1. Leases, licences, permissions and permits
GFS/EDP-course 2014
Leases, licences, permissions and permits
Chapter 11.11: A general introduction
Chapter 11.11: Leases, licences & permissions
Chapter 11.11: Leases, licences and permissions

2. Chapter 11.11: Leases, licences & permissions
GFS/EDP-course 2014
Overview of the issue
Government are involved in:
Leases e.g.
Issuing a lease to operate assets
Issuing a lease to exploit natural resources
Using a financial lease rather than purchasing assets
Or, the ‘sale’ of a permission or the issue of a permit e.g.
Issuing a permit or licence to exploit natural resources
Issuing a permit or licence to operate a taxi
Chapter 11.11: Leases, licences & permissions 2
Chapter 11.11: Leases, licences and permissions

3. Chapter 11.11: Leases, licences & permissions
GFS/EDP-course 2014
So… in overview
A lease or a licence could result in the payment of rent
A lease could relate to the repayment of a loan
A licence or a permit could be recorded as tax
A lease, licence or a permit could result in the purchase of an asset NB
Beware of the terminology
Consider the economic reality over the legal form
See ESA10 Chapter 15 and MGDD Part VI
Chapter 11.11: Leases, licences & permissions 3
Chapter 11.11: Leases, licences and permissions

4. Overview of the session
GFS/EDP-course 2014
Overview of the session
Brief reminder: the borderline issues in chapter 8 week 1
Contracts and licences for the use of an asset:
a produced asset
a non produced asset
Widening the analysis further in later sessions
PPPs & concessions,
Sale & lease back
Mobile phones
Chapter 11.11: Leases, licences & permissions 4
Chapter 11.11: Leases, licences and permissions

5. Government receipts: a brief reminder of borderline cases in chapter 8
GFS/EDP-course 2014
Government receipts: a brief reminder of borderline cases in chapter 8
Tax or sale of a service?
Receipt in return for permission to undertake an activity
Receipt for a product
Receipt for use of a government asset
Receipt for using a non-produced asset
Chapter 8 in week 1 and MGDD part VI.1 covers these
Here we widen the analysis
Chapter 11.11: Leases, licences & permissions 5
Chapter 11.11: Leases, licences and permissions

6. A brief reminder: Tax or service/sale?
GFS/EDP-course 2014
A brief reminder: Tax or service/sale?
Service/sale if:
Work involved is ‘individually requited’
Cost of work done by government is in proportion to the fee paid i.e. the fee reflects the cost (‘something’ for ‘something’)
E.g. Issue of an identity card sale of a service
Cost paid reflects the cost to produce the card
Government performs a function by checking identity
Fee is excessive or issue is automatic tax
Chapter 11.11: Leases, licences & permissions 6
Chapter 11.11: Leases, licences and permissions

7. A brief reminder: Permission / licence to undertake an activity
GFS/EDP-course 2014
A brief reminder: Permission / licence to undertake an activity
The permission can only be granted by government.
Permission to drive a car on the road?
An annual fee paid by all motorists
Permission to sell alcohol?
Regulated individuals need to complete a course and demonstrate their understanding of the relevant law
Permission to operate a taxi
One permission or license required for each taxi
Use the previous analysis for tax or sale of a service
Chapter 11.11: Leases, licences & permissions 7
Chapter 11.11: Leases, licences and permissions

8. A brief reminder: Permission / licence to undertake an activity cont
GFS/EDP-course 2014
A brief reminder: Permission / licence to undertake an activity cont
Where: (e.g. licence to operate a taxi)
The permission can only be granted by government
The permission does not utilise a government asset
The permission is issued to a restricted number of units and government enforces the restriction
The permission is not subject to qualifying criteria
The units can transfer the permission / permit.
creates monopoly profits for holder / operator
government receipt (the fee) is a tax (accrue it)
This permit can give rise to an AN.223 asset
Chapter 11.11: Leases, licences & permissions 8
Chapter 11.11: Leases, licences and permissions

9. Contracts & licences for the use of a government asset
GFS/EDP-course 2014
Contracts & licences for the use of a government asset
Payment for use of a government produced asset
Payment per use, or for use for a time period ≤ 1 year
E.g. Receipt for use of a swimming pool or a toll bridge Treatment: P.1 (sale of output by government)
Payment for use of a government asset for the rest of its economic life
E.g. Contract to sell the swimming pool or toll bridge
Treatment: P.51 (GFCF, sale of asset by government)
Payment for use of a government asset for > year but less than its economic life more complex, more anaysis…
2nd and 3rd bullets – Payment for use of a government asset for the rest of its economic life be could presented as a ‘sale’ or a ‘lease’ or as a permission to operate:
Sale of the pool ; sale of a licence to operate the pool : permission to operate the pool
Chapter 11.11: Leases, licences & permissions 9
Chapter 11.11: Leases, licences and permissions

