METHODS OF CONSOLIDATION OF FINANCIAL ACCOUNTS



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METHODS OF CONSOLIDATION OF FINANCIAL ACCOUNTS

IN THE OECD COUNTRIES

This document has been prepared by the OECD Secretariat for submission to the members of the working group on financial statistics as a basis for discussion of consolidation methods used in the OECD Member countries.

The purpose of the discussion is:

• to highlight the difficulties encountered by certain countries in preparing tables of consolidated financial accounts;

• to present the different methods used by countries to consolidate their financial accounts and resolve difficulties encountered, and the results of the work undertaken by certain international organisations;

• to underline the OECD’s need to have accurate and detailed information about the consolidation principles developed by each country so as to have a better grasp of the differences and similarities from one country to another;

• to try and develop specific common rules which the majority of OECD countries could adopt, so as to facilitate comparison between their financial accounts and provide more useful information for macro-economic analysis.

Introduction

1. Although the concept of consolidation is mentioned and its value recognised in the System of National Accounts, the presentation of consolidated financial accounts is not a requirement. Generally speaking, entries in Systems of National Accounts are not consolidated. However, for some types of analysis, especially in the area of financial accounts, information on consolidated transactions between sub-sectors in the same sector is more useful than information for each of the sub-sectors before consolidation. The value of consolidation, which consists of eliminating transactions of assets and liabilities within sectors and sub-sectors, and which can be done at different levels, is particularly important for financial corporations (sector S12) including monetary institutions (sector S121-S122), and for general government (Sector S13).

2. Several international organisations[1] have published reports dealing with aspects of consolidation of financial transactions, thus allowing progress in this area for several years and the establishment of a certain number of standards. There still remain, however, a number of difficulties in harmonising concepts and calculations of consolidated values, while in some countries, even, it is at present impossible to consolidate all instruments and/or sectors.

3. The OECD countries, particularly those of the European Union (including the candidate countries) have to answer an OECD/Eurostat questionnaire on their financial accounts which includes not only non-consolidated tables but also consolidated tables both for financial accounts by sector (transactions) or balance sheet accounts of financial assets and liabilities (stocks). The consolidation rules were recently established and published by Eurostat in a volume ‘Manual on Sources and Methods for the compilation of ESA95 Financial Accounts’ (see annex 1).

4. The aim of this document is to see whether all OECD countries can use these rules and to determine whether these principles can be defined more precisely.

Definitions of the aggregation and consolidation of data

5. In this paper, “aggregation” means the simple sum of the values. The aggregation of data on financial transactions and balance sheet accounts can be done both for institutional sectors and for financial assets and liabilities. Aggregation consists first of calculating the sum of the data provided for the institutional units which make up the sub-sectors, then calculating the sum of the data obtained for the sub-sectors which make up the sectors (e.g.: S121 + S122 + S123 + S124 + S125 = S12). In the aggregation process, data for transactions or stocks between institutional units in the same group, between sub-sectors in the same sector and between sectors are not eliminated. In the case of financial assets and liabilities, aggregation consists simply of calculating the sum of the data provided for instruments which belong to a category of assets or liabilities (e.g.: F511 +F512 + F513 = F51).

6. The consolidation of data relating to stocks and financial flows consists, in principle, of eliminating transactions in financial assets and liabilities within institutional units, between institutional units in the same sub-sector and between sub-sectors in the same sector. We do not speak of consolidation of data in sector 1 (total national economy) since by definition we would obtain the inverse value of the data reported for sector 2 (Rest of the World). Consequently, consolidation takes place at several levels in the hierarchy. For example, the consolidation of data in the financial transactions account in the general government sector, S13, consists of:

- first, for each of the sub-sectors (S1311 to S1314) eliminating transactions between each institutional unit belonging to it and other units in the same sub-sector;

- second, eliminating transactions between the sub-sectors (S1311 to S1314) that make up the general government sector, retaining only transactions with institutional units outside the sector.

7. In many countries, financial transactions within institutional units, which come most often from surveys of undertakings based on the legal entity, are consolidated, which means that it may be difficult to obtain data produced on a wholly non-consolidated basis. Conversely, according to SNA 93, financial flows and stocks of the units which make up the sub-sectors must not in principle be consolidated.

