Balance of Payments and International Investment Position Manual

Balance of

Payments and

International

Investment

Position Manual

Sixth Edition (BPM6)

Balance of Payments and International Investment Position Manual

Sixth Edition (BPM6)

Balance of Payments and International Investment Position Manual

IMF

Sixth Edition (BPM6)

2009

INTERNATIONAL MONETARY FUND

Balance of

Payments and

International

Investment

Position Manual

Sixth Edition (BPM6)

Production: IMF Multimedia Services Division

Typesetting: Alicia Etchebarne-Bourdin

Cataloging-in-Publication Data

Balance of payments and international investment position manual.—

Washington, D.C.: International Monetary Fund, 2009.

p.; cm.

6th ed.

Previously published as: Balance of payments manual.

ISBN 978-1-58906-812-4

1. Balance of payments—Statistics—Handbooks, manuals, etc. 2. Invest-

ments—Statistics—Handbooks, manuals, etc. I. Title. II. Title: Balance of

payments manual. III. International Monetary Fund.

HG3881.5.I58 I55 2009

Price: US$80.00

Please send orders to:

International Monetary Fund, Publication Services

700 19th Street, N.W., Washington, D.C. 20431, U.S.A.

Tel.: (202) 623-7430 Fax: (202) 623-7201

E-mail: publications@imf.org

Internet: www.imfbookstore.org

iii

Table of Contents

Foreword ix

Preface xi

List of Abbreviations xvii

Chapter 1. Introduction 1

A. Purposes of the Manual 1

B. Structure of the Manual 2

C. History of the Manual 3

D. The 2008 Revision 4

E. Revisions between Editions of the Manual 5

Chapter 2. Overview of the Framework 7

A. Introduction 7

B. Structure of the Accounts 7

C. Metadata, Dissemination Standards, Data Quality, and Time Series 16

Annex 2.1 Satellite Accounts and Other Supplemental Presentations 16

Annex 2.2 Overview of Integrated Economic Accounts 18

Chapter 3. Accounting Principles 29

A. Introduction 29

B. Flows and Positions 29

C. Accounting System 34

D. Time of Recording of Flows 35

E. Valuation 40

F. Aggregation and Netting 46

G. Symmetry of Reporting 48

H. Derived Measures 48

Chapter 4. Economic Territory, Units, Institutional Sectors,

and Residence 50

A. Introduction 50

B. Economic Territory 50

C. Units 52

D. Institutional Sectors 59

E. Residence 70

F. Issues Associated with Residence 75

Chapter 5. Classifications of Financial Assets and Liabilities 80

A. Definitions of Economic Assets and Liabilities 80

B. Classification of Financial Assets and Liabilities by Type of Instrument 82

C. Arrears 97

D. Classification by Maturity 97

E. Classification by Currency 97

F. Classification by Type of Interest Rate 98

Chapter 6. Functional Categories

A. Introduction 99

B. Direct Investment 100

C. Portfolio Investment 110

D. Financial Derivatives (Other than Reserves) and Employee Stock Options 110

E. Other Investment 111

F. Reserves 111

Chapter 7. International Investment Position

119

A. Concepts and Coverage 119

B. Direct Investment 122

C. Portfolio Investment 124

D. Financial Derivatives (Other than Reserves) and Employee Stock Options 125

E. Other Investment 126

F. Reserves 130

G. Off-Balance-Sheet Liabilities 130

Annex 7.1 Positions and Transactions with the IMF 130

Chapter 8. Financial Account 133

A. Concepts and Coverage 133

B. Direct Investment 135

C. Portfolio Investment 137

D. Financial Derivatives (Other than Reserves) and Employee Stock Options 137

E. Other Investment 138

F. Reserve Assets 141

G. Arrears 141

Chapter 9. Other Changes in Financial Assets and Liabilities Account 142

A. Concepts and Coverage 142

B. Other Changes in the Volume of Financial Assets and Liabilities 143

C. Revaluation 146

Chapter 10. Goods and Services Account 149

A. Overview of the Goods and Services Account 149

B. Goods 151

C. Services 160

Chapter 11. Primary Income Account 183

A. Overview of the Primary Income Account 183

B. Types of Primary Income 184

C. Investment Income and Functional Categories 202

Chapter 12. Secondary Income Account 207

A. Overview of the Secondary Income Account 207

B. Concepts and Coverage 207

C. Types of Current Transfers 210

Chapter 13. Capital Account

216

A. Concepts and Coverage 216

TABLE OF CONTENTS

B. Acquisitions and Disposals of Nonproduced, Nonfinancial Assets 217

C. Capital Transfers 219

Chapter 14. Selected Issues in Balance of Payments and International

Investment Position Analysis

222

A. Introduction 222

B. General Framework 222

C. Alternative Presentations of Balance of Payments Data 225

D. Financing a Current Account Deficit 227

E. Balance of Payments Adjustment in Response to a Current Account Deficit 230

F. Implications of a Current Account Surplus 232

G. The Balance Sheet Approach 234

H. Further Information 236

Appendix 1. Exceptional Financing Transactions

237

A. Introduction 237

B. Transfers 238

C. Debt-for-Equity Swap 238

D. Borrowing for Balance of Payments Support 239

E. Debt Rescheduling or Refinancing 239

F. Debt Prepayment and Debt Buyback 240

G. Accumulation and Repayment of Debt Arrears 240

Appendix 2. Debt Reorganization and Related Transactions 245

A. Debt Reorganization 245

B. Transactions Related to Debt Reorganization 253

Appendix 3. Regional Arrangements: Currency Unions, Economic

Unions, and Other Regional Statements 255

A. Introduction 255

B. Currency Unions 255

C. Economic Unions 261

D. Customs Arrangements 262

E. Other Regional Statements 264

Appendix 4. Statistics on the Activities of Multinational

Enterprises 269

A. Introduction 269

B. Coverage 270

C. Statistical Units 270

D. Time of Recording and Valuation 270

E. Attribution of AMNE Variables 270

F. Compilation Issues 271

Appendix 5. Remittances 272

A. Economic Concept of Remittances and Why They Are Important 272

B. Standard Components in the Balance of Payments Framework Related

to Remittances 272

C. Supplementary Items Related to Remittances 273

D. Related Data Series 275

E. Concepts 275

F. Data by Partner Economy 277

Table of Contents

Appendix 6a. Topical Summary—Direct Investment 278

A. Purpose of Topical Summaries 278

B. Overview of Direct Investment 278

Appendix 6b. Topical Summary—Financial Leases 280

Appendix 6c. Topical Summary—Insurance, Pension Schemes, and

Standardized Guarantees 282

A. General Issues 282

B. Nonlife Insurance 283

C. Life Insurance and Annuities 286

D. Pension Schemes 287

E. Standardized Guarantees 288

Appendix 7. Relationship of the SNA Accounts for the Rest of the

World to the International Accounts 289

Appendix 8. Changes from BPM5 292

Appendix 9. Standard Components and Selected Other Items 301

A. Balance of Payments 301

B. International Investment Position 309

C. Additional Analytical Position Data 313

Boxes

2.1 Double-Entry Basis of Balance of Payments Statistics 10

2.2 Data Quality Assessment Framework 15

6.1 Examples of Identification of Direct Investment Relationships under

FDIR 102

6.2 Direct Investment Relationships with Combination of Investors 104

6.3 Direct Investment Relationship Involving Domestic Link 106

6.4 Derivation of Data under the Directional Principle 109

6.5 Components of Reserve Assets and Reserve-Related Liabilities 112

8.1 Entries Associated with Different Types of Debt Assumption 140

9.1 Example of Calculation of Revaluation Due to Exchange Rate Changes 148

10.1 Examples of Goods under Merchanting and Manufacturing Services

on Physical Inputs Owned by Others (Processing Services) 158

10.2 Recording of Global Manufacturing Arrangements 162

10.3 Numerical Examples of the Treatment of Freight Services 165

10.4 Numerical Examples of the Calculation of Nonlife Insurance Services 171

10.5 Numerical Example of Calculation of FISIM 174

10.6 Technical Assistance 182

11.1 Reinvested Earnings with Chain of Ownership 191

11.2 Numerical Example of Calculation of Interest Accrual on a

Zero-Coupon Bond 194

11.3 Numerical Example of Calculation of Interest Accrual on an Index-

Linked Bond—Broad-Based Index 196

11.4 Numerical Example of Calculation of Interest Accrual on an Index-

Linked Bond—Narrowly Based Index 197

11.5 Numerical Example of Calculation of Reinvested Earnings of a

Direct Investment Enterprise 203

A3.1 Recording of Trade Transactions in Currency and Economic Unions 259

A6a.1 Direct Investment Terms 279

A6b.1 Numerical Example of Financial Lease 281

TABLEOFCONTENTS

vii

A6c.1 Numerical Example of Calculations for Nonlife Insurance 283

Figure

2.1 Overview of the System of National Accounts as a Framework for

Macroeconomic Statistics Including International Accounts 8

Tables

2.1 Overview of International Accounts 14

2.2 Overview of Integrated Economic Accounts 18

2.3 Link between Instrument and Functional Categories 26

4.1 SNA Classification of Institutional Sectors 60

4.2 BPM6 Classification of Institutional Sectors 61

4.3 Selected Effects of a Household’s Residence Status on the Statistics of the

Host Economy 73

4.4 Selected Effects of the Residence Status of an Enterprise Owned by a

Nonresident on the Statistics of the Host Economy 74

5.1 Economic Asset Classification 81

5.2 Returns on Financial Assets and Liabilities: Financial Instruments and

Their Corresponding Type of Income 83

5.3 2008 SNA Financial Instruments Classification (with Corresponding

BPM6 Broad Categories) 84

6.1 Link between Financial Assets Classification and Functional Categories 100

7.1 Integrated International Investment Position Statement 120

7.2 Overview of the International Investment Position 121

8.1 Overview of the Financial Account 134

9.1 Overview of the Other Changes in Financial Assets and Liabilities Account 143

10.1 Overview of the Goods and Services Account 150

10.2 Reconciliation between Merchandise Source Data and Total Goods on a

Balance of Payments Basis 161

10.3 Treatment of Alternative Time-Share Arrangements 168

10.4 Treatment of Intellectual Property 176

11.1 Overview of the Primary Income Account 184

11.2 Detailed Breakdown of Direct Investment Income 204

11.3 Detailed Breakdown of Other Investment Income 205

12.1 Overview of the Secondary Income Account 208

13.1 Overview of the Capital Account 217

14.1 “Analytic” Presentation of the Balance of Payments 226

A1.1 Balance of Payments Accounting for Selected Exceptional Financing

Transactions 241

A3.1 Methodological Issues Relevant for Different Types of Regional

Cooperation 256

A5.1 Components Required for Compiling Remittance Items and Their Source 273

A5.2 Tabular Presentation of the Definitions of Remittances 274

A7.1 Correspondence between SNA and International Accounts Items 290

A9-I Currency Composition of Assets and Liabilities 313

A9-II Currency Composition of Assets and Liabilities 315

A9-III Currency Composition by Sector and Instrument 316

A9-IV Remaining Maturity of Debt Liabilities to Nonresidents 320

A9-V Memorandum/Supplementary Items: Position Data 320

Index

322

Table of Contents

Foreword

The International Monetary Fund since its inception has had a compelling interest in

developing and promulgating guidelines for the compilation of consistent, sound, and

timely balance of payments statistics. This work underpins the IMF’s other responsi-

bilities, including conducting surveillance of countries’ economic policies and providing

financial assistance that enables countries to overcome short-term balance of payments

difficulties. Such guidelines, which have evolved to meet changing circumstances, have

been embodied in successive editions of the Balance of Payments Manual (the Manual)

since the first edition was published in 1948.

I am pleased to introduce the sixth edition of the Manual, which addresses the many

important developments that have occurred in the international economy since the fifth

edition was released. The fifth edition of the Manual, released in 1993, for the first time

addressed the important area of international investment position statistics. The sixth edi-

tion builds on the growing interest in examining vulnerabilities using balance sheet data,

as reflected in the addition of international investment position to the title, and extensive

elaboration of balance sheet components. The Manual also takes into account develop-

ments in globalization, for example, currency unions, cross-border production processes,

complex international company structures, and issues associated with international labor

mobility, such as remittances. In addition, it deals with developments in financial markets

by including updated treatments and elaborations on a range of issues, such as securitiza-

tion and special purpose entities.

Because of the important relationship between external and domestic economic devel-

opments, the Manual was revised in parallel with the update of the System of National

Accounts 2008. To support consistency and interlinkages among different macroeco-

nomic statistics, this edition of the Manual deepens the harmonization with the System of

National Accounts and the IMF’s manuals on government finance and on monetary and

financial statistics.

The revised Manual has been prepared by the IMF’s Statistics Department in close

consultation with the IMF Committee on Balance of Payments Statistics, which includes

experts from a range of member countries as well as international and regional organiza-

tions. In addition, input was received from specialized expert groups, and from member

countries and international organizations during regional seminars and public comment

periods on successive drafts of the Manual. In total, representatives from virtually all IMF

member countries participated in one or more of these initiatives. The process underly-

ing the revision of the Manual demonstrates the spirit of international collaboration and

cooperation, and I would like to commend all of the national and international experts

involved for their invaluable assistance.

I would like to recommend the Manual to compilers and users. I urge member countries to

adopt the guidelines of the sixth edition as their basis for compiling balance of payments and

international investment position statistics and for reporting this information to the IMF.

Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Preface

Introduction

1. The release of the sixth edition of the Balance of Payments and International Invest-

ment Position Manual (BPM6) is the culmination of several years of work by the IMF

Statistics Department and the IMF Committee on Balance of Payments Statistics (the

Committee) in collaboration with compilers and other interested parties worldwide. It

updates the fifth edition published in 1993, providing guidance to IMF member countries

on the compilation of balance of payments and international investment position data.

2. When the Committee decided in 2001 to initiate an update of the manual, it con-

sidered that, while the overall framework of the fifth edition (BPM5) remained adequate,

it needed to incorporate the numerous elaborations, clarifications, and improvements

and updates in methodology that had been identified since 1993, and to strengthen the

theoretical foundations and linkages to other macroeconomic statistics. The production of

BPM6 was conducted in parallel with the update of the OECD Benchmark Definition of

Foreign Direct Investment, and the System of National Accounts (SNA) to maintain and

enhance consistency among these manuals.

Consultative process

3. The production of BPM6 was characterized by extensive consultation. In addition to

the Committee’s oversight, there was significant outreach to the wider community.

Annotated outline

4. In April 2004, the IMF released an Annotated Outline for the update of the manual.

It included proposals and options for the style and content of the revised manual. Ques-

tions were posed on specific issues to gauge views. The outline was circulated to central

banks and statistical agencies, and was posted on the IMF website. Input was invited from

compilers and other interested parties worldwide. Altogether, 33 countries provided writ-

ten comments.

Technical expert groups

5. The Committee established four technical expert groups, with membership from

member countries and international agencies, to undertake detailed consideration of issues

and make recommendations on currency unions (Currency Union Technical Expert Group,

or CUTEG), direct investment (Direct Investment Technical Expert Group, or DITEG),

reserves (Reserve Assets Technical Expert Group, or RESTEG), and other issues (Balance

of Payments Technical Expert Group, or BOPTEG). DITEG was chaired jointly with the

OECD and had common membership and meetings with the OECD’s Benchmark Advi-

sory Group (BAG) to bring about consistent treatments. The issue papers and outcome

papers were posted on the IMF’s website. Many of the issues discussed also were relevant

xii

for the update of the SNA, thus ensuring coordination with the Advisory Expert Group on

National Accounts (AEG), which had been created by the InterSecretariat Working Group

on National Accounts as an advisory and consultative body for the update of the SNA.

6. In addition, other specialized groups provided input on such topics as trade in ser-

vices, merchandise trade, tourism, remittances, debt statistics, and fiscal statistics. Inter-

national organizations participated in all stages of the process directly and as members of

specialized groups.

Worldwide review

7. Draft versions of the Manual were published on the IMF website in March 2007 and

March 2008. In each case, worldwide comment was invited within a deadline of three months.

About 60 sets of comments were received on the 2007 version, and 20 on the 2008 version. In

addition, other draft versions of selected chapters and of the whole document were circulated

to Committee members, other departments of the IMF, and other interested parties.

8. Furthermore, an expert review of the draft version was undertaken in January 2008

by Mahinder Gill, a retired IMF staff member and former Assistant Director, who super-

vised the drafting of BPM5, to identify any inconsistencies or omissions in the document,

and to check the consistency with the SNA.

9. During 2008, a series of nine regional outreach seminars was conducted on the Man-

ual to explain the proposed changes and encourage comments on the content and drafting.

Representatives from 173 IMF member economies, along with a number of international

agencies, participated in these seminars and provided many useful suggestions.

10. Taking account of the written comments on the March 2008 draft, inputs from

the regional seminars, and the finalization of Volume 1 of the 2008 SNA, a new draft

version was circulated to Committee members in July 2008. Following a further round

of comments by Committee members and internal IMF review, the BPM6 was adopted

unanimously by the Committee in November 2008.

Major changes introduced

11. The overall framework of the fifth edition is unchanged and BPM6 has a high

degree of continuity with BPM5. Some of the most significant changes from the last edi-

tion are as follows:

• Revised treatment of goods for processing and goods under merchanting;

• Changes in the measurement of financial services, including Financial Interme-

diation Services Indirectly Measured (FISIM), spreads on the purchase and sale

of securities, and the measurement of insurance and pension services;

• Elaboration of direct investment (consistent with the OECD Benchmark Definition

of Foreign Direct Investment, notably the recasting in terms of control and influ-

ence, treatment of chains of investment and fellow enterprises, and presentation on

a gross asset and liability basis as well as according to the directional principle);

• The introduction of the concepts of reserve-related liabilities, standardized guar-

antees, and unallocated gold accounts;

• New concepts for the measurement of international remittances;

• Increased focus on balance sheets and balance sheet vulnerabilities (including a

chapter on flows other than those arising from balance of payments transactions);

PREFACE

xiii

• Strengthened concordance with the SNA (such as the full articulation of the

SNA/Monetary and Financial Statistics Manual (MFSM) financial instrument

classification and the use of the same terminology such as primary and second-

ary income); and

• Extensive additions to the Manual, which is double the length of the original

because of added detail and explanation, and new appendixes (such as currency

unions, multinational enterprises, and remittances).

12. A detailed list of changes from BPM5 is provided in Appendix 8 of the Manual.

Acknowledgments

IMF staff

13. The BPM6 was produced under the direction of three Directors of the Statistics

Department (STA): Carol Carson (2001–04), Robert W. Edwards (2004–08), and Adelheid

Burgi-Schmelz (2008–). Lucie Laliberté was the responsible Deputy Director (2004–).

14. In the Balance of Payments Divisions, the editor of the BPM6 throughout the

project was Robert Dippelsman, Senior Economist, who provided the essential expert

continuity. Robert Dippelsman and Manik Shrestha, a Senior Economist and coeditor,

2002–06, were primary drafters of both the Annotated Outline and BPM6. The project

was supervised by Neil Patterson, Assistant Director (2001–06); Robert Heath, Division

Chief (2003–08); and Ralph Kozlow, Division Chief (2007–).

