Regulation (EU) No 549/2013 of the European Parliament and of the Council of 21 May 2013 on the European system of national and regional accounts in the European Union Text with EEA relevance

• 20.198Payments to public corporations on a large and irregular basis, often called 'capital injections', are not subsidies. They are events that aim at capitalising or re-capitalising the beneficiary corporation, being put at the disposal of the latter in a long term perspective. According to the 'capital injection test', such capital injections are either capital transfers or acquisitions of equity, or a combination of both. The two cases are as follows.

• (a) A payment to cover accumulated, exceptional or future losses, or provided for public policy purposes, is recorded as a capital transfer. Exceptional losses are large losses recorded in one accounting period in the business accounts of a corporation, which usually arise from downward revaluations of balance sheet assets, in such a way that the corporation is under threat of financial distress (negative own funds, breach of solvency, etc.).

• (b) A payment where the government is acting as a shareholder in that it has a valid expectation of earning a sufficient rate of return, in the form of dividends or holding gains is an acquisition of equity. The corporation must enjoy a large degree of freedom in how it uses the funds provided. When private investors are part of the capital injection, and the conditions for private and government investors are similar, this is evidence that the payment is likely to be acquisition of equity.

• 20.199In many cases, payments made by government units to public corporations are intended to compensate for losses in the past or in future. Government payments are treated as an acquisition of equity only if there is sufficient evidence of the corporation's future profitability and its ability to pay dividends.

• 20.200Given that capital injections increase the own funds of the unit invested in, it is likely to also lead to an increase of the investor's equity stake in the invested unit. This is automatically the case of those 100 % owned public corporations whose equity is the value of their own funds. Such an increase in equity is not used as a criterion to judge the nature of the capital injection; instead, it leads to an entry in the revaluation account when the injection is recorded as capital transfer, and to an entry in the financial accounts when the injection is recorded as addition to equity.

Rules applicable to particular circumstances

• 20.201Capital injections carried out in the context of privatisation, when privatisation is expected to occur in less than one year, are recorded as a transaction in equity for the amount not in excess of privatisation proceeds, the remainder being subject to the capital injection test. The proceeds of privatisation are then deemed to repay the capital injection.

• 20.202Capital injections can be carried out by way of debt cancellation or debt assumption. Accounting rules applicable to those events result in the payment being a capital transfer, except for a privatisation when they are an acquisition of equity, the value of which is within the amount of privatisation proceeds.

• 20.203Capital injections in kind, by way of the provision of non-financial assets, are without impact on net lending/net borrowing. When the injection is expected to earn a sufficient rate of return, it is treated as a change in structure (K.61), the asset provided entering the balance sheet of the corporation via the other change in volume of assets accounts. When the injection is not expected to earn a sufficient rate of return, a capital transfer (investment grant, D.92) is recorded together with a matching entry in disposal of non-financial assets (P.5 or NP).

Fiscal operations

• 20.204Fiscal operations are carried out by government and financed through the budget under the usual budgetary procedures. However, some operations originated by government units may involve the intervention of entities not ruled by the legal government framework, including public corporations. Though they will not be reported in the budget, and might escape the usual control procedures, it is appropriate to record them within government revenue and expenditure. This is because the ESA recognises when government is the principal party to an operation and the public corporation is acting as an agent.

Public corporations distributions

Dividends versus withdrawal of equity

• 20.205The earnings from equity investment in public corporations may be recorded as a distributive transaction which are usually dividends, or as a financial transaction. Dividends are property income. The resource available for distribution of dividends is the entrepreneurial income of the corporation. Thus, the resources from which dividends are paid would include neither the proceeds of sales of assets nor the distribution of revaluation gains. Dividends funded from, or based on, such sources are recorded as withdrawal of equity. The same basic principles apply to withdrawals from income of quasi-corporations.

• 20.206Large and irregular payments or payments that exceed the entrepreneurial income of the year are called super-dividends. They are funded from accumulated reserves or sale of assets, and are recorded as withdrawal of equity equal to the difference between the payment and the entrepreneurial income of the relevant accounting period. In the absence of a measure of entrepreneurial income, the operating profit in business accounts is used as a proxy.

• 20.207Interim dividends are recorded as property income (D.42) to the extent that they can be related to the accrued income of the corporation. In practice, two conditions must be fulfilled:

• (a) the corporation making this payment makes short-period accounts available to the public and the payment is based on at least two quarters;

• (b) the interim payment should be in the same proportion as the dividends paid in the previous years, consistent with the usual rate of return to the shareholder and with the trend in growth of the corporation.

• If these conditions are not met, the interim payment is recorded as a financial advance, classified under other account receivable/payable (F.8), until the annual result is determined, given the need to conduct the super-dividend test of comparing the interim dividends with the entrepreneurial income of the year.

Taxes versus withdrawal of equity

• 20.208Taxes have a legal basis and are under the control of legislative procedure. These transactions, which are by mutual agreement, constitute the main revenue of general government.

• 20.209However, it may occasionally happen that a transaction described as a tax in legal documents is not recorded as such in the ESA. One example is the case of an indirect privatisation. If a public holding corporation sells its equity ownership in another public corporation and remits some of the proceeds to the government under the heading of tax, or is liable to a tax generated by the privatisation event and subsequent realised gains, under the heading of a capital gains tax, the payment is recorded as a financial transaction.

Privatisation and nationalisation

Privatisation

• 20.210Privatisation commonly involves the sale by government of shares or other equity in a public corporation. Privatisation proceeds are not government revenue but a financial transaction recorded in the financial account, with no impact on the government deficit/surplus, as this event is net worth neutral and is a reclassification of assets (AF.5 against AF.2) in the balance sheet of government. A direct sale of non-financial assets, such as buildings and land rather than an entire corporation, is recorded in the capital account as disposals of fixed assets or non-produced non-financial assets, unless carried out in the context of corporate restructuring.

• 20.211Any purchase of services to achieve this process should, however, be recorded as government intermediate consumption and should not be netted out of the privatisation proceeds. Thus, privatisation proceeds are to be recorded gross in the financial accounts.

