The 1993 International System of National Accounts: Its implementation in Canada

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by Kishori Lal
Director General, System of National Accounts

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The International System of National Accounts 1993 (1993 SNA) was prepared and published under the auspices of the Inter-Secretariat Working Group on National Accounts, consisting of the Statistical Office of the European Communities, the International Monetary Fund, the Organization of Economic Cooperation and Development, the Statistical Division and regional commissions of the United Nations Secretariat, and the World Bank. Its claim as a document for universal implementation derives from the fact that its adoption was unanimously recommended to the United Nations Economic and Social Council by its Statistical Commission at its twenty-seventh session, held in New York from February 22 to March 3, 1993. The plan for its implementation, however, does not seem to be as well organised as was its production.

We have made very detailed comments on this document in our two papers, "The 1993 International System of National Accounts vis-à-vis The Canadian System of National Accounts" and "The 1993 International System of National Accounts and the Canadian Input-Output Tables". The present paper highlights, in a summary fashion, certain important areas where the Canadian System of National Accounts (CSNA) will need to revise its practices to conform to the 1993 SNA; the reader is encouraged to refer to these two papers for further details. There are some areas where we may not be able to implement the recommendations of the 1993 SNA; in such cases, our reasons are stated and alternatives are suggested. Our occasional departures from the recommended guide-lines are primarily prompted by pragmatic considera-tions. We fully recognize the importance of promoting international comparability, but it should also be recognized that the specific circumstances existing at a given time in different countries can vary, often sub-stantially. We believe that it would prove useful, from the standpoint of encouraging wide implementation of the 1993 SNA, if countries share their own adaptations of the recommended guidelines with the larger international community. Our adaptations are presented in this spirit.

We plan to implement the 1993 SNA at the time of the forthcoming rebasing of the CSNA to the year 1992 from the present base of 1986. The results of this exercise will be released in the summer of 1997. Our comments, below, follow the sequence of chapters in the 1993 SNA.

1. Production Account for Institutional Sectors

The 1993 SNA differs from the 1968 UN SNA regarding a proposal to compile production accounts for establishments and industries as well as for institutional units and sectors. In the 1968 UN SNA, separate production accounts for establishments and industries are required but not for individual institutional sectors. The 1993 SNA recommends that there should be full production accounts, full in the sense of intermediate expenses, value added and gross output (paragraphs 6.1-4) for individual institutional sectors. Considering the very significant resources that would be required to develop such estimates for the current period and their limited usefulness, we do not plan to implement the recommendation.

Given our data sources, our alternative implementation plan has the following elements:

1. Develop a comprehensive production account for all the producing units in three sectors - business (both corporate and unincorporated enterprises), general government, and non-profit institutions serving households (NPISHs).
2. Disaggregate all three producing sectors, classified by economic activity in terms of establishment-based classification.
3. Produce full production accounts for the period for which input-output tables are prepared and construct production accounts limited to value-added for the current period.

Our current practices will require some minor changes in order to implement the above alternative in 1997.

2. Financial Intermediation Services Indirectly Measured (FISIM)

The recommendation for allocating FISIM to users in the 1993 SNA is quite different from the approach specified in the 1968 UN SNA. In the 1968 UN SNA, imputations for banking intermediation services are made; however, such services are allocated exclusively to the business sector rather than to all borrowers and lenders, as is now recommended in the 1993 SNA (paragraphs 6.124-126). Within the business sector, the 1968 UN SNA does not allocate these services to each industry; instead, it uses a dummy industry which buys the entire service as an intermediate expense and generates an equivalent negative value added.

The CSNA present practice on the estimation and allocation of financial intermediation services to all sectors is similar to the 1993 SNA. Some minor changes will be required in the CSNA to fully implement the 1993 SNA. The reader is encouraged to refer to our paper, "Financial Intermediation Services Indirectly Measured (FISIM) and the Canadian System of National Accounts", for further details.

