BPM5 Conceptual Framework: Valuation and Time of Recording ESCWA Workshop on the Compilation of Statistics on Trade in Services Cairo, Egypt February 6-9, 2007

2 Introduction This topic is divided into three components: Importance and fundamentals of valuation time of recording unit of account and conversion

3 Uniformity of Valuation BOP (and IIP) require a uniform system of valuation to permit Aggregation and interpretation Consistency between debit and credit entries Intercountry comparisons Intertemporal comparisons Macroeconomic analysis including other data sets

4 Valuing Transactions: what is the price? The choice of the most suitable price is not obvious; there are a range of possible prices:  quoted price  list price  cost of production  seller’s acquisition price  depreciated replacement cost (i.e., for goods)  transfer pricing (between affiliated enterprises)  customs value (for assessing duty on goods or to invalidate understatement) Note, price differences may exist for the same goods/services sold in different markets.

5 Valuation of Transactions: the Market Price BPM5 recommends that market price be used as the basis for valuing transactions. Thus, transactions are generally valued at actual prices agreed upon by transactors.. In the frameworks of the balance of payments and the national accounts market prices for transactions are defined as amounts of money that willing buyers pay to acquire something from willing sellers; the exchanges are made between independent parties and on the basis of commercial considerations only.

6 Attributes of a market price A market price refers to a single transaction Is not a general price for a class of supposedly identical exchanges, such as a "world market price" or a "fair market price” It need not necessarily occur in a competitive market. It could be a price in a monopolistic, or any other kind of market that is not wholly free.

7 Transfer Prices Transfer prices: transactions may not be market transactions because there is a lack of independence among the parties to the exchange, and the prices used in portraying such transactions in the books of the enterprises may or may not be market prices.

8 Time of Recording Transactions in services should be recorded when rendered i.e., delivered or received. This may differ from the time of payment which may occur before/after service is rendered. Thus, transactions should be recorded on an accrual- rather than on a cash-accounting basis.

9 Recording Basis Transactions in services should be recorded on a gross basisdebit (imports) and credits (exports) should be separately compiled. Services received from nonresidents by residents in the recording economy are expenses, and are debit entries in the services account of the balance of payments. Services provided to nonresidents by residents in the recording economy are expenses, and are credit entries in the services account of the balance of payments.

10 Unit of account and conversion Transactions may take place in a range of currencies, including the domestic currency of either the provider or consumer of the services. To produce meaningful statistics, all transaction values should be converted to a common unit of account. The market exchange rate prevailing at the time that the transaction takes place should be used. Midpoint between buying and selling rates should be used to exclude any service charges ( the spread between the mid point and those rates) * * Since the actual midpoint rate at the time at which the transaction occurs may not be available to the data compiler, using the average mid-point rate for the reference period is acceptable.