|
on Accounting and Auditing |
| By: | Iacob, Constanta; Bosoteanu, Maria Cristina |
| Abstract: | Cultural, economic, political, religious and social differences exercises influence also at accounting level, most contradictions existing between Anglo-Saxon and continental accounting systems. European directives, as well as IFRS are not binding in law, they do not bind national courts only in terms of outcome to be achieved and leaves them free when it comes to form and means used to achieve it. The enunciated aspect explains why we are dealing with national standards (rules) considering that, not only once, legislature and specialists in the field in our country have embraced all the collocations of "harmonization", "convergence" and newer, "compliance" of Romanian accounting regulations with European directives, with international accounting standards, namely IFRS, by which heads all countries and contributing to the globalization of accounting. The question naturally arises, how are European directives comply with International Financial Reporting Standards? but our national accounting regulations with IFRS or European directives? To answer these questions we considered useful to undertake a comparative empirical study in the international-European-national perimeter. |
| Keywords: | internationalization, globalization, normalization, conceptual framework, accounting reform |
| JEL: | C15 M48 M49 |
| Date: | 2016–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73456&r=acc |
| By: | Missaka Warusawitharana; Damian R. Thomas; Rick Ogden |
| Abstract: | Print{{p}}March 29, 2016{{p}}Corporate Equities by Issuer in the Financial Accounts of the United States{{p}}Richard E. Ogden, Damian R. Thomas, and Missaka Warusawitharana{{p}}Beginning with the December 2015 publication, the Financial Accounts of the United States reports estimates of the value of corporate{{p}}equities of publicly traded and closely held corporations separately; closely held corporations are further broken down into S{{p}}corporations and C corporations.1 This FEDS Note shows how we report the value of corporate equities outstanding in the Financial{{p}}Accounts and describes how we estimate each of its components.{{p}}Definition{{p}}In the framework of the Financial Accounts, corporate equities reflect ownership shares in corporate businesses. This instrument{{p}}category includes both common and preferred shares issued by domestic corporations, as well as shares issued by foreign corporations{{p}}in domestic markets. There are three important exceptions. Mutual fund shares and inter-corporate equities holdings are excluded from{{p}}the total outstanding for domestic corporations to prevent double counting of cross-holdings by firms. This reflects the fact that the{{p}}Financial Accounts aim to capture the balance sheet dynamics of the nonfinancial corporate sector as a whole. Foreign direct{{p}}investment--equity investment in a domestic corporation by a foreign entity that results in an ownership share greater than 10%--is{{p}}recorded separately. Furthermore, holdings of a corporation's stock by itself (reported by firms as treasury stock holdings) are also not{{p}}considered corporate equity.2{{p}}Presentation in the Financial Accounts{{p}}Table L.223 (PDF) of the Financial Accounts (not shown) summarizes the key series. The overall market value of corporate equities{{p}}outstanding for domestic corporations is reported on line 2. Lines 3 and 6 present values for nonfinancial and financial corporations,{{p}}respectively. The new detail is presented in lines 4 to 5 and 7 to 8, where the above totals are disaggregated into their publicly and{{p}}closely held components. The memo section of the table (lines 28-31) breaks down the market value of domestic equities by whether{{p}}they are publicly or closely held, with the closely held equities further disaggregated into the value of S and C corporations. Line 9{{p}}presents the value of corporate equities of foreign corporations sold on domestic financial markets. The lower portion of the Table L.223{{p}}(lines 11-27) presents the value of corporate equities from the holder's perspective. For example, line 11 presents the value of corporate{{p}}equities owned by the household sector.3{{p}}Table 1: Market Value of Corporate Equity Shares by Issuer as of 2015:Q4{{p}}Issuer type Percent of Total{{p}}Domestic equity 81.1%{{p}}Publicly traded 68.9%{{p}}Closely held 12.3%{{p}}S corporations 8.0%{{p}}C corporations 4.3%{{p}}Rest of the world equity 18.9%{{p}}Table 1 presents the market value of corporate equity as a proportion of the total as of 2015:Q4 for selected categories. As the table{{p}}indicates, publicly traded firms comprise the bulk of equities outstanding, with the value of closely held firms estimated to be about 12%{{p}}of the value of corporate equities.{{p}}Valuation of publicly held corporations{{p}}Publicly traded corporations are domestic companies that are listed in public exchanges. The total market value of equity in these{{p}}companies consists of the value of their common and preferred equity, with the former contributing the bulk of the total.4{{p}}The market value of common shares is measured directly by aggregating micro-level share data from the major exchanges. Source data{{p}}are obtained from the Center for Research in Security Prices (CRSP) Monthly Stock file accessed through Wharton Research Data{{p}}Services (WRDS). For each company, the share price and the number of shares outstanding at the end of each quarter are multiplied{{p}}and then summed across firms. We categorize firms into financial and nonfinancial sectors based on Standard Industrial Classification{{p}}(SIC) codes.{{p}} FRB: FEDS Notes: Corporate Equities by Issuer in the Financial Accoun... https://m-pubtest.frb.gov/econresdata/notes/feds-notes/2016/corporate-eq...{{p}}1 of 3 3/29/2016 10:40 AM{{p}}The market value of preferred shares is estimated using a perpetual inventory approach. We establish a historical benchmark as of{{p}} 2007:Q1 based on a report by Standard and Poor's and then grow the series subsequently based on both the net issuance of preferred{{p}}equity shares and the capital gains on existing shares. Net issuance of equities is estimated using data from SDC Platinum, from{{p}}Thomson Reuters. The capital gains are calculated based on quarterly returns to the S&P preferred stock index.5{{p}}Valuation of closely held firms{{p}}Closely held corporations are companies with shares that are not traded in public exchanges. Since the sales of outstanding shares of{{p}}equity in these companies are not directly observed we estimate the market value of equity in these companies based on available proxy{{p}}measures for S corporations and closely held C corporations, respectively. We then apply a discount of 25% to the above estimates to{{p}}reflect the lack of liquidity for closely held shares.6{{p}}The market value of equity in S corporations is estimated based on the book value of their net worth obtained from the IRS Statistics of{{p}}Income.7 We obtain net worth, estimated as the sum of capital stock, additional paid-in capital, and retained earnings, less treasury{{p}}stock, for S corporations in 15 distinct industry groups. We convert this net worth into a market value measure by multiplying it by the{{p}}ratio of market value to net worth (obtained from the Compustat dataset) for public corporations in the corresponding industries. As the{{p}}IRS data on net worth is available only at annual frequency, we interpolate quarterly values based on changes in the market value of{{p}}public corporations. Furthermore, as the benchmark data are available only with a lag, market values after the last benchmark are{{p}}obtained by extrapolation using the Russell 2000 index.{{p}}The total market value of outstanding equities in closely held C corporations is estimated based on annual revenues of the largest{{p}}closely held corporations. We obtain data on revenues for large closely held C corporations from Forbes Magazine, which provides{{p}}annual revenue data for companies with revenues greater than $2 billion.8 We follow a similar procedure as above to estimate market{{p}}value based on the revenue data. First, we create a matched sample of publicly traded companies based on a variety of company{{p}}characteristics such as industry, number of employees, and revenues. We compute an aggregate ratio of market value to revenue for{{p}}each quarter using the data for the public companies in the matched sample (obtained from Compustat). These quarterly conversion{{p}}factors are then multiplied by the aggregate revenue of closely held C companies in the same year to obtain the estimated quarterly{{p}}market values. Finally, the resulting market values are then raised by a multiplicative factor to account for the exclusion of smaller{{p}}closely held companies in the Forbes Magazine list.9 Quarterly values after the most recent annual data from Forbes are obtained by{{p}}extrapolation using the Russell 2000 Index.