3. Insurance

The 1993 SNA recommends to include income from investment of insurance technical reserves in the valuation of output of insurance services (paragraphs 6.135-140). In the CSNA, such income is ignored in the calculation of output. We support the 1993 recommendation and plan to implement it.

4. Operating Leasing versus Financial Leasing

The 1993 SNA states that operating leasing and financial leasing are totally different kinds of activity, the first being a process of production while the second is a method by which funds are channelled from a lender to a borrower (paragraph 6.119). It further states in the same paragraph that "It is therefore essential to distinguish between the two types of leasing, even though financial arrangements may be devised which are hybrids of the two and which are consequently difficult to classify". This recommendation is a departure from the 1968 UN SNA which does not recognize financial leases and, as a consequence, treats them in the same manner as operating leases.

We support the position taken by the 1993 SNA and will try to implement it, though fully recognizing that in practice it may be very difficult to distinguish the two leasing arrangements. In the CSNA, the present practice, with rare exceptions, is to treat all leases as operating leases. Our plan is to give higher priority to develop estimates for those leases which affect the rest of the world account than the ones which involve the transactors within the domestic economy of Canada. An example of such an arrangement with the rest of the world would be the leasing of aircraft by some Canadian airline company from abroad. Leasing arrangements within the domestic economy are more difficult to distinguish partly because of the evolving hybrid nature of leasing and the very large number of lessees, many having contracts of small values. Typically, professionals such as doctors and lawyers would lease cars rather purchase them.

5. Mineral Exploration

In another departure from the 1968 UN SNA, the 1993 SNA recommends: "Expenditures on mineral exploration are not treated as intermediate consumption. Whether successful or not, they are needed to acquire new reserves and are therefore all classified as gross fixed capital formation" (paragraph 6.166). Some minor changes are required and will be made in the present CSNA practice to bring it in line with the 1993 SNA recommendation.

6. Military Equipment

The 1993 SNA states that: "The construction of buildings for use by military personnel, including hospitals and schools, and also of roads, bridges, airfields, docks, etc., for use by military establishments should be treated as fixed capital formation. In addition, machinery and equipment of the same type as used by civil establishments for non-military purposes should also be treated as fixed capital formation" (paragraph 6.171). Conversely, military hardware such as rockets, missiles and their warheads, warships, submarines, fighter aircraft and bombers should continue to be treated as intermediate expenditures.

In the 1968 UN SNA and the CSNA, all military expenditures on goods are treated as intermediate expenditures. We support the recommendation in the 1993 SNA and plan to implement it in the CSNA.

7. Consumption of Fixed Capital, Major Earthquakes, Hurricanes, etc.

The 1993 SNA states that: "...losses due to war, or to major natural disasters which occur very infrequently - major earthquakes, volcanic eruptions, tidal waves, exceptionally severe hurricanes etc. - are not included under consumption of fixed capital. There is no reason for such losses to be charged in the production account as cost of production. The values of the assets lost in these ways are recorded in the other changes in volume of assets accounts". (paragraph 6.187). We completely agree with the 1993 SNA that the destruction of property due to hurricanes or major earthquakes should have no impact on consumption of fixed capital. We plan to implement this recommendation.

8. General Valuation Principles

The 1993 SNA states that the preferred method of valuation of output of goods and services produced for the market is at basic prices, especially when a system of VAT, or similar deductible tax, is in operation (paragraph 6.218). The concept of basic prices in the 1993 SNA is the same as that of approximate basic prices in the 1968 UN SNA. The CSNA Input-Output Accounts already use a basis of valuation that is close to this one. The required change with respect to the treatment of subsidies will be made to fully implement the 1993 SNA recommendation in 1997.

9. Payroll Taxes

Payroll taxes are taxes payable by the employer on the wage or salary bill. Such taxes are quite commonly applied by the various governments in Canada. The CSNA mostly treats such taxes as part of compensation of employees whereas the 1993 SNA recommends such taxes to be "treated as taxes on production in the same way as taxes on buildings, land or other assets used in production" (paragraph 7.21). The implementation of this recommendation will not change GDP at market prices, but it will reduce GDP at factor cost counterbalanced by an increase of taxes on production, and it will also reduce personal income. We plan to implement it in 1997.