Indirect privatisations

• 20.212Privatisation can occur under more complicated institutional arrangements. For instance, assets of a public corporation may be sold by a public holding company, or another public corporation, controlled by government, and all or part of the proceeds are passed to government. In all cases, the payment to government of the proceeds on the sale of assets in this manner is to be recorded as a financial transaction, irrespective of the way it is presented in the books of the government or of its subsidiary, with a simultaneous decrease in shares and other equities corresponding to the partial liquidation of assets of the holding company. Any privatisation proceeds retained by the holding are privatisation receipts of government ploughed back by way of a capital injection, which is then subject to the capital injection test to determine the nature of the payment.

• 20.213It may also happen that the public holding company, or other public corporation, acts as a 'restructuring agency.' In such a context, the proceeds of the sale may not be paid to government but kept by the restructuring agency to inject capital into other enterprises. When the restructuring unit, whatever its legal status, acts as a direct agent of government, its main function is to restructure and change the ownership status of public corporations and to channel funds from one unit to the other. The classification of the unit will normally be to the general government sector. However, when the restructuring unit is a holding company controlling a group of subsidiaries, and only a minor part of its activity is dedicated to channelling funds in the way described above, on behalf of government and for public policy purposes, the public holding company is classified in one of the corporations sectors according to its main activity, and the transactions made on behalf of government are to be rerouted through government.

Nationalisation

• 20.214Nationalisation means government taking control of specific assets or an entire corporation, usually by acquiring the majority or the whole stake in the corporation.

• 20.215Nationalisation usually takes the form of a purchase of shares: government buys all or part of the shares in the corporation at market price — or at a price sufficiently close, considering usual market practices with regard to valuation of corporations in the same activity. The transaction is by mutual agreement, even though the former owner may have little choice with regard to refusing the offer, or negotiating the price. The purchase of shares is a financial transaction to be recorded in the financial account.

• 20.216Exceptionally, government may acquire ownership over a corporation through an appropriation or confiscation: the change in ownership of assets is not the result of a transaction made by mutual agreement. There is no payment to the owners, or such payment which is made does not reflect the fair value of assets. The difference between the market value of the assets acquired and any compensation provided is recorded as an uncompensated seizure in the other changes in the volume of assets account.

Transactions with the central bank

• 20.217Two types of payments by the central bank to the government are observed in practice:

• (a) payments made on a regular basis, usually in the form of dividends, based on the current activity of the central bank (like managing foreign exchange reserves). These payments are recorded as dividends as long as they are not higher than a measure of net operating income, consisting of net property income, net of costs and of any transfers. Amounts in excess of this sum are to be recorded as a decrease in equity;

• (b) exceptional payments following the sale or the revaluation of reserve assets. These payments are recorded as a withdrawal of equity. The rationale is that the value of such assets affects the value of the equity liability of the central bank and the equity assets of government. Thus, holding gains on the reserve assets of the central bank have a counterpart in the equity assets of government via the equity liability of the central bank.

• Payments from central government to the central bank are to be recorded in a similar way as for other public corporations. In particular, large payments are subject to the 'capital injection test' to determine the character of the payments.

Restructures, mergers, and reclassifications

• 20.218When a public corporation is restructured, financial assets and liabilities may appear or disappear reflecting new financial relationships. These changes are recorded as changes in sector classification and structure in the other changes in the volume of assets account. An example of such a restructuring is when a corporation is split into two or more institutional units and new financial assets and liabilities are created.

• 20.219The purchase of shares and other equity of a corporation as part of a merger, on the other hand, is to be recorded as a financial transaction between the purchasing corporation and the previous owner.

• 20.220Any change in the classification of assets and liabilities not related to restructuring or changes in sector classification, such as the monetisation or demonetisation of gold, is recorded as a change in the classification of assets or liabilities in the other changes in the volume of assets account.

Debt operations

• 20.221Debt operations can be particularly important for the general government sector, as they often serve as a means for government to provide economic aid to other units. The recording of these operations is covered in Chapter 5. The general principle for any cancellation or assumption of debt of a unit by another unit, by mutual agreement, is to recognise that there is a voluntary transfer of wealth between the two units. This means that the counterpart transaction of the liability assumed or of the claim cancelled is a capital transfer. No flow of money is usually observed, this may be characterised as a capital transfer in kind.

Debt assumptions, debt cancellation and debt write-offs

Debt assumption and cancellation

• 20.222Debt assumption occurs when a unit assumes responsibility for another unit's outstanding liability towards a creditor. This happens frequently when a government guarantees a debt of another unit and the guarantee is called or activated.

• 20.223When a government assumes a debt, the counterpart transaction of the new government liability is a capital transfer in favour of the defaulting debtor. The case where a financial asset is recorded as a counterpart is to be examined carefully. There are two different contexts.

• (a) An actual pre-existing financial asset is acquired against a third party, as in the case of guaranteed export insurance. Thus, government records, as the counterpart transaction of its new liability, the acquisition of a financial asset equal to the present value of the amount expected to be received. If this amount is equal to the liability assumed, no further entries are required. If the amount expected to be recovered is less than the liability assumed, the government records a capital transfer for the difference between the liability incurred and the value of the asset acquired.

• (b) Government simply records a claim against the benefiting corporation, which is in most cases a public corporation in difficulty. In general, because of the very hypothetical value of this claim, no such claim is recorded. Possible future repayments by the beneficiary will be recorded as revenue by the government.

• 20.224Debt payments on behalf of others are similar to debt assumptions, but the unit making the payments does not assume the entire debt. The transactions recorded are similar.

• 20.225Debt cancellation (or debt forgiveness) is the extinction or reduction of a claim by agreement between the creditor and the debtor. The creditor records a capital transfer payable for the amount cancelled and the other unit records a capital transfer receivable. Mutual agreement is often presumed though not formally established in case of government forfeiting claims, such as in the case of student loans and lending to farmers.

• 20.226Debt assumptions and debt cancellations which benefit a controlled entity result in an increase in the value of the equity in the unit being invested in, that is reflected in the revaluation accounts. If a government has its debt assumed by another government, then it records a capital transfer revenue, a new debt to the assuming government unit, or both.

• 20.227Debt assumptions and debt cancellations carried out in the context of privatisation are recorded as transactions in equity, for the amount not in excess of privatisation proceeds, the remainder being a capital transfer, in order to ensure the accounting neutrality of the way in which privatisation is conducted. Privatisation must be carried out within one year.