{{p}}Rest of the world{{p}}Equity issued by foreign firms in domestic markets, including both American Depository Receipts and directly listed companies, are{{p}}included in this category. Investment in U.S. operations that results in ownership of more than 10 percent by foreign corporations is not{{p}}included in this category but is shown as foreign direct investment in the United States on Table L.230.{{p}}Evolution of corporate equity by issuers over time{{p}}Figure 1: Market Value of Corporate Equity Shares by Issuer Type.{{p}} Source: Financial Accounts of the United States{{p}}Accessible Version{{p}}Figure 1 presents the evolution of the share of corporate equities issued by publicly held corporations, closely held corporations, and the{{p}}rest of the world from 1996:Q4 onwards. The share of corporate equities issued by the rest of the world has almost doubled over this{{p}}period, reflecting increased globalization of financial markets. The share of corporate equities issued by closely held firms has also risen,{{p}}but more modestly.{{p}}1. S Corporations are domestic corporations that elect to be taxed under subchapter S of the Internal Revenue Code, which enables them to pass untaxed{{p}} FRB: FEDS Notes: Corporate Equities by Issuer in the Financial Accoun... https://m-pubtest.frb.gov/econresdata/notes/feds-notes/2016/corporate-eq...{{p}}2 of 3 3/29/2016 10:40 AM{{p}}Accessibility Contact Us Disclaimer Website Policies FOIA PDF Reader{{p}}corporate profits directly to their shareholders who are then taxed individually. Along with other requirements, S corporations must have 100 or fewer eligible{{p}}shareholders and must have only one class of stock. C corporations are taxed separately from their owners--both the dividends distributed to shareholders and{{p}}the profits earned by the corporation are taxed. For additional detail, see https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations{{p}}and https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Corporations. Return to text{{p}}2. See the descriptions of Tables L.223, L.224, and L.230 in the online Financial Accounts Guide for further details. Return to text{{p}}3. As with many other instrument categories, the household sector holdings are obtained residually by subtracting the holdings of the other sectors from the{{p}}total value of equities outstanding. Return to text{{p}}4. Since 2007, the value of preferred equity has been less than 2% of the value of publicly traded corporations. Return to text{{p}}5. The S&P Preferred Stock Index ("Index") is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by the Board.{{p}}Copyright © 2016 S&P Dow Jones Indices LLC, a subsidiary of the McGraw Hill Financial Inc., and/or its affiliates. All rights reserved. Redistribution,{{p}}reproduction and/or photocopying in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of{{p}}S&P Dow Jones Indices LLC's indices please visit www.spdji.com. S&P® is a registered trademark of Standard & Poor's Financial Services LLC and Dow{{p}}Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their{{p}}affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset{{p}}class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third{{p}}party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. Return to text{{p}}6. See Z. Christopher Mercer, 1997, Quantifying Marketability Discounts, Peabody Publishers. Return to text{{p}}7. https://www.irs.gov/uac/SOI-Tax-Stats-Returns-of-Active-Corporations,-Form-1120S-Table-7. Return to text{{p}}8. Prior to 2009, the Forbes Magazine compiled revenue data for firms with revenues above $1 billion. Return to text{{p}}9. Based on Forbes Magazine data on firms with revenues between $1 and $2 billion from 2006 to 2008, we currently set this multiplicative factor to be 1.2.{{p}}Return to text{{p}}Please cite this note as:{{p}}Ogden, Richard E., Damian R. Thomas, and Missaka Warusawitharana (2016). "Corporate Equities by Issuer in the Financial Accounts{{p}}of the United States," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, March 29, 2016, http://dx.doi.org{{p}}/10.17016/2380-7172.1731.{{p}} Disclaimer: FEDS Notes are articles in which Board economists offer their own views and present analysis on a range of topics in{{p}}economics and finance. These articles are shorter and less technically oriented than FEDS Working Papers.{{p}}Last update: March 29, 2016{{p}}Home | Economic Research & Data{{p}} FRB: FEDS Notes: Corporate Equities by Issuer in the Financial Accoun... https://m-pubtest.frb.gov/econresdata/notes/feds-notes/2016/corporate-eq...{{p}}3 of 3 3/29/2016 10:40 AM |
| Date: | 2016–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2016-03-29&r=acc |
| By: | Elizabeth Ball Holmquist; Maria G. Perozek |
| Abstract: | Print{{p}}March 3, 2016{{p}}Funding Agreement-Backed Securities in the Financial Accounts of the United States1{{p}}Elizabeth Holmquist and Maria Perozek{{p}}Introduction{{p}}This note describes a new method of accounting for funding agreement-backed securities (FABS) in the Financial Accounts of the{{p}}United States.2 A funding agreement is a deposit-type contract, sold by life insurance companies, that typically allows funds to{{p}}accumulate at a guaranteed rate of return over a specified period of time. Some funding agreements are purchased by domestic or{{p}}foreign special purpose entities (SPEs) which securitize them into funding agreement-backed securities (FABS) and sell them to{{p}}institutional investors. Raising funds using FABS typically involves converting an illiquid, longer-duration funding agreement contract into{{p}}a relatively liquid, often shorter-duration security. Some observers have pointed out that the liquidity transformation and maturity{{p}}transformation involved in FABS issuance entail risks to the financial stability of both the insurer and potentially the broader financial{{p}}system (see Foley-Fisher, Narajabad, and Verani (2015) for additional information on risks associated with FABS). Beginning with the{{p}}December 10, 2015 publication of the Financial Accounts, we now provide additional detail on these arrangements by separately{{p}}identifying the funding agreements held by foreign and domestic SPEs that back FABS issuance.{{p}}Trends in FABS issuance{{p}}The new FABS data are available beginning 1997:Q3 and include FABS issued in both domestic and foreign markets that are backed by{{p}}funding agreements purchased from U.S. life insurance companies. As figure 1 below shows, foreign issuance of FABS accounted for{{p}}most of this market through the early 2000s, after which foreign issuance began to flatten out and domestic issuance picked up sharply.{{p}}Foreign FABS outstanding peaked at $48 billion in 2004:Q3, and then declined over the subsequent years to a level of only $5 billion in{{p}} 2015:Q3.{{p}}Figure 1. Funding Agreement-Backed Securities Outstanding{{p}} Note: The gray shaded bars indicate NBER recession periods.{{p}} Source: Financial Accounts of the United States, December 10, 2015.{{p}}Accessible version{{p}}Domestic FABS issuance, on the other hand, continued at a robust pace through the 2000s until 2008:Q2 when the outstanding amount{{p}}of domestic FABS peaked at $140 billion. Domestic FABS then contracted sharply in the second half of 2008 through 2009, reflecting a{{p}}run on these relatively liquid liabilities triggered by the global financial crisis (see Foley-Fisher, Narajabad, and Verani, 2015; and Bao,{{p}}David, and Han, 2015). Recent levels of domestic FABS have remained fairly stable at levels roughly equivalent to those attained in the{{p}}mid-2000s.{{p}}Measuring funding agreements and FABS in the Financial Accounts{{p}}Prior to the December 2015 release of the Financial Accounts, our measurement of funding agreements was constrained by source data{{p}}for the life insurance sector that did not allow us to separate funding agreements that back FABS from similar deposit-type contracts that{{p}}back pension entitlements (such as guaranteed investment contracts). As a result of this data limitation, we categorized all such{{p}} FRB: FEDS Notes: Funding Agreement-Backed Securities in the Financi... https://m-pubtest.frb.gov/econresdata/notes/feds-notes/2016/funding-ag...{{p}}1 of 4 3/3/2016 10:08 AM{{p}}deposit-type contracts--including those that serve as collateral for FABS--as "pension entitlements."3 Beginning with the December 2015{{p}}release, the new data on FABS allow us to separate those funding agreements that back FABS from the deposit contracts that back{{p}}pension entitlements. We also make related adjustments to the Financial Accounts to reflect the fact that funding agreements backing{{p}}FABS are assets of the ABS sector or the foreign sector, depending on whether they are held by domestic or foreign SPEs.