10. Reinvested Earnings on Direct Foreign Investment

According to the 1993 SNA, both systems (SNA and Balance of Payments) "...require the saving or retained earnings of a foreign direct investment enterprise to be treated as if they were distributed and remitted to foreign direct investors in proportion to the ownership of the equity of the enterprise and then reinvested by them. In other words, two additional entries are required in the accounts of the enterprises and their foreign owners, one of which is the imputed remittances of retained earnings while the second is the imputed reinvestment of those earnings" (paragraph 7.120).

Starting with the first quarter of 1994, reinvested earnings have been incorporated in the Canadian Balance of Payments in both the current and capital accounts. The rest of the CSNA, particularly national income and expenditure accounts and financial flows accounts, has not incorporated the new treatment but, instead, provides reconciliation accounts to allow users to go from one approach to the other.

11. Final Consumption Expenditure and Actual Final Consumption

An important departure, both from the CSNA and the 1968 UN SNA, is the specification in the 1993 SNA of the interrelationship between final consumption expenditure and actual final consumption for the three sectors (general government, NPISHs and households) in which final consumption takes place (paragraphs 9.93-99). On a practical level, it may be noted that each of the aggregates, whether referring to consumption expenditure or actual final consumption, has to be derived from data on expenditures. It should be emphasized that actual final consumption for the whole economy is exactly equal to final consumption expenditures.

We welcome this recommendation and plan to implement it, as it would help international comparability of household consumption.

12. Inventories of Structures

The 1993 SNA states: "When there is no contract of sale agreed in advance, the output produced by the construction enterprise must be recorded as work-in-progress or as additions to the producers' inventories of finished goods, depending upon whether the construction is completed" (paragraph 10.75). In the CSNA, all structures, completed or unfinished, with or without contact of sale, are classified as fixed capital formation. The implementation of the 1993 SNA recommendation will affect gross fixed capital formation counterbalanced by an identical change in inventories. This will require additional information which is not collected at present. The only effect on GDP will be in terms of timing in the allocation of consumption of fixed capital. Given that there is minimal effect on measured GDP, and that there would be additional cost to collect information, we do not give high priority to the implementation of this recommendation.

13. Plantations, Orchards, etc.

The 1993 SNA recommends (repeating the recommendation of the 1968 UN SNA) that trees cultivated in plantations for the products they yield year after year - such as fruit trees, vines, rubber trees, palm trees, etc. - be treated as fixed assets. The value of such fixed assets may be approximated, if necessary, by the costs incurred in their production during the period (paragraph 10.88). The CSNA has not followed this procedure. Instead, it treats these costs as intermediate expenditure.

We support the 1993 SNA recommendation, in principle, as it would better reflect economic reality and promote better international comparability. However, given its minimal effect on measured GDP and the additional cost to collect information, we do not give high priority to its implementation.

14. Entertainment, Literary or Artistic Originals

The 1993 SNA recommends treating original creations - such as films, sound recordings, manuscripts, renderings, literary and artistic works, etc. - as capital formation (paragraph 10.94). The CSNA does not capitalize the value of such originals. In some cases they are added to inventories, and in others they are treated as intermediate consumption. Our data sources are quite weak in this area. Given its minimal effect on measured GDP, and the additional cost to collect information, we do not give high priority to implementing the recommendation, although, in principle, we support it.

15. Acquisitions Less Disposals of Valuables

The 1993 SNA recommends that acquisitions less disposals of valuables be reflected in the Capital Account. "Valuables are assets that are not used primarily for production or consumption, that do not deteriorate over time under normal conditions and that are acquired and held primarily as stores of value" (paragraph 10.116). We support this recommendation in principle and will try to implement it. Due to data problems, however, the CSNA may not be able to specify such expenditures in the Capital Finance Account; instead, they may continue to form part of the residual balancing item, net lending or borrowing requirements of the sectors.