15. Many staff of the Balance of Payments Divisions contributed to the project.

John Joisce, Senior Economist (2001–), was closely involved in various aspects of

the project throughout. The following Senior Economist staff drafted Appendixes:

Andrew Kitili (Appendixes 1 and 2), René Fiévet (Appendix 3), and Margaret Fitzgib-

bon (Appendix 4). Jens Reinke, Economist, drafted Appendix 5. Pedro Rodriguez, an

Economist in the IMF’s Strategy, Policy, and Review Department (SPR), contributed

material for Chapter 14. In addition to staff mentioned above, the following members

of the Balance of Payments Divisions conducted the nine regional seminars in 2008:

He Qi and Emmanuel Kumah (Deputy Division Chiefs); and Paul Austin, Thomas

Alexander, Antonio Galicia, John Motala, and Tamara Razin (Senior Economists).

Within the staff of the Balance of Payments Divisions, Simon Quin (Deputy Division

Chief); Colleen Cardillo, Jean Galand, Gillmore Hoefdraad, Natalia Ivanik, Eduardo

Valdivia-Velarde, and Mark van Wersch (Senior Economists); and Sergei Dodzin, an

Economist in SPR, made notable contributions to improving the overall quality of the

BPM6.

16. Carmen Diaz-Zelaya and Marlene Pollard prepared the BPM6 drafts for publica-

tion. In addition to these staff, Esther George, Elva Harris, and Patricia Poggi supported

the preparation of papers for presentation at the Committee or technical expert group

meetings.

The Committee

17. The BPM6 was prepared under the auspices of the Committee. The BPM6 ben-

efited immensely from the expert advice of Committee members throughout the process;

their contribution was crucial to the success of the project. The Statistics Department

wishes to acknowledge, with thanks, the members and the representatives of international

organizations on the Committee during 2001–08:

Preface

xiv

Members

Australia Zia Abbasi Korea Jung-Ho Chung

Michael Davies Russian Sergei Shcherbakov

Bronwyn Driscoll Federation Lidia Troshina

Ivan King Saudi Arabia Abdulrahman Al-Hamidy

Belgium Guido Melis Sulieman Al-Kholifey

Canada Art Ridgeway South Africa Ernest van der Merwe

Chile Teresa Cornejo Stefaans Walters

China Han Hongmei Spain Eduardo Rodriguez-Tenés

China, Hong Kong Lily Ou-Yang Fong Uganda Michael Atingi-Ego

SAR United Kingdom Stuart Brown

France Philippe Mesny

United States Ralph Kozlow

Germany Almut Steger Obie Whichard

Hungary Antal Gyulavári

India Michael Debabrata

Patra

Italy Antonello Biagioli

Japan Satoru Hagino

Joji Ishikawa

Teruhide Kanada

Makoto Kato

Hideki Konno

Takehiro Nobumori

Toru Oshita

Takuya Sawafuji

Hidetoshi Takeda

Takashi Yoshimura

Representatives of International Organizations

Bank for International Rainer Widera Organization for Ayse Bertrand

Settlements (BIS) Economic William Cave

European Central Werner Bier Cooperation and

Bank (ECB) Jean-Marc Israël Development

Carlos Sánchez- United Nations Masataka Fujita

Muñoz Conference on

Pierre Sola Trade and

Eurostat Elena Caprioli Development

Maria-Helena Figueira United Nations IvoC.Havinga

Jean-Claude Roman Statistics

Mark van Wersch Division

From 2004 onward, Philippe Mesny represented the Bank for International Settlements.

PREFACE

Technical expert groups

18. Asnotedabove,theCommitteecreatedfourtechnicalexpertgroupstoadviseiton

specific issues. The Statistics Department is most grateful for the expert advice provided

bythemembersofthesetechnicalexpertgroups.

Balance of Payments Technical Expert Group (BOPTEG)

Chair: Neil Patterson

Secretariat: Robert Dippelsman and Manik Shrestha

Zia Abbasi (Australia); Jamal Al-Masri (Jordan); Christopher Bach (United States); Stuart

Brown (United Kingdom); Khady Beye Camara (Banque Centrale des États de l’Afrique

de l’Ouest, BCEAO); Raymond Chaudron (the Netherlands); Teresa Cornejo (Chile);

MichaelDavies(Australia);SatoruHagino(Japan);HanHongmei(China);JanuusKroon

(Estonia); Philippe Mesny (BIS); Pawel Michalik (Poland); Frank Oudekken (the Neth-

erlands); Carlos Sánchez-Muñoz (ECB); Ipumbu Shiimi (Namibia); Almut Steger (Ger-

many); Hidetoshi Takeda (Japan); Nuannute Thana-anekcharoen (Thailand); Charlie

Thomas (United States); Mark van Wersch (Eurostat); Chris Wright (United Kingdom).

Direct Investment Technical Expert Group (DITEG)

Co-Chairs: Neil Patterson and Ralph Kozlow

Secretariat: John Joisce and Marie Montanjees (IMF), and Ayse Bertrand and Yesim Sisik

(OECD)

Olga Aarsman (the Netherlands); Zia Abbasi (Australia); Roger de Boeck (Belgium);

Lars Forss (Sweden); Christian Lajule (Canada); Mondher Laroui (Tunisia); Jeffrey Lowe

(United States); Peter Neudorfer (ECB); George Ng (Hong Kong SAR); Frank Ouddeken

(the Netherlands); Paolo Passerini (Eurostat); Art Ridgeway (Canada); Carlos Sánchez-

Muñoz(ECB);BrunoTerrien(France);LidiaTroshina(RussianFederation);Markvan

Wersch (Eurostat); Carlos Varela (Colombia); Martin Vaughan (United Kingdom); Maiko

Wada(Japan);GraemeWalker(UnitedKingdom);StefaansWalters(SouthAfrica);and

Obie Whichard (United States).

Currency Unions Technical Expert Group (CUTEG)

Chair: Robert Heath

Secretariat: René Fiévet and Samuele Rosa (IMF)

Gebreen Al-Gebreen (Saudi Arabia); Olga Antropova (Belarus); Khady Beye Camara

(BCEAO); Miriam Blanchard (Eastern Caribbean Central Bank, ECCB); Luca Buldorini

(Italy);RemigioEcheverria(ECB);NazaireFotsoNdefo(BanquedesÉtatsdel’Afrique

Centrale,BEAC);JeanGaland(ECB);RudolfOlsovsky(CzechRepublic);Jean-Marc

Israël (ECB);

andMarkvanWersch(Eurostat).

Reserve Assets Technical Expert Group (RESTEG)

Chair: Robert Heath

Secretariat:AntonioGaliciaandGillmoreHoefdraad

Hamed Abu El Magd (Egypt); Koichiro Aritoshi (Japan); Kevin Chow (Hong Kong

SAR); Allison Curtiss (United Kingdom); Mihály Durucskó (Hungary); Saher El-Sherbini

(Egypt); Kelvin Fan (Hong Kong SAR); Fernando Augusto Ferreira Lemos (Brazil);

DITEGwasajointtaskforcewiththeOECD’sBenchmarkAdvisoryGroup(BAG).RalphKozlowwas

chairoftheWorkshopofInternationalInvestmentStatistics(thebodyoverseeingtheBAG)whileAssociate

Director for International Economics at the Bureau of Economic Analysis, U.S. Department of Commerce,

before joining the IMF’s Statistics Department.

Cochaired the second meeting of CUTEG held in Frankfurt.

Preface

xvi

Reiko Gonokami (Japan); Hideo Hashimoto (Japan); Yang Hoseok (Korea); Mohammed

Abdulla A. Karim (Bahrain); Philippe Mesny (BIS); Jean Michel Monayong Nkoumou

(BEAC); Linda Motsumi (South Africa); Christian Mulder (Monetary and Capital Mar-

kets Department, IMF); Joseph Ng (Singapore); Ng Yi Ping (Singapore); Carmen Picón

Aguilar (ECB); Stephen Sabine (United Kingdom); Julio Santaella (Mexico); Dai Sato

(Japan); Ursula Schipper (Germany); Jay Surti (Monetary and Capital Markets Depart-

ment, IMF); Charlie Thomas (United States); Lidia Troshina (Russian Federation); and

Yuji Yamashita (Japan).

Preparation of issues papers

Issues papers for four technical expert groups were prepared by Olga Antropova, Ayse

Bertrand, Stuart Brown, Richard Button, Robert Dippelsman, Remigio Echeverria, René

Fiévet, Jean Galand, Antonio Galicia, Gillmore Hoefdraad, Ned G. Howenstine, Maurizio

Iannaccone, John Joisce, Andreas Karapappas, Andrew Kitili, Stephan Klinkum, Ralph

Kozlow, Marie Montanjees, Frank Ouddeken, Paolo Passerini, Valeria Pellegrini, Art

Ridgeway, Samuele Rosa, Carlos Sánchez-Muñoz, Manik Shrestha, Pierre Sola, Hidetoshi

Takeda, Bruno Terrien, Lidia Troshina, Philip Turnbull, Martin Udy, Mark van Wersch,

and Chris Wright.

Issues papers also were prepared by the following institutions: International and Finan-

cial Accounts Branch, Australian Bureau of Statistics; National Bank of Belgium; Sta-

tistics Canada; European Central Bank; Census and Statistics Department, Hong Kong,

SAR; Bank of Japan; Service Central de la Statistique et des Etudes Economiques, Lux-

embourg; Balance of Payments and Financial Accounts Department, De Nederlandsche

Bank; Directorate for Financial and Enterprise Affairs, OECD; and the U.K. Office for

National Statistics.

Other acknowledgments

19. The BPM6 also benefited from comments by national compilers, international

agencies, and interested individuals from the private sector arising from the public com-

ment periods on the March 2007 and March 2008 drafts. The IMF Statistics Department

acknowledges, with gratitude, their contributions.

20. The IMF Statistics Department is grateful for the support and cooperation of the

editor of the SNA, Anne Harrison.

Adelheid Burgi-Schmelz

Director, Statistics Department

International Monetary Fund

PREFACE

xvii

List of Abbreviations

AEG Advisory Expert Group on National Accounts

AMNE Activities of Multinational Enterprises

BAG Benchmark Advisory Group

BCEAO Banque Centrale des États de l’Afrique de l’Ouest

BEAC Banque des États de l’Afrique Centrale

BIS Bank for International Settlements

BOOT Build, own, operate, transfer

BOPSY Balance of Payments Statistics Yearbook

BOPTEG Balance of Payments Technical Expert Group

BPM5 Balance of Payments Manual, fifth edition (1993)

BPM6 Balance of Payments and International Investment Position Manual,

sixth edition (2008)

CDIS Coordinated Direct Investment Survey

CIF Cost, insurance, and freight

CIRR Commercial Interest Reference Rate

CMA Common monetary area

The Committee IMF Committee on Balance of Payments Statistics

CPC Central Product Classification

CPIS Coordinated Portfolio Investment Survey

CR. Credit

CU Currency union

CUCB Currency union central bank

CUNCB Currency union national central bank

CUTEG Currency Unions Technical Expert Group

DI Direct investment

DITEG Direct Investment Technical Expert Group

DR. Debit

EBOPS Extended Balance of Payments Services (Classification)

ECB European Central Bank

ECCB Eastern Caribbean Central Bank

EcUn Economic union

ESO Employee stock option

FATS Foreign AffiliaTes Statistics

FCA Free carrier

FD Financial derivatives (other than reserves) and employee stock

options

FDIR Framework for Direct Investment Relationships

FISIM Financial intermediation services indirectly measured

FOB Free on board

GAB General Arrangements to Borrow

GATS General Agreement on Trade in Services

xviii

GDP Gross domestic product

GFSM Government Finance Statistics Manual

GNDY Gross national disposable income

GNI Gross national income

HIPC Heavily indebted poor country

HS Harmonized Commodity Description and Coding System

IC Insurance corporations

ICPF Insurance corporations and pension funds

IIP International investment position

IMF International Monetary Fund

IMTS International merchandise trade statistics

ISIC International Standard Industrial Classification of All Economic

Activities

ISWGNA InterSecretariat Working Group on National Accounts

LIBOR London interbank offered rate

MFSM Monetary and Financial Statistics Manual

MMF Money market fund

MSITS Manual on Statistics of International Trade in Services

n.a. not applicable

NAB New Arrangements to Borrow

n.i.e. not included elsewhere

NGO Nongovernmental organization

NPISH Nonprofit institution serving households

OECD Organization for Economic Cooperation and Development

OFC Other financial corporations

OI Other investment

PF Pension funds

PI Portfolio investment

PRGF Poverty Reduction and Growth Facility

RA Reserve assets

RESTEG Reserve Assets Technical Expert Group

RRL Reserve-related liabilities

SDR Special Drawing Right

SNA System of National Accounts

SPE Special purpose entity

SWF Sovereign wealth fund

LIST OF ABBREVIATIONS

CHAPTER

Introduction

A. Purposes of the Manual

1.1 The sixth edition of the Balance of Payments

and International Investment Position Manual (BPM6,

the Manual) serves as the standard framework for sta-

tistics on the transactions and positions between an

economy and the rest of the world.

1.2 The main objectives of this Manual are as

follows:

(a) To provide and explain concepts, definitions,

classifications, and conventions for balance of

payments and international investment position

statistics;

(b) To enhance international comparability of data

through the promotion of guidelines adopted

internationally;

international investment position statistics to

other macroeconomic statistics and promote

consistency between different data sets; and

(d) To provide a brief introduction to uses of data on

balance of payments, other changes in financial

assets and liabilities, and international invest-

ment position, as the international accounts of

an economy.

1.3 Data collection and other compilation proce-

dures and dissemination are not generally within the

scope of a conceptual manual such as this one. Deci-

sions on such issues should take into account circum-

stances, such as practical and legal constraints, and

relative size, that need to be judged in each economy

and that may explain departures from guidelines. The

IMF’s Balance of Payments Compilation Guide pro-

vides information on these issues.

1.4 The Manual provides a framework that is applica-

ble for a range of economies, from the smallest and least

developed economies to the more advanced and complex

economies. As a result, it is recognized that some items

may not be relevant in all cases. It is the responsibil-

ity of national compilers to apply international guide-

lines in a way appropriate to their own circumstances. In

implementing this Manual, compilers are encouraged to

assess the materiality and practicality of particular items

according to their own circumstances and are further

encouraged to revisit these decisions from time to time to

see whether circumstances have changed. Such decisions

necessarily rely on the professionalism and knowledge of

the compilers.

1.5 Factors to take into account when determin-

ing the items to be collected and the techniques used

include whether or not exchange controls exist, the rela-

tive importance of particular types of economic activi-

ties, and the diversity of institutions and the range of

instruments used in financial markets. In addition, data

collection for some items in the framework may be

impractical if the item is small and the data collection

cost is high. Conversely, compilers may wish to iden-

tify other items of particular economic interest in their

economy for which additional detail may be required

by policymakers and analysts.

1.6 This Manual is harmonized with the System

of National Accounts 2008 (2008 SNA), which was

updated in parallel. Relevant elements of the Monetary

and Financial Statistics Manual 2000 and Govern-

ment Finance Statistics Manual 2001 will be revised

to maintain their harmonization with the two updated

manuals. Conceptual interlinkages mean that balance

of payments and international investment position com-

pilers should consult with other statisticians to ensure

consistent definitions and provide data that can be rec-

onciled where they overlap.

1.7 The definitions and classifications in this Man-

ual do not purport to give effect to, or interpret, various

provisions (which pertain to the legal characterization

of official action or inaction in relation to such transac-

tions) of the Articles of Agreement of the International

Monetary Fund.

B. Structure of the Manual

1.8 The Manual has 14 chapters and 9 appendixes.

Theintroductorychaptersdealwithissuesthatcutacross

theaccounts(Chapters1–6)andarefollowedbychap-

ters that cover respectively each main account (Chapters

7–13),closingwithachapteronanalysisofdata.The

Manual states general principles that are intended to be

applicable in a wide range of circumstances. As well, it

applies the principles to some specific topics that have

been identified as needing additional guidance. Defini-

tions are given throughout the text, shown in italics.

1.9 Consistent with this structure, different aspects

ofatopicaredealtwithindifferentchapterstomini-

mizerepetition.Forexample,theclassificationofport-

folioinvestmentisacross-cuttingissue(Chapter6),as

arevaluationandtimingissues(Chapter3).Theposi-

tion, transaction, other changes, and income aspects

are dealt with in Chapters 7, 8, 9, and 11, respectively.

Linkages are emphasized by extensive cross-references.

In addition, for direct investment, insurance, and finan-

cial leases, appendixes have been included to allow the

readertoseethelinkagesamongthedifferentaccounts

for that topic.

1. Introductory chapters

1.10 Theintroductorychapters(Chapters1–6)cover

the following:

(a) Chapter 1 gives background to the Manual.

(b) Chapter 2 covers the accounting and dissemina-

tion frameworks.

(d) Chapters 4 deals with issues associated with

units, sectors, and residence.

(e) Chapter 5 deals with the classification of assets

and liabilities.

(f) Chapter 6 explains the functional categories.

2. Chapters for each account

1.11 Chapters7–13dealwiththeaccountsofthe

framework. Each account reflects a single economic

process or phenomenon and has a single chapter. The

orderofchaptersisamatterofconvention;inthisedi-

tion,theinternationalinvestmentpositionappearsfirst

to reflect the increased emphasis on its compilation and

analysis since the release of the fifth edition (BPM5)and

to explain financial assets and liability positions before

dealing with the investment income they generate.

1.12 Each chapter starts with a statement of general

economic principles. A simplified table designed to

give an overview of the account is also included in

each chapter. The text provides general definitions

of items in the account. Specific cases are given as

examplesoftheapplicationofthegeneraldefinitions

andtoclearupambiguities.Afullunderstandingof

eachaccountalsorequiresapplyingthewiderprin-

ciplesthatapplyacrossseveralaccounts,suchasvalu-

ation, timing, residence, and classification, as covered

in the introductory chapters.

3. Analysis

1.13 Chapter 14 provides an introduction to the

analysisofdata,withparticularreferencetomacroeco-

nomicrelationshipsasawhole.

4. Appendixes

1.14 Appendixes provide more details on spe-

cificissuesthatgoacrossseveralaccounts,includ-

ingchangesfromBPM5, currency unions, exceptional

financing,debtreorganization,andalistingofstan-

dard components.

5. Standard components and memorandum

items

1.15 Alistofstandarditemsforpresentingand

reporting the balance of payments and international

investmentpositionisgiveninAppendix9.Standard

items consist of standard components and memoran-

dum items.

(a) Standard components are items that are fully

part of the framework and contribute to the

totals and balancing items.

(b) Memorandum items are part of the standard pre-

sentation, but are not used in deriving totals and

balancing items.Forexample,whereasnominal

valueisusedforloansinthestandardcompo-

nents, memorandum items provide additional

information on loans at fair value, as discussed

in paragraphs 7.45–7.46.

In addition,

presentation, but are compiled depending on

circumstances in the particular economy,taking

intoaccounttheinterestsofpolicymakersand

analysts as well as resource costs (see the items

in italics in Appendix 9).

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

1.16 Thelistofstandarditemsshouldnotinhibit

compilersfrompublishingadditionaldataofimportance

to their economy. IMF requests for information will not

be limited to standard items when further details are

required to understand the circumstances of particular

economiesortoanalyzenewdevelopments.IMFstaff

occasionally will consult with authorities to decide on

the reporting of additional details. Few economies are

likely to have significant information to report for every

standarditem.Furthermore,dataforseveralcomponents

may be available only in combination, or a minor com-

ponentmaybegroupedwithonethatismoresignifi-

cant. The standard items should nevertheless be reported

totheIMFascompletelyandaccuratelyaspossiblein

accordance with the compilation framework. Compilers

areinbetterpositionsthanIMFstafftomakeestimates

andadjustmentsforitemsthatdonotexactlycorrespond

to the basic series of the compiling economy.

