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TREATMENT OF TREATMENT OF NATURAL RESOURCESNATURAL RESOURCES

IN THE 1993 SNA IN THE 1993 SNA

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Ivo HavingaUN STATISTICS DIVISION

Economic Statistics BranchNational Accounts Section

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NATURAL RESOURCES IN THE SNANATURAL RESOURCES IN THE SNA

In this session we shall be discussing the treatment of the following in the SNA:

Mineral exploration Land Decommissioning costs Exploitation of natural resources by non-

residents Mobile phone licences

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NATURAL RESOURCES IN THE SNANATURAL RESOURCES IN THE SNA

Mineral exploration

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Mineral Exploration in the 1993 SNA

Mineral exploration is undertaken in order to discover new deposits of minerals or fuels that may be exploited commercially.  

• Such exploration may be undertaken on own account.  

• Alternatively, specialized enterprises may carry out exploration either for their purposes or for fees.  

The information obtained from exploration influences the production activities over a number of years.  

The expenditures incurred on exploration within a given accounting period, are therefore treated as expenditures on the acquisition of an intangible fixed asset and included in the enterprise's gross fixed capital formation.

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Treatment in 1993 SNA

In discovery of assets through mineral exploration, 1993 SNA recognises two assets

• “mineral exploration” as a category of produced fixed asset.

• “subsoil deposits’ as a category of non-produced assets.

Exploration, whether successful or not, is treated as gross capital formation.

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Calls for review of present treatment

Since publication of 1993 SNA a number of questions have been raised;

Is the exploration activity separable from the value of the asset?

How to measure exploration activity? How to value the deposit? How to record payments by the extractor to the legal

owner of the deposit?

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Terminology and coverage for mineral exploration

The IASB uses the expression “mineral exploration and evaluation” which includes expenditure on following items:

• acquisition of rights to explore;• topographical, geological, geochemical and geophysical

studies;• exploratory drilling;• trenching;• sampling; and• activities in relation to evaluating technical feasibility and

commercial viability of extracting a mineral resource. This coverage is substantially the same as the

SNA coverage (1993 SNA para10.91)

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AEG Recommendations:

Since information compiled according to the IASB recommendations is likely to form source material for statisticians, and because it is desirable to avoid giving the impression that the SNA coverage is narrower, it would seem desirable to adopt the longer and more precise terminology used by the IASB

AEG Recommendations: • The AEG agreed to change the item “mineral

exploration” to “mineral exploration and evaluation” and to draw on the IASB coverage of this item to specify the SNA item.

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One asset or two?

Is the exploration activity separable from the value of the asset? (one asset or two)

There was a suggestion that instead of keeping the discovery of the asset separate from the deposit itself, they should be combined and a new “developed natural asset” recorded instead. This would be treated as a produced asset so that, in effect, the value of the deposit became included in the total of produced assets and excluded from the total of non-produced assets.

AEG Recommendations The group agreed to maintain a distinction between:

• ‘mineral exploration and evaluation’ as a produced asset and

• the mineral deposit as non-produced assets.

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How to measure exploration activity?

The 1993 SNA (para 10.91) recommendation has led a number of users to assume that the mineral exploration activity is always to be treated as a non-market activity with no associated net operating surplus.

In case of own-account exploration, valuation may done so. However, when the activity is undertaken by a separate enterprise the full amount charged by this enterprise, including their net operating surplus, should be included in the value of mineral exploration and evaluation.

AEG Recommendation: “mineral exploration and evaluation” is market

production to be valued either at market prices, if purchased, or as the sum of costs plus mark-up, if produced on own-account.

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How to value deposits?

There are 3 options to value deposits:• Present value of net returns from exploitation

• Market prices (seldom available)

• Owner’s valuation

The AEG agreed that the preferred valuation for mineral deposits is market price which is seldom available. In default, the deposit should be valued as the present value of future receipts of resource rent.

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How to record payments by the extractor to the legal owner of the deposit?

In1993 SNA payments made by the exploiter to the legal owner are treated as property income.

Sometimes, when the owner of the resource is the govt, the payments may be described as taxes even though they are still effectively appropriation of part of the resource rent.