{{p}}Specifically, domestic SPEs' funding agreement purchases are shown as a new identified miscellaneous asset on the issuers of ABS{{p}}sector tables, such as table L.126 in the Financial Accounts. An abbreviated version of this table is shown as Table 1 below. As a result{{p}}of the new asset in line 5, total financial assets for the ABS sector (line 1) are higher by the amount of the funding agreements shown in{{p}}line 5, and total liabilities, line 6, are also higher by the same amount, reflecting the accounting for the sector's domestically issued{{p}}FABS.4{{p}}Table 1.5 L.126 Issuers of Asset-Backed Securities (ABS) - Abbreviated{{p}}2007 2008 2009 2010 2011 2012 2013 2014{{p}}1 FL674090005 Total financial assets 4641 4223.2 3377.9 2314.3 2059 1839 1543.6 1453.2{{p}}2 FL674022005 Debt securites 435.5 395.9 153.4 43.7 29.5 23.7 24.4 29.9{{p}}3 FL674023005 Loans 3966.3 3610.4 3075.1 2140.4 1912 1704.6 1422.3 1321.6{{p}}4 FL673070003 Trade credit 111.7 95.5 61.3 51.8 47.6 41.2 35.7 31.3{{p}}5 FL673090543 Miscellaneous assets (funding agreements) (1) 127.5 121.3 88.1 78.4 70 69.6 61.1 70.4{{p}}6 FL674122005 Total liabilities 4644.1 4225.9 3380.2 2314.3 2059 1839 1543.6 1453.2{{p}}7 FL674122005 Debt securities 4644.1 4225.9 3380.2 2314.3 2059 1839 1543.6 1453.2{{p}}8 FL673169105 Commercial paper 643.1 559.3 293.1 120.2 96 87 79.9 64.8{{p}}9 FL673163005 Corporate bonds (net) 4001 3666.6 3087.2 2194.1 1963 1752 1463.7 1388.4{{p}}(1) Funding agreements with life insurance companies. Return to text.{{p}}In contrast to the effect on the domestic ABS table, our new measures of the FABS activities of foreign SPEs do not result in revisions to{{p}}the rest of the world sector table (F.132 and L.132, not shown), because these transactions were already captured in the Financial{{p}}Accounts source data. Note that foreign SPEs' purchases of funding agreements from U.S. life insurance companies are a component of{{p}}foreign direct investment in the U.S.6 Any FABS issued by these foreign SPEs that are purchased by U.S. residents are included as part{{p}}of the debt securities liabilities of the rest of the world sector. FABS issued by foreign SPEs and purchased by foreign residents are not{{p}}included in the Financial Accounts.{{p}}Our new treatment of funding agreements backing securities resulted in changes to the life insurance sector table (L.116), shown in{{p}}abbreviated form as table 2 below.7 As noted above, prior to the December 2015 release of the Financial Accounts, these funding{{p}}agreements were included with pension entitlements liabilities, line 15, along with all other deposit-type contracts.8 The new treatment{{p}}lowers pension entitlements by the amount of funding agreements purchased by both domestic and foreign SPEs.9 Domestic SPEs'{{p}}funding agreement purchases are now shown as a separately identified miscellaneous liability category, "funding agreements backing{{p}}securities," line 20 of Table 2, while those purchased by foreign SPEs are included as part of foreign direct investment in the U.S., line{{p}}17 (as they were before the accounting change).10{{p}}Table 2. L.116 Life Insurance Companies - Abbreviated{{p}}2007 2008 2009 2010 2011 2012 2013 2014{{p}}1 FL544090005 Total financial assets 4949.7 4514.4 4823.9 5167.8 5340.1 5614.7 5977.3 6227.1{{p}}2 FL543020005 Checkable deposits and currency 58.3 82.8 50.7 51.7 53.7 56.4 47.2 50.8{{p}}3 FL543034073 Money market fund shares 21.6 39.2 33.7 21 28.8 27.5 21.6 27.7{{p}}4 FL542051073 Security repurchase agreements 2.7 8 10.2 10.9 6.1 8.2 2.9 3.4{{p}}5 FL544022005 Debt securities 2399.2 2374.3 2555.6 2716 2818.5 2879.1 2934.2 3004.3{{p}}6 FL544023005 Loans 472 508.5 467.1 458.2 481.1 494.8 517.1 546.6{{p}}7 LM543064105 Corporate equities 1464.6 1001.7 1208.5 1371.6 1355.5 1502.7 1743.4 1798.4{{p}}8 LM543064205 Mutual fund shares 188.4 121 140.8 186.7 184.8 201.7 235.8 246.4{{p}} FRB: FEDS Notes: Funding Agreement-Backed Securities in the Financi... https://m-pubtest.frb.gov/econresdata/notes/feds-notes/2016/funding-ag...{{p}}2 of 4 3/3/2016 10:08 AM{{p}}2007 2008 2009 2010 2011 2012 2013 2014{{p}}9 FL543092073 U.S. direct investment abroad 25.6 25 28.9 46.3 54.2 69.1 72.2 72.8{{p}}10 FL543090005 Miscellaneous assets 317.3 354 328.7 305.6 357.4 375.2 403 476.6{{p}}11 FL544190005 Total liabilities 4661.7 4265 4532.3 4844.3 5002.2 5248.8 5602.8 5828.1{{p}}12 FL542151073 Security repurchase agreements 20.2 12.9 12.4 10.3 12.1 14.4 20.9 21.9{{p}}13 FL543169373 Loans (other loans and advances) 28.7 54.9 48.3 45.1 46.8 51.6 59.4 71.8{{p}}14 FL543140005 Life insurance reserves 1156.1 1133.4 1194.5 1229.9 1302.3 1309 1366.3 1426.1{{p}}15 FL543150005 Pension entitlements 2102 1848.9 1994.7 2205.8 2256.2 2442.9 2716.9 2809.8{{p}}16 FL543178073 Taxes payable (net) -4.7 -24.4 -31.4 -28.8 -23.6 -28.3 -30.5 -32.4{{p}}17 FL543192073 Foreign direct investment in U.S. 68.7 60.3 69.4 84.3 103.6 105.3 88.1 101.4{{p}}18 FL543190005 Miscellaneous liabilities 1290.7 1178.9 1244.3 1297.8 1304.7 1353.9 1381.8 1429.6{{p}}19 FL543194733 Investment by parent companies 43.7 31.2 40.5 62.7 72 17.2 10.7 11.5{{p}}20 FL673090543 Funding agreements backing securities (1) 127.5 121.3 88.1 78.4 70 69.6 61.1 70.4{{p}}21 FL543195005 Other reserves 247.6 265.2 273.6 290.7 305.5 303.7 304.2 310{{p}}22 FL593095005 Unallocated insurance contracts 587.6 448.9 587 617.5 623.4 640 655.7 667.8{{p}}23 FL543193005 Other 284.2 312.3 255.1 248.4 233.8 323.4 350.1 370{{p}}(1) Equal to funding agreement-backed securities (FABS) issued by domestic issuers of asset-backed securities. Return to text.{{p}}Future enhancements to FABS data{{p}}In addition to the domestic and foreign FABS data that are now included in the Financial Accounts, Federal Reserve Board staff also{{p}}anticipate publishing more detailed and higher frequency FABS data as part of the Enhanced Financial Accounts initiative in the coming{{p}}months.11 When those data are released, an accompanying FEDS Note will provide additional information on different types of FABS{{p}}and the role of FABS in the recent financial crisis.{{p}} References:{{p}}Bao, Jack, Josh David, and Song Han (2015). "The Runnables," FEDS Notes 2015-09-03. Board of Governors of the Federal Reserve{{p}}System (U.S.).{{p}}Foley-Fisher, Nathan C., Borghan Narajabad, and Stephane H. Verani (2015). "Self-fulfilling Runs: Evidence from the U.S. Life{{p}}Insurance Industry," Finance and Economics Discussion Series 2015-032. Board of Governors of the Federal Reserve System (U.S).{{p}}Gallin, Joshua and Paul Smith (2014). "Enhanced Financial Accounts," FEDS Notes 2014-08-01. Board of Governors of the Federal{{p}}Reserve System (U.S.).{{p}}1. The views expressed herein are those of the authors and do not necessarily reflect those of the Federal Reserve Board or its staff. We thank Marco Cagetti,{{p}}Paul Smith, and Stephane Verani for their helpful comments. Return to text{{p}}2. This change to the accounting for funding agreement-backed securities in the Financial Accounts is made possible by newly available Federal Reserve{{p}}Board staff estimates of the outstanding amount of FABS based on data collected from Bloomberg Finance LP and Moody's ABCP Program Index. See Foley-{{p}}Fisher, Narajabad, and Verani (2015) for additional information on the construction of the dataset. Return to text{{p}}3. Some pension entitlements liabilities of the life insurance sector, including certain funding agreements, are held as unallocated insurance contract assets of{{p}}the pension sectors, while others, such as individual annuities, are directly held assets of households Return to text{{p}}4. While FABs can be issued as both bonds and commercial paper (FABCP), only the corporate bond line is revised up by this change because the{{p}}commercial paper data for the ABS sector already included FABCP issued domestically. Return to text{{p}}5. The first column shows the series mnemonics associated with each displayed Financial Accounts series. These mnemonics can be used to locate series for{{p}}download in the Federal Reserve Board's Data Download Program (DDP). Return to text{{p}}6. Although funding agreements purchased by foreign SPEs are not shown separately on the rest of the world sector tables in the Financial Accounts, a{{p}}separate time series is available for download through the Federal Reserve Board's DDP as series FL263090545.Q. Return to text{{p}}7. While not shown on tables in the Financial Accounts, a separate time series for all funding agreements sold by life insurance companies to SPEs is available{{p}}for download through the Federal Reserve Board's DDP as series FL543190543.Q. Return to text{{p}}8. In addition to removing funding agreements purchased by SPEs from pension entitlements, we also removed funding agreements purchased by the Federal{{p}}Home Loan Banks (FHLB). The FHLB funding agreements were already separately identified in the Financial Accounts FHLB advances (line 13 of table 3).