WORKING PARTY ON NATIONAL ACCOUNTS (WPNA)

OCTOBER 2004COST OF OWNERSHIP

TRANSFER - PART 2

COST OF OWNERSHIP TRANSFER - PART 2OUTLINE OF PRESENTATION

• COT – part 1 proposals, supported by the ISWGNA/AEG

• COT – part 2 proposals

• The rationale for the proposals

COST OF OWNERSHIP TRANSFER - PART 2COT – part 1

1. COT should continue to be recorded as GFCF

2. COT on the acquisition of an asset should be written off over the expected period of ownership (current SNA says over the entire life of the asset)

• Important for dwellings

• ISWGNA/AEG agreed to both of these

COST OF OWNERSHIP TRANSFER - PART 2COT 2 proposals

3. COT on disposal should be written off over the period the asset was held. (SNA currently says record as GFCF at the time the costs incurred and written off immediately.)

4. Installation (and de-installation costs and transportation costs should be included in COT when separately invoiced, otherwise included in the acquisition price of the asset.

COST OF OWNERSHIP TRANSFER - PART 2COT 2 proposals

5. Terminal costs (e.g. de-commissioning costs of nuclear power stations, open cut mines) should be treated in the same way as COT on disposal, except that they are written off over the expected service life of the asset. However, when termination costs are unanticipated or cannot be predicted with reasonable accuracy then they can be written off as CFC immediately.

COST OF OWNERSHIP TRANSFER - PART 2COT on Disposal - Proposal 3

• The value of an asset is equal to the present value of expected future benefits.

• This value must be sufficient to cover the costs of ownership of an asset, including COT on acquisition and disposal.

• Therefore, CFC should be recorded for both COT on acquisition and disposal over the period of ownership.

COST OF OWNERSHIP TRANSFER - PART 2COT on Disposal - Proposal 3

• This does not affect the recording of COT on disposal when it occurs, which can be regarded as a second instalment in the acquisition of the asset.

• The proposed change ensures that the value of the asset on the balance sheet reflects the fact that this second instalment is yet to be paid.

COST OF OWNERSHIP TRANSFER - PART 2COT on Disposal - Proposal 3

• By contrast, the present SNA recommendation leads to an overstatement of the value of the asset on the balance sheet.

• The proposal is no more difficult to implement.

COST OF OWNERSHIP TRANSFER - PART 2Installation costs - Proposal 4

• Installation and de-installation costs are likely to be incurred when a change of ownership occurs. Therefore, it is appropriate to write them off the expected period of ownership and include them with COT when separately invoiced.

COST OF OWNERSHIP TRANSFER - PART 2Terminal costs - Proposal 4

• Same as COT on disposal, only costs should be written off over the service life of the asset.

• Same rationale: gives appropriate value on the balance sheet.

• In cases where it is infeasible to implement, then the fall back is to write off the terminal costs immediately, and not before.