1. UNECE – National Accounts Financial Accounts Michael Connolly – National Accounts, CSO Ireland April 2010 Agenda item 4

2. Theory and Practice of Holding Gains and Losses – Is the importance of revaluation reflected in the National Accounts ? Vaclav Rybacek, Czech Statistical Office April 2010 WGGNA - Merchanting

3. Structure of Paper  Theoretical arguements - wealth v’s saving  Changes in Net wealth resulting from changes in relative prices  Savings are Disposable income less final consumption  Practical issues – compilation of revaluation account  Discussion and Conclusions April 2010 UNECE – Financial Accounts

4. Theory and Practice - Holding Gains and Losses  Discussion on the link between Savings and Revaluation  Purpose of National Accounts to provide database on consumption and savings behaviour of agents  Highlights the fact that Use of Disposable income account excludes revaluations April 2010 UNECE – Financial Accounts4

5. 1 November 2015National Accounts Income5 Opening Position 1 Jan 2010 Net Purchases (+)/Sales (-) Foreign exchange changes Market Price Changes Other Changes Closing Position 31 March 2010 10010+5 0120 Holding gains/losses Revaluation = +10 STOCK –FLOW FOR QUOTED EQUITY

6. Theoretical Arguements - Wealth v’s Saving  The impact of Holding Gains/Losses on consumption behaviour  Wealth effect - gains on Financial assets or real estate gains (capital account) have an impact on consumption  Keynes windfall gains and losses - exclude from disposable income  High volatility of gains/losses – not sufficiently strong permanent component => exclude holding gains from Disposable Income  Revaluation not considered as a source of consumption or saving in SNA/ESA April 2010 UNECE – Financial Accounts

7. Theory and Practice - Holding Gains and Losses  Example given of the use of the proceeds of sale of CEZ shares to fund pension reforms – is this revaluation or disinvestment and reinvestment?  Distinction between “expected” and “pure” holding gains  Some link between production and expected holding gains - is this related to the projection of future earnings?  Impact of tax on gains – included in non-financial accounts while impact of gains are excluded April 2010 UNECE – Financial Accounts7

8. 1 November 2015 UNECE – Financial Accounts 8 Opening Position Net Purchases/Sales Foreign exchange changes Market Price Changes Other Changes Closing Position 120-10000110 Holding gains/losses Revaluation = 0 STOCK –FLOW FOR QUOTED EQUITY 1. OS +T+OC+R = CS 2. OS + (S - GCF) +OC+R = CS (substituted T with saving – capform)

9. Theoretical Arguements - Wealth v’s Saving  Don’t really know if transactions are always equivalent to saving less capital formation  How does disinvestment fit into this analysis?  For any asset, the balance sheet change, the difference between S (Saving) and I (CapForm) are taken up by financial investment (also I)  Therefore for any given asset-liability the balance sheet change is equal to I (investment) and revaluations plus other changes  April 2010 UNECE – Financial Accounts

10. Theoretical Arguements - Wealth v’s Saving  Therefore for any sector the net sum of net worth changes  Δ Net Worth = Saving +Reval and Other changes  The net revaluation can provide a potential source of funds – wealth effect  Actual withdrawal from accumulated assets is disinvestment April 2010 WGGNA - Merchanting

11. Compilation of Revaluation Accounts  Quantification of revaluation is a difficult task - asymmetric information from two sides of a financial transaction  Use of single source - assets side to produce accounts  Data sources –  Surveys transactions, revaluation and other changes reported  Banking statistics and admin data - transactions and revaluation derived from stock data  Derivatives and securities other than shares most problematic April 2010 UNECE – Financial Accounts11

12. Compilation of Revaluation Account  Discussion regarding Table 1 - how is it that the financial assets and liabilities do not balance for the overall economy ? Does it exclude ROW ?  “Rise in net worth caused by Non-financial assets.” Is this a structural point related to the Czech Republic only?  Some further elaboration if possible in relation to AF.7 Other Payables data issues. April 2010 WGGNA - Merchanting

13. Observations  IFRS 9 - introduces the revaluation effect into the Profit and Loss accounts for corporations  It is clear that revaluation or holding gains/losses have an impact on consumption and disposable income  The savings measure is more correctly required to reflect the total of disposable income over final consumption  Importance of revaluations in business cycle analysis through real and neutral holding gains/losses April 2010 UNECE – Financial Accounts13

14. Conclusions  Careful how we think about reval  We can have a wealth effect arising from revaluations  Once we liquidate these assets with positive revaluation we have a disinvestment - offset by another investment  The proceeds are used to invest elsewhere or in bank deposits or Capital Formation.  The dominant strategy in an ever rising price level environment is to be a holder of non-financial assets (property) and a debtor ??? April 2010 WGGNA - Merchanting

15. Financial Accounts in Hungary Csaba Ilyes, Head of Financial Accounts Division, Magyar Nemzeti Bank (Central Bank of Hungary) April 2010 UNECE – Financial Accounts15

16. Purpose and Characteristics  Development of the Financial (transactions) and Balance Sheet (positions) Accounts in Hungary since 2003  Quarterly and Annual time series from 1990  Principles  valuation, substance over form etc.  Accruals accounting  Market prices  ∑ components of changes of stocks ≡ changes in stocks  Correspondence between assets and liabilities  Consistency - consolidated/non consolidated – annual/quarterly April 2010 16UNECE – Financial Accounts

17. Purpose and Characteristics  Market valuation and difficulties with non-traded securities  Methodologies – Accruals, Position plus accrued interest, Institutional sectors  Presentation, stock –flow, consolidation,  Quarterly vs annual accounts, revisions etc.  Institutional Units - Institutional Sectors  Data sources April 2010 UNECE – Financial Accounts

18. Data  Data sources:  Central Bank(BOP, Monetary Statistics, Securities stats)  Annual reports of Corporations  Supervisory reports (Pension Funds, Investment Funds etc.)  Tax Returns for corporate balance sheets  Government budgetary data  NPIs from CSO April 2010 18UNECE – Financial Accounts

19. Data  Data hierarchy (1. Securities, 2.BOP 3.MFI Balance Sheets.......8. NPIs)  Data gaps - cash, loans,insurance technical reserves, derivatives and other receivables are incomplete?  NFCs, h/h good quality  Estimations - flows from stocks, valuations from currency changes  Net lending /borrowing - less reliable that for Non- Financial Accounts  Impact of inflation on income and positions  Co-operation with CSO/Central Bank to reduce imbalances B9/B9f April 2010 UNECE – Financial Accounts

20. Conclusions and Questions  Use of a single source at instrument level - good for symmetry assets/liabilities - could obscure data problems  Quality of household data - “Financial Accounts of Households are of high quality” related to financial intermediaries  Substantial use of Administrative records – align with ESA /SNA accounting standards April 2010 UNECE – Financial Accounts20

21. Conclusions and Questions  Is it really appropriate to measure difference between B.9 and B.9f as a % of GDP?  Are the B.9 and B.9f for Govt and Corporations generally positive and ROW and H/Holds generally negative?  What about SPEs in Hungary?  Financial Accounts can be compiled by Central Bank or NSI - which is optimal? Does it depend on who is the BOP compiler? April 2010 UNECE – Financial Accounts

22. Thank you for your attention April 2010 WGGNA - Merchanting