1. THE DISTINCTION AND LINKS BETWEEN BALANCE SHEETS OF NON-FINANCIAL CORPORATIONS IN THE SNA AND BUSINESS ACCOUNTING Peter van de Ven Head of National Accounts, OECD NBS-OECD Workshop on National Accounts Guangzhou, December 2 – 5, 2014

2. Introduction Main data sources for compiling institutional sector accounts for corporations Business Accounting Standards Similarities and differences between SNA and business/tax accounting Multinational enterprises

3. Data sources for corporations Data sources may of course differ across countries Supply and Use Tables: specific production statistics For institutional sector accounts, data are needed from profit and loss accounts and balance sheets: –Specific surveys General Statistics on Income and Finance Specific statistics or information for certain groups of companies (e.g. hospitals, public corporations, etc.) FDI and FATS –Annual reports of companies –More and more data used from administrative sources, e.g. tax data or registers with data from annual reports –Often combination of various sources

4. Business Accounting Standards Sources usually based on business accounting standards and/or tax rules Business Accounting Standards published by International Accounting Standards Board (IASB) gaining growing importance => International Financial Reporting Standards (IFRS): http://www.ifrs.org/IFRSs/Pages/IFRS.aspx (also available in Chinese) http://www.ifrs.org/IFRSs/Pages/IFRS.aspx Many countries (intend to) apply the relevant standards in law or otherwise, especially for larger corporations Note: Development of International Public Sector Accounting Standards (IPSAS), but not yet that much applied

5. Similarities with SNA 2008 Main principles the same as the SNA: –Economic substance takes precedence over legal form –Conceptually preferred approach versus practical possibilities Both based on double entry bookkeeping: consistency between balance of non-financial transactions and balance of financial transactions (budget identity) => Jane Gleeson – White: “Double Entry” Both based on accrual accounting, not cash accounting Breakdowns of transactions and balance sheet positions rather similar

6. Main differences with SNA 2008 (1) Definition of income: SNA 2008 excludes holding gains/losses from income, it also excludes capital transfers and other changes in the volume of assets from income Provisions and contingent liabilities not recognised in the SNA 2008 Asset boundary of the SNA 2008 is larger than usual practice in business accounting: SNA 2008 treats much more expenditures as investments, adding to the capital stock of non-financial assets, e.g. various intangible assets Service lives of assets in business accounting usually based on tax rules

7. Main differences with SNA 2008 (2) Valuation principles: –Business accounting: “historic valuation” of non- financial assets (assets valued at the original purchase price) –SNA 2008: “current replacement costs” or “opportunity costs” –Under inflationary conditions: Operating surplus/ profits cf. SNA < Operating surplus cf. business accounting: withdrawals from inventories and depreciation in business accounting based on lower prices (note: service lives!) Value of non-financial assets will also be smaller, also because service lives according to tax rules then to be shorter

8. Multinational Enterprises For multinational enterprises (MNEs), data according to IFRS primarily available in a consolidated form For purposes of taxes and also statistics, data are needed for the national part of the MNE => however, recording also influenced by IFRS and other business accounting standards Additional difference between SNA and business accounting: reinvested earnings on foreign direct investment: –Undistributed profits of subsidiaries recorded as distributed income –In financial accounts: the relevant income is recorded as reinvestment in equity –Savings and net worth of subsidiaries basically equal to zero

9. Multinational Enterprises: allocation of Value Added to countries Allocation of Value Added and profits by MNEs mainly driven by minimisation of global tax burden through: –Transfer pricing –Channelling funds through SPEs –Optimisation of recording economic ownership and use of IPPs –Optimisation of the organisation of global production arrangements Economic rationale, but it hampers analysis and policy from an economic substance point of view Lots of discussion, also in the area of national accounts => main conclusion: impossible to change the recording and impute alternative transactions Note: may affect GDP, but does not have an impact on GNI (as a consequence of treatment reinvested earnings)

10. Multinational Enterprises: allocation of Value Added to countries Example of profit shifting affecting value added (and GDP), not affecting primary income (and GNI) Country ACountry BCountry ACountry B Output 100250125250 Intermediate consumption -25-100-25-125 Value Added 75150100125 Compensation of employees -50-100-50-100 Operating surplus 2550 25 Dividends -10+10-10+10 Reinvested earnings -15+15-40+40 Balance (non-financial transactions) 0750 Cash and deposits (assets) +15+60+40+35 Equity (assets) +15+40 Equity (liabilities) +15+40 Balance (financial transactions) 0750

11. Multinational Enterprises: need for subsectoring Breakdown of corporations by ownership/control: –Public corporations –National private corporations –Foreign controlled corporations Can substantially add to the understanding of the behaviour of corporations and its impact on the domestic economy

12. Multinational Enterprises: more information More information, also on recording of global value chains, goods for processing, merchanting, etc., can be found at the following links: “The Impact of Globalization on National Accounts”: http://www.unece.org/fileadmin/DAM/stats/publications/Guide_on_I mpact_of_globalization_on_national_accounts__web_.pdf http://www.unece.org/fileadmin/DAM/stats/publications/Guide_on_I mpact_of_globalization_on_national_accounts__web_.pdf “Task Force on Global Production”: http://www.unece.org/statistics/about-us/statstos/task-force-on- global-production.html

13. Thank you for your attention! 13