{{p}} FRB: FEDS Notes: Funding Agreement-Backed Securities in the Financi... https://m-pubtest.frb.gov/econresdata/notes/feds-notes/2016/funding-ag...{{p}}3 of 4 3/3/2016 10:08 AM{{p}}Accessibility Contact Us Disclaimer Website Policies FOIA PDF Reader{{p}}This correction lowered pension entitlements and raised miscellaneous liabilities, the residual liability category for the life-insurance sector. Return to text{{p}}9. The exclusion of the funding agreements that back FABS from the pension entitlements liabilities of the life insurance sector also reduces household sector{{p}}assets by lowering their pension entitlement holdings. However, the decline in household assets due to lower pension entitlements is partially offset by an{{p}}increase in household sector holdings of corporate bonds stemming from the new domestic FABS issuance. On net, the new accounting for FABS resulted in a{{p}}downward revision to household net worth that is equal to the value of foreign FABS outstanding from 1997:Q3 onward. Return to text{{p}}10. In addition to publishing the Financial Accounts, the Federal Reserve Board also prepares other data submissions to international statistical organizations{{p}}based on the reporting guidelines from the System of National Accounts (2008 SNA). In accordance with the SNA guidelines, funding agreements purchased{{p}}by domestic SPEs are recorded in the "currency and deposits" instrument category for these international data submissions rather than in miscellaneous{{p}}claims as in the Financial Accounts. Return to text{{p}}11. See Gallin and Smith (2014) for additional information on the Enhanced Financial Accounts initiative. Return to text{{p}}Please cite this note as:{{p}}Holmquist, Elizabeth B., and Maria G. Perozek (2016). "Funding Agreement-Backed Securities in the Financial Accounts of the United{{p}}States," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, March 3, 2016, http://dx.doi.org/10.17016{{p}}/2380-7172.1696.{{p}} Disclaimer: FEDS Notes are articles in which Board economists offer their own views and present analysis on a range of topics in{{p}}economics and finance. These articles are shorter and less technically oriented than FEDS Working Papers.{{p}}Last update: March 3, 2016{{p}}Home | Economic Research & Data{{p}} FRB: FEDS Notes: Funding Agreement-Backed Securities in the Financi... https://m-pubtest.frb.gov/econresdata/notes/feds-notes/2016/funding-ag...{{p}}4 of 4 3/3/2016 10:08 AM |
| Date: | 2016–03–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2016-03-03&r=acc |
| By: | Irina Stefanescu; Ivan Vidangos |
| Abstract: | October 31, 2014{{p}}Introducing Actuarial Liabilities and Funding Status of Defined-Benefit Pensions in the U.S. Financial Accounts{{p}}{{p}}Irina Stefanescu and Ivan Vidangos{{p}}{{p}}Last year, in its September 2013 release, the Financial Accounts of the United States (formerly known as Flow of Funds accounts) changed the treatment of defined-benefit (DB) pensions from a cash accounting basis to an accrual accounting basis. Under accrual accounting, pension plans' liabilities are set equal to the present value of future DB benefits that plan participants have accumulated to date, which are calculated using standard actuarial methods. As a result of this change, the Financial Accounts now provide a measure of the funding status of private and public DB pension plans. The accounting change also had other important effects on the balance sheets--and corresponding financial flows--of the private and public pensions sectors, the nonfinancial business sector, the government sector, and the household sector. This note discusses the accounting changes and their main effects in the Financial Accounts, including the new measures of funding status of private and public DB pension plans.{{p}}{{p}}1. Overview{{p}}Defined-benefit (DB) pension plans are employer-sponsored retirement plans in which workers are promised a fixed pension after retirement in the form of an annuity. The benefit is typically linked to the participant's final wage and the number of years of service, with the exact formula varying by employer. DB pension plans are offered by some private employers, as well as by the federal and state and local (S&L) governments.1{{p}}{{p}}The Financial Accounts report assets and liabilities (and corresponding financial flows) for both private and public (federal as well as S&L) DB pension funds.2 Prior to September 2013, the assets and liabilities of DB pension plans were reported using cash accounting principles, which record the revenues of pension funds when cash is received and expenses when cash is paid out. Under this treatment, there was no measure of a plan's accrued actuarial liabilities--i.e., the present value of earned future benefits--rather, the liabilities in the Financial Accounts were set equal to the plans' assets. As a result, the Financial Accounts did not report any measure of underfunding or overfunding of the pension sector's actuarial liabilities, as would occur if the assets held by the pension sector fell short of or exceeded the liabilities.{{p}}{{p}}Starting with the September 2013 release, the Financial Accounts treat DB pensions using accrual accounting principles, whereby the liabilities of DB pension plans are set equal to the present value of future DB benefits that participants have accumulated to date, which are calculated using standard actuarial methods.3 These actuarial liabilities of the DB pension sector are treated as an asset of the household sector.{{p}}{{p}}Additionally, the difference between actuarial liabilities and pension fund assets is now reported in the Financial Accounts as a new item, called "claims of pension fund on sponsor", which reflects the amount of underfunding or overfunding of the plans. These claims (which can be positive or negative) are treated as an asset of the pension funds sector and a liability of the sponsors of the plans (e.g. the employers in the nonfinancial corporate business, the federal government, or S&L government sectors).{{p}}{{p}}The transition to an accrual accounting method is an acknowledgement that DB pension accruals typically represent legally binding contractual agreements between employers and their employees, and that they should therefore be treated as liabilities of the DB plans' sponsors and as assets of households, regardless of the current funding status of the pension plan. This is consistent with the international standards recommended in the revised System of National Accounts (SNA 2008).4 Reflecting SNA terminology, we refer to accrued liabilities as "pension entitlements" in the Financial Accounts.{{p}}{{p}}In addition to these accounting changes, the Financial Accounts added two new tables in its September 2013 release, titled "Private and Public Pension Funds" (tables F.116 (PDF) and L.116 (PDF)), which aggregate the three pension sectors (private, federal, and S&L). These tables also include as memo items a breakdown of total household retirement assets held in tax-deferred accounts, including: DB and defined-contribution (DC) pension plans, individual retirement accounts (IRAs), and annuities at life insurance companies. Finally, a memo item was added to each of the pension-fund levels tables (tables L.116 (PDF) through L.119 (PDF)), showing the aggregate funding status--i.e., plan assets relative to accrued actuarial liabilities--of the DB plans in each of the three sectors.{{p}}{{p}}2. Measurement of actuarial pension liabilities (entitlements){{p}}End-of-quarter actuarial liabilities of private and public pensions in the Financial Accounts are estimated based on annual estimates of pension entitlements produced by the Bureau of Economic Analysis (BEA).5 For private and S&L government pension plans, the BEA calculates pension fund liabilities using an accumulated benefit obligation (ABO) method, which measures the present value of earned future benefits calculated based on current salaries, tenure, and life expectancy assumptions. For federal government pension plans, the BEA calculates liabilities using a projected benefit obligation (PBO) method, which incorporates projected future salary growth, in order to maintain consistency with the main published actuarial estimates of federal pension plans. The choice of discount rate in the present-value calculation is consequential and subject to some debate (see e.g., Novy-Marx and Rauh, 2011). For private and S&L plans, the discount rates used by the BEA, and hence in the Financial Accounts, are based on AAA-rated corporate bond rates; for federal government plans, they are based on the rates assumed by the actuaries in preparing their annual reports.6{{p}}{{p}}3. Impact on the Financial Accounts{{p}}The effects of the pension accounting change on the Financial Accounts depend on the funding status of the plans, which varies over time. The fundamental change is to count as household wealth the present value of accrued benefit obligations, rather than the current level of pension fund assets. When pension funds are underfunded (as has been the case in recent years for private, federal, and S&L pension funds), the new accounting treatment, relative to the previous treatment, results in:{{p}}{{p}}Higher pension wealth and therefore higher net worth of the household sector, reflecting the inclusion of unfunded accrued promises. Previously the unfunded promises were ignored; now they are treated as assets of households and liabilities of pension plans.