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27 National Accounts STD/NA(2002) For Official Use STD/NA(2002)27 Organisation de Coopération et de Développement Economiques Organisation for Economic Co-operation and Development ___________________________________________________________________________________________ English - Or. English STATISTICS DIRECTORATE For Official Use STD/NA(2002)27 National Accounts SOURCES OF DATA FOR INTERNATIONAL COMPARISONS OF COMPANY PROFITABILITY (METHODOLOGY) Paper prepared by Richard Walton - Bank of England (United Kingdom) OECD MEETING OF NATIONAL ACCOUNTS EXPERTS Château de la Muette, Paris 8-11 October 2002 Beginning at 9:30 a.m. on the first day [email protected] E nglish - Or. English Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format STD/NA(2002)27 SOURCES OF DATA FOR INTERNATIONAL COMPARISONS OF COMPANY PROFITABILITY (METHODOLOGY) 1. The rates of return to be presented in the article, International comparisons of company profitability (UK Economic Trends, 15 October 2002) are ratios of the operating surpluses of non-financial companies compared with capital employed, expressed as percentages. Tables 1.4, 1.5 and 1.6 provide data on international comparisons of all companies, manufacturing and services companies. Data for 2000 an 2001 will be released on 15 October. The rate of return can be calculated in many ways1, but this is considered the most important measure of profitability because it expresses the return on invested capital. The net rate of return uses capital estimates which are net of capital consumption and is more widely used than the gross rate of return. The sources of data are national accounts in most countries. In a few countries, financial indicators of business activity have been used which draw on data from balance sheets and the profit and loss accounts of surveys of enterprises. 2. The use of national accounts data has distinct advantages over company accounting: • National accounts definitions and concepts for operating surplus net of depreciation in ESA95/SNA93 are consistent across all firms and over time. When conventions have changed, historic as well as current data are revised. • National accounts data are gross of corporate taxes. • Accounting conventions differ across countries and even within countries in the measurement of profits in company accounts2. Accounting in Europe is geared rather more towards creditor protection than are US accounting policies. There are differences in the capitalisation of intangible assets related to computer software and in running costs which in Europe have to be included directly in the profit and loss account. In the US, operating earnings exclude items that firms choose to describe as extraordinary. Profits may also be distorted in company accounts because of inflation. Company accounts are often published with a huge time lag. • There are differences also in accounting for capital: the list of items which can and cannot be capitalised, service lives, the rate and method of depreciation, how to deal with write-offs from bankruptcies and closures and different valuation rules for fixed and intangible assets. • Capital is measured at current replacement cost, rather than at the prices at which the assets were purchased. Comparison of current income streams achieves consistency and coherence. 1 The numerator could be defined exclusive of net interest. Profits could be after tax or based on financial accounting standards. Similarly, capital could be measured at historical cost rather than at current cost and could include goodwill and intellectual property. Or, the denominator could be equity or sales. 2 All publicly traded European companies will have to conform with International Accounting Standards by 2005 and apply a single set of internationally agreed standards (fair value, accruals basis) for the preparation of consolidated financial statements. 2 STD/NA(2002)27 • National accounts cover the earnings of the resident corporate sector, not just publicly quoted companies. • Data in the non-financial sector of the national accounts are consistent with those for other sectors of the economy. 3. This paper sets out an inventory of present methodology. This is the third international survey and the author has noted that most countries have introduced concepts and classifications to produce comparable figures. There are now 34 countries contributing to this survey compared to 17 in the second and 11 in the first survey. Rates of return published in the third survey will be available on October 15. 4. The author recognises that even with comparable data care must be taken in analysis, given different structures and capital intensity of economies, institutional differences in corporate financing, the tax burden and different business cycles and rate of technological change. It follows that differences between countries can reflect a mixture of real differences in profitability and the results of differences in calculations. In this third world survey, these differences in calculation have continued to be minimised as a result of the use of national accounts data sources. In virtually every case, countries will, however, have calculated profitability consistently over time. Rises and falls will reflect real changes in their economies. I. How profits are calculated 5. In the United Kingdom, gross operating surplus consists of gross trading profits, plus income from rental of buildings less inventory holding gains. Gross trading profits include only that part of a company’s income which arises from trading activities in the UK. It does not include income from investments. Nor does it include earnings from subsidiaries or branches located outside the United Kingdom. Gross trading profits are calculated before payments of dividends, interest and tax. Any change in the book value of inventories is subtracted from profits, because revaluations are not considered to be part of economic activity (as defined for National Accounts’ purposes). Net operating surplus is net of depreciation (capital consumption). Capital consumption is derived from capital stock and covers the depreciation of fixed assets over their service lives. The main difference between UK commercial accounting and national accounting is in the treatment of net interest. Commercial accounting show net interest received as profit. National accounts treat interest flows as property income. 6. Other countries follow the international guidelines outlined above. There are differences of detail, but they are not significant in terms of the impact on the data. European Union 7. The measure of profits for Austria is the operating surplus of non-financial corporations (S.11). Data are available for 1996-2000. 2001 data would not be available until late December 2002 with the sectoral accounts within the national accounts (except financial accounts). 8. The measure of profits in Belgium is calculated indirectly from the value added, less compensation of employees and other operating expenses. It is equivalent to earnings before taxes, depreciation and amortisation. The manufacturing sector includes from 1997 oil refining companies. 3 STD/NA(2002)27 9. For Denmark, net rates of return are calculated using profits measured as the gross operating surplus after deduction of depreciation (consumption of fixed capital). Data are available for the non-financial sectors and subdivided into industries, manufacturing and services. 10. Statistics Finland do not currently publish data for Finland on net rates of return, but have produced data for this world survey and will be considering their future publication. The data for profitability are the current price net operating surplus per average net capital stock and average inventories. Data are available for non-financial corporations, manufacturing and services which include some household sector net operating surplus/mixed income which cause some upward bias. Revised data back to 1975 on the ESA95 basis are available, including the capital stock data. 11. In France, INSEE has completed the calculations of the French national accounts including non- financial balance sheets according to SNA93 from 1978. To calculate profitability ratios, the net operating surplus is calculated from the gross operating surplus of non-financial companies (S11) less capital consumption. Operating surplus is available quarterly. 12. In Germany, the use of national account data enables profits to be calculated in this third survey from the net operating surplus of non-financial corporations. Use of net operating surplus by industry has one disadvantage: data are available only at t+18 months. The Bundesbank publish annual profitability ratios for the corporate sector (ratios of income/turnover) and in the latest review on German enterprises’ profitability and financing in 2000 do have data for 2000 (Bundesbank Monthly report April 2002). The Bundesbank use current balance sheets and profit and loss accounts submitted by companies, but acknowledge that there is a statistical bias with weaker companies and the services sector less well represented. Before taxes, profits as a percentage of turnover are reported as 3.5% in 1998-2000, figures which were in line with data in the first two surveys and in line with data produced by the Cologne Research Institute on post-tax rates of return on sales earned by German international companies. 13. Data on sales and profits before taxes in Greece are collected (Financial accounts section, Statistics Department,
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