BPM6 Accounting Principles Excluding Time of Recording and Valuation

1. 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

2. Introduction • 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)

3. Flows and positions • Relationship between flows and positions • What are transactions? • Types of transactions • Rearranging of transactions for statistical purposes • Other flows • Position at point in time

4. Relationship between flows and positions • Flows (during a period) • = transactions (BOP) + other changes in assets and liabilities (reconciliation items in IIP) • Positions (IIP) are level of assets and liabilities at a point in time • Change in IIP from period 0 to period 1 • = Flows in period 1

7. 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) • e.g. transactions between a branch in one country and its head office in another • Include illegal activities

8. 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 • Guarantors • Agents

9. Types of transactions • Exchanges and transfers • An exchange - something of value provided by something of equal value. • Transfer - some of value provided without something of value provided in return. • Monetary and non monetary • Monetary - involves cash payments, or creation of assets and liabilities • Non monetary – barter trade, goods and services in kind

10. Rearranging of transactions • Rerouting, • e.g. social contribution paid by employers to government – incl. compensation of employees • Partitioning • Splitting interest/financial intermediation charges • Splitting financial derivatives from underlying assets • Splitting goods, freight and insurances changes

11. Rearranging of transactions Cont. • Imputation • 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

12. Other flows • Other flows (essentially do not occur by mutual agreement) • Volume changes • Monetisation and demonization of gold • Commercial debt cancellation • Transfer of assets due to residency change • Revaluation of assets

13. Position at a point in time • Financial assets have corresponding liabilities • Except for monetary gold

14. Accounting system • Based on broad book keeping principles • Peculiar some accountants might say! • Double and quadruple entry • Let’s not get carried away – in BOP we are only concerned with double (vertical) entry! • Types of accounting entries • Now this is important! – Learn it

15. 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, • Assets = Liabilities + Net worth

16. Accounting system: Double entry (Horizontal) • Horizontal double entry • Refers to transactions between transactors, e.g. A buys goods from B. • A: goods debit, and B: goods credit • A: cash credit and B: cash debit

17. Accounting system- Quadruple accounting Vertical double entry bookkeeping Horizontal double entry bookkeeping Unit A Unit B A acquires product from B B provides product to A A makes payment to B B receives payment from A

18. Accounting system: Types of accounting entries • Goods and services • credit (exports) debit (imports) • Primary income and transfers • credit (income and transfers receivable) • debit (income and transfers payable) • Non produced non financial assets • credit (disposal) and debit (acquisition) • Incurrence of assets and liabilities • Increase in assets (debit) and liabilities (credit) • Decrease in assets (credit) and liabilities (debit)

20. Accounting system: Examples of entries • Sale of goods to a nonresident • Exports 100 (CR.) • Currency 100 (DR.—Increase in financial assets) • 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 • Loan 70 (CR.—Increase in liabilities) • Currency 70 (DR.—Increase in financial assets)

21. Aggregation and Netting • Aggregates are summations • Of transactions (other flows and levels) within standard components • Of standard components to broader levels • And are hierarchical • Gross recording (current and capital account) • Credits and debits shown separately • Some special cases – merchanting and reverse investment

22. Aggregation and Netting Cont. • Net recording (financial account) • Debits deducted from credits • Net is also used in some derived measures • e.g., “net lending/borrowing”

23. Symmetry of reporting • Symmetry of reporting by counterparties is • important to ensure consistency, compatibility, and analytical usefulness • This is important in • bilateral comparisons, global balances and regional and global aggregates. • Symmetry is not always possibly • Conceptually – functional classification • Micro level data

24. 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 • Net international investment position

27. Changes from BPM5 • Transactions in external assets • between two resident units or between two nonresidents are treated as reclassification • Imputed transactions clarified and specified • Migrants transfers become volume changes • Bookkeeping conventions explained • vertical double-entry • horizontal double-entry • quadruple entry bookkeeping

28. Changes from BPM5 Cont. • The financial account uses the headings • “net acquisition of financial assets” • “net incurrences of liabilities” • The term “economic ownership” introduced • Income flows arising from reverse investment • 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

29. Changes from BPM5 Cont. • 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