8. Indeed the availability of non-consolidated data is important. Deciding to eliminate all intra-sectoral transfers can lead to a wrong interpretation of certain information and skew the results. Furthermore, another advantage of non-consolidated accounts lies chiefly in their additionality and thus the possibility of finding all the figures in lines (instruments) and columns (sectors).

9. However, there is another approach, useful in some analyses, which consists of consolidating financial transactions so as to eliminate those which occur at different levels in the hierarchy, whether within the same sub-sector, between sub-sectors or between sectors. In this case, by retaining only transactions between sub-sectors or sectors of the economy, it is possible to obtain information which takes better account of the financial position of the various macro-economic players. Thus, for example, there is interest in the OECD, as in the European Commission, in the consolidated debt of general government rather than non-consolidated debt.

10. The process of consolidating financial accounts, however, is not always applicable to all financial instruments, either because the question does not arise, or because the information does not exist, whether for statistical or practical reasons.

Database of financial accounts

11. The new OECD database of financial accounts covers financial transaction accounts and financial balance sheet accounts, both non-consolidated and consolidated. As indicated in the previous paragraph, not all countries provide all the information. On the other hand, if consolidated values are calculated, they are done both for transactions (Table 601) and stocks (Table 701).

12. Of the ten non-European Members of the OECD, financial accounts data has been provided up to now:

- both consolidated and non-consolidated: by only one country, Korea,

- non-consolidated only: by only one country, Japan,

- consolidated (or partially consolidated) only: by four countries, Canada, the United States, Mexico, Australia,

while the other four countries (Iceland, Switzerland, Turkey and New Zealand) are not at present in a position to provide financial accounts to the OECD.

13. Of the twenty European countries which provide data to Eurostat:

- fourteen countries send both consolidated and non-consolidated tables,

- two countries, the United Kingdom and the Czech Republic, do not send consolidated data,

- one country, the Slovak Republic, only provides consolidated data,

- three countries, Greece, Ireland and Luxembourg, have a derogation until 2005 and thus do not send any financial accounts.

14. The following table shows the availability in the OECD database of consolidated and non-consolidated tables of financial accounts.

|Tables |601 |602 |701 |702 |

| |Financial operating accounts |Financial operating accounts by|Financial assets and |Financial assets and |

| |by sector (transactions) |sector (transactions) |liabilities accounts (stocks) |liabilities accounts (stocks) |

|Country |consolidated |non-consolidated |consolidated |non-consolidated |

|AUS |( | |( | |

|AUT |( |( |( |( |

|BEL |( |( |( |( |

|CAN |( | |( | |

|CHE | | | | |

|CZE | |( | |( |

|DEU |( |( |( |( |

|DNK |( |( |( |( |

|ESP |( |( |( |( |

|FIN |( |( |( |( |

|FRA |( |( |( |( |

|GBR | |( | |( |

|GRC | | | | |

|HUN |( |( |( |( |

|IRL | | | | |

|ISL | | | | |

|ITA |( |( |( |( |

|JPN | |( | |( |

|KOR |( |( |( |( |

|LUX |( |( |( |( |

|MEX |( | | | |

|NLD |( |( |( |( |

|NOR |( |( |( |( |

|NZL | | | | |

|POL |( |( |( |( |

|PRT |( |( |( |( |

|SVK |( | |( | |

|SWE |( |( |( |( |

|TUR | | | | |

|USA |( | |( | |

Recommendation 1 : Tables for financial accounts and balance sheet accounts should be sent to the OECD by all countries both non-consolidated and consolidated.

15. On closer examination of the consolidated data sent by Member countries, one is confronted by certain limitations. Firstly, not all the countries consolidate their financial data in the same way. Consolidation is not applied in all the countries at the same level in the hierarchy of sectors, it is sometimes only partial (e.g. some countries do not consolidate transactions between sub-sectors and calculate other flows and stocks by simple aggregation). Nor is it applied to all financial instruments.

16. Chapter 4 of the Eurostat Manual, shown in annex 1 of this document, sets out the consolidation rules to be applied to sub-sectors and sectors:

1) Consolidation rules apply at the level of the sector and the sub-sector:

Sector level: all transactions and stock positions between institutional units within the boundary of the sector are eliminated.

Sub-sector level: all transactions and stock positions between institutional units within the boundary of the sub-sector are eliminated. This means that transactions or positions of institutional units in the sub-sector with institutional units outside of the sub-sector concerned are retained.