C. History of the Manual

1.17 Each new edition of the Manual is introduced

in response to economic and financial developments,

changesinanalyticalinterests,andaccumulationof

experience by compilers.

1.18 TheIMFshowedearlyinterestinstatistical

methodologywithitspublicationofthefirsteditionof

the Balance of Payments Manual in January 1948. The

major objective of that first Manual wastoprovidea

basis for regular, internationally standardized reporting

totheIMF.TheManual wasacontinuationofwork

startedbytheLeagueofNationstodevelopguide-

lines for balance of payments statistics. Economists and

other specialists from many countries contributed to

the Manual, and representatives of some 30 countries

and international organizations met in Washington,

D.C.,inSeptember1947tofinalizethefirstdraftof

the Manual.

1.19 ThefirsteditionoftheManual consisted pri-

marily of tables for reporting data and brief instruc-

tionsforcompletingthem.Nogeneraldiscussionof

balance of payments concepts or compilation methods

wasincluded,soitcanbesaidthattheManual grew out

of the listing of standard components.

1.20 The second edition was published in 1950,

greatlyexpandingthematerialdescribingtheconcepts

of the system.

1.21 The third edition was issued in 1961. It moved

beyond the previous editions by providing both a basis

for reporting to the IMF and a complete set of balance

of payments principles that could be used by countries

to serve their own needs.

1.22 The fourth edition was published in 1977.

Itrespondedtotheimportantchangesinthewayin

which international transactions were carried out and

to changes in the international financial system. Much

fullertreatmentsoftheunderlyingprinciplesofresi-

dence, valuation, and other accounting principles were

provided. The Manual also introduced flexibility in the

use of the standard components to construct various

balances, with no single presentation preferred.

1.23 ThefiftheditionwaspublishedinSeptem-

ber1993,followingalongperiodofdevelopmentthat

includedexpertgroupmeetingsconvenedbytheIMF

in1987and1992aswellastwoworkingpartiescover-

ingthecurrentandfinancialaccounts.Thiseditionwas

markedbyharmonizationwiththeSystem of National

Accounts 1993 (1993 SNA),whichwasdevelopedatthe

sametime.Thedecisiontoharmonizetheguidelines

wasaresultofincreasinginterestinlinkingdiffer-

ent macroeconomic data sets and avoiding data incon-

sistencies. BPM5 broughtaboutanumberofchanges

in definitions, terminology, and the structure of the

accounts, including removing capital transfers and non-

producedassetsfromthecurrentaccounttoanewly

designated capital account, the renaming of the capi-

talaccountasthefinancialaccount,andsplittingser-

vices from primary income (which previously had been

called factor services). Additionally, BPM5 introduced

microfoundations of units and sectors, consistent with

the SNA,ratherthantreatingtheeconomyasasingle

unit.Inaddition,theManual wasextendedbeyondbal-

ance of payments statistics to include the international

investment position.

1.24 The IMF subsequently published the Monetary

and Financial Statistics Manual 2000 and Government

Financial Statistics Manual 2001. These manuals also

brought about further harmonization of the statistical

guidelines,reflectingincreasingconcernsaboutthe

ability to link different statistical data, minimizing data

inconsistency, and enhancing analytical potential.

1.25 In1992,theIMFestablishedtheIMFCommit-

tee on Balance of Payments Statistics (the Committee),

as a continuing body for consultation with national

compilers and international organizations. A procedure

wasestablishedforpartialrevisionsofstatisticalguide-

lines between major revisions, as was done in the late

1990s for financial derivatives and aspects of direct

investment. (The procedures for partial revisions are

setoutinSectionE.)

Chapter 1 g Introduction

1.26 A number of related publications have been

developed since the 1993 edition. The Balance of Pay-

ments Compilation Guide was published in 1995. The

Guide complemented the Manual by providing practi-

cal advice on the collection and compilation of statis-

tics. The Balance of Payments Textbook was released

in 1996. It has a teaching orientation, for instance, giv-

ing numerical examples to illustrate general principles.

1.27 Some aspects of international accounts statis-

tics with particular interest were covered in specialized

guides. Those guides are Coordinated Direct Investment

Survey Guide (2008), Coordinated Portfolio Investment

Survey Guide (1996 and 2001), International Reserves

and Foreign Currency Liquidity: Guidelines for a Data

Template (2000), Manual on Statistics of International

Trade in Services (2002), External Debt Statistics:

A Guide for Compilers and Users (2003), Bank for

International Settlements Guide to the International

Banking Statistics (2003), International Transactions

in Remittances: Guide for Compilers and Users, and

the OECD Benchmark Definition of Foreign Direct

Investment (2008).

D. The 2008 Revision

1.28 At its 2001 meeting, the Committee decided

to initiate an update of the Manual by around 2008.

It was considered that although the overall frame-

work of the fifth edition did not need to change, a

new Manual should incorporate the numerous elabo-

rations and clarifications that had been identified

since 1993. Also, the sixth edition should strengthen

the theoretical foundations and linkages to other

macroeconomic statistics.

1.29 The Committee also decided to conduct the

update in parallel with the update of the 1993 SNA

and OECD Benchmark Definition of Foreign Direct

Investment.

1.30 The IMF released, through the Committee,

an Annotated Outline for the update of the Manual

in April 2004. It included proposals and options for

the style and content of the revised Manual. It was

circulated to central banks and statistical agencies,

as well as being made available on the Internet. Input

was invited from compilers and others on a global

basis. The Committee established technical expert

groups to undertake detailed consideration of issues

and make recommendations on currency unions,

direct investment, reserves, and other issues, respec-

tively. Draft versions of the Manual were published

on the IMF website in March 2007 and March 2008,

with invitations for worldwide comment. In addition,

other editions of selected chapters and the whole

document were circulated to Committee members

and other interested parties. A series of regional out-

reach seminars was conducted between January and

September 2008 to explain the changes in the Man-

ual and gain comments on the content. This process

led to a revised version submitted to the Committee

in November 2008.

1.31 Three major themes that have emerged

from the revision are globalization, increasing elabora-

tion of balance sheet issues, and financial innovation.

1.32 Globalization has brought several issues to

greater prominence. An increasing number of individ-

uals and companies have connections to two or more

economies and economies increasingly enter into

economic arrangements. In particular, there has been

increasing interest in the residence concept and in

information on migrant workers and their associated

remittance flows. Additionally, globalized production

processes have become more important, so treatments

have been developed to provide a fuller and more

coherent picture of outsourced physical processes (i.e.,

goods for processing) and sales and management of

manufacturing that do not involve physical posses-

sion (i.e., merchanting). Guidance is provided on the

residence and activities of special purpose entities and

other legal structures that are used for holding assets

and that have little or no physical presence. The results

of work on international trade in services and remit-

tances are included. Furthermore, for the first time,

specific guidance on the treatment of currency unions

is included.

1.33 The Manual reflects increased interest in bal-

ance sheet analysis for understanding international

economic developments, particularly vulnerability

and sustainability. Greater emphasis and elaboration

of the financial instrument classification in the SNA

and Monetary and Financial Statistics Manual are

designed to facilitate linkages and consistency. The

Manual provides considerably more detailed guid-

ance on the international investment position. It also

provides much greater discussion of revaluations and

other volume changes and their impact on the values

of assets and liabilities. The results of detailed work

over the past decade on international investment

position, direct investment, external debt, portfolio

investment, financial derivatives, and reserve assets

are incorporated into the new Manual. The move to

an integrated view of transactions, other changes, and

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

positions has been recognized in the amended title as

Balance of Payments and International Investment

Position Manual, with the acronym BPM6 used to

highlight the historical evolution from previous edi-

tions of the Manual, which were known as BPM5,

BPM4, and so on.

1.34 Financial innovation is the emergence and

growth of new financial instruments and arrangements

among institutional units. Examples of instruments

covered include financial derivatives, securitization,

index-linked securities, and gold accounts. An example

of institutional arrangements are special purpose enti-

ties and complex, multieconomy corporate structures.

Enhanced guidelines cover direct investment in cases

of long and complex chains of ownership, revised in

conjunction with the revised OECD Benchmark Defi-

nition of Foreign Direct Investment. Revised treat-

ments of insurance and other financial services are

adopted. The Manual also provides expanded treat-

ment on the issues of loan impairments, debt reorga-

nization, guarantees, and write-offs.

1.35 In addition, the Manual incorporates changes

arising from other statistical manuals, particularly the

2008 SNA. The harmonization with other macroeco-

nomic statistics is strengthened in terms of presentation

by more details on the underlying economic concepts

and their associated links with the equivalent parts of

the SNA and other manuals. Other changes were made

in response to requests to provide clarification or fur-

ther detail on particular topics.

1.36 The overall structure of the accounts and broad

definitions are largely unchanged in this edition, so the

changes are less structural than those made for the fifth

edition. Rather, economic and financial developments

and evolution of economic policy concerns are taken

into account, and clarification and elaboration of these

developments are provided. A list of changes made in

this edition of the Manual is included as Appendix 8.

E. Revisions between Editions of

the Manual

1.37 The IMF and the Committee have developed

procedures for updating the Manual on an ongoing

basis between major revisions. Under these procedures,

updates can be divided into four types:

(a) editorial amendments;

(b) clarifications beyond dispute;

(d) changes.

Each of these types of updates has a different set of steps

that are to be followed in the consultation process.

1.38 Editorial amendments refer to wording errors,

apparent contradictions, and, for non-English versions

of the Manual, translation errors. These corrections

affect neither concepts nor the structure of the system.

IMF staff will draft these amendments, which will be

brought to the Committee for advice. An errata sheet

will then be produced, and the amendments will be

publicized on the website.

1.39 A clarification beyond dispute arises when

a new economic situation emerges or when a situation

that was negligible when the Manual was produced has

become considerably more important, but for which

the appropriate treatment under existing standards is

straightforward. IMF staff will draft these clarifica-

tions, based on existing recommendations, and after

advice from the Committee, they will be publicized on

the website and by other means.

1.40 An interpretation arises when an economic

situation arises for which the treatment under the

Manual may not be clear. Several solutions on how

to treat the situation may be proposed, because it is

possible to have different interpretations of the Man-

ual. In this case, IMF staff, in consultation with the

Committee, will draft preliminary text that will be

sent to panels of experts, and to the InterSecretariat

Working Group on National Accounts (ISWGNA) (if

also relevant to the SNA). IMF staff will propose a

final decision, in consultation with the Committee.

Interpretations will be publicized on the website and

by other means.

1.41 A change to the framework arises when an

economic situation occurs in which it becomes appar-

ent that the concepts and definitions of the framework

are not relevant or are misleading and will require

change. In such a situation, parts of the Manual may

need to be substantially rewritten to reflect the needed

changes. In such a case, IMF staff, in consultation with

the Committee, will prepare proposals that will be dis-

seminated widely to panels of experts, the ISWGNA (if

also relevant to the SNA), and all IMF member coun-

tries. The Committee will advise how such changes

should be incorporated into the framework, whether

promulgated immediately through a booklet detailing

the amendments to the Manual or by issuing a new

Manual. Information will be produced and provided to

all countries with changes also publicized on the IMF

website and by other means.

Chapter 1 g Introduction

1.42 TheIMFwebsitewillprovideaconsolidated

list of these decisions.

1.43 A research agenda has been identified for pos-

siblefuturework.Itincludesthefollowing:

(a) ultimate investing economy and ultimate host

economyindirectinvestment(seeparagraph

4.156);

(b) whether direct investment relationships can be

achievedotherthanbyeconomicownership

ofequity(e.g.,throughwarrantsorrepos)(see

paragraph 6.19);

(d) reverse transactions (including short positions

and investment income that is receivable/pay-

ablewhileasecurityison-lent)(seeparagraphs

5.52–5.55, 7.28, 7.58–7.61, and 11.69);

(e) extendeduseoffairvaluesofloans(seepara-

graphs 7.48–7.49);

(f) how the risk and maturity structure of the finan-

cial assets and liabilities should be taken into

account in the reference rate for calculations of

financialservicesindirectlymeasured(seepara-

graphs 10.126–10.136);

(g) investment income, in particular the differ-

ent treatments of retained income for different

investmenttypesandtheborderlinebetween

dividends and withdrawal of equity (see Chapter

11, Primary Income Account);

(h) debt concessionality, in particular whether the

transfer element should be recognized and, if so,

howitshouldberecorded(seeparagraphs12.51

and 13.33); and

(i) emissions permits (see paragraph 13.14).

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

CHAPTER

Overview of the Framework

A. Introduction

2.1 This chapter first describes and illustrates how

theinternationalaccountsareanintegralconceptual

part of the broader system of national accounts. It then

covers important aspects of statistics such as time

series.

B. Structure of the Accounts

References:

2008 SNA, Chapter 2, Overview, and Chapter 16, Sum-

marizing and Integrating the Accounts.

IMF, The System of Macroeconomic Accounts Statis-

tics: An Overview,PamphletSeriesNo.56.

1. Overall framework

2.2 Theinternationalaccountsforaneconomysum-

marizetheeconomicrelationshipsbetweenresidents

ofthateconomyandnonresidents.Theycomprisethe

following:

(a) the international investment position (IIP)—a

statement that shows at a point in time the value

of:financialassetsofresidentsofaneconomy

thatareclaimsonnonresidentsoraregoldbul-

lion held as reserve assets; and the liabilities of

residents of an economy to nonresidents;

(b) the balance of payments—a statement that sum-

marizeseconomictransactionsbetweenresi-

dents and nonresidents during a specific time

period; and

bilities accounts—a statement that shows other

flows, such as valuation changes, that reconciles

the balance of payments and IIP for a specific

period, by showing changes due to economic

events other than transactions between residents

and nonresidents.

2.3 Theinternationalaccountsprovideanintegrated

framework for the analysis of an economy’s international

economic relationships, including its international eco-

nomic performance, exchange rate policy, reserves man-

agement, and external vulnerability. A detailed study

oftheuseofinternationalaccountsdataisprovidedin

Chapter 14, Selected Issues in Balance of Payments and

International Investment Position Analysis.

2.4 The framework provides a sequence of accounts,

eachoneencompassingaseparateeconomicprocessor

phenomenon,andshowsthelinkagesbetweenthem.

Whileeachaccounthasabalancingitem,theaccount

alsogivesafullviewofitscomponents.

2.5 The concepts of the international accounts are

harmonized with the System of National Accounts

(SNA), so they can be compared or aggregated with

other macroeconomic statistics. The framework for

macroeconomic statistics used in the SNA and interna-

tionalaccountsisshowninFigure2.1.

2.6 Theinternationalaccountsframeworkisthe

same as the SNA framework. However, some accounts,

which are shaded in Figure 2.1, are not applicable.

2.7 The framework is designed so that the core con-

cepts can be used to develop additional data sets, as

discussedinAnnex2.1tothischapter.

2. International investment position

2.8 The IIP is a statistical statement that shows at a

point in time the value of: financial assets of residents

of an economy that are claims on nonresidents or are

gold bullion held as reserve assets; and the liabilities

of residents of an economy to nonresidents. The differ-

encebetweentheassetsandliabilitiesisthenetposi-

tionintheIIPandrepresentseitheranetclaimonora

netliabilitytotherestoftheworld.

2.9 TheIIPrepresentsasubsetoftheassetsand

liabilitiesincludedinthenationalbalancesheet.In

addition to the IIP, the national balance sheet incorpo-

rates nonfinancial assets as well as financial assets and

liabilitypositionsbetweenresidents.Thisstatementis

described further in Chapter 7.

2.10 WhereastheIIPrelatestoapointintime,the

integrated IIP statement relates to different points in

time,andithasanopeningvalue(asatthebeginning

oftheperiod)andaclosingvalue(asattheendofthe

period). The integrated IIP statement reconciles the

openingandclosingvaluesoftheIIPthroughthefinan-

cial account (flows arising from transactions) and the

other changes in financial assets and liabilities account

(other volume changes and revaluation). So, the values

intheIIPattheendoftheperiodresultfromtrans-

actions and other flows in the current and previous

periods. The integrated IIP statement consists of the

accountsexplainedinChapters7–9(i.e.,theIIP,the

financialaccount,andtheotherchangesinfinancial

assets and liabilities account, respectively).

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Transactions/Balance of payments:

Other flows:

Key:

Shaded accounts do not appear in the international accounts.

The arrows represent the contributions of assets to production and income generation (e.g., using nonfinancial assets as an input to production,

using financial assets to generate interest and dividends).

Figure 2.1. Overview of the System of National Accounts as a

Framework for Macroeconomic Statistics Including International Accounts

Goods and services

account

Production account

Value added/GDP

Generation of income

account

Operating surplus

Distribution of income

account

National income

Secondary distribution

of income account

Disposable income

Use of income account

Saving

Opening balance sheet

Financial assets and liabilities

Net worth

Accumulation accounts

Capital account

Net lending/net borrowing

Financial account

Net lending/net borrowing

Other changes in

financial assets and

liabilities

Net other changes

Closing balance sheet

Financial assets and liabilities

Net worth

Nonfinancial assets

Other changes in

nonfinancial assets

Name of account

SNA Balancing item

2.11 Thehighestlevelofclassificationusedinthe

IIP,financialaccount,andotherchangesinassetsand

liabilities account is the functional classification, which

iscoveredinChapter6.Thefunctionalcategoriesgroup

together financial instruments based on economic moti-

vations and patterns of behavior to assist in the anal-

ysis of cross-border transactions and positions. These

categories are direct investment, portfolio investment,

financial derivatives (other than reserves) and employee

stock options, other investment, and reserve assets. The

SNA doesnothavesuchcategories,preferringtorecord

financial account activity by type of instrument alone

(althoughdirectinvestmentisamemorandumitemto

the SNA instrument classification). Chapter 5 covers the

classificationoffinancialinstruments.

3. Balance of payments

2.12 The balance of payments is a statistical state-

ment that summarizes transactions between residents

and nonresidents during a period. It consists of the goods

and services account, the primary income account, the

secondary income account, the capital account, and

the financial account. Under the double-entry account-

ingsystemthatunderliesthebalanceofpayments,each

transactionisrecordedasconsistingoftwoentriesand

thesumofthecreditentriesandthesumofthedebit

entriesisthesame.(SeeBox2.1forfurtherelaboration

on the double-entry accounting system.)

2.13 Thedifferentaccountswithinthebalanceof

payments are distinguished according to the nature of

the economic resources provided and received.

Current account

2.14 The current account shows flows of goods, ser-

vices, primary income, and secondary income between

residents and nonresidents.Thecurrentaccountisan

importantgroupingofaccountswithinthebalanceof

payments. Its components are dealt with in the follow-

ing chapters:

• Chapter 10 discusses the goods and services

account. This account shows transactions in goods

and services.

• Chapter 11 discusses the primary income account.

This account shows amounts payable and receiv-

able in return for providing temporary use to

another entity of labor, financial resources, or non-

produced nonfinancial assets.

Allowinganotherentitytouseproducedassetsgivesrisetoa

service (see paragraph 10.153). In contrast, allowing another entity

• Chapter 12 discusses the secondary income

account. This account shows redistribution of

income, that is, when resources for current pur-

poses are provided by one party without anything

ofeconomicvaluebeingsuppliedasadirectreturn

to that party. Examples include personal transfers

and current international assistance.

