it is necessary to deduct from turnover the cost of sales.


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• Own account output of capital formation, R&D, software and data bases

– The SNA includes in GFCF, the own account output of mineral exploration, R&D, software and data bases. The value of this production is not included the turnover of the enterprises. This output and GFCF should be estimated and included in national accounts

• Capitalised output

– Capitalised output is recorded in company accounts on the basis of production costs. For national accounts, it is necessary to include an element corresponding to operating surplus (2008 SNA recommendation)

• Adjustment for sales of land

– The turnover that includes sales of land must be removed from the calculation of output. The acquisition less disposal of land is included in the capital account under the non-produced non-financial assets


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• Ownership transfer costs

• In business accounts, acquisitions of fixed assets are valued by their cost plus the costs incurred for the transfer of the ownership. These costs include various elements, such as wages and salaries and intermediate consumption. These entries are shown three times:

» On the debit side of the income statement;

» On the credit side of the income statement; and

» On the debit side of the balance sheet as capital cost

• In national accounts, wages and salaries cannot directly add any value to assets as the gross fixed capital formation is a use of production. All expenditure on personnel costs corresponding to installation costs must therefore be considered as an own account production of capitalised goods by the enterprise.


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• Adjustment for inventory (stock) valuation

– In business accounts, the changes in inventories are measured by the difference between the closing stock value and the opening stock value.

– In national accounts, the change in inventories (stocks) corresponds to the difference between entries into and withdrawals from stock, these being valued at the time they take place


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Conceptual adjustments: B. Calculation of intermediate consumption (1/2)

• Taxes on production and some taxes on products; fines and penalties; depreciation; interest and dividends payable

– These are expenses in business accounts. In national accounts, they are not IC

• Insurance premiums

– Insurance premiums payable by enterprises are part of expenses. In national accounts, only service charge is IC and the rest is current transfer. Ratios of IC and current transfer in premiums can be estimated from insurance co. accounts

• Leasing

– Treated as rental in business accounts. In national accounts, adjustment is needed for interest and redemption of loans out of this amount. Rentals for produced assets is IC in national accounts.

• Adjustment for Commissions included in interest

– Some commissions are included in the interest payable by enterprises or deducted from that which they receive. The most important of these correspond to FISIM. It is necessary to take account of commissions deducted and interest payable by the investment undertakings.


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Conceptual adjustments: B. Calculation of intermediate consumption (2/2)

• Adjustment for Land purchase

– Expenditures shown for purchase of land in business accounts are not IC in national accounts

• Stock valuation adjustment

– Similar adjustments as in the case of finished products on the output side, should be made for raw materials and components

• Costs associated with the acquisition of assets

– In company accounts, installation costs are generally considered as incidental costs and are thus included in the purchasers’ price of fixed assets. They should be estimated as own account output of the enterprise and also must be added to intermediate consumption

• Bad debts

– Allowance for bad debts is not recognized in SNA, therefore, not IC


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Conceptual adjustments: C. Adjustments to achieve coherence with the accounts of

other sectors• Taxes and subsidies

– Information obtained from business accounts should be made coherent with those receivable by or payable by general government

– Adjustments need to be made for input VAT and output VAT, if details are not available.

– Taxes and subsidies appearing in company accounts should be segregated between those on products and production

• Property income

- Interests receivable and payable must be adjusted for FISIM

- Investment income must be increased by commissions deducted at source

- Dividends

- Reinvested earnings on direct foreign investment

- Property income allocated to policy holders


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Conceptual adjustments: D. Adjustments for exhaustiveness (1/2)

• These may be related to several causes

• Evasion regarding output sold and sale of goods for resale

• Income earned-in-kind

• Tips

• Evasion on purchases intended for intermediate consumption

• Undeclared employment

• Methods to make adjustments for exhaustiveness have been suggested in the session on GDP exhaustiveness

CalculationsFrom the numerical example, the

main indicators can be estimated:

Output = 32200 (1) + 500 (2) +

80 (3) + 300 (4) - 100 (5) =

32980

Intermediate consumption =

15000 (6) + 5000 (7) – 300 (8) =

19700

Gross value added = Output

(32980) – Intermediate

consumption (19700) = 13280

Table 1. Simplified bridge table for non-financial corporations

1 Net turnover IS 32200 P.1

2 Other income (e.g. from licenses) IS 500 P.1

3 Own production of non-mobile assets IS 80 P.1

4Changes in stocks of finished products

and work-in-progressIS 300 P.1

5 Cost of goods bought (for resale) IS 100 P.1

6 Cost of sales (goods & services) IS 15000 P.2

7Other operating expenses (less

personnel expenses)IS 5000 P.2

8Increase in provisions (they should be

removed, are not real expenses)CFS -300 - P.2

9 Changes in inventories CFS 350 P.52

10 Investment in tangible fixed assets CFS 4600 P.51

11 Disinvestment tangible fixed assets CFS -200 P.51

12 Personnel expenses IS 6800 D.1

13Depreciation of buildings and

equipmentIS 650 P.51

14 Interest payable (net) IS 400 D.41

15 Interest receivable (net) IS 100 D.41

16 Dividends Paid CFS 1500 D.4

17 Dividends Received CFS 500 D.4

18 Profit taxes current year IS 800 D.5

19 Profit taxes previous year IS 700 D.5


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Table 2. Conceptual adjustments

