BPM6 Accounting Principles

1

• BPM6 Accounting Principles
• Time of Recording of Flows and Valuation
• Course on Balance of Payments and
• International Investment Position Manual (BPM6)
• IMF-PFTAC
• Nadi
• November 22-December 1, 2010

BP03b
2
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 adjustments

3
Introduction cont.

• Valuation
• Transactions
• Positions
• Other flows
• Unit of Account and Currency Conversion
• Changes from BPM5

4
Timing

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

5
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 disbursed

6
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.

7
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

8
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.

9
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

10
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 units decision as to when to distribute
• Dividends when shares go exdividend
• Withdrawals from quasicorporations when they
  occur

11
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

12
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

13
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.

14
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

15
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 arms
  length.

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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

17
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

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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

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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

20
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

21
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

22
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

23
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

24
Unit of Account Currency Conversion

• Unit of account
• Domestic vs. foreign currency
• Currency conversion principles

25
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

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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

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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 ...

28
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

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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

30
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