• 20.228When debtor governments offer to repay the debt in anticipation, at a value below the principal value which includes interest in arrears, the event leads to an entry in the capital account with an impact on the government net lending/net borrowing, as a grant by the creditor is presumed. When early redemption leads to the payment of a penalty or fee to the lender as foreseen in the contract, the amount shall be recorded as income of the lender. In the case of securities, a buyback on the market leads to an entry in the revaluation accounts, unless the early redemption is imposed on the securities holder.

• 20.229The difference in value in case of sale to a third party of government claims against other governments leads to a capital transfer entry in the capital accounts, with an impact on the government deficit, because the nature of the claim implies an original intention to convey a benefit, and the sale is a way to conduct debt restructuring.

• 20.230As a result, the capital transfer expenditure of government is revenue of the debtor, in recognition of the fact that it is the genuine beneficiary of the transaction, with an entry in the rest of the world account matching the creditor government expenditure. For the seller, the transaction value of the claim disposed off is the principal value. The value of the claim enters both the new creditor's and debtor's accounts, i.e. respectively, the bank balance sheet and the ROW accounts — for the international investment position, at its reduced value.

• 20.231In rarer cases, when the discount negotiated with the third party or with a debtor offering the repurchase of its debt only reflects changes in market interest rates, and not a change in credit worthiness, the government creditor can be presumed to be acting as a normal investor. The difference, net of any penalty or fee, is entered in the revaluation accounts. One test is whether the amount repaid could have exceeded the principal value.

Debt assumption involving a transfer of non-financial assets

• 20.232If a government wants to ease the debt burden of a public corporation, it may also, in addition to the debt assumed by a government unit, take over non-financial assets such as public transport infrastructure. This debt assumption involving a transfer of non-financial assets to the government unit is deemed to be made by mutual agreement, and has exactly the same impact as a debt assumption on the government net lending/net borrowing: the amount of the capital transfer to be recorded in favour of the corporation is equal to the amount of the debt assumed. An acquisition of non-financial assets has a negative effect on net lending (+)/net borrowing (–).

Debt write-offs or write-downs

• 20.233Debt write-offs are the reduction by a creditor in the balance sheet of the amount owed to it, usually when a creditor concludes that a debt obligation has little or no value, because the debt is not going to be paid; the debtor is bankrupt, has disappeared or cannot be realistically pursued for recoveries that would justify the various costs incurred. Debt write-downs refer to the reduction by a creditor in the carrying value of an asset in its balance sheet.

• 20.234Write-downs and write-offs are internal accounting actions by the creditor and are often not recognised as transactions, because they are not carried out by mutual agreement. However, it happens that write-downs and write-off do not amount to the annulment of the claim over the debtor and consequently there may commonly be reversals of write-downs, and less frequently write-offs.

• 20.235Debt write-downs do not lead as such to entries in the balance sheet of the creditor because the carrying value of the debt already reflects the market value of the instrument or is at nominal value in the case of loans, unless the market value is proxied by the written down book value (in the case where the write down enters the revaluation accounts). In contrast, debt write-offs lead to the removal of the asset from the creditor balance sheet by way of an other change in the volume for the amount exiting — the principal value for loan, a market value for securities, unless the write-off reflects a debt cancellation event. Thus, differently from debt assumption or debt cancellation, debt write-offs and write-downs have no effect on net lending/borrowing of government.

Other debt restructuring

• 20.236Debt restructuring is an agreement to alter the terms and conditions for servicing an existing debt, usually on more favourable terms for the debtor. The debt instrument that is being restructured is considered to be extinguished and replaced by a new debt instrument with the new terms and conditions. If there is a difference in value between the extinguished debt instrument and the new debt instrument, it is a type of debt cancellation and a capital transfer is necessary to account for the difference.

• 20.237A debt-for-equity swap occurs when a creditor agrees to replace a debt owed to it by an equity security. For example, government may agree with a public enterprise owned by it to accept an increase in the government's equity stake in the public enterprises in place of an existing loan. In such circumstance, the event should be subject to the capital injection test. Any difference in the value of the debt instrument being extinguished and the equity recognised is a capital transfer with an entry recorded in the revaluation accounts.

• 20.238Debt arrears occur when a debtor misses an interest or principal payment. The debt instrument will not normally change, but knowing the amount of debts in arrears can provide important information.

Purchase of debt above the market value

• 20.239The acquisition of debt for a value above the market value, at inception is called concessional loans, and later on debt defeasance. Both intend to convey a benefit and so the recording of expenditure such as a capital transfer is required.

• 20.240Debt defeasance occurs when a debtor matches debt instruments with financial assets having the same or greater debt service inflows. Even when the defeased instruments have been transferred to a separate entity, the gross position should still be recorded by treating the new entity as an ancillary unit and consolidating it with the defeasing unit. If the ancillary unit is non-resident, it is treated as a special purpose entity and the transactions of government with this unit should be treated as described in section ‘The government finance presentation of statistics’.

• 20.241Debt issued on concessional terms. There is no precise definition of concessional loans, but it is generally accepted that they occur when units of the general government sector lend to other units in such a way that the contractual interest rate is intentionally set below the market interest rate that otherwise would apply. The degree of concessionality can be enhanced with grace periods, frequencies of payments, and a maturity period favourable to the debtor. Since the terms of a concessional loan are more favourable to the debtor than market conditions would otherwise permit, concessional loans effectively include a transfer from the creditor to the debtor.

• 20.242Concessional loans are recorded at their nominal value just as other loans, but a capital transfer is recorded as a memorandum item at the point of loan origination equal to the difference between the contract value of the debt and its present value using a relevant market discount rate. There is no single market interest rate that should be used to measure the capital transfer. The commercial interest reference rate published by the OECD may be applicable when the loan is issued by one of its member countries.

Defeasances and bailouts

• 20.243A bailout is a term meaning a rescue from financial distress. It is often used when a government unit provides short-term financial assistance to a corporation to help it survive a period of financial difficulty or a more permanent injection of financial resources to help recapitalise the corporation. Bailouts of financial institutions are often referred to as financial defeasance. Bailouts are likely to involve highly publicised one-time transactions with large values and, therefore, to be easy to identify.