2.15 The balance on these accounts is known as the

current account balance. The current account balance

showsthedifferencebetweenthesumofexportsand

incomereceivableandthesumofimportsandincome

payable(exportsandimportsrefertobothgoodsand

services, while income refers to both primary and sec-

ondaryincome).AsshowninChapter14,Selected

IssuesinBalanceofPaymentsandInternationalInvest-

ment Position Analysis, the value of the current account

balance equals the saving-investment gap for the econ-

omy. Thus, the current account balance is related to

understanding domestic transactions.

Capital account

2.16 The capital account shows credit and debit

entries for nonproduced nonfinancial assets and capital

transfersbetweenresidentsandnonresidents.Itrecords

acquisitions and disposals of nonproduced nonfinan-

cialassets,suchaslandsoldtoembassiesandsalesof

leases and licenses, as well as capital transfers, that is,

the provision of resources for capital purposes by one

party without anything of economic value being sup-

pliedasadirectreturntothatparty.Thisaccountis

described further in Chapter 13.

Financial account

2.17 The financial account shows net acquisition and

disposal of financial assets and liabilities. This account

is described in Chapter 8. Financial account transac-

tions appear in the balance of payments and, because

oftheireffectonthestockofassetsandliabilities,also

in the integrated IIP statement.

2.18 Thesumofthebalancesonthecurrentand

capitalaccountsrepresentsthenetlending(surplus)or

net borrowing (deficit) by the economy with the rest of

theworld.Thisisconceptuallyequaltothenetbalance

ofthefinancialaccount.Inotherwords,thefinancial

accountmeasureshowthenetlendingtoorborrowing

to use nonproduced nonfinancial assets gives rise to rent (paragraph

11.86) and allowing another entity to use financial assets gives rise

to investment income, such as interest, dividends, and retained earn-

ings (see paragraph 11.3).

Chapter 2 g Overview of the Framework

from nonresidents is financed. The financial account

plustheotherchangesaccountexplainthechangein

theIIPbetweenbeginning-andend-periods.

Gross and net recording

2.19 Thecurrentandcapitalaccountsshowtransac-

tions in gross terms. In contrast, the financial account

shows transactions in net terms, which are shown sepa-

rately for financial assets and liabilities (i.e., net trans-

actions in financial assets shows acquisition of assets

less reduction in assets, not assets net of liabilities).

Forresourcesthatenterandleaveaneconomy(such

asre-exportedgoods,andfundsintransit),itmaybe

analytically useful to present net flows as well. Each

oftheaccountsandtheborderlinesbetweenthemare

discussedinmoredetailinthespecificchapters.

4. Accumulation accounts

2.20 The accumulation accounts comprise the capi-

tal account, financial account, and other changes in

financial assets and liabilities accounts. They show the

accumulation (i.e., acquisition and disposal) of assets

and liabilities, their financing, and other changes that

affect them. Accordingly, they explain changes between

theopeningandclosingIIP/balancesheets.Whereas

the current account is concerned with resource flows

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Recording for individual transactions

The recording of debits and credits underlies the account-

ingsystematthelevelofindividualtransactions.Eachtrans-

action in the balance of payments is recorded as consisting

of two equal and opposite entries, reflecting the inflow and

outflow element to each exchange. For each transaction, each

partyrecordsamatchingcreditanddebitentry:

• Credit (CR.)—exports of goods and services, income

receivable, reduction in assets, or increase in liabilities.

• Debit (DR.)—imports of goods and services, income

payable, increase in assets, or reduction in liabilities.

Examples

Asimpleexampleisforsaleofgoodstoanonresident

for100incurrency.Fortheseller:

Exports 100 (CR.)

Currency 100 (DR.—Increase in financial assets)

(The transaction involves the provision of physical

resourcestononresidentsandacompensatingreceiptof

financial resources from nonresidents.)

An example of a transaction involving only financial

asset entries is the sale of shares for 50 in currency. For

the seller:

Shares and 50 (CR.—Reduction in financial assets)

other equity

Currency 50 (DR.—Increase in financial assets)

(The selling party provides shares and receives cur-

rencyinreturn.)

An example involving the exchange of an asset for the

creationofaliabilityiswhereaborrowerreceivesaloan

of70incash.Fortheborrower:

Loan 70 (CR.—Increase in liabilities)

Currency 70 (DR.—Increase in financial assets)

(There are some more complex cases when three or

morepartiesareinvolved,e.g.,thecaseofdebtassump-

tion shown in Box 8.1.)

Aggregate recording

Inbalanceofpaymentsaggregates,thecurrentand

capital account entries are totals, while financial account

entries are net values for each category/instrument for

each of assets and liabilities (as explained in paragraph

3.31).Chapter3,AccountingPrinciples,PartCprovides

furtherinformationontheaccountingsystemusedinbal-

ance of payments statistics.

Asaresultofthetwo-entrynatureofeachtransaction,

thedifferencebetweenthesumofcreditentriesandthe

sumofdebitentriesisconceptuallyzerointhenational

balanceofpayments,thatis,inconcept,theaccounts

asawholeareinbalance.Asdiscussedinparagraphs

2.24–2.26, measurement problems cause discrepancies

in practice.

The two-entry nature of the balance of payments can

be presented in aggregate data in different ways. A pre-

sentationwherethenatureoftheentriesisconveyed

bythecolumnheadings(namely,credits,debits,net

acquisition of financial assets, and net incurrence of

liabilities) is adopted in Table 2.1. This presentation is

considered to be easily understood by users. Another

presentationiswherecreditentriesareshownaspositive

anddebitentriesasnegative.Thispresentationisuseful

forcalculatingbalances,butrequiresmoreexplanation

for users (e.g., increases in assets are shown as a nega-

tive value).

In the SNA presentation, a credit entry for the com-

pilingeconomyinthebalanceofpaymentscurrent

accountiscalledausebytherestoftheworldsector

(e.g.,exportsareusedbytherestoftheworld).Simi-

larly,adebitentryforthecompilingeconomyiscalled

provisionof“resources”intheSNA (e.g., imports are a

resourceprovidedbytherestoftheworld).Becausethe

SNA rest of the world accounts use the point of view of

thenonresidents,assetsofthecompilingeconomyinthe

internationalaccountsareshownasliabilitiesoftherest

of the world sector in the SNA.

Box 2.1. Double-Entry Basis of Balance of Payments Statistics

oriented to the current period, the accumulation accounts

deal with the provision and financing of assets and liabil-

ities, which are items that will affect future periods.

2.21 The financial account shows the net acquisition

of financial assets and net incurrence of liabilities dur-

ing the specified period. In contrast, the other changes

in financial assets and liabilities account shows flows

that do not result from balance of payments transac-

tions. The other changes in financial assets and lia-

bilities account covers changes in volume, other than

balance of payments transactions; revaluation due to

exchange rate changes; and other revaluation. This

account is described further in Chapter 9.

5. Integrated recording of positions and

transactions

2.22 As highlighted in the previous sections, the

international accounts, inclusive of the IIP and bal-

ance of payments, consist of a set of accounts that are

integrated at two levels. First, while the accounts repre-

sent a great mass of detailed information on interaction

between the different economic agents, their recording

is based on the double-entry system of accounting, as

set out in Box 2.1.

2.23 Second, the system calls for consistent report-

ing by the two parties to each financial claim, transac-

tion, and other flow. In the case of the international

accounts, this consistency helps to promote compara-

bility across economies as well as the use of counter-

part data as data sources or for data validation.

6. Net errors and omissions

2.24 Although the balance of payments accounts

are, in principle, balanced, imbalances result in prac-

tice from imperfections in source data and compilation.

This imbalance, a usual feature of balance of payments

data, is labeled net errors and omissions and should be

identified separately in published data. It should not be

included indistinguishably in other items. Net errors and

omissions are derived residually as net lending/net bor-

rowing and can be derived from the financial account

minus the same item derived from the current and capital

accounts.

Therefore, a positive value of net errors and

omissions indicates an overall tendency that:

For example, if net lending/net borrowing measured from the

current and capital accounts is 29, while net lending/net borrow-

ing measured from the financial account is 31, then net errors and

omissions is +2.

(a) the value of credits in the current and capital

accounts is too low; and/or

(b) the value of debits in the current and capital

accounts is too high; and/or

cial account is too high; and/or

(d) the value of net increases in liabilities in the

financial account is too low.

(For a negative value of net errors and omissions, these

tendencies are reversed.)

2.25 The values of net errors and omissions should

be analyzed by compilers. The size and trends may help

identify data problems, such as coverage or misreport-

ing. Patterns in net errors and omissions may provide

useful information on data problems. For example, a

consistent sign indicates a bias in one or more compo-

nents. A persistent positive value of net errors and omis-

sions suggests that credit entries have been understated

or omitted or debit entries have been overstated. In con-

trast, a volatile pattern may suggest timing problems.

However, although net errors and omissions can help

point to some problems, it is an incomplete measure

because errors and omissions in opposite directions

offset each other. The term net errors and omissions

should not be interpreted as meaning errors on the part

of compilers; it is far more common that this discrep-

ancy is caused by other factors, such as incomplete data

sources and poor quality reporting.

2.26 A large or volatile value of net errors and omis-

sions hampers interpretation of the results. While it is

not possible to give guidelines on an acceptable size

of net errors and omissions, it can be assessed (where

possible) by compilers in relation to other items, such

as GDP, positions data, and gross flows. Statistical dis-

crepancies also can arise in the IIP statement. Closing

values are by definition equal to the opening values

plus net transactions plus net other changes during the

period. However, if these components are indepen-

dently measured, discrepancies may arise because of

data imperfections.

7. Linkages within the international accounts

2.27 Some of the important linkages within the

international accounts are as follows:

(a) The end of period values of the IIP are the sum

of the beginning of period values, transactions,

and other flows.

(b) The current, capital, and financial account entries

are in balance, in principle.

Chapter 2 g Overview of the Framework

thecurrentandcapitalaccountsisequaltothe

balanceonthefinancialaccount.Thisbalance

is called net lending/net borrowing, whichever

way it is derived.

(d) Consequent to (b), the current account balance is

equal to the balance on the financial account less

the balance on the capital account.

(e) Financial assets and liabilities generally give rise

to investment income. Table 5.2 shows the link

between financial instruments and their corre-

sponding income. The rate of return is derived

as the ratio of income to the corresponding stock

of assets or liabilities. (Rates of return might

also take into account holding gains or losses for

some analysis.)

2.28 Because of the harmonization of macroeco-

nomicstatisticalguidelines,itisalsopossibletolookat

residents’ transactions and positions with nonresidents

in relation to the transactions and positions between

residents. For example:

(a) the international financing can be compared with

domestic lending and borrowing; and

(b) theIIPcanbecomparedwiththenationalbal-

ance sheet and with monetary and financial

statistics.

Chapter 14, Selected Issues in Balance of Payments and

InternationalInvestmentPositionAnalysis,hasawider

discussion of interrelationships between the interna-

tional accounts and other macroeconomic data.

8. Linkages and consistency with other

data sets

2.29 Placing the international accounts in the

SNA framework shown in Figure 2.1 helps identify

linkages among macroeconomic data sets. Specific

aspects of the international accounts are provided,

forinstance,inreportingstatementsonmerchandise

trade, trade in services, direct investment, external

debt, and international reserves. Additionally, items

involving flows and positions between residents and

nonresidents that appear in the national accounts,

monetary and financial statistics, and government

finance statistics correspond exactly to international

accounts items.

2.30 The following paragraphs list data items that

should be consistent with the international accounts.

Datacompilersshouldreconciletheseoverlapping

items,withaviewtowardeliminatingorexplainingany

differences. Data consistency is particularly important

for comprehensive macroeconomic analysis, in order

toallowthedifferentdatasetstobecombinedcoher-

ently.Forexample,ifdataareconsistent,itispossible

tounderstandhowagovernmentisfinancingadeficit

from external and domestic sources, or show how the

saving-investment balances of individual sectors con-

tribute to the national current account balance.

National accounts

2.31 The international accounts correspond to the

rest of the world accounts of the SNA.Theydifferin

that the balance of payments is from the perspective of

theresidentsectors,whereasnationalaccountsdatafor

therestoftheworldarefromtheperspectiveofnon-

residents. The SNA items that are equivalent to balance

ofpaymentsitemsincludeexportsandimportsofgoods

and services, primary income, secondary income, cur-

rent external balance, balance on the capital account,

and net lending/net borrowing.

Monetary and financial statistics

2.32 Balancesheetsfordeposit-takingandother

financial corporations can be compared with the rel-

evantpartsoftheIIP.Inparticular:

• foreign assets and liabilities of the central bank;

and

• foreign assets and liabilities of other deposit-taking

corporations

should be consistent with the corresponding interna-

tionalaccountsitems.BecausetheIIPdataareorga-

nizedprimarilyonafunctionalcategorybasis,the

instrumentandsectordatafromdifferentfunctional

categories need to be combined if they are to be linked

with monetary and financial statistics. Direct invest-

ment,ifany,ofthecentralbankandotherdeposit-

taking corporations is needed to derive aggregates

consistent with monetary and financial statistics, and

thus is shown as a supplementary item where relevant.

Other adjustments may be needed for any deposit-

taking corporations whose liabilities are excluded from

broadmoney(e.g.,offshorebanksinsomecases)orfor

othertypesofcorporationsincludedinbroadmoney

(such as money market funds) and thus are included with

the deposit-taking corporations subsector in monetary

statistics.

2.33 Incasesinwhichmonetarystatisticsalso

include flows, they can be compared with the balance

of payments. Balance of payments transactions for a

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

period may differ from the transactions in foreign assets

and liabilities in the monetary statistics to the extent

that balance of payments statistics exclude transactions

in foreign assets and liabilities between residents. See

also paragraphs 14.20–14.22 on the possibility of linking

these transactions through the monetary presentation of

the balance of payments.

Government finance statistics

2.34 The following items that appear in government

finance statistics should be consistent with their inter-

national accounts equivalents:

• interest payable on general government external

debt;

• grants by general government to nonresidents;

• grants to general government from nonresidents;

• net external financing; and

• external assets and liabilities.

(Direct investment of general government, if any, is

needed to derive aggregates consistent with govern-

ment finance statistics. Thus, it is shown as a supple-

mentary item where relevant.)

9. Numerical example

2.35 Table 2.1 provides a numerical overview of

the international accounts, using data drawn from the

SNA framework presented in Annex 2.2. (The numeri-

cal example helps show interrelationships between

items.)

2.36 The international accounts data have the

same scope as the rest of the world sector in the SNA.

However, the international accounts are expressed

from the perspective of the resident units, but in

the SNA, the data for the rest of world sector are

expressed from the perspective of the nonresident

units. So, the current account surplus of 13 in Table

2.1 is presented as a current external balance for the

rest of the world sector of –13 in the table in Annex

2.2. Similarly, closing assets of 1,346 in the IIP are

shown as the liabilities of 1,346 of the rest of the

world sector in the SNA.

Chapter 2 g Overview of the Framework

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 2.1. Overview of International Accounts

(Consistent with Data in Annex 2.2)

Balance of payments Credits Debits Balance

Current account

Goods and services 540 499 41

Goods 462 392 70

Services 78 107 –29

Primary income 50 40 10

Compensation of employees 6 2

Interest 13 21

Distributed income of corporations 17 17

Reinvested earnings 14 0

Rent 00

Secondary income 17 55 –38

Current taxes on income, wealth, etc. 1 0

Net nonlife insurance premiums 2 11

Nonlife insurance claims 12 3

Current international cooperation 1 31

Miscellaneous current transfers 1 10

Adjustment for change in pension entitlements

Current account balance 13

________________________________________________________________________________________________________________

Capital account

Acquisitions/disposals of nonproduced nonfinancial assets 0 0

Capital transfers 1 4

Capital account balance –3

________________________________________________________________________________________________________________

Net lending (+)/ net borrowing (–) (from current and capital accounts) 10

________________________________________________________________________________________________________________

Net Net

acquisition of incurrence of

Financial account (by functional category) financial assets liabilities Balance

Direct investment 8 11

Portfolio investment 18 14

Financial derivatives (other than reserves) and ESOs 3 0

Other investment 20 22

Reserve assets 8

Total changes in assets/liabilities 57 47

Net lending (+)/net borrowing (–) (from financial account) 10

________________________________________________________________________________________________________________

Net errors and omissions 0

________________________________________________________________________________________________________________

Opening Transactions Other changes Closing

International investment position: position (fin. acc.) in volume Revaluation position

Assets (by functional category)

Direct investment 78 8 0 1 87

Portfolio investment 190 18 0 2 210

Financial derivatives (other than reserves) and ESOs 7 3 0 0 10

Other investment 166 20 0 0 186

Reserve assets 833 8 0 12 853

Total assets 1,274 57 0 15 1,346

Liabilities (by functional category)

Direct investment 210 11 0 2 223

Portfolio investment 300 14 0 5 319

Financial derivatives (other than reserves) and ESOs 0 0 0 0 0

Other investment 295 22 0 0 317

Total liabilities 805 47 0 7 859

Net IIP 469 10 0 8 487

Note: ESO = employee stock option.

The SNA tables in Annex 2.2 use instruments rather than functional categories. At the end of Annex 2.2, international accounts data are presented in terms

of instruments and the derivation of functional category data from instrument data is shown.

Chapter 2 g Overview of the Framework

This table shows the two-digit level of the IMF’s data

quality assessment framework, as at the time of publica-

tion. More detail of the framework on the specific aspects

for balance of payments is available on the IMF website.

New versions will be posted on the IMF website as they

are developed.

Box 2.2. Data Quality Assessment Framework

Quality dimensions Elements

0. Prerequisites of quality 0.1 Legal and institutional environment—The environment is supportive of statistics.

0.2 Resources—Resources are commensurate with needs of statistical programs.

0.3 Relevance—Statistics cover relevant information on the subject field.

0.4 Other quality management—Quality is a cornerstone of statistical work.

1. Assurances of integrity 1.1 Professionalism—Statistical policies and practices are guided by professional

The principle of objectivity in principles.

the collection, processing, and 1.2 Transparency—Statistical policies and practices are transparent.

dissemination of statistics is 1.3 Ethical standards—Policies and practices are guided by ethical standards.

firmly adhered to.

2.Methodological soundness 2.1 Concepts and definitions—Concepts and definitions used are in accord with

The methodological basis for internationally accepted statistical frameworks.

the statistics follows inter- 2.2 Scope—The scope is in accord with internationally accepted standards, guidelines,

nationally accepted standards, or good practices.

guidelines, or good practices. 2.3 Classification/sectorizations—Classification and sectorization systems are in

accord with internationally accepted standards, guidelines, or good practices.

2.4 Basis for recording—Flows and stocks are valued and recorded according to

internationally accepted standards, guidelines, or good practices.

3. Accuracy and reliability 3.1 Source data—Source data available provide an adequate basis to compile statistics.

Source data and statistical 3.2 Assessment of source data—Source data are regularly assessed.

techniques are sound and 3.3 Statistical techniques—Statistical techniques employed conform to sound

statistical outputs sufficiently statistical procedures.

portray reality. 3.4 Assessment and validation of intermediate data and statistical outputs—Inter-

mediate results and statistical outputs are regularly assessed and validated.

3.5 Revision studies—Revisions, as a gauge of reliability, are tracked and mined for

the information they may provide.

4. Serviceability 4.1 Periodicity and timeliness—Periodicity and timeliness follow internationally

Statistics, with adequate accepted dissemination standards.

periodicity and timeliness, 4.2 Consistency—Statistics are consistent within the data set, over time, and with

are consistent and follow a major data sets.

predictable revisions policy. 4.3 Revision policy and practice—Data revisions follow a regular and publicized

procedure.

