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 9/14/20152

3. Introduction cont.  Valuation Transactions Positions Other flows Unit of Account and Currency Conversion  Changes from BPM5 9/14/20153

4. Timing  Everything is in the timing Rules to determine when flows occur Ensure in quadruple accounts that all flows are recorded simultaneously 9/14/20154

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 9/14/20155

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. 9/14/20156

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 9/14/20157

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. 9/14/20158

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 9/14/20159

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 unit’s decision as to when to distribute  Dividends when shares go exdividend  Withdrawals from quasicorporations when they occur 9/14/201510

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 9/14/201511

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 9/14/201512

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. 9/14/201513

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 9/14/201514

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 arm’s length.” 9/14/201515

16. 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 9/14/201516

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 9/14/201517

18. 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 9/14/201518

19. 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 9/14/201519

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 9/14/201520

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 9/14/201521

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 9/14/201522

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 9/14/201523

24. Unit of Account & Currency Conversion  Unit of account  Domestic vs. foreign currency  Currency conversion principles 9/14/201524

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 9/14/201525

26. 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 9/14/201526

27. 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... 9/14/201527

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 9/14/201528

29. 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 9/14/201529

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 9/14/201530