2) It will clearly follow that the sum of financial assets/liabilities and financial transactions over the consolidated sub-sectors accounts does not necessarily equal the financial assets/liabilities and financial transactions for the consolidated sector accounts. The sum will be equal only in case of no transactions and positions between sub-sectors, but will be higher in other cases.

3) It can be noted that the balancing items (net lending/net borrowing) still add across for the sub-sectors and equal the sector total. Moreover, they are identical with the balancing items in the non-consolidated accounts

Recommendation 2: Il is proposed to extend the principles established by Eurostat to all OECD countries

Precision and limitations of the principles

17. In the consolidated tables, it is difficult to check the quality of the data and compare the information received. Indeed, since transactions between institutional units in the same sector and transactions within sub-sectors are eliminated in the consolidation process, the consistency of the data provided for sectors and aggregations of data provided for the component sub-sectors cannot be verified.

18. An analysis of the tables provided by countries also shows that the consolidation principles are not applied to all sectors or all instruments. For example, one finds, in making certain calculations, that some countries do not consolidate the major sectors of the economy (the non-financial corporations sector, the financial corporations sector, the general government sector) or others do not eliminate intra-sectoral transactions involving certain financial instruments.

19. To improve the quality and comparability of data, it thus seems essential for the most accurate information possible concerning :

- the exact meaning of the concept of consolidation used by countries,

- the methods applied at each level of the hierarchy,

- the limitations relating to sectors of the economy or financial transactions which it has been decided or it is possible to consolidate given the availability of information and the needs of the underlying economic analysis

to be sent to the Secretariat to allow it to highlight the differences and similarities of treatment by country, sector and instruments, to inform users of these accounts and to attempt as far as possible to reduce the disparities and allow greater comparability.

20. Some countries have submitted a brief document on their national practice in the consolidation of financial accounts. Examples of such concise information submitted by France (see annex 2) and Poland (see annex 3) are appended to this document. Other countries are invited to present similar information during the meeting.

Recommendation 3: Countries are requested to provide precise information on the methods currently used in their country along the lines of the model in the document submitted by France (in annex 2)

21. For that reason, before the OECD makes more precise recommendations, and in view of the heterogeneity of replies, it was considered wiser to set in motion a process of reflection on the subject to reach a better understanding of the methods used in different countries, the reasons behind the development of these methods and the difficulties encountered by some countries in implementing the consolidation rules.

Conclusions

22. Delegates are requested:

- to note the importance of sending detailed data, both non-consolidated and consolidated, to OECD to provide better knowledge of financial and balance sheet accounts in OECD countries,

- to understand the importance of sending OECD precise information on the methods used to consolidate financial statistics as well as the reasons behind the non-availability of consolidated data or the non-availability of non-consolidated data,

- to give their opinion on the recommendations proposed by the OECD in this document to facilitate comparability of financial accounts in the OECD countries so that these recommendations, once amended and adopted, can be introduced into the OECD/Eurostat questionnaire to be sent out to countries in 2004.

23. To allow the OECD to rapidly improve the financial accounts database and publish the data at the end of 2004, countries are requested to send the required information on methods by 31 December 2003 and to submit their proposed amendments to the recommendations by 31 March 2004.

ANNEX 1

Extract from ‘Sources and Methods for the compilation of ESA95 Financial Accounts’

From Eurostat

Issue N° 4 Consolidation

2002

1. Consolidation rules apply at the level of the sector and the sub-sector:

Sector level: all transactions and stock positions between institutional units within the boundary of the sector are eliminated.

Sub-sector level: all transactions and stock positions between institutional units within the boundary of the sub-sector are eliminated. This means that transactions or positions of institutional units in the sub-sector with institutional units outside of the sub-sector concerned are retained.

2. It will clearly follow that the sum of financial assets/liabilities and financial transactions over the consolidated sub-sectors accounts does not necessarily equal the financial assets/liabilities and financial transactions for the consolidated sector accounts. The sum will be equal only in case of no transactions and positions between sub-sectors, but will higher in other cases.

3. It can be noted that the balancing items (net lending/net borrowing) still add across for the sub-sectors and equal the sector total. Moreover, they are identical with the balancing items in the non-consolidated accounts.

4. Terminology and simplified example:

The following graphic introduces a series of terms and explains what is meant by ‘intra’ and ‘inter’:

* ‘Intra’ indicates that it is the relationships within a named sector or sub-sector that are being referred to.

