BPM6 Accounting PrinciplesTime of Recording of Flows and Valuation

Course on Balance of Payments and International Investment Position Manual

(BPM6)

IMF-PFTACNadi

November 22-December 1, 2010

BP03b

Introduction

Time of Recording of Flows Alternative recording basis Use of accrual accounting and its application to

Goods Services Primary income and transfers Financial assets Other flows

Timing adjustments04/19/23 2

Introduction cont.

Valuation Transactions Positions Other flows Unit of Account and Currency Conversion

Changes from BPM5

04/19/23 3

Timing

Everything is in the timing Rules to determine when flows occur Ensure in quadruple accounts that all flows are

recorded simultaneously

04/19/23 4

Timing: There are four basis

Accrual the time economic value is created, transformed,

exchanged, transferred, or extinguished Due-for-payment

time the payments fall due Commitment

when a unit has committed itself to a transaction Cash

when cash is received or disbursed04/19/23 5

Accrual is internationally recommended

The change of economic ownership is central in determining the time of recording on an accrual basis for transactions in goods, nonproduced nonfinancial assets, and financial assets.

04/19/23 6

Timing: Accrual accounting, Goods

The time when economic ownership occurs When the parties enter the goods in their books and

make a corresponding change to their financial assets and liabilities

High value goods and construction As agreed to by the parties

A difference in timing between the change of ownership and payments may give rise to trade credit and advances

04/19/23 7

Timing: Accrual accounting, Goods Cont.

When goods cross border - an approximation Goods on consignment - when ownership changes Goods under financial lease – inception of lease Goods for processing – no change of ownership Goods moved between parent & branch - who

assumes the risks and rewards Merchanting - when purchases and sales are

recorded.04/19/23 8

Timing: Accrual accounting, Services

Services are recorded when provided Services may be

Discrete period services (e.g. some transport) Continuous services (construction, operating

leasing, and insurance) For continuous services there may be advance

payments or settlements at later dates

04/19/23 9

Timing: Accrual, Primary inc. & transfers

Distributive transactions are recorded at the moment the related claims arise. For some As amount payable accrues

Compensation of employees, interest, social contributions and benefits, reinvested earnings, & interest

On the unit’s decision as to when to distribute Dividends when shares go exdividend Withdrawals from quasicorporations when they occur

04/19/23 10

Timing: Accrual, Primary inc. & trans Cont.

Taxes and transfers generally when income is earned. However, flexibility may be needed.

Grants Generally when corresponding entry is made

04/19/23 11

Timing: Accrual, Financial assets

Transactions (including payments of cash) - when economic ownership changes

Trade credit may be implicit -in some cases Float – the date creditor receives payment Securities – when ownership changes, and as a proxy

settlement may be ok, but not always Arrears – this depends on the contract Activation of guarantees - in some circumstances Employee stock options – at grant date

04/19/23 12

Timing: Accrual, Other flows

Volume changes, including reclassifications, are recorded as these changes occur.

Revaluations Can occur continuously as prices and exchange rates

change. In practice, revaluations are usually computed

between two points in time at which the relevant assets/liabilities are valued.

04/19/23 13

Timing adjustments

Timing adjustments are made to international merchandise trade statistics when practices in customs statistics lead to distortions Ships and aircraft Goods on consignment if not sold

Adjustments may also be made to ITRS data

04/19/23 14

Valuation: Transactions

Market prices are the basis for valuation in the international accounts Current exchange value, i.e., the values at which

goods and other assets, services, and labours are exchanged or else could be exchanged for cash. Willing buyers and seller Independent parties Commercial considerations only — “at arm’s length.”

04/19/23 15

Valuation: Transactions Cont.

Market prices Cont.

Transactions that involve dumping and discounting represent market prices

Market price is the price payable by the buyer after taking into account any rebates, refunds, adjustments, etc. from the seller.

Imports and exports of general merchandise are recorded at FOB values, which take into account any export taxes payable or any tax rebates receivable

04/19/23 16

Valuation: Transactions Cont.

Market prices Cont.

Explicit fees in financial assets transactions should be excluded and recorded separately

Use of market-price-equivalents Barter Grant and donation in kind - cost of acquisition, or donors’

value Goods under financial lease – market prices at the time of

acquisition, written down current, or present value of expected future returns

04/19/23 17

Valuation: Transactions Cont.

Market prices Cont.

Goods sold under contract - price is unknown. Initially price is estimated and revised when known

Prices may be under-or over invoiced. An adjustment should be made and corresponding

adjustments in other accounts

04/19/23 18

Valuation: Positions

Financial assets and liabilities Mainly should be valued as if they were acquired in market

transactions on the balance sheet date. For equity and securities record

Price quotation (where asset is regularly traded), Fair value (where not), or The present value of future cash flows

Market values, fair values, and nominal values should be distinguished from such notions as amortized values, face values, book values, and historic cost

04/19/23 19

Valuation: Positions Cont.

Debt securities include negotiable de facto loans, reclassified to securities

Record at nominal value Loan – incl. nonperforming loans Deposits and accounts receivable/payable,

including those at institutions in liquidation until they are written off

04/19/23 20

Valuation: Positions Cont.

Where market and nominal rates diverge, publish memorandum series

Where valuation does not comply with market value (commercial, supervisory, tax, or other accounting standards) they should be adjusted

Where spreads are involved, use midpoint rate. The spread is an implicit service fee

04/19/23 21

Valuation: Other flows

Holding gains and losses Arising from changes in market values May accrue continuously. But are calculated between two points in time

Valuation changes may record the difference between nominal and transaction value

Other changes in the volume are recorded at the market-equivalent prices

04/19/23 22

Valuation: Other flows Cont.

For writing-off of financial instruments that are valued at nominal values, the value recorded in the other changes should correspond to their nominal value prior to being written off.

For all reclassifications of assets and liabilities, values of both the new and old instruments should be the same

04/19/23 23

Unit of Account & Currency Conversion

Unit of account Domestic vs. foreign currency Currency conversion principles

04/19/23 24

Unit of Account

Is the currency in which the statistics are expressed Domestic currency Foreign currency (e.g. USD, even SDRs)

For international comparison, a standard (stable) currency needs to be used

04/19/23 25

Domestic vs. foreign currency Domestic currency

Is the legal tender in an economy issued by the monetary authority

All other currencies are foreign currencies Where in Pacific countries, the US, Oz or NZ dollar is

legal tender, they are a foreign currency Gold type accounts - in foreign currency

Note the distinction currency of denomination/currency of settlement

04/19/23 26

Currency conversion

For converting from foreign currency to domestic currency Flows - rate prevailing when the flows take place Positions - rate prevailing at balance sheet date Midpoint (buying and selling) rate should be used Transactions at the date they occur

In principle and in practice ...

04/19/23 27

Currency conversion Cont.

Derived measures are calculated by subtracting one type of flow from another

A multiple exchange rate regime, including black market regimes, need to take into account the implicit taxes and subsidies

04/19/23 28

Timing & Valuation: Changes from BPM5

Timing Dividends – when stocks or shares go ex-dividend Repayments of debts when they are extinguished

rather than when due i.e. paid, rescheduled, or forgiven

Activation of one-off guarantees clarified

04/19/23 29

Timing & Valuation: Changes - BPM5 Cont.

Valuation - currency Definition - domestic & foreign currencies provided

Currency union issues related to definition of domestic/foreign currency discussed

Currency conversion is clarified for exchanges, continuous transactions, other flows, including revaluations, and positions

Terms “currency of denomination” and “currency of settlement” are introduced and their use explained

04/19/23 30