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AEG Recommendations

In principle, payments by the extractor to the owner of the deposit are property income.

Payments by extractor to owner of deposits should continue to be shown as property income even if they are described as taxes and treated as such in government accounts.

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Lease on Natural Resources

Natural resources with infinite life (like land and radio spectrum) may be made available, on lease to other units, for use.

Such a lease does not fit in the characterization of either the operational lease or the financial lease.

Resource Lease: A resource lease is an agreement whereby the legal owner of a natural resource which has an infinite life makes it available to a lessee in return for a regular payment, recorded as property income and described as rent. The resource is recorded on the balance sheet of the lessor. No consumption of fixed capital is recorded in respect of the resource in the SNA in the accounts of either the lessor or lessee.

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NATURAL RESOURCES IN THE SNANATURAL RESOURCES IN THE SNA

Treatment of Land

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Treatment of Land in 1993 SNA

Land improvements are GFCF.

On the balance sheet, land improvements are included with land as non-produced assets.

The decline in value of land improvements is recorded as CFC.

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Land improvement – 1993 SNA

Reclamation of land: dykes, sea walls, dams.

Clearance of forests, rocks, etc. Draining marshes, irrigation of deserts by

dykes, ditches, irrigation channels. Prevention of flooding or erosion by sea

or rivers: breakwaters, sea walls, flood barriers.

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Land improvement – 1993 SNA

Land improvements …..are not in themselves used directly to produce other goods and services in a way that most structures are. Their construction is undertaken to obtain more or better land, and it is the land, a non-produced asset, that is needed for production. For example, a dam built to produce electricity serves quite a different purpose from a dam built to keep out the sea.

Acquisitions of tunnels and other structures associated with the mining of mineral deposits, etc., are classified as GFCF and not as improvements to land.

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Land - Problems in current treatment

• Land improvements are recorded as GFCF but are also recorded as non-produced assets on the balance sheet

• CFC is recorded in respect of a non-produced asset.

• In some cases, land improvements may account for most of the combined value.

• Some countries are unable to obtain estimates of the total value of land, and they can only estimate land improvements.

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Way forward: Options

1. Leave the SNA as it is.

2. Classify land as either produced or non-produced according to how much land improvements contributed to total value.

3. Identify land improvements as produced assets and unimproved land as non-produced.

4. Treat land improvements in the same way as buildings and structures.

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AEG decisions

GFCF of land improvements should be treated like other GFCF and result in a produced asset appearing separately in the balance sheet;

The non-produced component of land should be valued at its present unimproved value;

Where the value of land cannot be partitioned into an improved and unimproved part, adopt recommendations for land and associated structures as in Para 13.57 for balance sheets and Para 7.131 for rent and rentals;

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AEG decisions – contd.

Costs of ownership transfer on land should be recorded as fixed assets and included with land improvements.

Activities such as land clearance, land contouring, creation of wells and watering holes which are integral to the land in question and which are carried out by the landowner are to be treated as part of land improvements. Activities such as the creation of sea walls, dykes, dams and major irrigation systems which are in the vicinity of the land but not integral to it, often affect land belonging to several owners and which are often carried out by government, are to be classified as structures.

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Treatment of disposal/decommissioning

costs in the SNA

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Cost of disposal of non-financial assets

Costs of ownership transfer is capital formation

The cost of ownership transfer on disposal of an asset should be recorded as gross capital formation at the time it occurs, but this GCF should be written off over the period the asset is held.

• This is a change from SNA93, which says that it is written off immediately after the transaction occurs.

• This also means that in order to write off the value of COT on disposal, one needs to have an estimate of expected length of time an asset is held on average and an estimate of expected COT on disposal. Remember that it is written off even before COT takes place.

Installation and de-installation costs should be included in costs of ownership transfer if separately invoiced, and in the purchaser’s price of the asset otherwise.

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Cost of disposal of non-financial assets

Terminal costs should be recorded as capital formation when they occur but the whole cost should be written off as CFC over the life of the asset, analogous to costs of ownership transfer on disposal. This means that it will have to be written off even before decommissioning takes place.