10. Contracts & licences for the use of a government asset
GFS/EDP-course 2014
Contracts & licences for the use of a government asset
Payment to use a government non produced asset
Payment to use a natural resource for a limited time
E.g. Receipt for exploitation of water or oil for a specified time
Treatment: D.45 (rent of a natural asset)
Payment to use a natural resource for the rest of its economic life (i.e. until extinction)
E.g. Receipt for the sale of natural resource
Treatment: NP.1 (sale of a non produced)
Payment to use a natural resource for an extended time with other criteria more complex, more analysis…
Chapter 11.11: Leases, licences & permissions 10
Chapter 11.11: Leases, licences and permissions

11. More complex contracts & licences for the use of an asset
GFS/EDP-course 2014
More complex contracts & licences for the use of an asset
Payment by for use of an asset for > year but less than its economic life….. 3 types of leases are distinguished in ESA10 for non financial assets:
An operating lease;
A finance lease; or
A resource lease (e.g. for land or radio spectra)
Look beyond the legal form at economic reality
NB. Economic owner has risks and rewards of ownership
Within ESA10 the terms these 3 types of leases have particular associated treatments BUT in the accounting world the name given to a contract may not coincide with the treatment required in national accounts.
National accounts is focussed on economic ownership and economic reality – remember lots of our analyses of complex issues come back to these basics
Chapter 11.11: Leases, licences & permissions 11
Chapter 11.11: Leases, licences and permissions

12. More complex contracts & licences for the use of an asset
GFS/EDP-course 2014
More complex contracts & licences for the use of an asset
An operating lease;
This is close to rental for the lessee
Risk of ownership remains with the lessor (legal owner is economic owner)
Lessee (user) is not the economic owner
A finance lease;
This is close to ownership for the lessee
Risk of ownership is with the lessee (legal owner is not economic owner)
Lessee (user) is the economic owner
A resource lease (e.g. for land or radio spectra)
In its simple form, like an operation lease and close to rental
Chapter 11.11: Leases, licences & permissions 12
Chapter 11.11: Leases, licences and permissions

13. More complex contracts & licences for the use of an asset:
GFS/EDP-course 2014
More complex contracts & licences for the use of an asset:
An operating lease;
Lessor allows the lessee to use the asset for a contracted period
Asset is not fully used up, so can be leased out again
Asset is on lessor’s balance sheet
Capital consumption is also with lessor
Accrue rental payments from lessee (P.2, purchase of a service) to lessor (P.1, sale of a service)
Payment could involve F.8 if all rental is paid up front
Risks and rewards of ownership are with the lessor
e.g. operating lease for government airport: Lessor (government) owns the airport, lessee pays to use (i.e. operate) the airport
Chapter 11.11: Leases, licences & permissions 13
Chapter 11.11: Leases, licences and permissions

14. More complex contracts & licences for the use of an asset
GFS/EDP-course 2014
More complex contracts & licences for the use of an asset
A finance lease;
Legal form: Bank buys aircraft and leases it to airline company.
Airline makes monthly payments to bank
Airline maintains aircraft and has option to buy it at end of lease period for a nominal fee.
Economic reality: a finance lease, the bank is effectively making a loan so that the airline can buy the aircraft
Aircraft should appear on airline company balance sheet and the airline records capital consumption
Impute F.4 loan, interest payments & a management fee
Airline effectively purchases aircraft with a loan which it pays off over time.
Risks and rewards of ownership are with the lessee
Chapter 11.11: Leases, licences & permissions 14
Chapter 11.11: Leases, licences and permissions

15. More complex contracts & licences for the use of an asset
GFS/EDP-course 2014
More complex contracts & licences for the use of an asset
A resource lease (e.g. land or water);
Lessor allows the lessee to use the asset for a contract period
Asset is on lessor’s (owner’s) balance sheet
Any decline in value is also with lessor (K.21 depletion)
Accrue D.45, rent payments, from lessee to lessor
Payment could involve F.8 if all rental is paid up front
But lessor (owner) may allow extended use of the asset that, in effect, gives control of the asset to the lessee (user) with little or no intervention from the owner.. See next slide..
Could lead to user recording rent payment and creation of an asset
We will take this analsis further in a later session..
Chapter 11.11: Leases, licences & permissions 15
Chapter 11.11: Leases, licences and permissions

16. More complex contracts & licenses for the use of an asset
GFS/EDP-course 2014
More complex contracts & licenses for the use of an asset
If both:
Market price > contract price; and
User can transfer the contract;
Consequence:
The increase in the market price above the original price creates an asset that appears on the balance sheet
e.g. If you rent land for 4 years at €100 per year and the market price rises to €120 at end of year 1, if you can transfer the contract, the balance sheet would record €60 at this point.
This could also relate to a contract to operate assets
Chapter 11.11: Leases, licences & permissions 16
Chapter 11.11: Leases, licences and permissions