{{p}}New claims of pension funds, in turn, on the sponsors of DB pension plans, reflecting the sponsors' obligation to fully fund its accrued promises. These are assets of the pension funds and liabilities of the sponsors.{{p}}{{p}}Thus, in effect, the new treatment creates a new asset for households, equal to unfunded accrued pension promises, which is ultimately borne as a liability by the plan sponsors in the corporate, S&L, and federal government sectors. The pension fund sectors act as intermediaries between sponsors and households, and thus the unfunded promises appear on both sides of their balance sheets. Note that when DB pension plans are overfunded (an infrequent occurrence), the new treatment of DB pensions results in lower household pension wealth and smaller liabilities for the plan sponsors than the previous treatment.7{{p}}{{p}}3.1. Effect on private pension funds{{p}}Table L.117.b (PDF) (Private Pension Funds: Defined Benefit Plans), reproduced here from the Second Quarter 2014 release of the Financial Accounts (see the Supplements section), shows the assets and liabilities of private DB pension funds.8{{p}}{{p}}Under the accrual treatment of DB pensions, line 19, labeled "Pension entitlements (liabilities)", shows the actuarial liabilities accrued by the plans' beneficiaries, estimated at $3.1 trillion for 2014q2. Figure 1 shows the sector's DB liabilities under both the new (accrual) and old (cash) treatment of DB pensions, on a quarterly basis, from 1974q1 to 2014q2. As can be seen, private DB pension liabilities under accrual and cash accounting were relatively close to each other until the late 1990s, when the stock-market boom led many plans to be overfunded. Under the previous accounting, which equated liabilities to assets, the run-up in assets resulted in a run-up in liabilities as well. Similarly, the sharp drop in assets in 2008 led to a sharp drop in liabilities as well, under the previous accounting treatment. By contrast, liabilities under accrual accounting continued to climb in a relatively smooth fashion, with a bit of an acceleration in 2010 due to the reduction in interest rates. The gap between the two series has been slowly narrowing since early 2009 and is now nearly closed.{{p}}Figure 1: Liabilities of Private DB Pension Funds under Accrual and Cash Accounting{{p}}Figure 1: Liabilities of Private DB Pension Funds under Accrual and Cash Accounting. See accessible link for data.{{p}}{{p}}Accessible Version{{p}}{{p}}Since the dashed red line is equal to plan assets, the difference between the blue line and the dashed red line is equal to the claims on the sponsor of the plans (in this case, the nonfinancial corporate business sector), and represents the level of underfunding (when the blue line is above the dashed red line) or overfunding (when the dashed red line is above the blue line). These claims are also reported in line 17 of Table L.117.b, and were estimated to be $31.7 billion in 2014q2.{{p}}{{p}}Figure 2 shows the claims on the sponsor as a ratio of total DB liabilities of the sector. As can be seen, private DB pension funds were overfunded (indicated by negative values of the ratio) in the late 1990s, in large part as a result of the strong stock market performance of the 1990s. The plans' funding situation deteriorated markedly with the burst of the dot-com bubble in 2000-2001, stabilized in the mid-2000s, and then deteriorated further with the financial crisis of 2008-2009, when the "unfunded ratio" climbed to about 30 percent of total private pension liabilities. The unfunded ratio has been declining gradually towards zero since then. That is, the financial situation of private pension funds has improved substantially since the time of the financial crisis, and the funds are almost back to being fully funded.9{{p}}Figure 2: Liabilities of Private DB Pension Funds (Accrual Accounting): Unfunded Ratio{{p}}Figure 2: Liabilities of Private DB Pension Funds (Accrual Accounting): Unfunded Ratio. See accessible link for data.{{p}}{{p}}Accessible Version{{p}}{{p}}3.2. Effect on the nonfinancial corporate business sector{{p}}The effect of the accounting change on the balance sheet of the nonfinancial corporate business sector can be seen in Table L.102 (PDF), which shows the assets and liabilities of nonfinancial corporate businesses. Under the accrual accounting of DB pensions, total liabilities (line 22) include the claims of private pension funds on nonfinancial corporate businesses (the sponsors of the plans); these claims ($31.7 billion in 2014q2) are reported on line 35 and come from line 17 of Table L.117.b. With total liabilities of the sector running at $16.2 trillion in 2014q2, the change in the treatment of DB pensions has a fairly modest effect on the bottom line of nonfinancial corporate businesses in recent quarters, reflecting the relatively small amount of current underfunding.{{p}}{{p}}3.3. Effect on S&L pension funds{{p}}The effects of the accounting change on the S&L pensions sector can be seen in Table L.118.b (PDF), which shows the assets and liabilities of DB pension funds sponsored by S&L governments. This sector includes the DB retirement plans of state governments and local government entities such as counties, municipalities, townships, school districts, and special districts.10{{p}}{{p}}Line 18 of L.118.b, labeled "Pension entitlements (liabilities)", shows the actuarial liabilities accrued by the beneficiaries of the DB plans, which is estimated at about $5.0 trillion in 2014q2. Figure 3 shows the sector's DB liabilities under both accrual and cash accounting of DB pensions, and as was the case with the private plans shown above, the difference between the blue line and the dashed red line represents the amount of underfunding. Unlike private plans, however, substantial underfunding remains in the state and local government pension sector. The difference, i.e. the claims on the sponsor of the plans (S&L governments), is reported in line 16 of Table L.118.b, and was estimated to be about $1.3 trillion in 2014q2.{{p}}Figure 3: Liabilities of State & Local DB Pension Funds under Accrual and Cash Accounting{{p}}Figure 3: Liabilities of State & Local DB Pension Funds under Accrual and Cash Accounting. See accessible link for data.{{p}}{{p}}Accessible Version{{p}}{{p}}Figure 4 shows these claims on the sponsor as a ratio of total DB liabilities of the sector. In the most recent quarters, unfunded liabilities of S&L pension funds have been running at around 25 percent of total DB liabilities of the sector.{{p}}Figure 4: Liabilities of State & Local Pension Funds (Accrual Accounting): Unfunded Ratio{{p}}Figure 4: Liabilities of State & Local Pension Funds (Accrual Accounting): Unfunded Ratio. See accessible link for data.{{p}}{{p}}Accessible Version{{p}}{{p}}3.4. Effect on S&L governments{{p}}The effect of the new pension accounting treatment on the balance sheet of S&L governments can be seen in Table L.104 (PDF), which shows the financial assets and liabilities of the S&L government sector. Under the accrual treatment of DB pensions, total liabilities (line 18) include the claims of S&L government pension funds on S&L governments; these claims are reported on line 25 of the table (and come from line 16 of Table L.118.b).{{p}}{{p}}Figure 5 shows the total liabilities of S&L governments with and without the inclusion of "claims of pension fund on sponsor" (i.e. under accrual and cash accounting of DB pensions), expressed as a percent of GDP. As can be seen, the inclusion of these claims increases the total liabilities of S&L governments from about 22 percent of GDP to about 29 percent of GDP in the most recent quarters. That is, the shift in the treatment of DB pensions to an accrual accounting basis substantially raises the estimated financial obligations currently faced by S&L governments.{{p}}Figure 5: Liabilities of State & Local Governments Under Accrual and Cash Accounting of DB Pensions{{p}}Figure 5: Liabilities of State & Local Governments Under Accrual and Cash Accounting of DB Pensions testing. See accessible link for data.