sEPArAtIon of loAns AnD trADE CrEDIts
2.6 special purpose entities (sPEs) in financial accounts
In general, special purpose entities (special purpose entity – SPE, special purpose vehicle – SPV) are corporations established by their owners for carrying out a special task. This task may be the financing of a specific project, the separate management or securitisation of different components of corporate assets, or exploiting specific regulatory or taxation benefits. (Special purpose entities established specifically for securitisation purposes are called special purpose vehicles or SPVs in the literature).
From a statistical perspective, special purpose entities in domestic practice are resident corporations (registered in Hungary) of non-resident owners, which perform a passive, financial channelling function between their non-resident partners. Rather than performing an activity affecting the real economy (manufacturing or services), these organisations are engaged in intermediating financial assets within the enterprise group (as their special purpose). Before
2006, financial channelling took place typically by lending sources received in form of equity to non-residents. Starting from 2006, however, some SPEs have moved their lending activities to their non-resident branch offices, and invest the funds received from abroad in non-resident shareholdings (shares and other equities).
As SPEs do not represent an independent legal category, in statistics they may be identified and separated on the basis of their business accounting or statistical indicators (non-resident owners, small number of employees, low revenues, significant financial assets and liabilities existing exclusively vis-à-vis non-residents, insignificant volume of non-financial assets.) The separation of SPEs in statistics is necessary, because – based on the affected corporate assets, financial transactions and the related income – passive financial intermediary (holding, group financing) activities performed for non-resident enterprise groups Chart 2-3
stock data of the financial assets and liabilities of sPEs relative to that of the national economy
–350,000
S.1 including SCV (right-hand scale) Sources: MNB.
Chart 2-4
transactions in financial assets and liabilities of sPEs relative to that of the national economy
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
S.1 including SCV (right-hand scale) –30,000
have a rather significant share in Hungary. Stemming from their financial channelling function, the assets and liabilities of special purpose enterprises is almost identical – disregarding from one or two years – their net financial worth is around zero. The transactions of assets and liabilities are nearly identical in volume, resulting in a net lending/borrowing near to zero. As a result, the recognition of SCVs in the statistics has no significant impact on the balancing items, however, it increases the stock (Chart 2-3) and transaction (Chart 2-4) of the assets and liabilities without reason. But, eliminating SCVs allows for the presentation of normal economic processes.
In Hungary, the legal and taxation category of off-shore companies existed until the end of 2005. Based on their tax office license, those companies were listed under this category, whose business contacts were exclusively non-resident partners. Since domestic financial statistics did not consider off-shore companies as resident economic operators, until the end of 2005 data pertaining to these companies were included either only through netting, or were excluded completely from the national accounts, the balance of payments, and the financial accounts.
off-shore companies registered in Hungary typically performed a passive financial intermediation within a non-resident enterprise group, or traded intangible assets (rights) with non-resident partners. The exclusion of off-shore companies from the statistics was a useful approach from a practical perspective, but was not consistent with international methodological standards. At the beginning of 2006, the legal status of off-shore companies ceased to exist in Hungary.
Corporations with this former license continued to operate as normal corporations, and in domestic statistics they were included in the sector of resident corporations. At the same time, domestic statistical organisations intended to continue the practice of separating intra-group financial intermediation – i.e.
the primary activity of former off-shore companies – from ‘normal’ real economy and financial processes, therefore they established and applied the category of SPEs in statistics. Nevertheless, at the beginning of 2006 the elimination of the off-shore status and the replacement of off-shore companies with SPEs resulted in breaks in both the national accounts and the balance of payments, as follows.
From 2006, data excluding off-shore companies were replaced by data pertaining to all corporations (including SPEs) in national (non-financial) accounts.
In the balance of payments statistics, net flow and stock data of off-shore companies engaged in passive financial intermediation vis-à-vis the rest of the world were incorporated into the data through the end of 2005. From 2006, separate statistics are prepared for corporations without SPEs, and for all corporations (including SPEs).
Incorporation of off-shore company data into the statistics caused the most significant break in the stock data indicating financial worth. The total assets of off-shore companies, more than 800 in number, exceeded HUF 11,000 billion. Nearly 10 percent of this amount was represented by companies trading rights (and thus excluded from the SPE category), the number of which was over 100. In line with the balance of payments statistics and based on data extracted from the statistics, from 2006 financial accounts statistics present the financial worth and the components of asset changes for both the ‘normal’
economy and corporate sector excluding SPEs, and for
the ‘whole’ economy and corporate sector including SPEs. As opposed to the practice of other statistics, all categories valid from 2006 are applied retrospectively by estimates in financial accounts for previous years also; thus the consistency of the time series is ensured.
Chart 2-5
stock data of non-sPE off-shore companies added to the balance of payments until the end of 2005 as presented in financial accounts
2000 Q1 2000 Q2 2000 Q3 2000 Q4 2001 Q1 2001 Q2 2001 Q3 2001 Q4 2002 Q1 2002 Q2 2002 Q3 2002 Q4 2003 Q1 2003 Q2 2003 Q3 2003 Q4 2004 Q1 2004 Q2 2004 Q3 2004 Q4 2005 Q1 2005 Q2 2005 Q3 2005 Q4
1999 Q4
Sources: MNB.
For the purposes of this data revision, the gross data of off-shore companies and non-SPE corporations classified among off-shore companies were established on the basis of their annual reports, corporate tax returns and previous balance of payments data.
With the methodological changeover in 2014, in line with the new methodological rules, in addition to the financial intermediaries connected to the general public, corporations providing financial services to a limited group of clients, typically within a corporate group, must also be regarded as financial corporations.
These corporations had to be reclassified from the non-financial corporations (S.11) sector to the financial corporations (S.12) sector. A holding or group financing company that engages in passive financial intermediation within the corporate group – if qualified
as an independent institutional unit – must be classified into the category of captive financial institutions (S.127), a newly created sub-sector within the financial corporations sector (S.12). The corporations pertaining to the new sub-sector are not connected to the financial markets neither on the assets not on the liabilities side. Based on the changes, the Hungarian SPEs to be considered as financial corporations (with large financial instrument) are recorded also in the new sub-sector of captive financial institutions, As the result of reclassifications, the stock of financial assets and liabilities of the non-financial corporation sector declined significantly, and accordingly, the financial worth of financial corporations increased in the financial accounts. The change was applied in financial account statistics retrospectively to the entire time series back until 1989.