1. Integration of natural resource wealth in the Canadian National Balance Sheet Accounts Implementation challenges Note by Canada

2. 08/02/2014 Statistics Canada Statistique Canada 2 Natural Resource Wealth Canada has substantial reserves of natural resources (NR) - Energy and minerals in the ground - Accessible stands of timber in forests In 2010, natural resource wealththe dollar value of selected resource reservesstood at $1.16 trillion Important in terms of growth... exports, employment and income economic accounts

3. Current Partial Integration in CSNA Current treatment of NR in Canadian system of national accounts reflects a partial integration Specifically, NR are incorporated into annual estimates of national wealth... At economy-wide level on Consolidated National Balance Sheet National wealth covers produced as well as non- produced assets includes NR by major type Two issues: Frequency of NR; develop sectoral estimates for National Balance Sheet Accounts 08/02/2014 Statistics Canada Statistique Canada 3

4. International standards' guidance - SNA08 SNA08 Assets appear on the balance sheet of the unit that is the economic owner of the asset`` (SNA08 13.3) a key principle in the economic accounts... But not always followed in SNA08... In many cases this unit (the economic owner) will also be the legal owner but in the case of a financial lease, the leased asset appears on the balance sheet of the lessee, while the lessor has a financial asset of similar amount and a corresponding claim on the lessee (SNA08 13.3 ) But is it required to treat NR as a leased produced asset ? 08/02/2014 Statistics Canada Statistique Canada 4

5. :... On the other hand, when a natural resource is the subject of a resource lease, the asset continues to appear in the balance sheet of the lessor even though most of the economic risks and rewards of using the asset in production are assumed by the lessee (SNA08 13.3) No SNA08 guidance as to why in this case... Why violate the key economic ownership principle? 08/02/2014 Statistics Canada Statistique Canada 5 SNA 2008 (contd)

6. Contracts, leases and licenses may be operating leases, licenses to use natural resources, permits to undertake specific activities and entitlement to future goods and services on an exclusive basis... these sorts of contracts are regarded as assets only if the existence of the legal agreement confers benefits to the holder in excess of the price paid by the lessor, owner of the natural resource or permit issuer and the holder can realize these benefits legally and practically. It is recommended that such assets (the natural resource lease, permit or licenses) be recorded only when the value of the asset is significant and realized, in which case a suitable market price necessarily exists. (SNA08 13.52) NR pass the significance and suitable market tests resource leases should be recorded... As a non-financial intangible asset, following corporate accounting 08/02/2014 Statistics Canada Statistique Canada 6

7. SNA 2008 (contd)... Because there is no wholly satisfactory way in which to show the value of the asset split between the legal owner and the extractor, the whole of the resource is shown on the balance sheet of the legal owner and the payments by the extractor shown as rent (SNA08 13.50) Possible interpretation: second-best solution An attempt at establishing a one approach fits all economies... Realistic? For CSNA implementation issues 08/02/2014 Statistics Canada Statistique Canada 7

8. SNA08 Issues in relation to sectoring natural resource wealth Inconsistency with economic ownership principle Does not reflect economic reality in Canada and in a number of other economies no one approach applies to all economies Accounting standards for corporations and government Does not articulate impact on government accounts... GFS? No clear distinction between value of NR and associated resource leases (rights to extract) 08/02/2014 Statistics Canada Statistique Canada 8

9. SEEA03 1. The draft SEEA (2012) proposes that the value of mineral and energy resources is split between the two owners based on their share of the future stream of resource rent. The share accruing to the government should be based on the expected stream of payments of rent by the extractor to the government SEEA supports the partitioning of NR with options Can the physical assets be partitioned or is their an approach that shows claims based on rent shares? 08/02/2014 Statistics Canada Statistique Canada 9 1 SEEA (2003). Integrated Environmental and Economic Accounting, Handbook of National Accounting, United Nations, New York

10. Government Accounting Natural resource stocks are not included in government financial statements Not included in IMF GFS manual currently being updated Government holds assets in trust for the nation While stocks not necessarily recognized, revenues including royalties and resource rights are recognized Suggests a corresponding asset 08/02/2014 Statistics Canada Statistique Canada 10

11. Corporate Accounting Usually carried as intangible asset (also some out-of-scope depletable assets) Carried at written-down acquisition cost rather than market value Can be sold (implies claim on the resources) and would be carried at transaction price Substantial revenues and profits (largest share of the rent) imply economic ownership Reflected in corporate share values 08/02/2014 Statistics Canada Statistique Canada 11

12. Proposed CSNA treatment Issue of partitioning the physical assets Can physical assets be sectored? NO Issue of assets required to match income stream Assumptions related to future stream of earnings and royalties Assumptions related to return to capital Assumptions related to intangible assets (claims on the physical stock – right to exploit the reserve) proportional to their respective shares of rent 08/02/2014 Statistics Canada Statistique Canada 12

13. Proposed CSNA treatment, cont`d 08/02/2014 Statistics Canada Statistique Canada 13 INSERT MATRIX HERE Sectored NR assets... sectoral net worth, national wealth

14. Sectoring Methodolgy Draft SEEA 2012 base the governments share of natural resource wealth on the NPV of the expected stream of government income paid by resource extractors to governments (i.e., royalties and special taxes). The amount of royalties depends on a number of factors, such as resource price, quantity of production and government's policies 08/02/2014 Statistics Canada Statistique Canada 14

15. Sectoring Methodology (contd) To arrive at the corresponding corporate sector asset, the NPV of the remaining resource rent (total resource rent less government royalties and special taxes) is allocated to the corporate sector as its share of resource wealth 08/02/2014 Statistics Canada Statistique Canada 15

16. Summary Plan to implement sectored natural resources in 2014 mini historical revision Based on the model described here Would be appreciative of feedback (now or later) Questions or Suggestions? Joe.Wilkinson@statcan.gc.ca 08/02/2014 Statistics Canada Statistique Canada 16