{{p}}{{p}}Accessible Version{{p}}{{p}}3.5 Effect on federal pension funds{{p}}Table L.119.b (PDF) shows the assets and liabilities of federal government DB plans.11 Line 10, labeled "Pension entitlements (liabilities)", shows the total liabilities of DB pension plans sponsored by the federal government, representing the benefits that have accrued to the beneficiaries to date, estimated to be $3.2 trillion in 2014q2.{{p}}{{p}}Figure 6 shows the liabilities of federal DB pension plans under accrual and cash accounting of DB pensions. This pattern is notably different from that of private and S&L pension plans--in particular, liabilities under accrual accounting are significantly higher than under cash accounting in all years. The difference between the two series, or "claims of pension fund on sponsor", is shown in line 9 of Table L.119.b, and was estimated to be about $1.8 trillion in 2014q2.{{p}}Figure 6: Liabilities of Federal DB Pension Funds under Accrual and Cash Accounting{{p}}Figure 6: Liabilities of Federal DB Pension Funds under Accrual and Cash Accounting. See accessible link for data.{{p}}{{p}}Accessible Version{{p}}{{p}}This pattern is shown in another way in Figure 7, which displays the claims on the sponsor as a ratio of total DB liabilities of the sector (i.e. the "unfunded ratio"). Historically, DB pensions sponsored by the federal government were funded on a pay-as-you-go basis--that is, there were few (if any) assets set aside to pay future benefits.. This was the case, for example, for the Civil Service Retirement System (CSRS), which was established in 1920 and was the main federal DB pension plan until the establishment of the Federal Employees' Retirement System (FERS) in 1986.12 As a result, federal government DB pension plans were largely unfunded for several decades, as illustrated in Figure 7 by an unfunded ratio of close to 90 percent of total liabilities of the sector in the 1970s. In the 1980s, the FERS--which was designed to be essentially fully funded--was introduced to gradually replace the CSRS, leading to a decrease in the unfunded component of federal DB pension liabilities.13 Additionally, in recent decades, the Treasury Department has been required to make "catch-up" payments to the federal DB pension funds from its general fund in order to gradually close the funding gap in federal DB pensions. As a result, the unfunded component has decreased from about 90 percent to about 58 percent of total DB liabilities of the sector.{{p}}Figure 7: Liabilities of Federal DB Pension Funds (Accrual Accounting): Unfunded Ratio{{p}}Figure 7: Liabilities of Federal DB Pension Funds (Accrual Accounting): Unfunded Ratio. See accessible link for data.{{p}}{{p}}Accessible Version{{p}}{{p}}One important difference between federal and S&L (or private) DB pensions, however, is that federal DB pension funds are invested almost exclusively in special-issue, nonmarketable Treasury securities.14 As a result, unlike private and S&L pension funds, the "asset holdings" of federal DB pension funds are not assets that can be sold in private markets in order to fund future benefits. Instead, they represent claims on the Treasury, and therefore the balances of the federal pension funds are available for future benefit payments only in a bookkeeping sense.15 ,16{{p}}{{p}}3.6 Effect on the federal government{{p}}The effect of the pension accounting change on the balance sheet of the federal government can be seen in Table L.105 (PDF), which shows the assets and liabilities of the federal government. Total liabilities (line 15), estimated at $16.4 trillion in 2014q2, include the claims of pension plans on the federal government (the sponsor of the plans); these claims are shown in line 29 of the table (and come from line 9 of Table L.119.b).17{{p}}{{p}}Figure 8 shows the total liabilities of the federal government with and without the inclusion of "claims of pension fund on sponsor" (i.e. under accrual and cash accounting of DB pensions), as a percent of GDP. As can be seen, the inclusion of these claims raises the total liabilities of the federal government by about 10 percentage points of GDP in the most recent quarters (e.g. from 85 percent to 95 percent of GDP in 2014q2).18 That is, as in the case of S&L governments, the shift to accrual accounting of DB pensions significantly raises this measure of the financial obligations of the federal government.{{p}}Figure 8: Total Liabilities of the Federal Government Under Accrual and Cash Accounting of DB Pensions{{p}}Figure 8: Total Liabilities of the Federal Government Under Accrual and Cash Accounting of DB Pensions. See accessible link for data.{{p}}{{p}}Accessible Version{{p}}{{p}}3.7. Effects on household wealth{{p}}As already discussed, under the new pension accounting treatment, pension entitlements (i.e., accrued benefits promised to be paid in the future) are considered an asset of the household sector, regardless of current funding status.19 Because pension funds have been underfunded more often than overfunded, the new treatment has generally increased the value of household pension wealth and therefore the net worth of the household sector. That is, household wealth now includes the full value of accrued pension promises, not just the currently funded component. This effect can be clearly seen in Table L.100 (PDF), which shows the financial assets and liabilities of households and nonprofit organizations. The main effect of the transition to accrual accounting of DB pensions can be seen in line 21 of the table, which shows a new asset on household balance sheets--claims of pension funds on sponsors, representing the total value of unfunded DB pension promises from private plans, S&L plans, and federal plans. As the table shows, including the unfunded pension liabilities increases the assets, and therefore the net worth, of the household sector by $3.1 trillion in 2014q2.20{{p}}{{p}}Figure 9 shows household net worth under accrual and cash accounting of DB pensions, expressed as a ratio to disposable personal income. As the figure shows, the accrual treatment of DB pensions raises the ratio in most years of the last four decades (except in the late 1990s, when both private and S&L pension funds were overfunded, but federal pensions were underfunded). Over the previous five years, the accounting change increases the net worth ratio by an average of about 0.3, or 30 percent of aggregate annual income.{{p}}Figure 9: Household Net Worth Relative to Disposable Personal Income under Accrual and Cash Accounting of DB Pensions{{p}}Figure 9: Household Net Worth Relative to Disposable Personal Income under Accrual and Cash Accounting of DB Pensions. See accessible link for data.{{p}}{{p}}Accessible Version{{p}}{{p}}References{{p}}Novy-Marx, Robert, and Rauh, Joshua, "Public Pension Promises: How Big Are They and What Are They Worth?", Journal of Finance 66(4), 2011, 1207-1245.{{p}}{{p}}Reinsdorf, Marshall, David Lenze, and Dylan Rassier (2014), "Bringing Actuarial Measures of Defined Benefit Pensions into the U.S. National Accounts". Paper prepared for the IARIW 33rd General Conference, Rotterdam, the Netherlands, August 2014. Available at http://www.iariw.org/papers/2014/ReinsdorfPaper.pdf .{{p}}{{p}}US Department of Labor, Bureau of Labor Statistics (2013), "National Compensation Survey: Employee Benefits in the United States, March 2013," Bulletin 2776 (September). Available at http://www.bls.gov/ncs/ebs/benefits/2013/ebbl0052.pdf.{{p}}{{p}}1. In the private sector, the use of DB plans has been declining since the early 1980s. In March 2013, about 16% of private sector workers participated in a DB plan (US Department of Labor, Bureau of Labor Statistics, 2013). In contrast, in the public sector, most workers participate in DB pension plans. Return to text{{p}}{{p}}2. The Financial Accounts do not include Social Security, which is a social insurance program rather than an employer-sponsored retirement program. Return to text{{p}}{{p}}3. These changes in the treatment of DB pensions in the Financial Accounts were introduced in coordination with the Bureau of Economic Analysis (BEA), which also changed its treatment of DB pensions in the National Income and Product Accounts (NIPA) from a cash to an accrual accounting basis starting in July 2013, as part of its 2013 comprehensive revision. Return to text{{p}}{{p}}4. The revised System of National Accounts (SNA 2008) was jointly produced by the United Nations, the European Commission, the Organization for Economic Co-operation and Development, the International Monetary Fund and the World Bank Group, and is available at http://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf . Return to text{{p}}{{p}}5. The BEA started reporting these estimates in their July 2013 release of the National Income and Product Accounts, when it adopted the accrual accounting of DB pensions. Return to text{{p}}{{p}}6. For details, see Reinsdorf, Lenze, and Rassier (2014). In particular, see Table B1 of their paper for the discount rates used by BEA in the calculation of liabilities for private and S&L pension