5. Accessibility 5.1 Data accessibility—Statistics are presented in a clear and understandable manner,

Data and metadata are easily forms of dissemination are adequate, and statistics are made available on an

available and assistance to impartial basis.

users is adequate. 5.2 Metadata accessibility—Up-to-date and pertinent metadata are made available.

5.3 Assistance to users—Prompt and knowledgeable support service is available.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

C. Metadata, Dissemination Standards,

Data Quality, and Time Series

References:

IMF, Dissemination Standards Bulletin Board at

www.imf.org.

IMF, The General Data Dissemination System: Guide

for Participants and Users.

IMF, Special Data Dissemination Standard.

1. Metadata, dissemination standards, and

data quality

2.37 Metadata are systematic, descriptive infor-

mation about data content and organization.They

provide information on the concepts, sources, and

methods underlying the data and therefore help users

to understand and assess the characteristics of the

data. Statistical compilers should provide metadata to

their users because metadata are an integral part of

thepublicationofstatistics.

2.38 Good dissemination practices are essential in

addition to good data compilation. As well as provi-

sion of metadata, aspects of good dissemination prac-

tices include predictable release schedule, availability

of publications, and identification of internal govern-

ment access to statistics before public release. In recent

years,internationalguidelineshavebeendevelopedon

good data dissemination practices, namely, the IMF’s

General Data Dissemination System and Special Data

Dissemination Standard.

2.39 The IMF’s Data Quality Assessment Frame-

workidentifiesaspectsofdataquality,includingthe

definitionsandsourcesofdataaswellasthedissem-

ination and institutional aspects. Box 2.2 shows the

broadestheadingsoftheframework.

2. Time series

Reference:

IMF, Quarterly National Accounts Manual,Chap-

terVIII,SeasonalAdjustmentandEstimationof

Trend-Cycles, and Chapter XI, Revision Policy and

the Compilation and Release Schedule.

2.40 While the tables included in the Manual have

been designed to highlight classifications and inter-

relationships, tabulations for users will generally use

timeseries.Goodpracticesinthecompilationofinter-

national accounts for time series analysis include the

following:

(a) Consistencyovertimeinconceptsandcompila-

tion practices to minimize “breaks” and “steps”

intheseries—wherechangesindefinitionsand

techniquesareimplemented,theyshouldbe

clearlyidentifiedtodatausersandtheeffect

should be quantified, where practical, prefer-

ably with an overlapping period;

(b) Atransparentwayofhandlingofrevisions—

revisionstodataarenecessarytoaccountfor

revisedmethodsandmorerecentinformation.The

revisionofdatashouldbedealtwiththroughapre-

dictable and documented policy. The causes and

sizesofsignificantindividualrevisionsshouldbe

identified. Revision studies should be made to iden-

tifythesizeandanybiasofpastrevisions.Thiswill

help to refine preliminary data and to define the

optimumrevisioncyclethatislargelydrivenbythe

availability of major data sources; and

and monthly data—the monthly values should

sum to the corresponding quarterly values,

whichshouldsumtothecorrespondingannual

values.

2.41 Seasonal adjustment of monthly and quar-

terlydataispotentiallyusefulfortimeseriesdatain

both analysis and compilation. However, some inter-

national accounts items, especially in the financial

account, may not be suitable for seasonal adjustment

because of the high degree of irregularity associated

with large, one-time transactions.

Annex 2.1

Satellite Accounts and Other Supplemental

Presentations

Reference:

2008 SNA, Chapter 29, Satellite Accounts and Other

Extensions.

2.42 This Manual shows a standard presentation,

whichisdesignedtobeusedflexiblyandtosupport

manykindsofanalysis.However,itisrecognizedthat

no single framework can meet all the different analytical

interests. Thus, satellite accounts and other supplemen-

tal presentations are encouraged. Such presentations

would be based on the circumstances in each economy

andarenotincludedinthestandardcomponentsor

memorandumitems.Theymayincludedatafromother

sourcesthatarenotnecessarilyobtainedfromtheinter-

national accounts compilation system.

Chapter 2 g Overview of the Framework

2.43 Satellite accounts provide a framework linked

to the central accounts and that enable attention to be

focused on a certain field or aspect of economic and

social life.Commonexamplesofsatelliteaccountsfor

thenationalaccountsincludetheenvironment,tour-

ism, and nonprofit institutions. International accounts

have more detailed presentations for direct invest-

ment, portfolio investment, external debt, remittances,

tourism, and reserves. The analytic and monetary pre-

sentations are discussed in Chapter 14. Statistics on

activities of multinational enterprises (as discussed

inAppendix4)arealsoarelateddataset.Thesepre-

sentationsusethebasicframeworkasastartingpoint

butdifferbyaddingdetailorotherinformation,orby

rearranging information, to meet particular needs. Use

ofthebasicframeworkasastartingpointincreases

theabilitytorelatethetopictootheraspectsofthe

economy while maintaining international compara-

bility.Specificmanualsandguidesareproducedon

some of these topics. While the term satellite accounts

suggestsamajorsetofdata,othersupplementalpre-

sentations are encouraged. This Manual refers to

supplementaryitemsaspossibleadditionaldataona

smallerscalethanafullsatelliteaccount.Therange

of supplementary data is wide and can be developed

accordingtonationalcircumstances.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Annex 2.2

Overview of Integrated Economic Accounts

Table 2.2. Overview of Integrated Economic Accounts (from 2008 SNA)

Production account

Uses

________________________________________________________________________________________________________________

Rest Goods

Nonfinancial Financial General Total of the and

Transactions and balancing items corporations corporations government Households NPISHs economy world services Total

Imports of goods and services 499 499

Imports of goods 392 392

Imports of services 107 107

Exports of goods and services 540 540

Exports of goods 462 462

Exports of services 78 78

Output 3,604 3,604

Intermediate consumption 1,477 52 222 115 17 1,883 1,883

Taxes on products 141 141

Subsidies on products (–) –8 –8

________________________________________________________________________________________________________________

Value added, gross/Gross domestic product 1,331 94 126 155 15 1,854 1,854

Consumption of fixed capital 157 12 27 23 3 222 222

Value added, net/Net domestic product 1,174 82 99 132 12 1,632 1,632

________________________________________________________________________________________________________________

Generation of income account

Uses

________________________________________________________________________________________________________________

Compensation of employees 986 44 98 11 11 1,150 1,150

Wages and salaries 841 29 63 11 6 950 950

Employers’ social contributions 145 15 35 0 5 200 200

Taxes on production and imports 235 235

Taxes on products 141 141

Other taxes on production 88 4 1 0 1 94 94

Subsidies –44 –44

Subsidies on products –8 –8

Other subsidies on production –35 0 0 –1 0 –36 –36

________________________________________________________________________________________________________________

Operating surplus, net 135 34 0 69 0 238 238

Mixed income, net 53 53 53

________________________________________________________________________________________________________________

Allocation of primary income account

Uses

________________________________________________________________________________________________________________

Compensation of employees 6 6

Wages and salaries 6 6

Employers’ social contributions 0 0

Taxes on production and imports 0

Taxes on products 0

Other taxes on production 0

Subsidies 0

Subsidies on products 0

Other subsidies on production 0

Property income 134 168 42 41 6 391 44 435

Interest 56 106 35 14 6 217 13 230

Distributed income of corporations 47 15 62 17 79

Reinvested earnings on foreign

direct investment 0 0 0 14 14

Other investment income 47 47 0 47

Rent 31 0 7 27 0 65 65

Balance of primary income, net /

National income, net 97 15 171 1,358 1 1,642 1,642

________________________________________________________________________________________________________________

Table 2.2 (continued)

Production account Resources

________________________________________________________________________________________________________________

Rest Goods

Nonfinancial Financial General Total of the and

Transactions and balancing items corporations corporations government Households NPISHs economy world services Total

Imports of goods and services 499 499

Imports of goods 392 392

Imports of services 107 107

Exports of goods and services 540 540

Exports of goods 462 462

Exports of services 78 78

Output 2,808 146 348 270 32 3,604 3,604

Intermediate consumption 1,883 1,883

Taxes on products 141 141

Subsidies on products (–) –8 –8

________________________________________________________________________________________________________________

Generation of income account Resources

________________________________________________________________________________________________________________

Value added, net /Net domestic

product 1,174 82 99 132 12 1,632 1,632

Compensation of employees

Wages and salaries

Employers’ social

contributions

Taxes on production and

imports

Taxes on products

Other taxes on production

Subsidies

Subsidies on products

Other subsidies on

production

________________________________________________________________________________________________________________

Allocation of primary income account Resources

________________________________________________________________________________________________________________

Operating surplus, net 135 34 0 69 0 238 238

Mixed income, net 53 53 53

Compensation of employees 1,154 1,154 2 1,156

Wages and salaries 954 954 2 956

Employers’ social

contributions 200 200 0 200

Taxes on production and

imports 235 235 235

Taxes on products 141 141 141

Other taxes on production 94 94 94

Subsidies –44 –44 –44

Subsidies on products –8 –8 –8

Other subsidies on production –36 –36 –36

Property income 96 149 22 123 7 397 38 435

Interest 33 106 14 49 7 209 21 230

Distributed income of

corporations 10 25 7 20 0 62 17 79

Reinvested earnings on foreign

direct investment 4 7 0 3 0 14 0 14

Other investment income 8 8 1 30 0 47 0 47

Rent 41 3 0 21 0 65 65

________________________________________________________________________________________________________________

Chapter 2 g Overview of the Framework

Table 2.2 (continued)

Secondary distribution of income account

Uses

________________________________________________________________________________________________________________

Rest Goods

Nonfinancial Financial General Total of the and

Transactions and balancing items corporations corporations government Households NPISHs economy world services Total

Current transfers 98 277 248 582 7 1,212 17 1,229

Current taxes on income, wealth, etc. 24 10 0 178 0 212 1 213

Net social contributions 333 333 0 333

Social benefits other than social transfers

in kind 62 205 112 0 5 384 0 384

Other current transfers 12 62 136 71 2 283 16 299

Disposable income, net 71 13 290 1,196 34 1,604 1,604

________________________________________________________________________________________________________________

Use of disposable income account

Uses

________________________________________________________________________________________________________________

Final consumption expenditure 352 1,015 32 1,399 1,399

Adjustment for the change in pension

entitlements 0 11 0 0 11 0 11

Current external balance –13 –13

________________________________________________________________________________________________________________

Capital account

Changes in assets

________________________________________________________________________________________________________________

Gross capital formation 308 8 38 55 5 414 414

Consumption of fixed capital –157 –12 –27 –23 –3 –222 –222

Changes in inventories 26 0 0 2 0 28 28

Acquisitions less disposals of valuables 2 0 3 5 0 10 10

Acquisitions less disposals of nonproduced

assets –7 0 2 4 1 0 0

Capital transfers, receivable

________________________________________________________________________________________________________________

Capital transfers, payable

________________________________________________________________________________________________________________

Net lending (+) / net borrowing (–) –56 –1 –103 174 –4 10 –10 0

________________________________________________________________________________________________________________

Financial account

Changes in assets

________________________________________________________________________________________________________________

Net acquisition of financial assets 83 172 –10 189 2 436 47 483

Monetary gold and SDRs –1 –1 1 0

Monetary gold 0 0 0 0

SDRs –1 –1 1 0

Currency and deposits 39 10 –26 64 2 89 11 100

Debt securities 7 66 4 10 –1 86 9 95

Loans 19 53 3 3 0 78 4 82

Equity and investment fund shares 10 28 3 66 0 107 12 119

Insurance, pension, and standardized

guarantee schemes 1 7 1 39 0 48 0 48

Financial derivatives and employee

stock options 3 8 0 3 0 14 0 14

Other accounts receivable/payable 4 1 5 4 1 15 10 25

________________________________________________________________________________________________________________

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 2.2 (continued)

Secondary distribution of income account Resources

________________________________________________________________________________________________________________

Rest Goods

Nonfinancial Financial General Total of the and

Transactions and balancing items corporations corporations government Households NPISHs economy world services Total

Balance of primary income, net / National

income, net 97 15 171 1,358 1 1,642 1,642

Current transfers 72 275 367 420 40 1,174 55 1,229

Current taxes on income, wealth, etc. 213 213 0 213

Net social contributions 66 213 50 0 4 333 0 333

Social benefits other than social transfers

in kind 384 384 0 384

Other current transfers 6 62 104 36 36 244 55 299

________________________________________________________________________________________________________________

Use of disposable income account Resources

________________________________________________________________________________________________________________

Disposable income, net 71 13 290 1196 34 1,604 1,604

Final consumption expenditure 1,399 1,399

Adjustment for the change in pension

entitlements 11 11 0 11

________________________________________________________________________________________________________________

Capital account Changes in liabilities and net worth

________________________________________________________________________________________________________________

Saving, net 71 2 –62 192 2 205 205

Current external balance –13 –13

Gross capital formation 414 414

Consumption of fixed capital –222 –222

Changes in inventories 28 28

Acquisitions less disposals of valuables 10 10

Acquisitions less disposals of

nonproduced assets 0 0

Capital transfers, receivable 33 0 6 23 0 62 4 66

Capital transfers, payable –16 –7 –34 –5 –3 –65 –1 –66

________________________________________________________________________________________________________________

Changes in net worth due to saving and

capital transfers 88 –5 –90 210 –1 202 –10 192

________________________________________________________________________________________________________________

Financial account Changes in liabilities and net worth

________________________________________________________________________________________________________________

Net lending (+)/ net borrowing (–) –56 –1 –103 174 –4 10 –10 0

Net acquisition of liabilities 139 173 93 15 6 426 57 483

Monetary gold and SDRs

Monetary gold

SDRs 0

Currency and deposits 65 37 102 –2 100

Debt securities 6 30 38 0 0 74 21 95

Loans 21 0 9 11 6 47 35 82

Equity and investment fund shares 83 22 105 14 119

Insurance, pension, and standardized

guarantee schemes 48 0 48 0 48

Financial derivatives and employee

stock options 3 8 0 0 0 11 3 14

Other accounts receivable/payable 26 0 9 4 39 –14 25

_________________________________________________________________________________________________________________

Chapter 2 g Overview of the Framework

Table 2.2 (continued)

Other changes in the volume of assets account

Changes in assets

________________________________________________________________________________________________________________

Rest Goods

Nonfinancial Financial General Total of the and

Other flows corporations corporations government Households NPISHs economy world services Total

Economic appearance of assets 26 0 7 0 0 33 33

Produced nonfinancial assets 3 3 3

Nonproduced nonfinancial assets 26 0 4 0 0 30 30

Economic disappearance of

nonproduced nonfinancial

assets –9 0 –2 0 0 –11 –11

Other economic disappearance of

nonproduced nonfinancial assets –3 0 0 0 0 –3 –3

Catastrophic losses –5 0 –6 0 0 –11 –11

Uncompensated seizures –5 0 5 0 0 0 0

Other changes in volume n.e.c. 1 1 0 0 0 2 2

Changes in classification 6 –2 –4 0 0 0 0

Changes in sector classification

and structure 6 0 –4 0 0 2 2

Changes in classification of

assets and liabilities 0 –2 0 0 0 –2 –2

Total other changes in volume 14 –1 0 0 0 13 13

Produced nonfinancial assets –2 –2 –3 0 0 –7 –7

Nonproduced nonfinancial assets 14 0 3 0 0 17 17

Financial assets 2 1 0 0 0 3 3

Monetary gold and SDRs 0 0

Currency and deposits 0 0

Debt securities 0 0

Loans 0 0

Equity and investment fund

shares/units 2 2 2

Insurance, pension, and

standardized guarantee

schemes 1 1 1

Financial derivatives and

employee stock options 0 0

Other accounts

receivable/payable 0 0

________________________________________________________________________________________________________________

Revaluation account

Changes in assets

________________________________________________________________________________________________________________

Nonfinancial assets 144 4 44 80 8 280 280

Produced nonfinancial assets 63 2 21 35 5 126 126

Nonproduced nonfinancial

assets 81 2 23 45 3 154 154

Financial assets/liabilities 8 57 1 16 2 84 7 91

Monetary gold and SDRs 11 1 12 12

Currency and deposits 0 0

Debt securities 3 30 6 1 40 4 44

Loans 0 0

Equity and investment fund

shares/units 5 16 10 1 32 3 35

Insurance, pension, and

standardized guarantee

schemes 0 0

Financial derivatives and

employee stock options 0 0

Other accounts

receivable/payable 0 0

________________________________________________________________________________________________________________

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 2.2 (continued)

Other changes in the volume of assets account Changes in liabilities and net worth

________________________________________________________________________________________________________________

Rest Goods

Nonfinancial Financial General Total of the and

Other flows corporations corporations government Households NPISHs economy world services Total

Economic appearance of assets

Produced nonfinancial assets

Nonproduced nonfinancial assets

Economic disappearance of

nonproduced nonfinancial

assets

Other economic disappearance of

nonproduced nonfinancial assets

Catastrophic losses

Uncompensated seizures

Other changes in volume n.e.c. 0 0 0 1 0 1 1

Changes in classification 0 0 2 0 0 2 2

Changes in sector classification

and structure 0 0 2 0 0 2 2

Changes in classification of assets

and liabilities 0 0 0 0 0 0 0

Total other changes in volume 0 0 2 1 0 3 3

Produced nonfinancial assets

Nonproduced nonfinancial assets

Financial assets 0 0 2 1 0 3 3

Monetary gold and SDRs

Currency and deposits

Debt securities

Loans 0 0

Equity and investment fund

shares/units 2 2 2

Insurance, pension, and standardized

guarantee schemes 1 1 1

Financial derivatives and employee

stock options

Other accounts receivable/payable

________________________________________________________________________________________________________________

Changes in net worth due to other changes in

volume of assets 14 –1 –2 –1 0 10

________________________________________________________________________________________________________________

Revaluation account Changes in liabilities and net worth

________________________________________________________________________________________________________________

Nonfinancial assets

Produced nonfinancial assets

Nonproduced nonfinancial assets

Financial assets/liabilities 18 51 7 0 0 76 15 91

Monetary gold and SDRs 12 12

Currency and deposits

Debt securities 1 34 7 42 2 44

Loans

Equity and investment fund

shares/units 17 17 34 1 35

Insurance, pension, and standardized

guarantee schemes

Financial derivatives and employee

stock options

Other accounts receivable/payable

________________________________________________________________________________________________________________

Changes in net worth due to nominal holding

gains/losses 134 10 38 96 10 288 –8 280

________________________________________________________________________________________________________________

Chapter 2 g Overview of the Framework

Table 2.2 (continued)

Rest Goods

of the and

Nonfinancial Financial General Total world services

Stocks and changes in assets corporations corporations government Households NPISHs economy account account Total