16. Acquisitions Less Disposals of Non-produced Non-financial Assets

The 1993 SNA recommends that acquisitions less disposals of non-produced non-financial assets be reported in the Capital Account. These assets consist of land, sub-soil assets that may be used in the production of goods and services and intangible assets such as patented entities, leases, other transferable contracts, etc. (paragraphs 10.120-130). We also support this recommendation in principle and will try to implement it. Here, too, due to data problems, the CSNA may not be able to specify such expenditures in the Capital Finance Account; instead they may continue to form part of the residual balancing item, net lending or borrowing requirements of the sectors. It is worth reporting that at present, the CSNA is developing estimates of some sub-soil and forestry assets as part of its natural resource accounting work and its environment satellite account.

17. The Reconciliation Statement in the Balance Sheets

The 1993 SNA states that: "This chapter is concerned with the recording of changes in assets, liabilities, and net worth between opening and closing balance sheets that result from other flows - that is, flows that are not transactions, the transactions being recorded in the capital account and financial account of the System" (paragraph 12.1). There are two kinds of changes: "The first kind consists of changes that are due to factors such as discoveries or depletion of sub-soil resources, destruction by war or other political events, or destruction by natural catastrophes, all of which actually change the volume of assets. The second kind consists of changes in assets, liabilities, and net worth due to changes in the level and structure of prices, which are reflected in holding gains and losses" (paragraph 12.2). The changes of the first kind are further elaborated in the Other Changes in the Volume of Assets Account and of the second kind in the Revaluation Account.

Many of the items discussed in the 1993 SNA, in the context of the Other Changes in Assets Account, form, in principle, part of the Reconciliation Statement (not yet fully developed) in the CSNA Balance Sheets. The development and compilation of this account is of high priority in the CSNA as this will help specify several items which still remain consolidated or unexplained, thus permitting better analysis of balance sheets.

18. Progress Payments, and Exports and Imports

Progress payments are treated as financial transactions even if there is a contract of sale. The goods involved will be valued in exports and imports only when they are 'physically' in the hands of the owners (paragraphs 14.57-64). At present, progress payments for certain machinery and equipment purchased by the government are treated as fixed capital formation in the CSNA and as exports and imports in the Canadian Balance of Payments. We plan to implement the 1993 SNA recommendation at the time of the rebasing of the CSNA.

Processing is another case where the present Canadian Balance of Payments statistics will need to be changed. The 1993 SNA recommends that the goods which are sent for processing abroad should be treated on a gross basis in exports and imports (paragraphs 14.61-64). To the extent that it can be identified, processing, at present, is treated as a service in the Canadian Balance of Payments. This treatment will be changed to bring it in line with the 1993 SNA guidelines.

19. Gold

The 1993 SNA, in the 'Rest of the World Account', differentiates the transactions in monetary gold conducted between the monetary authorities of the different countries from other transactions in gold as a commodity. It recommends that the transactions in monetary gold be recognized as financial items and not included in the imports or exports of goods (paragraph 14.93). The 1993 SNA distinguishes three types of gold: (1) monetary gold owned by monetary authorities as a component of international reserves; (2) gold held as a store of value; and (3) other gold used for industrial purposes. A transaction in the second and third category of gold is always treated as a transaction in a commodity, no matter who the transactor is. A transaction in monetary gold can only be conducted between the monetary authorities of one country and the monetary authorities of another country or international monetary authorities; such a transaction is always a financial transaction. All other transactions in gold are recognized as transactions in gold as a commodity.

We support this recommendation and plan its implementation in the CSNA.