plans, and table B2 for the discount rates used for federal plans. Return to text{{p}}{{p}}7. That is, our previous treatment overestimated household pension wealth when DB plans were in overfunded positions. Return to text{{p}}{{p}}8. The difference between total financial assets and liabilities in the table reflects nonfinancial assets, which consist primarily of real estate investment assets. All underfunding of private pensions is attributed to the nonfinancial corporate business sector, because financial firms represent only a very small share of underfunding. The balance sheet of private DC plans is shown in table L.117.c, and the combined balance sheet of private DB and DC plans is shown in L.117. Return to text{{p}}{{p}}9. This improvement also reflects in part the effect of private pension funds selling liabilities to insurance companies in recent years, which effectively eliminates the pension liabilities from the sponsors' books. Return to text{{p}}{{p}}10. Starting with the September 2014 release of the Financial Accounts, we report data for the defined-contribution plans sponsored by S&L governments (mostly 403(b) and 457 plans), as well as for DB plans. A forthcoming FEDS Note will provide additional details about the data used for S&L DC plans. As in the case of private pension funds, the small difference between total financial assets and liabilities in the pension tables reflects nonfinancial assets, which consist primarily of real estate investment assets. Return to text{{p}}{{p}}11. The DB plans include the Civil Service Retirement and Disability Fund (CSRDF), Military Retirement Fund, Railroad Retirement Board, Judicial Retirement Fund, and Foreign Service Retirement and Disability Fund. The federal government also sponsors a DC plan, consisting largely of the Thrift Savings Plan (TSP). Return to text{{p}}{{p}}12. Under both the CSRS and FERS, DB pension benefits are paid out of the Civil Service Retirement and Disability Fund (CSRDF). Return to text{{p}}{{p}}13. Military retirement was also essentially funded on a pay-as-you-go basis until 1984, when the Military Trust Fund was established. Return to text{{p}}{{p}}14. These nonmarketable Treasury securities represent intragovernmental debt, or debt that the government owes to itself. They are part of federal debt subject to the statutory debt limit (though they are not part of federal debt held by the public). Note that, by contrast, the unfunded portion of federal DB pension liabilities is not part of federal debt subject to the statutory limit. Return to text{{p}}{{p}}15. This may be viewed as a decision by the federal government to pay future pension benefits out of future revenues (or future borrowing). Return to text{{p}}{{p}}16. The two blips seen in the series around 2011q2 and 2013q2-q3 reflect the use of "extraordinary measures" by the Treasury Department at the time of the federal debt-limit standoffs of 2011 and 2013. See Feds Note "The Federal Debt-Limit Standoff of 2013 in the Financial Accounts of the United States", available at http://www.federalreserve.gov/econresdata/notes/feds-notes/2014/federal-debt-limit-standoff-of-2013-in-the-financial-accounts-of-the-united-states-20140421.html. Return to text{{p}}{{p}}17. In addition to the underfunding or overfunding of federal DB pension plans, these claims also include suspended investments in the Thrift Savings Plan (TSP) G Fund. Suspending investments in the G Fund is one of the "extraordinary measures" available to the Treasury Department when operating at the federal statutory debt limit. Suspended investments in the G Fund are typically zero, but have been large around periods characterized by legislative standoffs over raising the debt limit. See Feds Note "The Federal Debt-Limit Standoff of 2013 in the Financial Accounts of the United States", available at http://www.federalreserve.gov/econresdata/notes/feds-notes/2014/federal-debt-limit-standoff-of-2013-in-the-financial-accounts-of-the-united-states-20140421.html. Return to text{{p}}{{p}}18. Both series in the figure include nonmarketable Treasury securities held by federal pension funds (but not by Social Security). There is a debate in the international arena about whether the "correct" measure of debt should or should not include claims from public pension plans on the government. Return to text{{p}}{{p}}19. Under cash accounting, only the current financial assets of DB plans were treated as an asset of the household sector. Return to text{{p}}{{p}}20. Table B.100 in the Balance Sheets section of the Financial Accounts shows the balance sheet of households and nonprofit organizations including both financial and nonfinancial assets. Line 28 of that table shows total pension entitlements of the household sector (private and public, DB and DC), including claims on the sponsor of the plans. Return to text{{p}}{{p}} Disclaimer: FEDS Notes are articles in which Board economists offer their own views and present analysis on a range of topics in economics and finance. These articles are shorter and less technically oriented than FEDS Working Papers.{{p}}Search Working Papers{{p}}{{p}}{{p}}{{p}}Skip Meet Economists Section{{p}}{{p}}Meet the Economists{{p}}All Economists{{p}}By Field of Interest{{p}}Financial Economics{{p}}International Economics{{p}}Macroeconomics{{p}}Mathematical and Quantitative Methods{{p}}Microeconomics{{p}}{{p}}Skip stay connected section{{p}}{{p}}Stay Connected{{p}}Twitter{{p}}YouTube{{p}}RSS Feeds{{p}}Subscribe{{p}}{{p}}{{p}}Last update: October 31, 2014 |
| Date: | 2014–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2014-10-31&r=acc |
| By: | Stefanie Stantcheva (Harvard University); Emmanuel Saez (UC Berkeley) |
| Abstract: | We provide a simpler theory of capital taxation. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:503&r=acc |
| By: | Määttänen, Niku; Ropponen, Olli |
| Abstract: | Abstract We consider the taxation of non-listed companies and their owners in Finland. We analyse how the current highly non-linear dividend taxation influences the allocation of labour and capital across different firms, average labour productivity and the equilibrium wage level. To this end, we use a general equilibrium model of firm investment where firms may have different production technologies. We find that the current tax system is likely to distort resource allocation compared to linear dividend taxation. This works to lower the average labour productivity as well as the general wage level. |
| Keywords: | Dividend taxation, non-listed companies, productivity |
| JEL: | D92 G35 H24 |
| Date: | 2016–08–26 |
| URL: | http://d.repec.org/n?u=RePEc:rif:report:56&r=acc |
| By: | Christian Miller; Casey Clark |
| Abstract: | FEDS Notes Print{{p}}May 11, 2016{{p}}Where do I see the Monetary Policy Normalization Tools on the Fed's Balance Sheet and{{p}}Income Statement?{{p}}Christian Miller and Casey Clark1{{p}}On December 16, 2015, the Federal Open Market Committee (FOMC) determined it was appropriate to raise the effective federal funds{{p}}rate from the 0 to 25 basis point range it had been set at since late 2008. This note highlights where some of the key elements of the{{p}}FOMC's approach to policy normalization are reported on the Federal Reserve's website. Specifically, this note focuses on the interest on{{p}}excess reserves (IOER) rate, excess reserve balances, and interest expense on excess reserves. This note also identifies where{{p}}information can be found on the overnight reverse repurchase agreement (ON RRP) offering rate and the associated Federal Reserve{{p}}balances and interest expense.{{p}}Background on Federal Reserve publications{{p}}The Federal Reserve Board's Statistical Release H.4.1,"Factors Affecting Reserve Balances of Depository Institutions and Condition{{p}}Statement of Federal Reserve Banks," is a weekly publication that presents a balance sheet for each Federal Reserve Bank, a{{p}}consolidated balance sheet for all 12 Reserve Banks, an associated statement that lists the factors affecting reserve balances of{{p}}depository institutions, and several other tables presenting information on the assets, liabilities, and commitments of the Federal Reserve{{p}}Banks. Table 1 presents details on the factors that supply and absorb reserve balances, as well as the level of reserve balances--that is,{{p}}funds that depository institutions hold on deposit at the Federal Reserve to satisfy reserve requirements and funds held in excess of{{p}}requirements.2 Table 5 presents the balance sheet of the Federal Reserve System.{{p}}Annually, the Federal Reserve System releases the combined annual financial statements for the Federal Reserve Banks (combined{{p}}statements), as well as statements for the 12 individual Federal Reserve Banks, which provide a significant amount of information about{{p}}the assets, liabilities, earnings, and expenses of the Reserve Banks. The financial statements are audited annually by an independent{{p}}auditing firm. In addition to the annual financial statements, the Federal Reserve System releases quarterly the Federal Reserve Banks{{p}}Combined Quarterly Financial Reports, which provide unaudited quarterly updates to the information presented in the annual financial{{p}}statements.