* ‘Inter’ refers to flows or positions between sectors or between sub-sectors that are referred to.

In both cases the context or position within the range of sectors or sub-sectors must be known to correctly specify the set of relationships subject to the discussions. (This context is shown most efficiently in the attached figurine.)

The figurine, and later example, takes the General Government sector as a single main example. It is emphasised that this is for illustrative purposes and that the principles outlined apply to all ESA 95 sectors or sub-sectors.

| SUB-SECTORS | | SECTOR |

|“Reciprocal Transactions” | | |

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|Example: Cash deposit – assets |CG |LA |SSF |GG |Notes |

|Deposits held (non-consolidated) |100 |70 |30 |200 | |

|Analysis by Sub-sectors and by counterpart location | | | | | |

|Central Government |40 | | | |Transactions with other |

|– intra transactions | | | | |institutional units in CG |

| – inter transactions |5 | | | |Transactions with units in LA, |

|(broken down by sub-sector) | | | | |SSFs |

| – other |55 | | | |Transactions with units outside |

| | | | | |of GG |

| | | | | | |

|Local Authorities[2] | |10 | | |Transactions with other |

|– intra transactions | | | | |institutional units in LA |

| – inter transactions | |25 | | |Transactions with units in CG, |

|(broken down by sub-sector) | | | | |SSFs |

| – other | |35 | | |Transactions with units outside |

| | | | | |of GG |

| | | | | | |

|Social Security Funds | | |0 | |Transactions with other |

|– intra transactions | | | | |institutional units in SSF |

| – inter transactions | | |5 | |Transactions with units in CG, |

| | | | | |LAs |

| – other | | |25 | |Transactions with units outside |

| | | | | |of GG |

| | | | | | |

|ESA 95 – Consolidated Results for the sub-sectors |CG |LA |SSF | | |

|‘intra’ transactions (from perspective of sub-sector) |40 |10 |0 | |For the sub-sectors, we remove |

| | | | | |the transactions or positions |

| | | | | |with units within their own |

| | | | | |sub-sectoral boundary i.e. intra |

| | | | | |transactions |

|= ESA 95 Sub-sectors |60 |60 |30 | | |

|ESA 95 – Consolidated Results for the Sector (GG) | | | | |Remove the ‘inter’ sub-sectoral |

| | | | | |transactions – these are ‘intra’ |

| | | | | |for GG) |

| – inter |5 |25 |5 |115 | |

DGEI – DESM

47-1421 – SESOF – F03-59

Dominique DURANT - ( 2.28.12

ANNEXE 2

• Consolidation In THE FRENCH FINANCIAL accounts

1 Introduction: the regulatory framework

Article 1.58 of the European System of Accounts 1995 (ESA95) defines consolidation: “Consolidation refers to the elimination, from both uses and resources, of transactions which occur between units when the latter are grouped, and to the elimination of reciprocal financial assets and liabilities”.

For sub-sectors or sectors, flows and stocks between constituent units are not consolidated as a matter of principle. However, in the official transmission programme of financial accounts, Eurostat requests both consolidated and non-consolidated data. Specific rules were agreed by the Financial Accounts Working Party (FAWP) on 19-20 October 2000. The rules are the following [3]:

- Consolidation rules apply at the sector and the sub-sector levels. At sector level, all transactions and stock positions between institutional units within the boundaries of the sector are eliminated. At sub-sector level, all transactions and stock positions between institutional units within the boundaries of the sub-sector are eliminated. This means that transactions or positions of institutional units within a particular sub-sector with institutional units outside this sub-sector are retained.

- It follows that the sum of financial assets/liabilities/transactions consolidated at sub-sector level does not necessarily equal the financial asset/liabilities/transactions for the corresponding consolidated sector. The sum will be equal only if there are no transactions and positions between sub-sectors. Regarding positions, it will be higher in other cases.

- However, net lending/net borrowing items add across for the sub-sectors and equal the sector total. Moreover, they are identical with the balancing item in the non-consolidated accounts.

Eurostat states other recommendations:

- For reasons of comparability, non-consolidated data should be based on a complete picture of all financial transactions and financial assets and liabilities in the balance sheets of units classified in the same sub-sector/sector. Basic information should therefore consist preferably of the aggregation of data for individual units.