Opening balance sheet

Nonfinancial assets 2,151 93 789 1,429 159 4,621 4,621

Produced nonfinancial assets 1,274 67 497 856 124 2,818 2,818

Nonproduced nonfinancial assets 877 26 292 573 35 1,803 1,803

Financial assets/liabilities 982 3,421 396 3,260 172 8,231 805 9,036

Monetary gold and SDRs 690 80 770 770

Currency and deposits 382 150 840 110 1,482 105 1,587

Debt securities 90 950 198 25 1,263 125 1,388

Loans 50 1,187 115 24 8 1,384 70 1,454

Equity and investment fund

shares/units 280 551 12 1,749 22 2,614 345 2,959

Insurance, pension, and

standardized guarantee

schemes 25 30 20 391 4 470 26 496

Financial derivatives and

employee stock options 5 13 0 3 0 21 0 21

Other accounts

receivable/payable 150 19 55 3 227 134 361

________________________________________________________________________________________________________________

Total changes

Nonfinancial assets 300 –2 57 116 11 482 482

Produced nonfinancial assets 195 –4 29 67 7 294 294

Nonproduced nonfinancial assets 105 2 28 49 4 188 188

Financial assets/liabilities 93 230 –9 205 4 523 54 577

Monetary gold and SDRs 0 10 1 0 0 11 1 12

Currency and deposits 39 10 –26 64 2 89 11 100

Debt securities 10 96 4 16 0 126 13 139

Loans 19 53 3 3 0 78 4 82

Equity and investment fund

shares/units 17 44 3 76 1 141 15 156

Insurance, pension, and

standardized guarantee

schemes 1 8 1 39 0 49 0 49

Financial derivatives and employee

stock options 3 8 0 3 0 14 0 14

Other accounts

receivable/payable 4 1 5 4 1 15 10 25

________________________________________________________________________________________________________________

Closing balance sheet

Nonfinancial assets 2,451 91 846 1,545 170 5,103 5,103

Produced nonfinancial assets 1,469 63 526 923 131 3,112 3,112

Nonproduced nonfinancial assets 982 28 320 622 39 1,991 1,991

Financial assets/liabilities 1,075 3,651 387 3,465 176 8,754 859 9,613

Monetary gold and SDRs 0 700 81 0 0 781 1 782

Currency and deposits 421 10 124 904 112 1,571 116 1,687

Debt securities 100 1,046 4 214 25 1,389 138 1,527

Loans 69 1,240 118 27 8 1,462 74 1,536

Equity and investment fund

shares/units 297 595 15 1,825 23 2,755 360 3,115

Insurance, pension, and

standardized guarantee

schemes 26 38 21 430 4 519 26 545

Financial derivatives and employee

stock options 8 21 0 6 0 35 0 35

Other accounts

receivable/payable 154 1 24 59 4 242 144 386

________________________________________________________________________________________________________________

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 2.2 (concluded)

Rest Goods

of the and

Nonfinancial Financial General Total world services

Stocks and changes in liabilities corporations corporations government Households NPISHs economy account account Total

Opening balance sheet

Nonfinancial assets

Produced nonfinancial assets

Nonproduced nonfinancial assets

Financial assets/liabilities 3,221 3,544 687 189 121 7,762 1,274 9,036

Monetary gold and SDRs 0 770 770

Currency and deposits 40 1,281 102 10 38 1,471 116 1,587

Debt securities 44 1,053 212 2 1,311 77 1,388

Loans 897 328 169 43 1,437 17 1,454

Equity and investment fund shares/units 1,987 765 4 2,756 203 2,959

Insurance, pension, and standardized

guarantee schemes 12 435 19 5 471 25 496

Financial derivatives and employee

stock options 4 10 14 7 21

Other accounts receivable/payable 237 22 8 35 302 59 361

________________________________________________________________________________________________________________

Net worth –88 –30 498 4,500 210 5,090 –469 4,621

________________________________________________________________________________________________________________

Total changes

Nonfinancial assets

Produced nonfinancial assets

Nonproduced nonfinancial assets

Financial assets/liabilities 157 224 102 16 6 505 72 577

Monetary gold and SDRs 12 12

Currency and deposits 0 65 37 0 0 102 –2 100

Debt securities 7 64 45 0 0 116 23 139

Loans 21 0 9 11 6 47 35 82

Equity and investment fund shares/units 100 39 2 0 0 141 15 156

Insurance, pension, and standardized

guarantee schemes 0 48 0 1 0 49 0 49

Financial derivatives and employee

stock options 3 8 0 0 0 11 3 14

Other accounts receivable/payable 26 0 9 4 0 39 –14 25

________________________________________________________________________________________________________________

Changes in net worth, total 236 4 –54 305 9 500 –18 482

________________________________________________________________________________________________________________

Saving and capital transfers 88 –5 –90 210 –1 202 –10 192

Other changes in volume of assets 14 –1 –2 –1 0 10 10

Nominal holding gains/losses 134 10 38 96 10 288 –8 280

Neutral holding gains/losses 82 6 27 87 6 208 –10 198

Real holding gains/losses 52 4 11 9 4 80 2 82

________________________________________________________________________________________________________________

Closing balance sheet

Nonfinancial assets

Produced nonfinancial assets

Nonproduced nonfinancial assets

Financial assets/liabilities 3,378 3,768 789 205 127 8,267 1,346 9,613

Monetary gold and SDRs 782 782

Currency and deposits 40 1,346 139 10 38 1,573 114 1,687

Debt securities 51 1,117 257 2 0 1,427 100 1,527

Loans 918 0 337 180 49 1,484 52 1,536

Equity and investment fund shares/units 2,087 804 6 0 0 2,897 218 3,115

Insurance, pension, and standardized

guarantee schemes 12 483 19 1 5 520 25 545

Financial derivatives and employee

stock options 7 18 0 0 0 25 10 35

Other accounts receivable/payable 263 0 31 12 35 341 45 386

________________________________________________________________________________________________________________

Net worth 148 –26 444 4,805 219 5,590 –487 5,103

Chapter 2 g Overview of the Framework

Table 2.3. Link between Instrument and Functional Categories

Table 2.3a. International Accounts Financial Account by Instrument

(Consistent with data in Table 2.1)

Financial account (by instrument) Changes in assets Changes in liabilities Balance

Monetary gold and SDRs 0 1

Currency and deposits –2 11

Debt securities 21 9

Loans 35 4

Equity and investment fund shares 14 12

Insurance, pension, and standardized

guarantee schemes 0 0

Financial derivatives and ESOs 3 0

Other accounts receivable/payable –14 10

Total changes in assets/liabilities 57 47

Net lending (+) / net borrowing (–) (from financial account) 10

Note: ESO = employee stock option.

Table 2.3b. IIP by Instrument

(Consistent with data in Table 2.1)

Opening Transactions Other changes Closing

International investment position position (fin. acc.) in volume Revaluation position

Assets (instrument split)

Monetary gold and SDRs 770 0 0 12 782

Currency and deposits 116 -2 0 0 114

Debt securities 77 21 0 2 100

Loans 17 35 0 0 52

Equity and investment fund shares 203 14 0 1 218

Insurance, pension, and standardized

guarantee schemes 25 0 0 0 25

Financial derivatives and ESOs 7 3 0 0 10

Other accounts receivable/payable 59 –14 0 0 45

Total 1,274 57 0 15 1,346

Liabilities (instrument split)

Monetary gold and SDRs 0 1 0 0 1

Currency and deposits 105 11 0 0 116

Debt securities 125 9 0 4 138

Loans 70 4 0 0 74

Equity and investment fund shares 345 12 0 3 360

Insurance, pensions, and standardized

guarantee schemes 26 0 0 0 26

Financial derivatives and ESOs 0 0 0 0 0

Other accounts receivable/payable 134 10 0 0 144

Total 805 47 0 7 859

Net IIP 469 10 0 8 487

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 2.3c. Conversion of Data from Instrument Split to Functional Categories

(Consistent with data in Table 2.1)

Functional categories

_____________________________________________________

DI PI FD OI RA Total

Financial account

Assets (instrument split)

Monetary gold and SDRs

Currency and deposits –5 3 –2

Debt securities 2 14 5 21

Loans 35 35

Equity and investment fund shares 10 4 14

Insurance, pension, and standardized

guarantee schemes

Financial derivatives and ESOs 3 3

Other accounts receivable/payable –4 –10 –14

Total 8 18 3 20 8 57

Liabilities (instrument split)

Monetary gold and SDRs 1 1

Currency and deposits 11 11

Debt securities 4 5 9

Loans 4 4

Equity and investment fund shares 3 9 12

Insurance, pension, and standardized

guarantee schemes

Financial derivatives and ESOs

Other accounts receivable/payable 4 6 10

Total 11 14 0 22 0 47

________________________________________________________________________________________________________________

IIP (opening)

Assets (instrument split)

Monetary gold and SDRs 770 770

Currency and deposits 80 36 116

Debt securities 10 40 27 77

Loans 17 17

Equity and investment fund shares 53 150 203

Insurance, pension, and standardized

guarantee schemes 25 25

Financial derivatives and ESOs 7 7

Other accounts receivable/payable 15 44 59

Total 78 190 7 166 833 1,274

Liabilities (instrument split)

Monetary gold and SDRs

Currency and deposits 105 105

Debt securities 15 110 125

Loans 70 70

Equity and investment fund shares 155 190 345

Insurance, pension, and standardized

guarantee schemes 26 26

Financial derivatives and ESOs

Other accounts receivable/payable 40 94 134

Total 210 300 0 295 0 805

________________________________________________________________________________________________________________

Revaluation

Assets (instrument split)

Monetary gold and SDRs 12 12

Debt securities 1 1 2

Equity and investment fund shares 1 1

Total 1 2 0 0 12 15

Liabilities (instrument split)

Debt securities 1 3 4

Equity and investment fund shares 1 2 3

Total 2 5 0 0 0 7

________________________________________________________________________________________________________________

Chapter 2 g Overview of the Framework

Table 2.3c (concluded)

Functional categories

_____________________________________________________

DI PI FD OI RA Total

IIP (closing)

Assets (instrument split)

Monetary gold and SDRs 782 782

Currency and deposits 75 39 114

Debt securities 13 55 32 100

Loans 52 52

Equity and investment fund shares 63 155 218

Insurance, pension, and standardized

guarantee schemes 25 25

Fin. deriv and ESOs 10 10

Other accounts receivable/payable 11 34 45

Total 87 210 10 186 853 1,346

Liabilities (instrument split)

Monetary gold and SDRs 1 1

Currency and deposits 116 116

Debt securities 20 118 138

Loans 74 74

Equity and investment fund shares 159 201 360

Insurance, pension, and standardized

guarantee schemes 26 26

Fin. deriv and ESOs

Other accounts receivable/payable 44 100 144

Total 223 319 0 317 0 859

Note: DI = direct investment.

PI = portfolio investment.

FD = financial derivatives (other than reserves) and employee stock options.

OI = other investment.

RA = reserve assets.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

CHAPTER

Accounting Principles

A. Introduction

3.1 This chapter discusses the nature of basic entries

in the international accounts and the accounting prin-

ciples governing their recording. Entries in the interna-

tional accounts are either flows or stocks. In the context

of international accounts, stocks are called positions. The

entries are recorded following a consistent set of account-

ing principles to ensure a complete integration of flows

and positions as well as symmetry of recording between

counterparties. This chapter first describes the important

characteristics of flows and positions. It then explains the

double-entry and quadruple-entry bookkeeping systems

in the context of international accounts. Finally, the chap-

ter describes general accounting principles concerning

the time of recording, valuation, and aggregation and net-

ting. Descriptions of specific types of flows and positions

and the application of general accounting principles to

their recording are discussed in relevant chapters.

B. Flows and Positions

References:

2008 SNA, Chapter 3, Stocks, Flows and Accounting

Rules.

IMF, Government Finance Statistics Manual (GFSM)

2001, Chapter 3, Flows, Stocks, and Accounting

Rules (Sections A–B).

3.2 Flows refer to economic actions and effects of

events within an accounting period, and positions refer

to a level of assets or liabilities at a point in time.

International flows are recorded in the accounts as

transactions (balance of payments) and other changes

in financial assets and liabilities account. Flows and

positions are integrated so that all changes in posi-

tions between two points in time are fully explained

by the recorded flows. Positions and flows of financial

assets and liabilities are grouped according to the func-

tional and instrument classifications of financial assets

and liabilities. Nonfinancial transactions are generally

grouped according to their nature and characteristics.

Positions of external financial assets and liabilities are

shown in the international investment position. Descrip-

tions of specific types of flows are discussed in the

relevant chapters. The classification of financial assets

and liabilities is discussed in Chapters 5 and 6.

1. Flows

3.3 Flows reflect the creation, transformation,

exchange, transfer, or extinction of economic value;

they involve changes in the volume, composition, or

value of an institutional unit’s assets and liabilities.

This classification is the basis for the flow accounts, as

discussed in Chapters 8–13. Flows also can be classi-

fied into (a) those that are associated with transactions

and (b) other flows.

a. Transactions

3.4 A transaction is an interaction between two

institutional units that occurs by mutual agreement

or through the operation of the law and involves an

exchange of value or a transfer. Transactions are clas-

sified according to the nature of the economic value

provided—namely, goods or services, primary income,

secondary income, capital transfers, nonproduced non-

financial assets, financial assets, or liabilities. Chapters

8 and 10–13 deal with transactions. Mutual agreement

means that there is prior knowledge and consent by

the institutional units. Transactions imposed by force

of law are applicable mainly to certain distributive

transactions, such as the payment of taxes, fines, and

penalties. Although taxes or penalties are imposed

on individual institutional units by administrative or

judicial decisions, there is collective recognition and

acceptance by the community of the obligation to pay

taxes and penalties. Because of the exchange of value,

a transaction consists of two economic flows, one in

each direction—for example, goods supplied by one

party in return for currency supplied by the other.

The definition is extended to cover actions within an

institutional unit that are analytically useful to treat as

transactions, often because the unit is operating in two

different capacities, such as where one part operates as

a branch. The definition is also extended to cover unre-

quited transfers, by the identification of transfers as the

corresponding flow to the economic value supplied.

Transactions recorded in the international accounts are

between two institutional units, one a resident of the

compiling economy and the other a nonresident.

3.5 Illegal transactions are treated the same way

as legal actions. Illegal transactions are those that are

forbidden by law. Illegal economic actions are transac-

tions only when the institutional units involved enter

the actions by mutual agreement. Otherwise, they

are other flows. Macroeconomic statistics, including

international accounts, cover all economic phenomena

irrespective of whether they are illegal or legal. Differ-

ences in the definition of illegal transactions between

economies or within an economy over time would

cause inconsistencies in the international accounts if

illegal transactions were omitted. Furthermore, illegal

transactions generally affect other legal transactions

(e.g., certain legal external financial claims may be cre-

ated through illegal exports of goods). Thus, exclusion

of illegal transactions could lead to an imbalance in the

international accounts.

3.6 Transactions recorded in the balance of payments

are interactions between a resident and a nonresident

institutional unit. By the nature of international accounts,

intra-unit transactions are not recorded. The flows

between the branch and its parent enterprise are shown

as interactions between institutional units, with a branch

recognized as a separate institutional unit (a quasi-cor-

poration). Similarly, when a notional enterprise (a quasi-

corporation) is created for holding land and associated

buildings by nonresident owners, the flows between the

nonresident owners and the notional enterprise are con-

sidered interactions between institutional units.

3.7 Transactions between two resident institutional

units in external assets are domestic transactions. Such

transactions, however, affect the external asset posi-

As stated in paragraph 3.6, however, notional institutional units

are created to account for cross-border transactions that occur

within a single corporation. In the national accounts, transactions

cover also some actions within an institutional unit (intra-unit trans-

actions) with the purpose of providing a more analytically useful

picture of output, final uses, and costs. Examples include consump-

tion of fixed capital, movements in inventories, and production for

own final use of goods by producers.

tions of the two resident units involved. The external

asset position of one resident unit is reduced and the

position in the same external asset of another resident

unit is increased, and thus leads to a change in domestic

sectoral breakdown if the two parties are in different

sectors. Such transactions result in changes in structure

of external asset positions and should be recorded in the

international accounts as a reclassification of sectors

of holding (i.e., in the other changes in financial assets

and liabilities account).

If both units fall in the same

institutional sector, such reclassification entries can-

cel each other out and thus have no effect on sectoral

positions. Similarly, when financial instruments issued

by residents are exchanged between nonresidents, no

transactions are recorded in the balance of payments

and there is no change in overall external liabilities.

3.8 To establish whether a transaction involving

an external financial asset is a transaction between a

resident and a nonresident, the compiler must know the

identities of both parties. The information available on

transactions in claims constituting external assets may

not, however, permit identification of the two parties

to the transaction. That is, a compiler may not be able

to ascertain whether a resident, who acquired or relin-

quished a claim on a nonresident, conducted the trans-

action with another resident or with a nonresident, or

whether a nonresident dealt with another nonresident or

with a resident. As a result, recorded international trans-

actions may include not only those that involve assets

and liabilities and take place between residents and

nonresidents but also those that involve financial assets

of economies and take place between two residents and,

to a lesser extent, transactions that take place between

nonresidents. (See also paragraphs 4.152–4.153 on the

additional issues associated with partner attribution of

transactions in financial instruments between residents

and nonresidents. In addition, transactions between

residents in external assets and liabilities may have to

be taken into account for specific purposes, particularly

as described in paragraph 14.21.)

3.9 Some mutual agreements involve three parties.

For example, guarantees involve the guarantor, the

debtor, and the creditor. Transactions occurring between

two parties (e.g., between the guarantor and debtor, or

between the guarantor and creditor, or between the

The resident-to-resident transaction between the buyer and seller

is recorded in the national accounts.

As discussed in paragraph A3.4, national contributions for com-

piling financial flows data in currency and economic unions may

be allocated along the debtor-creditor approach as a way to ensure

bilateral symmetry.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

debtor and creditor) should always be identified and

recorded as such. For one-off guarantees, the activa-

tion of the guarantee gives rise to transactions and, in

some cases, other flows (for a definition and discussion

of other flows, see paragraphs 3.19–3.22) between each

of the three pairs of the three parties (see paragraphs

8.42–8.45 and 13.27 for the treatment of one-off guar-

antees). For each pair of parties, transactions in the

international accounts are recorded if one party is a

resident and another party is a nonresident.

3.10 Service activities may consist of one unit (an agent)

arranging for a transaction to be carried out between two

other units in return for a fee from one or both parties to

the transaction. In such a case, the transaction is recorded

exclusively in the accounts of the two parties engaging in

the transaction and not in the accounts of the agent facili-

tating the transaction. Therefore, in the case of agents,

transactions should be attributed to the economy of the

principal on whose behalf a transaction is undertaken,

and not to the economy of the agent acting on behalf of

the principal. The accounts of the agent show only the

fee charged to the principal for the facilitation services

rendered (see also paragraph 4.149).

3.11 Each transaction involves two entries, a debit

entry and a credit entry, for each party to the transac-

tion. That is, each transaction consists of two flows

and gives rise to two accounting entries for each party.

(Given that each transaction involves two entries, a

phrase such as a “goods transaction” may be more cor-

rectly called a “transaction involving goods” or “goods

entry” or “goods flow.”) Reclassification also involves

two entries for each economy. All other flows that are

not transactions or reclassification involve only one

entry for each party as they directly affect net worth.

Types of transactions

3.12 Transactions take many different forms. Trans-

actions can be classified according to whether they

are exchanges or transfers (see paragraph 3.13) and

whether they are monetary or nonmonetary (see para-

graph 3.14). Furthermore, certain transactions are

rearranged through rerouting and partitioning (see

paragraphs 3.16–3.17), whereas other transactions may

be imputed to reflect the underlying economic relation-

ship (see paragraph 3.18).

Exchanges or transfers

3.13 Every transaction involves either an exchange

or a transfer. An exchange involves the provision of

something of economic value in return for a corre-

sponding item of economic value. Purchases of goods

and services, acquisition of assets, compensation of

employees, dividends, and so on are all exchanges. An

exchange is sometimes called a transaction with “some-

thing for something” or a transaction with a quid pro

quo. A transaction involving a transfer involves a pro-

vision (or receipt) of an economic value by one party

without receiving (or providing) a corresponding item

of economic value. A transfer entry is used to provide a

corresponding entry to the unrequited flow. Taxes, debt

forgiveness, grants, and personal transfers are examples

of transfers. A transaction involving a transfer is also

called a transaction with “something for nothing” or a

transaction without a quid pro quo.