• 20.244Intervention of general government can take various forms. Examples are the following:

• (a) a government may guarantee certain liabilities of the enterprise to be assisted;

• (b) a government may provide equity financing on exceptionally favourable terms;

• (c) a government may purchase assets from the enterprise to be assisted for prices greater than their true market value;

• (d) a government may create a special purpose entity or other type of public body to finance and/or to manage the sales of assets or liabilities of the enterprise to be assisted.

• 20.245Government guarantees during a bailout are treated as one-off guarantees to entities in financial distress. An example is where the entity is not able or has substantial difficulties to meet its obligations since its cash generating abilities are limited or the tradability of its assets is severely limited due to exceptional events. This will normally lead to recording a capital transfer at inception, as if the guarantee were called, for the entirety of the granted guarantee or, in case a reliable estimation is available, for the amount of the expected call, which is the expected loss of government. See also paragraph 20.256.

• 20.246If the government buys assets from the enterprise to be assisted, the amount paid will normally be more than the true market price of the assets. The purchase is recorded at the actual market price and a capital transfer recorded for the difference between the market price and the total amount paid.

• 20.247During a bailout, governments often buy loans from financial institutions for their nominal value rather than their market value. Even though loans are recorded at nominal prices, the transaction is partitioned by recording a capital transfer and an entry in the revaluation accounts. If there is reliable information that some loans are irrecoverable, fully or for nearly their total amount, or if there is no reliable information on the expected loss, these loans are accounted for at zero value and a capital transfer is recorded for their former nominal value.

• 20.248If a public institutional unit is created by government with its only task being to assume management of the bailout, the unit should be classified in the general government sector. If the new unit is intended to be an on-going concern with the bailout a temporary task, its classification as a government unit or a public corporation is made following the general rules as described in the section on restructuring agencies above. Units that purchase financial assets from distressed financial corporations with the objective of selling them in an orderly manner cannot be considered financial intermediaries because they do not place themselves at risk. They are classified in the general government sector.

Debt guarantees

• 20.249A debt guarantee is an arrangement in which a guarantor agrees to pay a creditor if a debtor defaults. For general government, giving a guarantee is a way to support economic activities without a need for an immediate cash outlay. Guarantees have a significant impact on the behaviour of economic agents by modifying the lending and borrowing conditions on financial markets.

• 20.250For each guarantee, there are three parties involved: the lender, the borrower, and the guarantor. Originally, stocks and flows of the credit relationship are recorded between the lender and the borrower, while after the call stocks and flows related to the guarantee relationship are recorded between the lender and the guarantor. Thus, the activation of guarantees involves the recording of flows and changes in the balance sheets of the debtor, the creditor, and the guarantor.

• 20.251There are three main types of guarantee:

• (i) guarantees that meet the definition of a financial derivative;

• (ii) standardised guarantees; and

• (iii) one-off guarantees.

Derivatives-type guarantees

• 20.252Guarantees that meet the definition of financial derivatives are those that are actively traded on financial markets, such as credit default swaps. The derivative is based on the risk of default of a reference instrument and generally not actually linked to an individual loan or bond.

• 20.253When such a guarantee is initiated, the purchaser makes a payment to the financial institution creating the derivative. This is recorded as a transaction in financial derivatives. Changes to the value of the derivative are recorded as revaluations. If the reference instrument defaults, the guarantor pays the purchaser for its theoretical loss on the reference bond. This is also recorded as a transaction in financial derivatives.

Standardised guarantees

• 20.254Standardised guarantees cover similar types of credit risk for a large number of cases. It is not possible to estimate precisely the risk of any one loan being in default, but it is possible to estimate how many, out of a large number of such loans, will default. The treatment of standardised guarantees is explained in Chapter 5.

One-off guarantees

• 20.255One-off guarantees exist where the conditions of the loan or the security are so particular that it is not possible for the degree of risk associated with the loan to be calculated with any degree of accuracy. In general, the granting of a one-off guarantee is considered a contingency and is not recorded as a financial asset/liability in the balance sheet of the guarantor.

• 20.256In exceptional cases, one-off guarantees granted by governments to corporations in certain well-defined financially distressed situations (for example where the corporation has negative own funds), implying a very high likelihood to be called, are treated as if such guarantees were called at inception (see also paragraph 20.245).

• 20.257The activation of a one-off guarantee is treated in the same way as a debt assumption. The original debt is liquidated and a new debt is created between the guarantor and the creditor. The debt assumption implies the recording of a capital transfer in favour of the defaulting debtor. The capital transfer is offset by a financial transaction, the financial liability transferred from the corporation to government.

• 20.258The activation of a guarantee may or may not require repayment of debt at once. The accrual principle for time of recording suggests that the total amount of debt assumed should be recorded at the time the guarantee is activated and the debt assumed. The guarantor is the new debtor, and principal repayments by the guarantor and interest accruals on the assumed debt should be recorded when these flows occur. Thus, when calls on guarantees solely involve the settlement of the debt service due on the debt during the accounting period, as in the case of cash calls, a capital transfer is recorded for the amounts settled. However when a pattern of partial calls are observed such as three times in succession, and is expected to continue, a debt assumption is recorded.

• 20.259When the original debtor refunds the guarantor while an expenditure has been recorded on past guarantee calls, revenue is recorded by the guarantor. However this revenue should be tested for the super-dividend test when the debtor is controlled by the guarantor; any excess of the refund over the entrepreneurial income is recorded as withdrawal of equity.

Securitisation

Definition

• 20.260Securitisation consists of issuing securities on the basis of cash flows that are expected to be generated by assets, or other income streams. Securities depending on cash flows from assets are called 'asset backed securities' (ABS).

• 20.261In securitisation, the originator conveys ownership rights over assets, or the right to receive specific future flows, to a securitisation unit, which in return pays an amount to the originator from its own source of financing. Such a securitisation unit is often known as a special purpose entity. The securitisation unit obtains its own financing by issuing securities using the assets or rights to future flows transferred by the originator, as collateral. The key question in recording the payment by the securitisation unit to the originator is whether the transfer of the asset is a sale of an existing asset to the securitisation unit, or a means of borrowing using future flows of revenues as collateral.