- Financial accounts should rely as much as possible on direct information, including counterpart information. Where no significant improvement in sources of information may be expected in a short delay, the process of consolidation could be based on assumptions.

For the purpose of the Excessive Deficit Procedure (EDP), in Economic and Monetary Union, government debt must be consolidated at the sector level. Following the Council regulation (EC) 3605/93 of 22 November 1993, “Government debt means the total gross debt at nominal value outstanding at the end of the year of the sector of general government (S13), with the exception of those liabilities the corresponding financial assets of which are held by the sector of general government”.

2 Implementation in French financial accounts

1 General remarks

The annual financial accounts are transmitted to Eurostat in non-consolidated and consolidated versions. In the latter case, consolidation is carried out at the sub-sector and sector levels. Consolidated accounts are available for stocks, transactions, revaluation and other changes in volume.

The consolidated accounts are drawn up only in a semi-definitive and definitive version of the accounts. The provisional accounts are drawn up over a fairly short period (3 months and a half), which does not make it possible to compile the available information on counterpart sectors. The computerised production of full quarterly financial accounts in the near future will provide the basis for the compilation of the counterpart information within the production of provisional accounts and therefore, for the compilation of consolidated provisional accounts.

The sector’s consolidated accounts amount to less than the sum of the sub-sector’s consolidated accounts. This means that some inter-sub-sector operations, which are also intra-sector operations, are eliminated in the process of sector consolidation. No consolidation is carried out at the global economy level (sector S1). Should such consolidation be carried out, the consolidated assets (resp. liabilities) of the total economy would simply equal the liabilities (resp. assets) of the rest of the world. Presently, the S1 sector in the consolidated accounts equals the sum of the consolidated resident sectors.

Consolidation does not affect net financial worth, thus for each sector/sub-sector and each operation, the difference between the consolidated and the non-consolidated amount is exactly the same on the liability and on asset sides.

Consolidation has no impact on the “Rest of the world” account because financial operations between non-residents are not included in the non-consolidated accounts of this sector.

2 Consolidation by operation

“A full consolidation is highly demanding concerning the needed information. Compilers must be in the position to get for each instrument, information on the counterpart sector or sub-sector according to ESA95 sector classification.”[4]

This is why long-term securities (bonds, shares and other equities including mutual funds shares) are not consolidated in the French financial accounts. Information on the final owner of such long-term securities is very scarce. Some information is gleaned on the portfolios of credit institutions, mutual funds, insurance companies, the State and some other general government entities by looking at the asset side of their balance sheets. A survey conducted on a sample of resident custodians gives further information on the portfolios of households and non-financial corporations. However the survey is limited to listed securities and information on issuers of securities is limited to residency. This information was not considered sufficient to consolidate long-term securities. However, some improvements are foreseen in the next four years. They will involve the reshaping of the survey on resident custodians.

For all other operations, the information on the counterpart sector is either obtained directly from the basic data or estimated later in the treatments. Ultimately, the information on the counterpart sub-sector is recorded in the financial account database for every operation, except long-term securities.

The counterpart information is included in the data collected in several cases. Loans and deposits involving financial institutions such as credit institutions, securities and derivatives dealers and mutual funds are recorded in the individual balance sheets with precise counterpart information, consistent with ESA95 sector and sub-sector classification. The same goes for loans and deposits involving general government after the treatments by the Department of Public Accounts. The balance of payment provides stocks and flows for all transactions with counterpart information following sector breakdowns, which are broadly compatible with ESA95 classification. As stated above, the “Rest of the world” sector does not need to be consolidated. However, balance of payment data are used as counterpart information for resident sectors.

The split by counterpart is estimated in the following cases:

- loans and deposits of insurance corporations with non financial counterparts, which total is obtained from the insurance corporations’ supervisor,

- derivatives, on the basis of the information provided by credit institutions and the balance of payments,

- trade credit and advances as well as loans between non financial entities, whose total is known, without information on counterpart, from the fiscal database with a two-year delay.

The consolidation of short-term securities involves a specific treatment. As a supervisor of short-term securities issues, the Banque de France records information on issuers and buyers on the primary market. It is then assumed that short term securities are not sold on a secondary market, an assumption that is not entirely false given that these securities, which, legally have an original maturity of less than one year, are, in practice, frequently of even shorter maturity. Moreover, the original maturity of each individual security is known. It is thus possible to calculate the outstanding amount of short-term securities held by the different sectors by issuer. This information is crossed with balance of payment data. Consolidation is carried out on the basis of this counterpart information.