Monetary or nonmonetary transactions

3.14 Every transaction is either a monetary or non-

monetary transaction. A monetary transaction is one in

which one institutional unit makes a payment (receives

a payment) or incurs a liability (acquires an asset)

stated in units of currency. A nonmonetary transaction

is one not initially stated in units of currency by the

transacting parties. Nonmonetary transactions include

barter transactions, remuneration in kind, payments

in kind, compensation in kind, and transfers in kind.

In kind means that resources are provided in a form

other than funds, such as goods, services, and interest

forgone. For example, provision of foreign aid goods is

a transfer in kind. Because all flows are to be expressed

in monetary terms, the monetary values of nonmon-

etary transactions need to be indirectly measured or

otherwise estimated. The main distinguishing charac-

teristic of a monetary transaction is that the parties to

the transaction express their agreement in monetary

terms, such as a given amount of units of a currency

per unit of a good. Both monetary and nonmonetary

transactions may be either exchanges or transfers.

Rearranging transactions for statistical purposes

3.15 Most transactions can be clearly observed

because the way they take place also reflects the under-

lying economic relationships. Some transactions (as

they appear to the institutional units) do not reflect the

underlying economic relationships, however, and need

to be rearranged so that the accounts portray economic

reality. Rerouting, partitioning, and imputation are

three types of rearrangements employed in the inter-

national accounts.

Rerouting

3.16 Rerouting records a transaction as taking place

in channels different from those observed. For exam-

ple, a direct transaction between unit A and unit C may

Chapter 3 g Accounting Principles

be best understood as a transaction first between unit

A and unit B and second between unit B and unit C.

This most often occurs when a unit that is a party to

a transaction does not appear in the actual accounting

records because of administrative arrangements. Social

contributions paid by employers directly to a retire-

ment scheme are one such example (see paragraphs

12.32–12.39 for recording of social contributions). The

economic substance of such a transaction is revealed by

rerouting: showing the social contributions as part of

compensation of employees that is payable by employ-

ers to employees, who then make social contributions to

the retirement scheme. Similarly, the transfer elements

of lotteries and other gambling are transactions through

the gambling operator, but they are rerouted to occur

directly between those participating in the lottery or

gambling, that is, between households and possibly to

charities (see paragraph 12.25).

Partitioning

3.17 Partitioning unbundles two or more different

transactions that appear as a single transaction from

the perspective of the parties involved. For example,

interest payable and receivable by financial intermedi-

aries is partitioned into two components. One compo-

nent represents the return on investment (pure interest),

while the remainder represents the purchase of financial

intermediation services for which the intermediaries do

not explicitly charge (see paragraphs 10.126–10.136 for

measuring financial intermediation services). Likewise,

when a financial derivative is settled with the delivery

of the underlying asset, this single event should be bro-

ken down into a transaction in the financial derivative

and a separate transaction in the underlying asset. One

example of partitioning and rerouting is the valuation

of goods at FOB (free on board) values, with transpor-

tation and insurance services separately recorded (see

paragraph 10.34 for CIF (cost, insurance, and freight)

and FOB adjustments).

Imputation

3.18 Imputation of transactions refers to constructing

entries in the accounts when no separate transactions

are identified by the parties involved. As a general rule,

transactions are to be imputed only in specific cases to

reflect underlying economic relationships. Imputation

of transactions in the international accounts is made in

the following specific cases:

(a) Retained earnings of direct investment enter-

prises are attributed to direct investors as if the

retained earnings had been distributed in pro-

portion to direct investors’ shares in the earn-

ings of the direct investment enterprises and

then reinvested by them in the direct investment

enterprise. The rationale behind this treatment

is that, because a direct investment enterprise is,

by definition, subject to control or influence by a

direct investor or investors, the decision to retain

some of its earnings within the enterprise repre-

sents an investment decision on the part of the

direct investor(s). The treatment of the retained

earnings of direct investment enterprises are

described in paragraphs 11.40–11.47.

(b) Investment income earned on technical reserves

held by insurance corporations is deemed to be

payable to policyholders who are then deemed

to return the funds back to insurance corpora-

tions as premium supplements even though in

terms of actual cash flows the property income

is retained by the insurance corporations. The

same treatment is followed for the income earned

by investing the technical reserves for standard-

ized guarantees. Investment income earned on

the technical reserves held by life insurance

corporations and defined contribution pension

schemes as well as the increase in entitlements

during the period for defined benefits pension

schemes are also deemed to be payable to poli-

cyholders who are then deemed to acquire finan-

cial claims on the life insurance corporations

and pension funds. The technical reserves are

liabilities of insurance corporations, guarantors,

and pension funds and assets of policyholders.

Therefore, the investment income attributable

to policyholders provides a measure of income

receivable by the policyholders on their claims.

This imputation provides a more suitable pic-

ture of the disposable income of policyholders,

of their saving, and of production and trade in

insurance services.

treated as if they were distributed to share-

holders who are then deemed to reinvest in the

investment fund. The treatment and recording

of these transactions are explained in para-

graphs 11.37–11.39.

(d) When government has a nonresident entity

undertake fiscal functions related to govern-

ment borrowing or incurring government outlays

abroad with no or incomplete economic flows

between the government and the nonresident

entity related to these fiscal activities, transac-

tions are imputed in the accounts of both the

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

government and the nonresident entity to reflect

the fiscal activities of the government. Imputa-

tions of these transactions are described in para-

graphs 8.24–8.26, 11.40, and 12.48.

(e) Implicit taxes or subsidies associated with a mul-

tiple exchange rate regime are discussed in para-

graph 3.107.

b. Other flows

3.19 Other flows are changes in the volume, value,

or classification of an asset or liability that do not

result from a transaction between a resident and a

nonresident. Other flows are genuine economic phe-

nomena and capture changes in assets and liabilities

between opening and closing positions that are not due

to transactions. In the context of international accounts,

other flows are recorded only for financial assets and

liabilities that represent claims on and liabilities to

nonresidents and gold bullion (see paragraph 3.24),

because the international investment position relates

only to external financial assets and liabilities.

3.20 Other flows cover various kinds of changes in

assets and liabilities that are recognized analytically

under two broad types:

(a) Other changes in the volume of assets and liabil-

ities reflect entrances of new assets into balance

sheets and exits of existing assets and liabilities

from balance sheets that are not caused by inter-

actions by mutual agreement between institu-

tional units (i.e., transactions).

(b) Revaluations (holding gains and losses) on an

asset or liability arise from changes in their

prices and/or the exchange rates. In interna-

tional accounts, revaluations are further clas-

sified into those that are due to exchange rate

changes and those that are due to other price

changes.

3.21 Other changes in the volume of assets and lia-

bilities are recorded when either:

(a) new assets that were not in the opening balance

sheet appear in closing balance sheet,

(b) or existing assets that were in the opening bal-

ance sheet disappear from the closing balance

sheet,

the result of transactions.

Included are write-offs of claims by creditors, reclas-

sification of assets, monetization and demonetization

of gold bullion, and other events. If debt forgiveness is

provided, such as in a noncommercial setting, transac-

tions are recorded (see paragraphs 13.22–13.23). In

the case of debt cancellations, it may sometimes be

unclear whether they should be classified as transac-

tions or other flows. In commercial settings, in the

absence of specific information, debt cancellation can

be treated as other changes in the volume of assets

(see also paragraphs 9.8–9.11). Changes in the sta-

tus of existing financial claims and liabilities arising

from the change in residence of individuals from one

economy to another are treated as other changes in the

volume of assets. These flows result from a change

in the classification of the owner’s residence status,

and hence, they should not be classified as transac-

tions (see also paragraphs 9.21–9.23). Assumption of

debts arising from the activation of guarantees and

rescheduling of debts and are the results of mutual

agreements between the parties and, hence, are clas-

sified as transactions (see paragraphs 8.42–8.45 and

8.54, respectively).

3.22 A separate account (other changes in financial

assets and liabilities account) shows changes in assets

and liabilities due to other flows. Chapter 9 describes

the structure of this account as well as various catego-

ries of other flows and their treatment.

2. Positions

3.23 Positions refer to the level of financial assets or

liabilities at a point in time. They are recorded in the

international investment position, which is a balance sheet

of external financial assets and liabilities. Generally, posi-

tions are shown at the beginning and end of an accounting

period. Positions between two periods are connected with

flows during that period because changes in positions are

caused by transactions and other flows.

3.24 Financial assets are economic assets that are

financial instruments. Financial assets include finan-

cial claims and, by convention, monetary gold held in

the form of gold bullion (including gold held in allo-

cated gold accounts). A financial claim is a financial

instrument that has a counterpart liability. Gold bullion

is not a claim and does not have a corresponding liabil-

ity. It is treated as a financial asset, however, because

of its special role as a means of financial exchange in

international payments by monetary authorities and as

a reserve asset held by monetary authorities.

3.25 The international investment position covers

financial assets and liabilities that have an international

character. All financial claims involve two parties, so

Chapter 3 g Accounting Principles

they have an international character if the claim is on a

nonresident. Similarly, all liabilities involve two parties,

so they have an international character if the obligation

is to a nonresident. International investment position is

described in Chapter 7.

C. Accounting System

References:

2008 SNA, Chapter 2, Overview.

Gorter, Cornelis N., and Manik L. Shrestha, “Book-

keeping Conventions and the Micro-Macro Link,”

Review of Income and Wealth, Vol. 50, June

2004.

3.26 The accounting system underlying the inter-

national accounts derives from broad bookkeeping

principles. To understand the accounting system for

international accounts, three bookkeeping principles

can be distinguished:

(a) vertical double-entry bookkeeping (also known

in business accounting as simply double-entry

bookkeeping);

(b) horizontal double-entry bookkeeping; and

Vertical double-entry bookkeeping—

corresponding entries

3.27 The main characteristic of vertical double-entry

bookkeeping is that each transaction leads to at least

two corresponding entries, traditionally referred to as a

credit entry and a debit entry, in the books of the trans-

actor. The international accounts for an economy are

to be compiled on a vertical double-entry bookkeeping

basis from the perspective of the residents of that econ-

omy. Because each transaction is either an exchange or

a transfer, it requires two entries. This principle ensures

that the total of all credit entries and that of all debit

entries for all transactions are equal, thus permitting

a check on consistency of accounts for a single unit.

Reclassifications also lead to debit and credit entries.

Other flows have their corresponding entries directly in

changes in net worth. As a result, vertical double-entry

bookkeeping ensures the fundamental identity of a unit’s

balance sheet, that is, the total value of assets equals the

total value of liabilities plus net worth. The total value of

the assets owned by an entity minus the total value of lia-

bilities provides net worth. In the international accounts,

net international investment position provides a measure

of net financial claims with nonresidents plus gold bul-

lion held as monetary gold. These terms are discussed in

paragraphs 7.1–7.2.

Horizontal double-entry bookkeeping—

counterpart entries

3.28 The concept of horizontal double-entry book-

keeping is useful for compiling accounts that reflect the

mutual economic relationships between different insti-

tutional units in a consistent way. It means that if unit

A provides something to unit B, the accounts of both A

and B show the transaction for the same amount: as a

payment in A’s account and as a receipt in B’s account.

Horizontal double-entry bookkeeping ensures the con-

sistency of recording for each transaction category by

counterparties. For example, at the worldwide level,

dividends payable by all economies should be equal to

dividends receivable by all economies.

Quadruple-entry bookkeeping

3.29 The simultaneous application of both the verti-

cal and horizontal double-entry bookkeeping results in

a quadruple-entry bookkeeping, which is the account-

ing system underlying the recording of transactions

in the national accounts and international accounts.

Additionally, definitions, classifications, and account-

ing principles in the international accounts are derived

from the viewpoint of conceptual symmetry as well

as symmetric reporting by partner economies. The

quadruple-entry system deals in a coherent way with

multiple transactors or groups of transactors, each of

which practices vertical double-entry bookkeeping.

A single transaction between two counterparties thus

gives rise to four entries. In contrast to business book-

keeping, international accounts deal with interactions

among a multitude of units in parallel and thus require

special care from a consistency point of view. As a

liability of one unit is mirrored in a financial asset of

another unit, for instance, they should be identically

valued, allocated in time, and classified to avoid incon-

sistencies in aggregating balance sheets of units into

regional or global totals. The same is also true for all

transactions and other flows that affect balance sheets

of two counterparties. The quadruple approach to trans-

actions in the international accounts is needed for bilat-

eral comparisons and global integrated data.

Types of accounting entries

3.30 The international accounts use the following

conventions and terminologies for recording flows. In

the current and capital accounts, a credit denotes entries

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

from exports, primary income receivable, transfers

receivable, and disposals of nonproduced nonfinancial

assets. A debit is used to record entries for imports,

primary income payable, transfers payable, and acquisi-

tions of nonproduced nonfinancial assets.

3.31 In the case of transactions in financial assets and

liabilities, the terms “net acquisition of financial assets”

and “net incurrence of liabilities” are used. Financial

account items are recorded on a net basis separately

for each financial asset and liability (i.e., they reflect

changes due to all credit and debit entries during an

accounting period). The use of the terms “net acquisition

of financial assets” and “net incurrence of liabilities”

highlights the impact of the financial account on the

international investment position. The use of these terms

also simplifies the interpretation of data. A positive

change indicates an increase in assets or liabilities and a

negative change indicates a decrease in assets or liabili-

ties. The interpretation of increase or decrease under the

credit or debit notion, however, depends on whether the

increase or decrease refers to assets or liabilities (a debit

for an asset is an increase; a debit for a liability is a

decrease). Although the debit and credit presentation is

not emphasized for the financial account transactions, it

is important to recognize and maintain the accounting

identities. For example, a credit is always conceptually

matched with a corresponding debit, the latter relating to

either an increase in an asset or a reduction in a liability

(see Box 2.1). The conventions for aggregation, consoli-

dation, and netting assets against liabilities are described

in Section F.

D. Time of Recording of Flows

References:

2008 SNA, Chapter 3, Stocks, Flows and Accounting

Rules.

IMF, GFSM 2001, Chapter 3 (Section C), Flows, Stocks,

and Accounting Rules.

IMF, Monetary and Financial Statistics Manual

(MFSM) 2000, paragraphs 225–228.

IMF, External Debt Statistics: Guide for Compilers

and Users, Box 2.1, The Choice of a Recording

Basis: The Case for Accrual Accounting.

3.32 Once a flow is identified, the time at which it

occurred must be determined so that the value of all

flows within a given accounting period can be com-

piled. The international accounts do not show indi-

vidual transactions or other flows, but there are several

reasons why precise rules on their individual timing

must be given. First, rules have to be formulated to

determine in which accounting period the discrete

flows are to be recorded. Second, an exact timing of

individual flows within the accounting period is crucial

to make the distinction between changes in net worth

due to transactions and those due to other changes (e.g.,

other changes in volume and revaluations). Third, the

integrated nature of the system means that the posi-

tions recorded on the balance sheet are influenced by

the timing of flows. Finally, the quadruple accounting

system requires that entries for a transaction are made

by the counterparties at the same time. This ensures the

consistency of accounts for each party (e.g., consistency

between the merchandise item and the corresponding

financial account entries) as well as the symmetry of

recording by partner economies.

3.33 One of the problems in determining the tim-

ing of transactions is that activities of institutional units

often stretch over periods in which several important

moments can be distinguished. For instance, exports and

imports of goods commence with the signing of a con-

tract between a seller and a buyer; encompass dates of

crossing borders, a date of delivery, and a date or dates

on which payments become due; and are completed only

when the last payment is received by the seller. Each

of these distinct moments in time is, to some extent,

economically relevant and may result in multiple trans-

actions in the international accounts. As explained in

the following paragraphs, each transaction should be

recorded according to the accrual basis, which deter-

mines the time period to which it shold be attributed.

1. Alternative recording bases

3.34 Broadly, the time of recording could be deter-

mined on four bases: the accrual basis, the due-for-

payment basis, the commitment basis, and the cash

basis. Other timing bases, such as physical movement

or administrative process, may be used in some data

sources. The accrual basis is used in the international

accounts as well as in other major macroeconomic sta-

tistical systems (e.g., national accounts, government

finance, and monetary and financial statistics).

3.35 Accrual accounting records flows at the time

economic value is created, transformed, exchanged,

transferred, or extinguished. This means that flows that

imply a change of economic ownership are recorded

when ownership passes and services are recorded when

provided. In other words, the effects of economic events

are recorded in the period in which they occur, irrespec-

tive of whether cash was received or paid or was due to

Chapter 3 g Accounting Principles

be received or paid. When an economic event is accom-

panied by a settlement at a later date, such as an import

of goods with trade credit, the time lag is bridged by

recording each event separately, the corresponding entry

at the time of import being trade credit payable.

3.36 A due-for-payment basis records flows that

give rise to cash payments at the time the payments

fall due. If a payment is made before it is due, then the

flows are recorded when the cash payment is made.

3.37 A commitment basis records flows when a unit

has committed itself to a transaction. Normally, this

basis may be envisaged only for acquisition of finan-

cial assets or incurrence of liabilities, and purchases of

goods, services, and labor inputs. The time of recording

generally is when a commitment is made or a purchase

order is issued.

3.38 A cash basis records flows when cash is received

or disbursed. In its strict form, only those flows that

involve cash as the medium of exchange are included.

2. Use of accrual basis in the international

accounts

3.39 The Manual recommends use of the accrual

basis for determining the time of recording of flows. The

accrual basis matches the time of recording with the tim-

ing of the events giving rise to the actual resource flows.

With the cash basis, the time of recording would poten-

tially diverge significantly from the time of the economic

activities and transactions to which the cash flows relate.

The due-for-payment basis would usually record transac-

tions after the resource flows have taken place, although

the long delays caused by the cash basis would, in most

cases, be reduced. The timing of the commitment basis

would precede the actual resource flows.

3.40 The accrual basis provides the most comprehen-

sive information because all resource flows are recorded,

including nonmonetary transactions, imputed transac-

tions, and other flows. Such a comprehensive recording

ensures the integration of flows and changes in balance

sheets. The accrual basis is consistent with the way

transactions, other flows, and main economic aggregates

(balance on goods and services, net lending/net borrow-

ing) are defined. It is also close to business accounting.

a. Time of recording of transactions

3.41 The change of economic ownership is central

in determining the time of recording on an accrual

basis for transactions in goods, nonproduced nonfinan-

cial assets, and financial assets. The term “economic

ownership” reflects the underlying reality economic

accounts are attempting to measure. Economic owner-

ship takes account of where the risks and rewards of

ownership lie. The concepts of economic ownership

and associated risks and rewards are further elaborated

in paragraph 5.3. A change in ownership from an eco-

nomic point of view means that all risks, rewards, and

rights and responsibilities of ownership in practice are

transferred. In general, a change in “legal ownership”

also involves a change in economic ownership. In some

cases, a change of “economic ownership” takes place

even though the “legal ownership” remains unchanged

(e.g., financial leases and transactions between an

enterprise and its foreign branches). In other cases,

there is no change in economic ownership, even though

there is a change in legal ownership. For example, for

repurchase agreements involving the provision of secu-

rities for cash, the risks and rewards attached to the

securities remain with the original holder (as discussed

in paragraphs 5.52–5.54) and the only transaction is a

loan. Similarly, in the case of securities lending without

cash collateral, there is no change in ownership of the

securities, although securities lending fees may arise

(see paragraphs 11.67–11.68).

