BPM6 Accounting Principles Excluding Time of Recording and Valuation Course on Balance of Payments and International Investment Position Manual (BPM6) IMF-PFTAC Nadi November 22-December 1, 2010 BP03a Introduction 4/13/2015 Flows and Positions Accounting System Time of Recording of Flows (next session) Valuation (next session) Aggregation and Netting Symmetry of Reporting Derived Measures Changes from BPM5 (this & next session) 2 Flows and positions 4/13/2015 Relationship between flows and positions What are transactions? Types of transactions Rearranging of transactions for statistical purposes Other flows Position at point in time 3 Relationship between flows and positions Flows (during a period) Positions (IIP) are level of assets and liabilities at a point in time Change in IIP from period 0 to period 1 4/13/2015 = transactions (BOP) + other changes in assets and liabilities (reconciliation items in IIP) = Flows in period 1 4 Balance of Payments Current account Goods and services Goods Services Primary income Secondary income Current account balance Capital account Credit Debit 540 462 78 50 17 499 392 107 40 55 1 4 Net lending (+) borrowing (-) (from current and capital account) Financial account (by functional category) Total Net lending (+) borrowing (-) (from financial account) Net errors and omissions 4/13/2015 Balance 10 Net incurrence of financial assets 57 Net incurrence of liabilities 47 10 0 JAI Tunis/L4:5 International Investment Position Opening position Transactions (financial account) Other changes in volume Revaluations Closing positions 1,274 57 0 15 1,346 Liabilities (by functional category) 805 47 0 7 859 Net IIP 469 10 0 8 487 Assets (by functional category) 4/13/2015 6 What are transactions? Transactions are classified by the nature of the economic value provided Goods, services, primary & secondary income, capital transfers, non produced non financial assets, and financial assets and liabilities. May include intra unit transactions (that are considered to be analytically useful) 4/13/2015 e.g. transactions between a branch in one country and its head office in another Include illegal activities 7 What are transactions? Cont. Take place between two institutions, A resident and a non-resident Transactions involving financial assets and liabilities, between residents and between non residents excluded and included in reclassifications By mutual agreement, or By law (taxes and penalties) May involve third parties 4/13/2015 Guarantors Agents 8 Types of transactions Exchanges and transfers Monetary and non monetary 4/13/2015 An exchange - something of value provided by something of equal value. Transfer - some of value provided without something of value provided in return. Monetary - involves cash payments, or creation of assets and liabilities Non monetary – barter trade, goods and services in kind 9 Rearranging of transactions Rerouting, Partitioning 4/13/2015 e.g. social contribution paid by employers to government – incl. compensation of employees Splitting interest/financial intermediation charges Splitting financial derivatives from underlying assets Splitting goods, freight and insurances changes 10 Rearranging of transactions Cont. Imputation 4/13/2015 Retained earnings of direct investment enterprises Investment income held on technical reserves by insurance corporations Retained earnings of investment funds Fiscal activity relating to government borrowing or outlays undertaken by a non-resident Implicit taxes and charges associated with multiple exchange rate systems 11 Other flows Other flows (essentially do not occur by mutual agreement) Volume changes 4/13/2015 Monetisation and demonization of gold Commercial debt cancellation Transfer of assets due to residency change Revaluation of assets 12 Position at a point in time 4/13/2015 Financial assets have corresponding liabilities Except for monetary gold 13 Accounting system Based on broad book keeping principles Double and quadruple entry Let’s not get carried away – in BOP we are only concerned with double (vertical) entry! Types of accounting entries 4/13/2015 Peculiar some accountants might say! Now this is important! – Learn it 14 Accounting system: Double entry (vertical) Vertical double entry For a transactor, each transaction and other flow has a debit and credit entry As we are concerned with only resident transactors, the BOP may be described as a vertical entries, or set of accounts For positions, for each transactor, 4/13/2015 Assets = Liabilities + Net worth 15 Accounting system: Double entry (Horizontal) Horizontal double entry Refers to transactions between transactors, e.g. A buys goods from B. 4/13/2015 A: goods debit, and B: goods credit A: cash credit and B: cash debit 16 Accounting system - Quadruple accounting Unit A Unit B A acquires product from B B provides product to A Vertical double entry bookkeeping A makes payment to B B receives payment from A Horizontal double entry bookkeeping JAI Tunis/L3:17 Accounting system: Types of accounting entries Goods and services Primary income and transfers credit (disposal) and debit (acquisition) Incurrence of assets and liabilities 4/13/2015 credit (income and transfers receivable) debit (income and transfers payable) Non produced non financial assets credit (exports) debit (imports) Increase in assets (debit) and liabilities (credit) Decrease in assets (credit) and liabilities (debit) 18 Balance of Payments (three column presentation) Current account Goods and services Goods Services Primary income Secondary income Current account balance Capital account Credit Debit 540 462 78 50 17 499 392 107 40 55 1 4 Net lending (+) borrowing (-) (from current and capital account) Financial account (by functional category) Total Net lending (+) borrowing (-) (from financial account) 4/13/2015 Net errors and omissions Balance 10 Net incurrence of financial assets 57 Net incurrence of liabilities 47 10 0 JAI Tunis/L4:19 Accounting system: Examples of entries Sale of goods to a nonresident Sale of shares for currency Shares and other equity 50 (CR.—Reduction in financial assets) Currency 50 (DR.—Increase in financial assets) A borrower receives a loan 4/13/2015 Exports 100 (CR.) Currency 100 (DR.—Increase in financial assets) Loan 70 (CR.—Increase in liabilities) Currency 70 (DR.—Increase in financial assets) 20 Aggregation and Netting Aggregates are summations Gross recording (current and capital account) 4/13/2015 Of transactions (other flows and levels) within standard components Of standard components to broader levels And are hierarchical Credits and debits shown separately Some special cases – merchanting and reverse investment 21 Aggregation and Netting Cont. Net recording (financial account) Net is also used in some derived measures 4/13/2015 Debits deducted from credits e.g., “net lending/borrowing” 22 Symmetry of reporting Symmetry of reporting by counterparties is This is important in bilateral comparisons, global balances and regional and global aggregates. Symmetry is not always possibly 4/13/2015 important to ensure consistency, compatibility, and analytical usefulness Conceptually – functional classification Micro level data 23 Derived measures Are important analytical tools. Balance on goods and services; External financial assets minus external liabilities Balance on trade in goods Balance on trade in services Balance on goods, services, and primary income Current account balance Net lending/ net borrowing: – from current and capital accounts – from financial account 4/13/2015 24 Net international investment position Balance of Payments (three column presentation) Current account Goods and services Goods Services Primary income Secondary income Current account balance Capital account Credit Debit Balance 540 462 78 50 17 499 392 107 40 55 41 70 -29 10 -38 13 1 4 -3 Net lending (+) borrowing (-) (from current and capital account) Financial account (by functional category) Total Net lending (+) borrowing (-) (from financial account) 4/13/2015 Net errors and omissions 10 Net incurrence of financial assets 57 Net incurrence of liabilities 47 10 0 JAI Tunis/L4:25 International Investment Position Opening position Transactions (financial account) Other changes in volume Revaluations Closing positions 1,274 57 0 15 1,346 Liabilities (by functional category) 805 47 0 7 859 Net IIP 469 10 0 8 487 Assets (by functional category) 4/13/2015 26 Changes from BPM5 Transactions in external assets Imputed transactions clarified and specified Migrants transfers become volume changes Bookkeeping conventions explained 4/13/2015 between two resident units or between two nonresidents are treated as reclassification vertical double-entry horizontal double-entry quadruple entry bookkeeping 27 Changes from BPM5 Cont. The financial account uses the headings The term “economic ownership” introduced Income flows arising from reverse investment 4/13/2015 “net acquisition of financial assets” “net incurrences of liabilities” where the direct investment enterprise owns less than 10 percent of the voting power of its direct investor are also to be recorded on a gross basis 28 Changes from BPM5 Cont. 4/13/2015 All capital account transactions are recorded on a gross basis Currency union issues related to consolidated regional international accounts are discussed Symmetry of reporting and derived measures are dealt with explicitly 29