In remaining cases, there is no room for consolidation because, by nature, the transaction involves different sub-sectors. This is the case for monetary gold and SDR, which are held by central banks and issued by international institutions located in the “rest of the world”, deposits from non financial entities in financial institutions such as saving books and contractual savings, deposits with international institutions, loans from financial institutions to non financial entities, households’ net equities in life insurance reserves. Currencies issued by central banks and held by other sectors are not consolidated at the sub-sector level but at the sector level, as central banks and other financial institutions are in the same sector.

3 Consolidation by sector and sub-sector

In the French financial accounts, the sub-sectors financial auxiliaries, households unincorporated enterprises, other households and non-profit institutions serving households are not subject to consolidation because direct information on these entities is insufficient. These sub-sector’s accounts are compiled mainly on the basis of counterpart information from financial institutions and the balance of payments that does not enable the identification of financial links inside the non financial resident sectors. However, fiscal data provide information on trade credit for households’ unincorporated enterprises and non-profit institutions serving households. The amount of trade credit transactions realised between these two sub-sectors is estimated and gives rise to consolidation in the sector households + NPISH.

In other sub-sectors, direct information is available to varying extents. It comes mainly from the balance sheets of the individual entities and not from groups’ balance sheets. Thus, the non-consolidated accounts provide a complete picture of the financial transactions, assets and liabilities of the institutional units classified under the same sector/sub-sector.

The information may be very detailed for some sub-sectors (central banks, credit institutions, securities and derivative dealers, mutual funds, central government, local government, social security funds), including information on counterparts that permit very accurate consolidation. Regarding financial institutions, the information comes from balance sheets transmitted to the Banque de France, partly for prudential reasons. For general government, it comes from direct accounting information transmitted by public entities to the Department of Public Accounts.

The central bank sub-sector includes two entities: the “Banque de France” and the “Institut d’Emission des Territoires d’Outre Mer” (IEDOM - the French overseas departments note-issuing bank), which is in charge of implementing the monetary policy and issuing euro in overseas regions on behalf of the Banque de France. Reciprocal loans between IEDOM and the Banque de France financing the supply of euro banknotes in overseas regions are thus eliminated from the consolidated accounts.

Information on counterparts is limited for other sub-sectors (insurance corporations, non-financial corporations) and has to be estimated in many cases. Estimates are based mainly on elements of balance sheets transmitted by corporations to the Ministry of Finance for fiscal purposes.

3 Results of consolidation in 2001

The comparison between consolidated and non-consolidated data is clearly relevant for macro-financial analysis.

Regarding financial institutions, 69% of currencies and deposits held and 39% of currencies and deposits incurred are held or incurred inside the sector. This holds equally true for 55% of loans incurred. However, only 5% of loans granted are granted to financial institutions, which is quite logical. Among market operations, 45% of derivatives held, 46% of derivatives incurred, 39% of short-term securities held and 49% of short-term securities incurred have a financial institution as counterpart. Thus, it is obvious that intra-sector transactions are considerable. Moreover, these intra-sector transactions need to be added to a large part of the transactions carried out with the “Rest of the world” in order to measure the financial links between financial institutions. For example, the share of derivatives contracted between resident or foreign financial institutions is estimated at 90%.

Regarding general government, 83% of transferable deposits held and 59% of transferable deposits incurred have a general government entity as counterpart. This is an illustration of the “Treasury circuit” as a means of financing. On the other hand, short-term securities issued by central government entities – mainly the State – and held by general government represent only 3% of general government debt. That amounts however to 70% of the general government portfolio.

For non-financial corporations, the intra-sector links only concern the loans between non-financial entities and trade credit. About 80% of the former and 75% of the latter are contracted inside the sector.

It is obvious that the consolidation of long-term securities would permit a more thorough analysis of the financial links in the French economy. This is why the calculation of “who-to-whom” is foreseen for these operations.

Conclusion

The data used for consolidation, namely the information on the counterpart sector for most of the operations, may enhance the quality of the financial accounts because when the counterpart operation is recorded in the same conditions as the operation itself, the line is automatically balanced and no further adjustment is required. However, this arithmetic truth does not preclude some concurrence of different sources for a single operation and some difficulties in the assessment of the best quality data. In cases where no information is available at all, neither directly nor from counterparts, the costs that may be incurred in the collection of the information may be very high and should be compared with the potential benefits.