Criteria for sale recognition

• 20.262In order for the securitisation to be treated as a sale, a marketable asset must exist in the balance sheet of government and there must be a full change of ownership to the securitisation unit as evidenced by the transfer of the risks and rewards linked to the asset.

• 20.263Thus, securitisation of future revenue flows not recognised as a return on economic assets, such as future oil royalties, is borrowing by the originator.

• 20.264When a securitisation involves flows associated to a financial or a non-financial asset, the risks and rewards associated with owning the assets must be transferred for a sale to be recorded.

• 20.265If government retains a beneficial interest in the securitisation, by way of retaining a deferred purchase price, which is the right to excess flows above the original securitisation value, or the right to own the last tranche issued by the securitisation unit, or by other means, no sale has occurred, and the event is originator's borrowing.

• 20.266If government, as originator, guarantees repayment of any debt incurred by the securitisation unit related to the asset, risks associated with the asset have not been transferred. No sale has occurred and the event is originator's borrowing. Guarantees can take various forms such as insurance contracts, derivatives, or clauses of substitution of assets.

• 20.267If it is determined that the securitisation contract involves the true sale of a marketable asset, the sector classification of the securitisation unit must be examined. Criteria are set in the section ‘Defining the general government sector’ for establishing if the securitisation unit is an institutional unit and if it has a financial intermediation function. If the securitisation unit is classified to the government sector, the securitisation is government borrowing. If the securitisation unit is classified as other financial intermediary (S.125), then the securitisation will be reported as a sale of assets, with no direct impact on government debt, and with an impact on government deficit if the flows are securitised on a non-financial asset.

• 20.268If government provides compensation, in the form of cash after the event, or other means such as guarantees, thus removing the transfer of risks, a securitisation originally viewed as a sale is from that moment classed as borrowing, with the following transactions: incurrence of a liability and acquisition of assets with a capital transfer expenditure in the event that the value of the liability exceeds that of the asset.

Recording of flows

• 20.269When a securitisation operation is recorded as borrowing, the cash flows passed on to the securitisation unit are first recorded in the accounts of government and simultaneously as repayment of debt, both interest and principal.

• 20.270When cash flows extinguish prior amortisation of the debt incurred, the remainder liability is removed from the government balance sheet by another change in volume.

• 20.271After complete extinction of a debt incurred, any remaining cash flows passed over to the securitisation unit in accordance with the securitisation contract are recorded as originator's expenditure.

Other issues

Pension obligations

• 20.272The treatment of pension schemes is described in Chapter 17, including a supplementary table to the core national accounts of the ESA, where all obligations of pension schemes are to be accounted for, including pension obligations arising from social security schemes. The pension entitlements of government sponsored unfunded employment-related defined benefit schemes are to be recorded only in those supplementary accounts.

Lump sum payments

• 20.273On occasion, units may pay a lump sum to government in exchange for taking over some of their pension obligations. Such large one-off transactions occur between a government and another unit, usually a public corporation, often linked to the change of status of the corporation, or to its privatisation. The government usually assumes the obligations in question in exchange for a cash payment covering the expected deficit resulting from the transfer.

• 20.274In concept, being an equal exchange of cash for the incurrence of an obligation that is a liability, the transaction should not affect measures of net worth and financial net worth, and should not alter government net lending/net borrowing. However, the pension obligation may not appear as a liability on the balance sheet of either of the units transferring and assuming the obligations. For example, when transferred to the government, the pension obligations may be merged with a social security scheme for which no liability is recognised.

• 20.275In this context, such a lump sum payment should be viewed as a prepayment of social contributions. In consideration of the various arrangements observed in practice and in order to avoid any distortion in the calculation of some aggregates such as labour costs and compulsory levies, the lump sum is recorded as a financial advance (F.8), a prepayment of miscellaneous current transfers (D.75) which will be recorded in the future in proportion to the related payments of pensions. As a result, the lump sum payment has no impact on the net lending/net borrowing of the general government in the year of transfer of obligations.

Public-private partnerships

Scope of PPP

• 20.276Public-private partnerships (PPPs) are complex, long-term contracts between two units, one of which is normally a corporation (or a group of corporations, private or public) called the operator or partner, and the other normally a government unit called the grantor. PPPs involve a significant capital expenditure to create or renovate fixed assets by the corporation, which then operates and manages the assets to produce and deliver services either to the government unit or to the general public on behalf of the public unit.

• 20.277At the end of the contract, the grantor usually acquires legal ownership of the fixed assets. The fixed assets are in most cases characteristic of some core public service such as schools or universities, hospitals, and prisons. They also may be infrastructure assets because many of the large projects undertaken by means of PPPs involve the provision of transportation, communications, utilities, or other services typically described as infrastructure services.

• 20.278A general description that includes the most common accounting problems is as follows: a corporation agrees to acquire a complex of fixed assets and then to use those assets together with other production inputs to produce services. Those services may be delivered to government, either for use as an input to its own production such as in motor vehicle maintenance services, or for distribution to the public without payment such as education services, in which case government makes periodic payments during the contract period and the corporation expects to recover its costs and earn an adequate rate of return on its investment from those payments.

• 20.279PPP contracts under this definition involve the grantor paying the operator 'availability' or 'demand' fees, and as such constitute a procurement arrangement. In contrast to other long-term service contracts, a dedicated asset is created. Thus, a PPP contract implies the government purchase of a service produced by a partner through the creation of an asset. There can be many variations in PPP contracts regarding the disposition of the assets at the end of the contract, the required operation and maintenance of the assets during the contract, the price, quality, and volume of services produced, and so forth.

• 20.280When the corporation sells the services directly to the public through for example a toll road, the contract is seen as a concession rather than a PPP. The price is routinely regulated by the government and set at a level that the corporation expects will permit it to recover its costs and earn an adequate rate of return on its investment. At the end of the contract period, the government may gain legal ownership and operational control of the assets, possibly without payment.

• 20.281In PPP contract, the corporation acquires the fixed assets and is the legal owner of the assets during the contract period, in some cases with the backing of the government. The contract often requires that the assets meet the design, quality, and capacity specified by government, be used in the manner specified by government to produce the services required by the contract, and be maintained in accordance with standards defined by government.