When this recommendation on terminal costs cannot be followed for lack of adequate data, these costs should still be recorded as GFCF but written off as CFC immediately.

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Natural resources in the SNA

Right to use/exploit natural resources between residents

and non-residents

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Right to exploit natural resources between residents and non-residents

LAND For land a notional resident unit is created which is

deemed to purchase the land while the non-resident is deemed to purchase a financial asset.

Similar treatment for the building or other immobile produced asset when acquired by a non-resident. Thus the decision to treat some land as produced (land improvements) does not alter the position that all land must be owned by a resident unit.

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Right to exploit natural resources – contd.

Mineral Deposit If a unit is exploiting mineral deposit for more than one year, it is

necessarily a resident unit.

It is possible to imagine a licence to exploit a mineral deposit being given to a non-resident unit

In the period before exploitation starts, should this unit be regarded as resident?

The 1993 SNA recognize that in this case a centre of economic interest was not established before activity started.

But in alignment with the BPM, it has been decided by the AEG that the acquisition of the licence is sufficient to establish a centre of economic interest and thus the licence holder would be deemed to be resident.

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Right to exploit natural resources – contd.

Forests If a non-resident unit enters a country for a short period

(less than one year) to fell part of a forest, should this be treated as a notional resident unit giving rise to production or not?

AEG Decisions:For logging or static natural resources subject to short-term

extraction: Extraction must take place for more than a year to

establish a resident unit, A fee for one-time extraction represents the sale of an

asset, and Illegal extraction should be recorded as uncompensated

seizure.

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Right to exploit natural resources – contd.

Fish A fishing vessel becomes resident only if the operator

establishes a base in the country in question, otherwise the residence of the vessel remains that of the operator, regardless of the area in which it is fishing,

Fish beyond the EEZ may be treated as assets if allocated by international agreement,

Permits to catch fish may represent assets in their own right,

Illegal fishing should in principle be recorded as uncompensated seizure.

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Treatment of mobile phone licences

Issuing licences for mobile phone licences – major source of income to Govts. Treatment not exclusively mentioned in the1993 SNA

The ISWGNA decided:• Spectrum is a tangible, non-produced asset• The license to use it is an intangible asset in most circumstances• Typically, licence payments are neither taxes nor purchases of the

spectrum itself• Land, subsoil assets and the spectrum are similar types of assets and so

are leases and licences based on the use of these assets• There is no single, universal and clear-cut criterion to distinguish

between rent and asset sale — a range of criteria needs considering• Most cases examined point to licence payments as purchase of an asset,

not rent• The value of licence and the value of the spectrum move symmetrically• Further elaboration will be useful for the future

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Mobile phone licences – contd.

Payment for licence to use - rent or sale of asset?

Determining Criteria: Costs and benefits assumed by licensee: more risks and

benefits associated with the right to use an asset are incurred by the licensee, the more likely the qualification of a transaction as the sale of an asset as opposed to rent.

Up-front payment or installment: mode of payment is in itself not conclusive for a characterisation as asset or rent payment. However, business practice shows that up-front payments of rent for long periods (15-25 years in the case of mobile phone licences) are highly unusual and this favours an interpretation as sale of an asset.

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Mobile phone licences – contd.

Length of the licence: licences granted for long periods suggest a treatment as the sale of an asset, for shorter periods a treatment as payments for rent.

Actual or de facto transferability: possibility to sell the licence is a strong indication of ownership.

Cancellation possibility: stronger the restrictions on the issuer's capacity to cancel the licence at his/her discretion, the stronger the case for treatment as a sale of an asset.

Conception in the business world and international accounting standards: businesses, in accordance with IAS, often treat a licence to use the spectrum as an asset. This provides an added incentive to treat them in a similar way in the national accounts.

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Licence to undertake an activity

Payment to Govt. to undertake a specified activity is a tax unless it involves the use of a natural resource (environment is not a natural resource in the SNA).

When payment is associated with the use of a natural resource – whether it is payment of rent or acquisition of an asset would be determined using the criterion mentioned in case of the mobile phone licence.

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Thank You