ANNEX 3

Consolidation of Financial Accounts

General rules and Polish experiences

Financial accounts can be compiled in two versions: non-consolidated and consolidated. ESA’95 states that “as a matter of principle” flows and stocks between units belonging to the same sector or sub-sector are not consolidated. However, according to the official transmission programme of financial accounts, Eurostat asks for both non-consolidated and consolidated data.

Manual on Sources and Methods for the compilation of ESA’95 Financial Accounts gives special rules to be applied for consolidation of financial accounts data.

Consolidation rules apply to the level of sectors and sub-sectors:

– Sector level – all transactions which occur between institutional units included into the same sector are eliminated and all reciprocal financial assets and liabilities are eliminated;

– Sub-sector level - all transactions which occur between institutional units included into the same sub-sector are eliminated and all reciprocal financial assets and liabilities are eliminated.

As a consequence of these rules, the sum of financial assets/liabilities and financial transactions over the consolidated sub-sector accounts does not necessarily equal the financial assets/liabilities and financial transactions for the consolidated sector accounts. These sums will be identity only in case when no transactions and positions between sub-sectors appear.

On the other hand consolidation has no effect on the balancing item (net lending/net borrowing is equal by definition for the sum of sub-sectors and for sector total). Moreover, this item is identical with the balancing items in the non-consolidated accounts.

Central Statistical Office of Poland is responsible for compiling annual financial accounts. The experimental version of financial accounts was published in 1998 for the first time and it covered data for 1995. Big progress regarding data sources and methodology has been made since then. The main problem now is two years delay in compiling process. In December 2002 financial accounts for 2000 were published. At the moment we are in the final stage of compiling accounts for 2001 and there are plans to compile accounts for 2002 by the end of this year.

For years 1995-1997 only consolidated accounts were compiled (it was a beginning of compiling of financial accounts in Poland and therefore not all ESA’95 rules were known and sufficiently used in practice). For two next years (1998-1999) only non-consolidated accounts were compiled.

Both versions of financial account were compiled in 2000 for the first time and therefore our practical experience in consolidation process is still not very wide. However, basing on accessible counterpart information and various estimation methods, it was possible to make two-level consolidation.

1. Rest of the world (S.2)

In Polish financial accounts ROW sector has not been divided into sub-sectors (UE countries and other countries) so far. Therefore consolidation has no effect on this sector data.

2. Households (S.14) and Non-profit institutions serving households (S.15)

Majority of data on households and NPISH come from other sectors reporting. Financial accounts of Households and NPISHs are compiled as a residual value of counterpart sectors reporting. The only possibility to eliminate financial flows within these sectors is to make assumptions and to estimate. However, the situation is not very problematic here taking into account rather negligible intra-sector financial links and therefore having a small impact on non-consolidated data.

3. General Government (S.13)

It was possible to consolidate accounts within sub-sectors of GG in 2000 using reporting data directly for some instruments or making reliable estimations in case of lack of counterpart information.

A new source of information covering detailed data relating to each sub-sector has been developed within Ministry of Finance starting from the end of 2001. These are quarterly questionnaires from units classified to GG sector, covering “from whom to whom” information on claims and liabilities (e.g. data on securities, loans) that will be very useful for consolidation process.

4. Financial corporations (S.12)

There is accurate data from Central Bank reporting for sub-sectors S.122 (Other monetary financial institutions) and S.125 (Insurance corporations and pension funds) to make consolidation on the sub-sector level. The problem is to get information on sub-sectors S.123 (Other financial intermediaries, except insurance companies and pension funds) and S.124 (Financial auxiliaries). Many small units belong to these sub-sectors therefore the reporting is rough and does not cover detailed information, which makes consolidation very difficult even to estimate. For last both sub-sectors we assume there is no significant flows between units belonging to them.

5. Non-financial corporations (S.11)

Non-financial corporations sector has not been divided into sub-sectors so far.

Majority of data on corporations comes from statistical survey (special questionnaires covering balance sheet positions are filled in by corporations and collected by CSO). This information is rather aggregated, without any “from whom to whom” information and that is why consolidation process is very difficult here. The situation is especially problematical taking into account significant differences between consolidated and non-consolidated data of this sector. In such case we have to make assumptions to estimate transactions values between units belonging to the sector.