• 20.282Furthermore, the assets typically have service lives much longer than the contract period so that government may control the assets, bear the risks and receive the rewards, for a major portion of the assets' service lives. Thus, it is frequently difficult to determine whether it is the corporation or the government that bears the majority of the risks and reaps the majority of the rewards.

Economic ownership and allocation of the asset

• 20.283As with leases, the economic owner of the assets in a PPP is determined by assessing which unit bears the majority of the risks and which unit is expected to receive a majority of the rewards of the assets. The asset will be allocated to this unit, and consequently the gross fixed capital formation. The main risk and reward elements to be assessed are:

• (a) construction risk, which includes costs overruns, the possibility of additional costs resulting from late delivery, not meeting specifications or building codes, and environmental and other risks requiring payments to third parties;

• (b) availability risk, which includes the possibility of additional costs such as maintenance and financing, and the incurrence of penalties because the volume or quality of the services do not meet the standards specified in the contract;

• (c) demand risk, which includes the possibility that demand for the services is higher or lower than expected;

• (d) residual value and obsolescence risk, which include the risk that the asset will be less than its expected value at the end of the contract and the degree to which the government has an option to acquire the assets;

• (e) the existence of grantor financing or granting guarantees, or of advantageous termination clauses notably on termination events at the initiative of the operator.

• 20.284The risks and rewards are with the operator if the construction risk and either the demand or the availability risks have been effectively transferred. Majority financing, guarantees covering a majority of financed levied, or termination clauses providing for a majority reimbursement of finance provider on termination events at the initiative of the operator lead to the absence of effective transfer of either of these risks.

• 20.285In addition, owing to the specificity of PPP contracts, which involve complex assets, and when the assessment of risks and rewards is not conclusive, a relevant question is which unit has a decisive influence on the nature of the asset and how the terms and conditions of the services produced with the asset are determined, notably:

• (a) the degree to which the government determines the design, quality, size, and maintenance of the assets;

• (b) the degree to which the government is able to determine the services produced, the units to which the services are provided, and the prices of the services produced.

• 20.286The provisions of each PPP contract shall be evaluated in order to decide which unit is the economic owner. Due to the complexity and variety of PPPs, all of the facts and circumstances of each contract should be considered, and then the accounting treatment, that best reflects the underlying economic relationships, selected.

Accounting issues

• 20.287If the corporation is assessed as being the economic owner and if — as is commonly the case — the government obtains legal and economic ownership at the end of the contract without an explicit payment, a transaction is recorded for the government's acquisition of the assets. One general approach is for the government gradually to build up a financial claim and the corporation gradually to accrue a corresponding liability such that the value of both will equal the expected residual value of the assets at the end of the contract period. Implementing this approach requires existing monetary transactions to be rearranged or new transactions to be constructed using assumptions about expected asset values and interest rates. This implies partitioning the PPP payments, when the PPP asset is off government balance sheet, in a component representing the acquisition of a financial asset.

• 20.288An alternative approach is to record the change of legal and economic ownership at the end as a capital transfer in kind. The capital transfer approach does not reflect the underlying economic reality as well, but data limitations, uncertainty about the expected residual value of the assets, and contract provisions allowing various options to be exercised by either party make using a capital transfer approach the most prudent.

• 20.289Another significant problem arises when government is assessed as being the economic owner of the assets but does not make any explicit payment at the beginning of the contract. A transaction must be constructed to accomplish the acquisition. The most common suggestion is that the acquisition be made with an imputed financial lease because of the similarity with actual financial leases. The implementation of that choice, however, depends on the specific contract provisions, how they are interpreted, and possibly other factors. For example, a loan could be imputed and actual government payments to the corporation, if they exist, could be rearranged so that a portion of each payment represents repayment of the loan. If there are no actual government payments, then non-monetary transactions could be constructed for the loan payments. Other means of payment by government for the asset could be an operating lease prepayment if an operating lease is imputed or an intangible asset for the right of the corporation to access the assets for the production of services.

• 20.290Another important problem concerns the measurement of production. Whatever decisions are made about which unit is the economic owner of the assets during the contract period and how the government eventually acquires them, care should be taken that production is correctly measured. Again, there are options and their desirability varies with the exact situation and the availability of data. The difficulty arises when the government is assessed as being the economic owner of the assets but the assets are used by the corporation to produce services. It is desirable to show the value of the capital services as a cost of production of the corporation, but that may require the imputation of an operating lease, which in turn may require a rearrangement of actual transactions or a construction of non-monetary transactions to identify the lease payments. An alternative is to show the cost of capital services in the production account of the general government sector but to classify the output of the government in the same way as the classification of the output of the corporation so that the total output in the economy is correctly classified.

Transactions with international and supranational organisations

• 20.291Transactions that occur between resident units and international or supranational organisations are classified to the rest of the world sector.

• 20.292An example of such transactions is between non-government residents and institutions of the European Union, where these are considered as the principal parties to the transaction even though government units play a role as an intermediary agent in channelling the funds. The recording of the main transactions is directly between the two parties and does not impact on the government sector. The government's role is recorded as a financial transaction (F.89).

• 20.293The recording of specific transactions between national residents and institutions of the European Union are set out below for various categories:

• (a) taxes: some taxes on products, such as import duties and excises, are payable to institutions of the European Union or other supranational organisations. These form three categories:
• (1) those payable directly, such as, in the past, the European Coal and Steel Community levy on mining and iron and steel producing entities, which are recorded directly;
• (2) those collectible by national governments as agents on behalf of the institutions of the European Union or other supranational organisations, but where the tax is judged as payable directly by the resident producers. Examples are levies on imported agricultural products, monetary compensatory amounts levied on imports and exports, sugar production levies and the tax on isoglucose, co-responsibility taxes on milk and cereals, and custom duties levied on the basis of the integrated tariff of the European Communities. Such items are recorded directly from the producers to the supranational organisation, with government's role as an intermediary recorded as a financial transaction;
• (3) receivables of value added tax in each Member State. They are recorded as receivable by national governments, with the amounts that Member States provide to the European Union recorded as a current transfer (D.76). The time of recording of the transfer from government is when it is to be paid;

• (b) subsidies: any subsidies directly payable by supranational organisations to resident producers are recorded as directly payable by the supranational organisation rather than a resident government unit. Subsidies payable to resident producers and channelled through government units as intermediaries are similarly recorded directly between the principal parties, but also create entries in other accounts receivable/payable (F.89) in the government financial accounts;