20. Cross-Classification of Value Added by Sectors and Industries

The 1993 SNA recommends that the value added by industry in the Use tables be cross-classified by institutional sectors, such that income and consumption can readily be related (see paragraphs 15.106-110). The implementation of this recommendation requires a well functioning business register which can readily relate establishments to enterprises and sectors. Such information needs to be current, so that one can relate the current profile of establishment-based input-output industry statistics to the institutional-based structure of the economy. This also demands a highly articulated micro database which can be readily added to provide aggregates for the System of National Accounts. These conditions are rigorous and very costly to implement. Given its demand for resources and its limited utility to relate production with income and consumption, we are not planning to implement this recommendation. An alternative would be the development of an institutional distribution of value added components for the total economy; e.g., total labour compensation may be distributed by institutional sectors. See also item 1, Production Account for Institutional Sectors.

21. Conversion of the Supply and Use Tables into Symmetric Tables

The 1993 SNA opts for the product (commodity) technology assumption to convert the rectangular supply and use tables into symmetric tables (see paragraphs 15.137-143). The product technology assumption may be valid if one can develop a vector of inputs for each of the twenty thousand or so products identified in the market. It is, however, completely unrealistic to seek to achieve such a data base. Aggregating twenty thousand products into a manageable set of 200-300, or even 500-1000, product groups can hardly be called a replication of the commodity technology. At this level of aggregation of products or industries, there is hardly any difference between the two sets. Furthermore, it is evident that at least some important expenditures such as R&D, as well as management skills and management style, which are industry specific or even firm specific, affect importantly and similarly all the products produced within an industry.

Our alternative presentation for symmetric tables is to use an industry technology assumption. For model building purposes, the algebraic manipulation is easier using this assumption, which does not require artificially transforming the basic rectangular Supply and Use tables into square tables. On the other hand, the commodity technology assumption can only work with a square table. (See also the 1968 UN SNA paragraph 3.84: "The assumption of a commodity technology can only be used if the number of industries is equal to the number of commodities").

22. Chain Indices

The 1993 SNA recommends: "In general, the constant price series should not be allowed to run for more than five, at most ten years, without rebasing" (paragraph 16.76). It further recommends: "The preferred measure of year to year movements of GDP at constant prices is a Fisher Volume index, changes over longer periods being obtained by chaining: i.e., by cumulating the year to year movements" (paragraph 16.73a). The CSNA already provides chain indices, one chain is typically linked every five years (the present weights refer to 1986) and two sets of quarterly chain indices are published, one rebased and linked annually and the other linked quarterly.

23. Terms of Trade

The 1993 SNA recommends estimating trading gains and losses from changes in the terms of trade in calculating real Gross Domestic Income (GDI). The 1993 SNA states: "...an improvement in the terms of trade makes it possible for an increased volume of goods and services to be purchased by residents out of the income generated by a given level of domestic production. Real GDI measures the purchasing power of the total incomes generated by domestic production, so that when the terms of trade change there may be a significant divergence between the movements of GDP at constant prices and real GDI. The difference between the change in GDP at constant prices and real GDI is generally described as the trading gain (or loss). The differences between movements in GDP at constant prices and real GDI are not always small. If imports and exports are large relative to GDP, and if the commodity composition of the goods and services which make up imports and exports are very different, the scope for potential trading gains and losses may be large" (paragraph 16.152). The recommendation to calculate real GDI is not currently implemented in many countries, including Canada. We plan its implementation, as it will provide a very useful additional analytical construct.

24. Satellite Accounts

The 1993 SNA encourages countries to develop satellite accounts in a more flexible manner than the mainstream SNA accounts. The 1993 SNA provides examples of satellite accounts, some which are within the economic boundary of the SNA and others which extend the boundary. The tourism satellite account is an example of the first kind and the valuation of household work and environment accounts are examples of the second kind. At Statistics Canada, both kinds are under development.

Concluding Remarks

Our several adaptations of the recommended guidelines and our proposed alternatives are primarily prompted by pragmatic considerations. Apart from satellite accounts, our implementation approach hardly requires significant development of new data sources based on economic surveys or censuses. Most of the work is of a developmental/analytical nature. By and large, the 1993 SNA recommendations are implementable in the CSNA and, once implemented, will provide a more coherent, integrated analytical framework and, and also greater international comparability.

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