Output IC GCF

Transition to the basic prices

- Other taxes on products -

-Subsidies +

Deliveries between establishments of the same

enterprise+ +

Own account output of software and other

intellectual products+ +

Own account output of research and development + +

FISIM +

Holding gains for inventories +/- +/- +/-

Exhaustiveness + + +


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Table 3. AdjustmentsOutput IC GVA

Total accounting 32980 19700 13280

Conceptual adjustments: (externally estimated) 0

-Taxes on products -1800 -1800

-Subsidies on products 80 80

-Holding gains -310 400 -710

-FISIM allocation 150 -150

-Own account output of software and other

intellectual products200 200

-Own account output of research and development 400 400

-Intra-unit deliveries 300 230 70

Exhaustiveness adjustments 0

-misreporting 2100 650 1450

-VAT fraud 900 900

TOTAL -national accounts indicators 34850 21130 13720


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I: Production account

Resources

P.1 Output 34850

P.11 Market Output 34250

P.12 Output for own final use 600

P.13 Non-market output 0

Uses

P.2 Intermediate Consumption 21130

B.1g Value added, Gross 13720

K.1 Consumption of fixed capital (externally determined) 400

B1n Value added, Net 13320


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II.1.1: Generation of income account

Resources

B.1gGross Value added, Gross (GDP) 13720

B1nValue added, Net (NDP) 13320

Uses

D.1Compensation of employees(CE) 6800

D.11 Wages & Salaries 5700

D.12 Employers' social security contribution 1100

D.121 Employers' actual social security Contribution

D.122 Employers' imputed social Contribution

D.29- D.39Other Taxes Less Subsidies On Production 450

B.2gOperating surplus , Gross 6470

B.2nOperating surplus , Net 6070


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II.1.2: Allocation of primary income account

Resources

B.2gOperating surplus, gross 6470

B.2nOperating surplus , Net 6070

D.4Property income receivable 600

D.41Net interest receivable 100

D.42Distributed income of corporations 500

D.421Dividends received 500

Uses

D.4Property income payable 1900

D.41Net interest payable 400

D.42Distributed income of corporations 1500

D.421Dividends paid 1500

B.5gBalance of primary incomes, gross 5170

B.5nBalance of primary incomes, net 4770


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II.2: Secondary distribution of income account

Resources

B.5gBalance of primary incomes, gross 5170

B.5nBalance of primary incomes, net 4770

Uses

D.5Current taxes on income, wealth, etc. 800

B.6gDisposable income, gross 4370

B.6nDisposable income, net 3970


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II.4: Use of income account

ResourcesB.5gBalance of primary incomes, gross 4370B.5nBalance of primary incomes, net 3970

UsesD.8Adjustment for the change in pension entitlements. 0

B.8gSaving, gross 4370B.8nSaving, net 3970


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II.1: Capital account

Changes in liabilities and net worth

B.6nSaving, net 3970

Changes in assets

P.5gGross capital formation 5440

P.5nNet capital formation 5040

P.51gGross fixed capital formation 5000

P.51cConsumption of fixed capital -400

P.52Change in inventories 440

B.9Net lending (+)/net borrowing (–) -1070


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Summary

• The use of company accounts to compile national accounts is not new, actually they are considered one of the main sources used for compiling national accounts.

• In spite of the many differences between company accounts and national accounts the capacity of using directly company accounts to compile national accounts is obviously large.

• It is possible to compile national accounts for non-financial companies as being the result of aggregation of the individual company records, naturally with a number of adjustments.


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Suggested reading

• Guidebook on the Use of Administrative Data in National Accounts (Draft), UNECA, Chapter 3

• The 2008 SNA, European Commission, IMF, OECD, UN, World Bank, 2009;

• Chapter 4: Institutional units and sectors

• Chapters 6 to 10: Production account to capital account

• Chapter 21: Measuring corporate activity

• Essential SNA: Building the basics, Eurostat, 2013 edition

• Chapter 5: Administrative data sources: Sections 1 and 2.1

THANKS / MERCI

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