• (c) miscellaneous current transfers: contributions to the European Union budget from Member States for the third and fourth types of payment designed to give the European Union its own resources. The third resource is calculated by applying a flat rate to the Value Added Tax base of each Member State. The fourth resource is based on the gross national income of each Member State. Such payments are considered to be compulsory transfers from governments to the European Union. They are classified as miscellaneous current transfers and recorded when they are to be paid;

• (d) current international cooperation: most other current transfers, in cash or in kind, between government and non-resident units, including international organisations, are classified as current international cooperation. This includes current aid to developing countries, wages payable to teachers, advisers and other government agents in activity abroad etc. One characteristic of current international cooperation is that it consists of transfers made on a voluntary basis;

• (e) capital transfers: investment grants, in cash or in kind, and other capital transfers, especially as the counterpart transaction of debt cancellation or debt assumption, can be payable to or receivable from an international or supranational organisation;

• (f) financial transactions: some financial transactions, usually loans, may be recorded when granted by international organisations such as the World Bank and International Monetary Fund. Government investments in the capital of international and supranational organisations apart from the International Monetary Fund are classified as other equity (F.519), unless there is no possibility of repayment in which case they are classified as current international cooperation.

• 20.294The institutions of the European Union make significant current and capital transfers through structural funds such as the European Social Fund, the European Regional Development Fund and the Cohesion Fund. The final beneficiaries of such transfers can be government or non-government units.

• 20.295Grants paid from structural funds often involve co-financing, whereby the European-Union jointly funds an investment made by government. There can be a mixture of pre-payments, interim and final payments, which may be channelled through at least one government unit. Resident government units may also make advances payments of the receipts expected from the European Union.

• 20.296When non-government units are the beneficiaries, any payments made by government in advance of European Union cash receipts are recorded as financial transactions in other accounts receivable/payable. The counterpart of the financial transaction is the European Union if the accrual point of the non-financial transaction has occurred, otherwise it is the beneficiary. The accounts receivable/payable positions unwind when the cash is paid.

• 20.297The recording time of co-financed government expenditure transfers is the time when European Union authorisation is given.

• 20.298There may be circumstances where government advances exceed the amount allowable once this is determined by the authorisation process. If the beneficiary is in a position to repay the excess this unwinds the other accounts payable it has with government. If the beneficiary cannot repay, then a capital transfer from government is recorded cancelling the other accounts payable.

• 20.299When government units are the beneficiaries, the government revenue is moved forward to match the time of expenditure in a departure from the general rules on time of recording for such transfers. If there is a considerable time lag between the government expenditure taking place and cash being received, then the revenue can be recorded when the claim to the European Union is submitted; this is applicable only when: reliable information on the time of the expenditure is not available; or amounts are big; or the time lag between the expenditure and submission of claim is small.

• 20.300All advance payments from the European Union to government units as final beneficiaries at the inception of multi-year programmes are recorded as financial advances.

Development assistance

• 20.301Governments provide assistance to other countries by lending funds at an interest rate that is intentionally less than the market interest rate for a loan with comparable risk (concessional loans as described in the section ‘Accounting issues relating to general government’, ‘Dept operations’), or grants in cash and in kind.

• 20.302Recording the international assistance through grants in kind, such as deliveries of food stocks, often creates difficulty. The prices of the goods or services being delivered in kind, such as the food stocks, in the receiving country might be quite different from the prices in the donor country. As a general principle, the value of the donation to the recipient should be regarded as equal to the cost of providing the assistance to the recipient. It follows that the prices of the donor country should be used as a basis for the calculation of the value of the donation. In addition to the goods or services themselves, all supplemental costs identifiable with the delivery of the goods or services should be included, such as transportation to the foreign country, delivery within that country, the compensation of government employees of the donating country to prepare the shipments or oversee their delivery, insurance, and so forth.

THE PUBLIC SECTOR

• 20.303The public sector consists of general government and public corporations. The elements composing the public sector are already present in the main sector structure of the system and can be rearranged to compile the public sector accounts. This is undertaken by putting together the subsectors of the general government sector and the public subsectors of non-financial and financial corporations.

Non-financial corporations	Financial corporations	General government	NPISHs	Households
Public	Public	Public	Private	Private
Private	Private	Public	Private

• 20.304Public financial corporations can be further divided into the central bank, and other public financial corporations, which can be further subdivided into subsectors of financial corporations as appropriate.

Table 20.2 —  The public sector and its subsectors

General government	General government	General government	General government	Public corporations	Public corporations	Public corporations
Central government	State government	Local government	Social security	Public non-financial corporations	Public financial corporations	Public financial corporations
Central government	State government	Local government	Social security	Public non-financial corporations	Central bank	Other public financial corporations

• 20.305Public sector accounts may be constructed according to the ESA framework and sequence of accounts, and in principle both consolidated and unconsolidated versions are analytically useful. Alternative presentations, such as the consolidated and unconsolidated equivalents of the Government Finance Statistics presentation described earlier in this Chapter, are also useful.

• 20.306All institutional units included in the public sector are resident units controlled by government, either directly or indirectly by public sector units in aggregate. The control over an entity is defined as the ability to determine the general policy of that entity. This is described in more detail below.

• 20.307The distinction between a public sector unit being part of general government or a public corporation is determined by the market/non-market test, as described in Chapter 3 and above. Non-market public sector units are classified in general government and market public sector units are classified as public corporations. The only exception to this general rule is for certain financial institutions that either supervise or serve the financial sector, which are classified as public financial corporations irrespective of whether they are market or non-market.

• 20.308The legal form of a body is not a guide to its sector classification. For example, some legally constituted public sector corporations may be non-market units and hence classified to general government rather than as public corporations.

