REPORT OF THE OECD TASK FORCE ON SOFTWARE MEASUREMENT IN THE NATIONAL ACCOUNTS


 Introduction

A change was made in the latest system of national accounts (SNA93) that recommended the capitalization of software.  This was widely welcomed since it recognized the "asset" and "investment" characteristics of software and brought the treatment of software purchased separately into line with software purchased as a bundle with hardware, which has always been capitalized. 

 However, this has come at a cost, namely, a deterioration in the international comparability of economic statistics.  An examination of the estimation techniques used in National Statistics Offices (NSOs) in the OECD area suggests that this reflects differences in interpreting what software is, as much as it does differences in measurement approaches.

This is not the only area of the national accounts where issues of international comparability arise but the comparability of software estimates across countries has been the subject of much discussion and scrutiny, reflecting its importance to economic growth and investment and its role in productivity and capital services’ estimates.  The differences in estimation processes are significant:

  the impact of harmonizing definitions and measurement techniques could lead to revisions of over 1 percent of current price GDP levels, with consequential impacts on GDP growth and ICT investment.

To address these measurement issues, and improve international comparability, an OECD Task Force was set up in October 2001.  19 countries were represented in the Task Force - 12 European and 7 non-European.  A European (Eurostat)    Task Force was also convened to work in parallel with the OECD Task Force.  The common objective of the task forces was to propose conceptual and practical recommendations on software measurement in the national accounts that would improve the comparability of data between countries.

This report describes the recommendations of the OECD Task Force that will be presented to the OECD national accounts expert meeting in October 2002.  The Eurostat Task Force presented its report to the Eurostat GNP Committee in July 2002. 

 While the two reports may differ in presentation, their recommendations are fully consistent.

In the present report, to help the reader, recommendations have been highlighted and numbered, and a summary of recommendations is included as an annex.

Overview

The first step of the Task Force was to evaluate the extent of differences across countries and to improve understanding of their underlying causes.  As such a detailed Questionnaire was sent to Task Force Members towards the end of 2001.  Responses confirmed that significant differences existed, both in concepts and in estimation procedures, and that this compromised comparability.

The two charts below, compiled from a synthesis of the returns, illustrate the impact and significance of these differences.  The first details the significance of software, as a proportion of GDP.  A striking feature is the variance across countries, particularly when contrasted with other information.  For example, the UK, with a software-producing industry 50% larger than Denmark’s (as a percent of GDP) has software


investment levels less than one-third the size of Denmark’s.


Central to the issue of measurement is how investment expenditure in computer services (software) is distinguished from intermediate consumption in computer services.  In other words, the ratio of capitalized software to total expenditure (by businesses and government on computer services) is a measure of the propensity of any country to capitalise software, so a comparison of this ratio (the investment ratio) provides insight into the scale of measurement differences across countries.  The Questionnaire used a harmonized definition of computer services and the chart below compares this ratio across countries. 

 Figure 2 below compares these ratios for 14 OECD countries.  (Not all countries were able to comply exactly with the harmonized definition although all EU countries use exactly the same definition).



A priori, assuming that common definitions and measurement procedures existed, one would have expected these ratios to be much closer together. At the more detailed level differences are starker.  For example for a given expense of 100 on similar (detailed) types of software services, the US will capitalize 100, while France will capitalize only 50. 


 One feasible and measurable objective of the Task Force, therefore, would be to obtain similar ratios for the same computer services sub-product groups across countries.

 It is this benchmark that will enable the Task Force to gauge its success in the coming years (after NSOs adopt the changes recommended in this report).  A short survey will be sent to participating countries during 2003 in order to try to measure the actual or potential impacts of the present recommendations.

Responses to the questionnaire, and discussions with business accountants, revealed that one of the main sources of difference between countries is the weakness of business surveys. 

 Business investment surveys, on the whole, use fairly general descriptions of software that leave some ambiguity in interpretation to businesses; which tend to adopt very prudent accounting rules.  

For example, very few businesses capitalize own-account or customized software including those companies with large and valuable "software originals" such as Microsoft.  Another problem, related to "prudence" is the fact that tax regulations do not in practice provide incentives for businesses to capitalize software, as they generally allow them, as an option, to be expensed.

Some countries have recognized this phenomenon explicitly in their estimation procedures and so use independently derived ("supply-based") methods to estimate software investment instead of business survey estimates.

  As a result, countries that base their estimates on traditional business surveys, using what businesses report as capitalized, are likely to obtain results that are much lower than countries that estimate independently.  An objective of the Task Force is to improve matters here by providing a clearer definition of software investment, that can be, in due course, included in business investment surveys.




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