{{p}}IOER and reserve balances{{p}}The FOMC has stated that the IOER rate will be a primary tool during the normalization period.3 Depository institutions should be{{p}}unwilling to lend to any private counterparty at a rate lower than the rate they can earn on balances maintained at the Federal Reserve.{{p}}As a result, an increase in the IOER rate will put upward pressure on a range of short-term interest rates. In effect, raising the IOER rate{{p}}allows the Federal Reserve to increase the value that depository institutions place on reserve balances, which will have market effects{{p}}similar to those associated with a reduction in the quantity of reserves in the traditional, quantity-based mechanism for tightening the{{p}}stance of monetary policy.4 The IOER rate paid on excess reserve balances can be found on the Board of Governors' "Interest on{{p}}Required Balances and Excess Balances" page. Although the Federal Reserve pays interest on required reserves (IORR) in addition to{{p}}IOER, the marginal return of an additional dollar of reserves to a depository institution is the IOER rate given the large amount of excess{{p}}reserves in the System.{{p}}The H.4.1 reports the level of aggregate reserve balances--required and excess reserve balances together--on a weekly basis in Tables 1{{p}}and 5. Table 1 reports "Reserve balances with Federal Reserve Banks," which deducts depository institution overdrafts from overall{{p}}reserve balances.{{p}}Figure 1{{p}} FRB: FEDS Notes: Where do I see the Monetary Policy Normalization Tools on the Fed's... Page 1 of 5{{p}} https://m-pubtest.frb.gov/econresdata/notes/feds-notes/2016/where-do-i-see-the-monetary-... 5/11/2016{{p}}In Table 5, the line item "Other deposits held by depository institutions" reports both required and excess reserve balances, but is not{{p}}reduced by any overdrafts which would be reported in the assets section of table 5. Thus, this value may not always align with "Reserve{{p}}balances with Federal Reserve Banks" in Table 1.{{p}}The Statistical Release H.3, "Aggregate Reserves of Depository Institutions and the Monetary Base," reports reserve balances maintained{{p}}by month and by two-week maintenance period. "Reserve balances maintained/Total" for a given two-week maintenance period on Table{{p}}1 of the H.3 is the average of the two "Reserve balances with Federal Reserve Banks" weekly averages reported in the given{{p}}maintenance period in Table 1 of the H.4.1.{{p}}Interest expense on reserves is calculated based on balances that comprise "Other deposits held by depository institutions" reported in{{p}}Table 5. Information on how interest is calculated on required and excess reserves can be found in the Reserve Maintenance Manual.{{p}}Interest expense on reserves held by depository institutions is presented in the combined statements and quarterly reports. Within these{{p}}reports, interest expense can be found in the Combined Statements of Income and Comprehensive Income (SOI) under the "Interest{{p}} Expense: Deposits: Depository institutions" line of the statements. The expense information is presented inclusive of required and excess{{p}}reserves and does not provide the interest expense related to excess reserves separately.5{{p}}Figure 2{{p}}Figure 3{{p}} FRB: FEDS Notes: Where do I see the Monetary Policy Normalization Tools on the Fed's... Page 2 of 5{{p}} https://m-pubtest.frb.gov/econresdata/notes/feds-notes/2016/where-do-i-see-the-monetary-... 5/11/2016{{p}}ON RRP offering rate and RRPs{{p}}Another administered rate to help control the level of the effective federal funds rate is the overnight reverse repurchase program (ON{{p}}RRP) offering rate. In general, any counterparty that is eligible to participate in the ON RRP facility should be unwilling to invest funds{{p}}overnight with another counterparty at a rate below the ON RRP rate. Information on the ON RRP operations can be found on the Federal{{p}}Reserve Bank of New York's "Temporary Open Market Operations" website.{{p}}Both Table 1 and Table 5 of the H.4.1 report "Reverse repurchase agreements" under "Factors absorbing reserve balances" and{{p}}"Liabilities," respectively.{{p}}Figure 4{{p}}Figure 5{{p}} FRB: FEDS Notes: Where do I see the Monetary Policy Normalization Tools on the Fed's... Page 3 of 5{{p}} https://m-pubtest.frb.gov/econresdata/notes/feds-notes/2016/where-do-i-see-the-monetary-... 5/11/2016{{p}}As shown above, Table 1 breaks out RRPs into two categories: "Foreign official and international accounts" and "Primary Dealers and{{p}}expanded counterparties." All RRPs reported in the latter category, include transactions with primary dealers and other financial{{p}}counterparties who have met eligibility criteria to transact in reverse repurchase agreements that serve as an effective tool for managing{{p}}money market interest rates to help support a floor on those rates.6{{p}}In the combined statements and quarterly reports, interest expense information related to RRPs is available in the "System Open Market{{p}} Account: Securities sold under agreements to repurchase" line of the SOI. More detailed information on RRP balances and expense,{{p}}including the break-out of RRP categories equivalent to Table 1 of the H.4.1, is presented in footnote 5 of the combined statements and{{p}}tables 4 and 13 of the quarterly report.{{p}}1. The authors thank Greg Evans, Jane Ihrig, Elizabeth Klee, and Lawrence Mize for comments. Return to text{{p}}2. Table 1 is not the balance sheet, but it is derived primarily from components of the Federal Reserve's balance sheet. Hence, many of the line items reported{{p}}under "Assets" in Table 5 are also reported under "Factors supplying reserve balances," and this parallelism is also evident among line items reported as{{p}}"Liabilities" in Table 5 and "Factors absorbing reserve balances" in Table 1. Return to text{{p}}3. The Fed also raised the primary credit rate when it began raising short-term interest rates. The primary credit rate is the interest rate at which banks can{{p}}borrow reserves overnight from the Federal Reserve. From early 2010 to late 2015, the primary credit rate was set at 75 basis points or 50 basis points above{{p}}the top of the range for the target federal funds rate. Given that reserves are now superabundant and will remain so for some time, depository institutions will not{{p}}need to borrow from the Federal Reserve and so are unlikely to be influenced by the level of the primary credit rate. Return to text{{p}}Figure 6{{p}} FRB: FEDS Notes: Where do I see the Monetary Policy Normalization Tools on the Fed's... Page 4 of 5{{p}} https://m-pubtest.frb.gov/econresdata/notes/feds-notes/2016/where-do-i-see-the-monetary-... 5/11/2016{{p}}Last update: May 11, 2016{{p}}Home | Economic Research & Data{{p}}4. For a more detailed discussion surrounding the dynamics at play in the federal funds market, please see Ihrig, Meade, and Weinbach. 2015. "Rewriting{{p}}Monetary Policy 101: What's the Fed's Preferred Post-Crisis Approach to Raising Interest Rates?" Journal of Economic Perspective 29 (4): 177-198. Return to{{p}}text{{p}}5. Currently, IOER is set equal to IORR. Therefore, it is possible to approximate interest expense at a higher frequency by multiplying (IOER/365) by the level of{{p}}balances maintained by depository institutions. Return to text{{p}}6. Participation in the ON RRP operations is open to the Federal Reserve's primary dealers as well as its expanded RRP counterparties, which covers a wide{{p}}range of entities including 2a-7 money market funds, banks, and government-sponsored enterprises (Fannie Mae, Freddie Mac, and Federal Home Loan{{p}}Banks). Return to text{{p}}Please cite this note as: Miller, Christian S. and Casey H. Clark (2016). "Where do I see the Monetary Policy Normalization Tools on the{{p}}Fed's Balance Sheet and Income Statement? ," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, May 11,{{p}}2016, http://dx.doi.org/10.17016/2380-7172.1764.{{p}} Disclaimer: FEDS Notes are articles in which Board economists offer their own views and present analysis on a range of topics in{{p}}economics and finance. These articles are shorter and less technically oriented than FEDS Working Papers.{{p}}Accessibility Contact Us Disclaimer Website Policies FOIA PDF Reader{{p}} FRB: FEDS Notes: Where do I see the Monetary Policy Normalization Tools on the Fed's... Page 5 of 5{{p}} https://m-pubtest.frb.gov/econresdata/notes/feds-notes/2016/where-do-i-see-the-monetary-... 5/11/2016 |
| Date: | 2016–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2016-05-11&r=acc |