Public sector control

• 20.309Control of a resident public sector unit is defined as the ability to determine the general policy of the unit. This can be through the direct rights of a single public sector unit or the collective rights of many. The following indicators of control are to be considered:

• (a) rights to appoint, veto or remove a majority of officers, board of directors etc. The rights to appoint, remove, approve or veto a majority of the governing board of an entity are sufficient to determine control. Such rights may be directly held by one public sector unit, or indirectly by public sector units in aggregate. If the first set of appointments are controlled by the public sector but subsequent replacements are not subject to these controls, then the entity remains in the public sector until the time when the majority of the directors are not controlled appointments;

• (b) rights to appoint, veto or remove key personnel. If the control of general policy is effectively determined by influential members of the board, such as the chief executive, chairperson and finance director, then the powers to appoint, veto or remove those personnel are given greater prominence;

• (c) rights to appoint, veto or remove a majority of appointments for key committees of the entity. If key factors of the general policy, such as remuneration of senior staff, pay and business strategy, are delegated to subcommittees, then the rights to appoint, remove or veto of directors on these subcommittees is a determinant of control;

• (d) ownership of the majority of the voting interest. This will normally determine control when decisions are made on a one-share, one-vote basis. The shares may be held directly or indirectly, with shares owned by all public sector units aggregated. If decisions are not made on a one-share, one-vote basis the situation should be analysed to see if the public sector has a majority vote;

• (e) rights under special shares and options. These golden or special shares were once common in privatised corporations and also feature in some special purpose entities. In some cases they give public sector entities some residual rights to protect interests; such rights may be permanent or time-limited. The existence of such shares is not by itself an indicator of control, but needs to be carefully analysed, in particular the circumstances where the powers may be invoked. If the powers influence the current general policy of the entity they will be important to the classification decisions. In other cases they will be reserve powers that may confer rights to control general policy in times of emergency etc, these are judged as irrelevant if they do not influence existing policy, although in the event that they are utilised they will usually trigger immediate reclassification. The existence of a share purchase option to public sector entities in certain circumstances is a similar situation, and a judgement is necessary on whether the powers to implement the option influence the general policy of the entity;

• (f) rights to control via contractual agreements. If all the sales of an entity are to a single public sector entity, or a collection of public sector entities, there is scope for dominant influence that can be judged as control. The presence of other customers, or the potential to have other customers, is an indicator that the entity is not controlled by public sector units. If the entity is restricted from dealing with non-public sector customers due to public sector influence, then this is an indicator of public sector control;

• (g) rights to control from agreements/permission to borrow. Lenders often impose controls as conditions of making loans. If the public sector imposes controls through lending, or to protect its risk exposure from a guarantee, which are tougher than a private sector entity would typically face from a bank, this is an indicator of control. If an entity requires permission from the public sector to borrow, then this is an indicator of control;

• (h) control via excessive regulation. When regulation is so tight that it effectively dictates the general policy of the business, it is a form of control. Public authorities can in some cases have powerful regulatory involvement, particularly in areas such as monopolies and privatised utilities where there is a public service element. It is possible for regulatory involvement to exist in important areas, such as price setting, without an entity ceding control of general policy. Choosing to enter into or operate in a highly regulated environment is similarly an indicator the entity is not subject to control;

• (i) others. Control may also be obtained from statutory powers or rights contained in an entity's constitution, for example to limit the activities, objectives and operating aspects, approve budgets or prevent the entity changing its constitution, dissolving itself, approving dividends, or terminating its relationship with the public sector. An entity that is fully, or close to fully, financed by the public sector is considered to be controlled if the controls on that funding stream are restrictive enough to dictate the general policy in that area.

• 20.310Each classification case needs to be judged on its own merits and some of these indicators may not be relevant to the individual case. Some indicators, such as (a), (c) and (d) in paragraph 20.309, are sufficient by themselves to establish control. For others a number of separate indicators may collectively indicate control.

Central banks

• 20.311Central banks are generally assumed to be public financial corporations, even in the case where other than government are their sole or majority legal owner. They are considered as public corporations through governments having economic ownership or exerting control by other means.

• 20.312A central bank is a financial intermediary, whose activity is subject to specific legal provisions, and which is placed under general control of government, representing the national interest, even though the central bank enjoys a large degree of autonomy or independence with respect to exercising its main activity (notably the monetary policy). The key issue here is the recognition of the central bank's main function and activity — to manage the nation's reserve assets, to issue the national currency and to conduct the monetary policy — rather than its legal status. Government often has a formal right to liquidation proceeds.

• 20.313Because of the existence of such beneficial interest or because of the government role, ownership of government over the central bank equity — or, at least, over the reserve assets managed by the central bank — is recognised in national accounts, as an economic ownership even in circumstances where it has no legal ownership.

Public quasi-corporations

• 20.314Public quasi-corporations do not possess the legal characteristics of independent corporations but behave sufficiently differently from their owners, and more like entities in the non-financial or financial corporations sectors, to be recognised as institutional units.

• 20.315The activities of the quasi-corporation must be ring-fenced, with sufficient information to allow a complete set of accounts to be compiled (see point (f) of paragraph 2.13), and be market units.

Special purpose entities and non-residents

• 20.316Public sector entities may set up or use special purpose entities (SPEs) or special purpose vehicles. Such units often have no employees or non-financial assets and little physical presence beyond a 'brass plate' confirming their place of registration. They may be resident in a different territory.

• 20.317SPE units set up by the public sector must be investigated to see if they have the power to act independently, are restricted in their activities, and carry the risks and rewards associated with the assets and liabilities they hold. If they do not meet such criteria they are not recognised as separate institutional units and, if resident, are consolidated into the public sector unit that created them. If non-resident they are recognised as part of the rest of the world and any transactions they undertake are re-routed via the public sector unit that created them.

• 20.318Non-resident international joint ventures between governments, where neither party has control of the entity, are apportioned to governments as notional resident units.

Joint ventures

• 20.319Public and private sector units can enter into a joint venture whereby an institutional unit is established. That unit may enter into contracts in its own name and raise finance for its own purposes. The unit is allocated to the public or private sectors depending on which party controls it.

• 20.320In practice, in most joint ventures there is joint control. If the unit is classified as non-market it is by convention classified to general government since its behaviour is that of a government unit. If the unit is classified as a market producer and control is evenly divided, then the unit is partitioned into halves, one half allocated to the public sector and the other allocated to the private sector.

CHAPTER 21

LINKS BETWEEN BUSINESS ACCOUNTS AND NATIONAL ACCOUNTS AND THE MEASUREMENT OF CORPORATE ACTIVITY