1. ESTP Course
Balance of Payments – Introductory course Paris, May 2014 Introduction to the Financial Account

2. Outline The Nature of Financial Assets Residence and Coverage
Transactions in Assets
Reinvested Earnings
Net Recording
Functional Basis for Classification and its Motivation
Institutional Sectors
Long and Short-Term Instruments
Integration of International Accounts

3. The Nature of Financial Assets and Financial Transactions
Financial assets fulfill the requirement of economic assets:
they are instruments over which ownership rights are enforced and from which economic benefits may be derived by their owners by holding or using them
they have counterpart liabilities by other units (with the exception of gold bullion included in monetary gold)
Every economic asset has demonstrable value, functioning as a store of value that reflects the amounts of the economic benefits that its owner can derive by holding it or using it.
Financial transactions involve changes of ownership of financial assets, including the creation and liquidation of financial claims.

4. Residence and Coverage (1/4)
The currency or unit of account of a bank deposit is not relevant for determining the residence of the account holder.
Nor is the unit of account in which a financial claim is denominated relevant for determining residence.
Claims must be actual claims that are legally in existence.
The authorization, commitment, or extension of an unutilized line of credit or the incurrence of a contingent obligation does not establish such a claim.
The pledging or setting aside of an asset, such as through a sinking fund, does not settle a claim or alter the ownership of an asset.

5. Residence and Coverage (2/4)
Financial derivatives are financial instruments that are linked to a specific indicator or commodity (or another financial instrument) through which specific risks can be traded in financial markets in their own right.
They represent financial claims because they have a present economic value that can be calculated by reference to the market price of the derivative or to the market prices of the commitments underlying the derivative.
Alternatively, the value could be viewed as the amount that one party must pay to another to extinguish the contract.
Both parties to a derivative contract recognize a financial instrument that is an asset to one party and a liability to another.

6. Residence and Coverage (3/4)
Land and unincorporated enterprises
The ownership of immovable assets, such as land and structures, is always attributed to residents of the economies in which the assets are located.
An unincorporated enterprise, operating in an economy different from where the owner resides, is resident in the economy where the enterprise operates.

7. Residence and Coverage (4/4)
Financial leasing
A financial lease is a contract under which the lessor as legal owner of an asset conveys substantially all the risks and rewards of ownership of the asset to the lessee.
The lessee becomes the economic owner of the asset.

8. Transactions in Assets
Transactions in assets include the creation and liquidation of claims.
Financial claims may be exchanged for other financial claims or for real resources.
If one party does not receive economic value, the offset to the financial account transaction is a transfer.

9. Reinvested Earnings
Reinvestment of earnings of a direct investment enterprise and investment fund shares:
The financial account counterpart to what is recorded in the current account as having been earned by the investor.
The financial account entry follows from the fact that no payment is made to the investor, whose equity has therefore increased.

10. Net Recording
Recording of financial account transactions on a net basis means that purchases and sales of a particular asset within a reporting period are netted out.
This is partly because such details may be difficult to collect (for example, they cannot be derived from stock data).
They are also of less analytic interest. However, supplementary data on a gross basis for securities transactions are sometimes considered useful (for example, using ITRS).
Net reporting is used for all the standard components of direct investment.

11. Functional Basis for Classification (1/5)
The financial account and the IIP follow a functional basis of classification that is not reflected in the national accounts. A functional classification tries to categorize institutional units by types of behavior.
The national accounts classification of the financial account for each institutional sector is by type of instrument. This is to facilitate consolidation across sectors. Hence, there is no direct investment sector and no monetary authorities sector.

12. Functional Basis for Classification (2/5)
Classification within the BOP functional categories follows closely the national accounts in the identification of sectors and instruments (with the exception of direct investment).
This classification is broadly based on the liquidity and legal characteristics of the asset.
Liquidity has the connotation of negotiability, transferability, marketability, and convertibility
Primary instrument classification in the national accounts: equity and shares, securities (short and long-term), loans (short and long-term), currency and deposits, monetary gold and SDRs, insurance technical reserves, other accounts receivable and payable.

13. Functional Basis for Classification (3/5)
Financial innovation has led to the development of new, and often complex financial assets with respect to maturity, yield, and avoidance of risk. This has required some flexibility in the classification of instruments.
The classification followed is consistent with other statistical systems of the IMF, and is consistent with the classification of related income components of the current account.
There is an exact correspondence between the standard components of the financial account and those of the IIP.

14. Functional Basis for Classification: Motivation (4/5)
Direct investment. Transactions between a direct investor and a direct investment enterprise (which are transactions between related parties) are largely influenced by the objective of maximizing return on equity.
Portfolio investment. Transactions by portfolio investors are largely governed by the desire to maximize income and manage risk.

15. Functional Basis for Classification: Motivation (5/5)
Financial derivatives. Transactions in financial derivatives enable parties to trade specific financial risks to other entities that are more willing or better suited to take or manage these risks, and that typically—but not always—do so without trading in primary assets or commodities.
Reserve assets. Transactions in reserve assets reflect official actions aimed at influencing the exchange rate or supporting the existing exchange rate.
Other investment. A residual category

16. Institutional Sectors
For assets:
the institutional sector of the domestic creditor should be identified
sector attribution by creditor and transactor always coincide, as the domestic creditor is always the owner of the asset
For liabilities, the institutional sector of the domestic debtor should be identified.
It may be less easy to identify ownership of a claim on a domestic debtor, which could be acquired by a resident.
Nonetheless, the original nature of the liability is considered more important than the identity of the present holder of the claim.

17. Institutional Sector Breakdown in BPM6
Central bank*1
Deposit-taking corporations except the central bank*2
General government
Other sectors
Other financial corporations*2
Nonfinancial corporations, households, and NPISHs
Nonfinancial corporations*2
Households
NPISHs (nonprofit institutions serving households; may be combined with households)
Additional sectors for counterpart data:
International organizations
International financial organizations
Central bank of currency union
Other international organizations
*1 Additional subsectors may be identified for monetary authorities, as needed (see paragraph 4.70)
*2 Supplementary “of which” items may be provided for public corporations (see paragraphs  )

18. Long and Short-term Instruments
For direct investment, splits of intercompany lending by maturity are supplementary items.
For reserves, other classification principles are given more attention (availability for use).
However, original maturity remains an important principle for debt instruments in portfolio investment and other investment.
Remaining maturity may be a more important determinant of liquidity management than original maturity.
On a supplementary basis, information is sought on long-term instruments with a remaining maturity of one year or less.

19. Integration of the International Accounts
The classification of the IIP is fully aligned with that of the financial account and the investment income category.
This alignment permits validation of data and computation of earnings to stock ratios.
The integrated IIP statement reconciles opening and closing values of the IIP.
The reconciliation takes place through the financial account (transactions) and other changes in financial assets and liabilities accounts (other volume changes and revaluations).