Example

Let’s take Trade credits and advances (F.71) of non-financial corporations. This position has strong influence on difference between non-consolidated and consolidated accounts in Poland (a trade credit is very popular way of financing between non-financial corporations because of expensive bank credit in Poland).

The first step for consolidation is to settle the value of corporations’ deliveries and services claims (such data is available from corporations questionnaire, but there is no information about counterparts). From other sectors reporting (except from households) we have the values of trade credits liabilities (this position refers to deliveries and services claims from the asset side). The amount of each sector liabilities has to be assigned to all sectors. A key for dividing is the share of a particular sector in each sector’s total value of deliveries and services sold. Thanks to comparing the non-financial corporations’ claims with the sum of other sectors’ liabilities we know the value of transactions between non-financial corporations and other sectors except from households. The rest value of claims (the value not covered by liabilities) has to be split into households and non-financial corporations. Obviously majority of transactions is made between units belonging to non-financial corporations. We assume that 90% of transactions are made within non-financial corporations (this amount is eliminated from consolidated accounts) and the rest is made between corporations and households.

| |Financial assets – stocks in 2000 (106 PLN) |

| |S.11 |S.12 |S.13 |S.14+S.15 |

|Non-consolidated |525 871,2 |663 006,8 |253 635,1 |383 238,3 |

|Consolidated |140 848,4 |525 644,4 |228 969,1 |383 094,1 |

| |Financial liabilities – stocks in 2000 (106 PLN) |

| |S.11 |S.12 |S.13 |S.14+S.15 |

|Non-consolidated |1 100 593,5 |617 870,8 |345 881,4 |61 639,2 |

|Consolidated |715 570,7 |486 601,9 |313 899,5 |61 495,0 |

As it is shown in tables above, consolidation has strong impact especially on non-financial corporations sector (S.11), regarding both assets and liabilities sides. Such significant discrepancy is caused mainly by Other accounts receivable/payable (F.7) - as it was mentioned before, corporations are financed by themselves quite often in Poland. The smallest difference between consolidated and non-consolidated accounts appears in Households and NPISH sectors (S.14+S.15). Because these sectors’ data is based on other sectors reporting, it is difficult to say whether the real difference is higher or not. In case of Financial Corporations (S.12) consolidation is based on good quality information for units having crucial influence on total value. Flows between small units are not taken into account, but these flows are negligible and they do not affect much total value. Consolidation in GG sector (S.13) has rather little impact on non-consolidated data. However, some estimation had to be made in 2000 to consolidate this sector data. The real difference will be shown in 2001.

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[1] Among these publications, the following are worthy of mention:

- Consolidation rules extracted from the ‘Manual on Sources and Methods for the compilation of ESA95 Financial Accounts’ (available in English only) published by Eurostat in 2002, with the example of the general government sector (see annex 1)

- A chapter of the draft report on Financial Soundness Indicators which sets out the IMF approach to consolidated data for deposit-takers (available in English at ).

- An extract of the International Monetary Fund’s Manual of Monetary and Financial Statistics published in 2000 (available at ).

[2] For simplicity, we assume no State sub-sector in the example.

[3] Manual on Sources and Methods for the compilation of ESA 95 Financial Accounts, first edition, 2002

[4] Manual on Sources and Methods for the compilation of ESA 95 Financial Accounts, first edition, 2002

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INTRA (cg to/from cg)

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INTER

(Broken down by sub-sector)

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OTHER (cg to/from FE, HH, ROW etc)

Sub-sector view

INTRA

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(la to/from la)

(ssf to/from ssf)

INTRA (la to/from la)

[pic]

INTER

(Broken down by sub-sector)

[pic]

OTHER (la to/from FE, HH, ROW etc)

INTRA (ssf to/from ssf)

[pic]

INTER

(Broken down by sub-sector)

[pic]

OTHER (ssf to/from FE, HH, ROW etc)

Sub-sector view

INTER

(cg to/from la/ssf)

(la to/from cg/ssf)

(ssf to/from cg/la)

Sector view

OTHER

Sub-sector view

OTHER

Sector view

INTRA

(GG to/from GG)

Social security Funds

Local authorities

Central Government

CENTRAL STATISTICAL OFFICE

OF POLAND

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