3.42 Entries for transactions in goods, nonproduced

nonfinancial assets, and financial assets owned by insti-

tutional units are made at the time economic ownership

of the underlying asset is transferred. When a change in

economic ownership is not obvious, the change is con-

sidered to occur at (or is proxied by) the time the parties

to the transaction record it in their books or accounts.

3.43 General principles for applying the accrual basis

for time of recording to various flows are described in

paragraphs 3.44–3.66. More specific descriptions of the

accrual basis are detailed in relevant chapters.

Application to goods

3.44 Transactions in goods should be recorded as of

the time that the change of economic ownership takes

place. Goods are considered to change economic own-

ership when the parties enter the goods in their books

and make a corresponding change to their financial

assets and liabilities. For high-value capital goods such

as ships, heavy machinery, and other equipment, own-

ership changes are recorded at the time agreed between

the parties as to when ownership changes (see para-

graph 10.28). When a contract for building and other

construction is agreed in advance, progressive change

of ownership occurs for the work-in-progress, which

may take several months or years to complete. When

the contract calls for stage payments (progress pay-

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

ments), the transaction values may often be approxi-

mated by the value of stage payments made each period

(see paragraphs 5.71 and 10.107). A difference in tim-

ing between the change of ownership and payments

may give rise to trade credit and advances.

3.45 The timing used in international merchandise

trade statistics generally follows customs procedures,

which are set up to record the movement of goods across

borders. The time at which goods cross the border can

be taken only as an approximation to the time when the

change of economic ownership occurs. A customs-based

collection system usually provides a choice of dates at

which transactions may be recorded (e.g., lodgment of

customs declaration, customs clearance of goods). The

time of recording in the international guidelines for mer-

chandise trade statistics is when the customs declaration

is lodged. Ideally, for international accounts purposes,

customs data should be adjusted (see paragraphs 3.61–

3.66). Likewise, an exchange record system that reflects

payments may not coincide in timing with the change in

economic ownership of the goods.

3.46 Goods on consignment (i.e., goods intended

for sale but not actually sold when the goods cross

the frontier) should be recorded only at the time eco-

nomic ownership changes. Goods under financial lease

arrangements are considered to change economic own-

ership at the inception of the lease (see paragraph 5.56

on the definition of a financial lease and paragraphs

7.57 and 10.17(f) for positions and transactions aris-

ing from financial leases). Goods sent abroad for pro-

cessing under the ownership of the same party are not

treated as if they change economic ownership. Goods

may move between a parent and its branch abroad.

In that case, possibilities exist that either the goods

have changed economic ownership or they may have

been sent for processing. The correct statistical treat-

ment is to identify which location assumes the risks and

rewards of ownership most strongly (e.g., from factors

such as whether the goods are included in the accounts,

and which location is responsible for subsequent sale

of the goods). For goods under merchanting, purchases

and resales are recorded at the time the change in eco-

nomic ownership of goods occurs.

Application to services

3.47 Transactions in services are recorded when

the services are provided. Some services, such as

some transport or hotel services, are provided within

a discrete period, in which cases, there is no problem

in determining the time of recording. Other services

are supplied or take place on a continuous basis. For

example, construction services, operating leasing, and

insurance services are recorded continuously as long

as they are being provided. When construction takes

place with a prior contract, the ownership of the struc-

ture is effectively transferred progressively as the work

proceeds. When services are provided over a period of

time, there may be advance payments or settlements

at later dates for such services (e.g., freight, insurance,

port services). The provision of services should be

recorded on an accrual basis in each accounting period

(i.e., they should be recorded as they are rendered, not

when payments are made). Entries for advance pay-

ments or settlements at later dates should be made in

the appropriate accounts when they occur (as explained

in paragraph 3.35 in the case of import of goods).

Application to primary income and transfers

3.48 Distributive transactions are recorded at the

moment the related claims arise. As a result, for exam-

ple, compensation of employees, interest, social con-

tributions and benefits are all recorded in the period

during which the amounts payable accrue. (See para-

graphs 11.20–11.21 for the recording of compensation

of employees associated with employee stock options.)

With respect to some distributive transactions, the time

of accrual depends on the unit’s decision as to when

to distribute primary income or make a transfer. Divi-

dends are recorded at the moment the shares go ex-

dividend. Three dates are associated with dividends:

(a) the date they are declared;

(b) the date they are excluded from the market price

of shares, known as the ex-dividend date. The

recipients of the dividends are determined from

the register of shareholders at this time and sub-

sequent shareholders do not have a right to the

dividends; and

Although dividends sometimes may be related to the

enterprise’s profits in the previous period, in other

cases, they are only loosely related or not at all. The

price of shares includes declared dividends up to the

ex-dividend date, thus the holder of the shares before

the ex-dividend date owns the share and does not hold a

separate debt instrument reflecting declared and unpaid

dividends. Between the ex-dividend date and actual

settlement, the amount payable is recorded as other

accounts receivable/ payable. Withdrawals from income

of quasi-corporations, such as distributed branch prof-

its, are recorded when they actually take place. Rein-

vested earnings are derived from retained earnings,

Chapter 3 g Accounting Principles

and therefore they are recorded in the period in which

retained earnings accrue. (See paragraphs 11.33–11.47

for issues in the calculation of reinvested earnings.)

3.49 Interest is recorded as accruing on a continuous

basis because the financial resources are provided for

use on a continuous basis. For some financial instru-

ments, the debtor does not make any payments to the

creditor until the financial instrument matures, at which

time a single payment discharges the debtor’s liability;

the payment covers the amount of funds originally pro-

vided by the creditor and the interest accumulated over

the entire life of the financial instrument. Correspond-

ing entries to the interest accruing in each period before

maturity should be recorded as financial transactions

that represent an additional acquisition of the financial

asset by the creditor and an equal incurrence of a liabil-

ity by the debtor.

3.50 Taxes and other compulsory transfers should

be recorded when the activities, transactions, or other

events occur that create the government’s claim to the

taxes or other payments. In principle, income taxes

and social contributions based on income should be

attributed to the period in which the income is earned.

In practice, however, some flexibility may be needed

so that income taxes deducted at the source and regular

prepayments of income taxes may be recorded in the

periods in which they are paid, and any final tax liabil-

ity on income may be recorded in the period in which

it is determined.

3.51 Some compulsory transfers, such as fines,

penalties, and property forfeitures, are determined at

a specific time. These transfers are recorded when a

legal claim is established, which may occur when a

court renders judgment or an administrative ruling is

published.

3.52 Determining the time of recording for grants

and other voluntary transfers can be complex because

there is a wide variety of eligibility conditions that

have varying legal powers. In some cases, a potential

grant recipient has a legal claim when it has satis-

fied certain conditions, such as the prior incurrence

of expenses for a specific purpose or the passage of

legislation. These transfers are recorded when all

requirements and conditions are satisfied. In other

cases, the grant recipient never has a legal claim on

the donor, and the transfer should be attributed to the

time at which the settlement is made (e.g., cash pay-

ment). In general, the time of recording of voluntary

transfers is determined by the time at which there is

a change in the economic ownership of the resources

(such as goods, services, or financial assets) that are

corresponding entries to transfers.

Application to transactions in nonproduced

nonfinancial assets

3.53 Transactions in nonproduced nonfinancial

assets are recorded at the time economic ownership of

these assets changes. The treatment is similar to those

for goods and financial assets, as discussed in para-

graphs 3.44 and 3.54–3.55, respectively.

Application to transactions in financial assets

3.54 Transactions in financial assets (including

payments of cash) are recorded when economic own-

ership changes. Some financial assets, such as trade

credit, are the implicit result of a nonfinancial transac-

tion. In these cases, the financial claim is deemed to

arise at the time the corresponding nonfinancial trans-

action occurs. In some cases, the parties to a transac-

tion may perceive ownership to change on different

dates because they acquire the documents evidencing

the transaction at different times. This variation usually

is caused by the process of clearing, or the time checks

are in the mail. The amounts involved in such “float”

may be substantial in the case of transferable deposits

and other accounts receivable or payable. If no pre-

cise date can be fixed, the timing of the transaction is

determined according to the date on which the creditor

receives payment or some other financial claim.

3.55 Transactions in securities are recorded at the

time ownership changes, which determines the transac-

tion date. Both parties should record the transactions at

the time ownership changes, not when the underlying

financial asset is delivered. If settlement occurs after

the ownership has changed, this gives rise to accounts

receivable/payable. In practice, when the delay between

the transaction and settlement is short, the time of set-

tlement may be considered as an acceptable proxy, so

that accounts receivable/payable would not arise. In

cases of longer delays, however, accounts receivable/

payable should be identified.

3.56 According to the accrual basis, repayments of

debts are recorded when they are extinguished (such

as when they are paid, rescheduled, or forgiven by the

creditor). When arrears occur, no transactions should be

imputed, but the arrears should continue to be shown in

the same instrument until the liability is extinguished.

However, if the contract provided for a change in the

characteristics of a financial instrument when it goes

into arrears, this change should be recorded as a reclas-

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

sification in the other changes in the financial assets

and liabilities account. The reclassification applies to

situations in which the original contract remains, but

the terms within it change (e.g., interest rates, repayment

periods). If the contract is renegotiated or the nature

of the instrument changes, as agreed between the par-

ties, from one instrument category to another (e.g., from

bonds to equity), the consequences are to be recorded as

new transactions. Consistent with the accrual principle,

an overdue obligation to settle a financial derivative con-

tract is not recorded as a transaction; however, the obli-

gation is reclassified to a debt liability because of the

change in the nature of the claim (see paragraph 5.82).

3.57 Data on arrears are important in their own right,

and thus should be presented as supplementary items,

where significant (or memorandum items in the case of

Exceptional Financing, see Appendix 1). Although it

is useful to identify some commonly important arrears

(such as arrears on public and publicly guaranteed

debt), flexibility is needed in determining which items

of arrears are important to disseminate, depending on

each economy’s circumstances. Arrears are described

further in paragraphs 5.99–5.102.

3.58 Activation of one-off (nonstandardized) guar-

antees gives rise to financial transactions because this

involves a creation of a new liability. The time of record-

ing of flows arising from activation of one-off guaran-

tees (including capital transfers and other changes in

the volume of assets, if applicable) is determined by the

occurrence of the events activating the guarantee. The

treatment of flows arising from the activation of one-

off guarantees is described in more detail in paragraphs

8.42–8.45.

3.59 Employee stock options are recognized at

grant date. Compensation of employees associated

with employee stock options should be recorded as

accruing over the period to which the option relates,

which generally is the period between the granting and

vesting dates. Sometimes, the options may cover the

period before the granting date, which should also be

taken into account when allocating the compensation

of employees.

b. Time of recording of other flows

3.60 Other flows include other changes in the vol-

ume of assets and revaluations. Other changes in the

volume of assets are usually discrete events that accrue

at precise moments or within fairly short periods of

time. Other changes in the volume of assets, includ-

ing 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 and liabilities are valued.

3. Timing adjustments

3.61 Differences in the time of recording by partner

economies may occur because of various factors. One of

the intrinsic problems in the international transactions

is the difference in time zones. Differences in time of

recording may arise from delays in mail deliveries or

settlement clearing processes. Several data sources may

often only approximate the required basis. It is important

to make timing adjustments in cases in which major

divergences occur from the required basis.

3.62 In choosing among available statistical sources,

compilers may wish to consider the advantage of using

data for which the correct timing is already recorded.

For example, records of actual drawings on loans are

preferable to sources that quote authorization dates or

program dates that may not be realized.

3.63 Timing adjustments to international merchan-

dise trade statistics may be necessary because these sta-

tistics may not reflect changes in economic ownership.

Moreover, they may not always reflect physical move-

ments correctly. Timing adjustments should be made

when practices in customs statistics lead to distortions.

For example, in the case of the purchase or sale of

ships and aircrafts, information on the time at which

the goods are entered in the books of the supplier or

customer could be used. It is a good practice to identify

the timing of large individual shipments or transactions

(such as a ship or aircraft) to ensure that the goods flow

and corresponding financing transactions are recorded

in the same period.

3.64 A change in the economic ownership of goods

can vary widely from the time at which the goods are

recorded in trade statistics, if a lengthy voyage is

part of the process of importing or exporting. If the

unit value of trade changes substantially from the

beginning to the end of the reporting period, the pos-

sible difference of one or more months between the

shipment or receipt of goods and the change of own-

ership can be a source of error in the statement for

a particular economy and a source of asymmetries

between partner economies. Inquiries, perhaps on a

sample basis, are required to ascertain specific prac-

tices, and timing adjustments should, in principle, be

applied to correct the trade statistics for those classes

of goods that are found to change ownership at times

Chapter 3 g Accounting Principles

other than those at which the goods were recorded in

the trade statistics.

3.65 Goods on consignment may often be recorded at

the time the goods cross the frontier, on the assumption

that a change of ownership has occurred or will shortly

occur. If that treatment is followed and there is no change

of ownership, adjustments will have to be made, prefer-

ably by revising the original entries. In practice, these

adjustments may be made in the periods when the goods

are returned, if goods returned involve minor cases.

3.66 Information based on exchange records pro-

vides data on a cash basis. For certain transactions,

cash and accrual bases for recording may be the same,

but for many they will differ. In particular, transactions

in goods, services, and income may not coincide with

the corresponding payments for settling the transac-

tions. Alternative information should be used routinely

to verify or adjust selected transaction categories. Com-

pilers using an exchange record system should check

each large settlement transaction. Information on inter-

est from either the payments records or debt service

schedule may not be appropriate for accrual account-

ing. Other possibilities of deriving interest accrual, such

as using the data on positions and contractual interest

rates, should be explored and implemented.

E. Valuation

References:

2008 SNA, Chapter 3, Stocks, Flows and Accounting

Rules.

IMF, GFSM 2001, Chapter 3, Flows, Stocks, and

Accounting Rules.

IMF, External Debt Statistics: Guide for Compilers

and Users, paragraphs 2.31–2.52, 6.12.

3.67 Market prices refer to current exchange

value, that is, the values at which goods and other

assets, services, and labors are exchanged or else

could be exchanged for cash. Market prices are the

basis for valuation in the international accounts. This

section describes the general principles for valuation

of flows and positions. Valuation of specific types of

flows and positions are discussed in further detail in

relevant chapters.

1. Valuation of transactions

3.68 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—sometimes called

“at arm’s length.” Thus, according to this strict defi-

nition, a market price refers only to the price for one

specific exchange under the stated conditions. A sec-

ond exchange of an identical unit, even under circum-

stances that are almost exactly the same, could result

in a different market price. A market price defined in

this way is to be clearly distinguished from a price

quoted in the market, a world market price, a going

price, a fair market price, or any price that is intended

to express the generality of prices for a class of sup-

posedly identical exchanges rather than a price actu-

ally applying to a specific exchange. Furthermore,

a market price should not necessarily be construed

as equivalent to a free market price—that is, a mar-

ket transaction should not be interpreted as occurring

exclusively in a purely competitive market situation.

In fact, a market transaction could take place in a

monopolistic, monopsonistic, or any other market

structure. Indeed, the market may be so narrow that

it consists of the sole transaction of its kind between

independent parties.

3.69 Actual exchange values in the contract between

two parties in most cases will represent market prices

as described in the preceding paragraph, regardless

of taxes and subsidies. Paragraphs 3.77–3.79 describe

cases in which actual exchange values do not represent

market prices. 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, and so on 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.

3.70 Transactions in financial assets and liabili-

ties are recorded according to the general principles

described in paragraph 3.68. In particular, transac-

tions in loans, deposits, and other accounts receivable/

payable also should be valued at market prices. Trans-

actions in financial assets and liabilities should be

recorded exclusive of any commissions, fees, and taxes

whether charged explicitly, included in the purchaser’s

price, or deducted from the seller’s proceeds. This is

because both debtors and creditors should record the

same amount for the transaction in the same financial

instrument. The commissions, fees, and taxes should be

recorded separately from the transaction in the finan-

cial asset and liability, under appropriate categories.

The valuation of transactions in financial instruments,

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

which excludes commission charges (recorded as trans-

actions in services), differs from the valuation of nonfi-

nancial asset transactions, which includes any costs of

ownership transfer unless paid separately.

3.71 When market prices for transactions are not

observable, valuation according to market-equivalent

prices provides approximation to market prices. In such

cases, market prices of the same or similar items when

such prices exist will provide a good basis for applying

the principle of market prices. Generally, market prices

should be taken from the markets in which the same or

similar items are traded currently in sufficient numbers

and in similar circumstances. If there is no appropriate

market in which a particular good or service is cur-

rently traded, the valuation of a transaction involving

that good or service may be derived from the market

prices of similar goods and services by making adjust-

ments for quality and other differences.

3.72 Some cases in which market prices are not avail-

able or pose specific problems include barter transac-

tions, provision of goods and services without a charge,

and goods under financial lease. If a buyer and a seller

engage in a barter transaction—the exchange of goods

or services for other goods, services, or assets (of equal

value)—the goods or services bartered should be valued

at the prices that would have been received if the goods

or services had been sold in the market. Similarly, a

grant and donation in kind can be valued using the mar-

ket price of the goods or services at the time of transfer.

Cost of acquisition also may be used in certain situa-

tions, particularly when there is no time lag between the

acquisition and the transfer. Acquisition of goods under

financial lease should be valued at market prices at the

time of acquisition, if such prices are available. When no

price is determined, it may be necessary to use the esti-

mated written-down current acquisition values of fixed

assets or the present value of expected future returns.

3.73 Market valuation also poses problems for trans-

actions in goods in which the contracts establish a quota-

tion period often months after the goods have changed

hands. In such cases, market value at the time of change of

ownership should be estimated, which should be revised

with the actual market value, when known. Market value

is given by the contract price regardless of whether it is

unknown at the time of change of ownership.

3.74 Values of imputed transactions will have to be

derived from values of other observed transactions to

which they are related. For example, values of transac-

tions in reinvested earnings are derived from the direct

investors’ shares in the net saving of the direct invest-

ment enterprise before reinvested earnings are distrib-

uted. Reinvested earnings and the recording of related

financial account entries are described in paragraphs

8.15–8.16 and 11.33–11.47.

3.75 When nonfinancial resources are provided,

without a quid pro quo, to nonresidents by the govern-

ment or private nonprofit institutions of an economy,

the same values must be reflected in the international

accounts of both recipient and donor. In conformity with

the general principles, such resources should be valued

at the market prices that would have been received if

the resources had been sold in the market. The donor’s

view of the imputed value of the transaction may be

quite different from that of the recipient. The suggested

rule of thumb is to use the value assigned by the donor

as a basis for recording.

3.76 In some cases, actual exchange values may

not represent market prices. Examples are transac-

tions involving the following: transfer pricing between

affiliated enterprises; manipulative agreements with

third parties; and certain noncommercial transactions,

including concessional interest. Prices may be under- or

overinvoiced (i.e., shown at a price other than the actual

price, for instance, to evade taxes or exchange controls),

in which case, an assessment of a market-equivalent

value needs to be made. An adjustment should be made

when actual exchange values do not represent market

prices, but this may not be practical in many cases.

Adjusting the actual exchange values to reflect market

prices will have consequences in other accounts. There-

fore, when such adjustments are made, corresponding

adjustments in other accounts also should be made;

for example, if prices of goods are adjusted, associated

income account or financial account transactions also

should be adjusted.

3.77 Transfer pricing refers to the valuation of trans-

actions between affiliated enterprises. In some cases,

transfer pricing may be motivated by income distribu-

tion or equity buildups or withdrawals. Replacing book

values (transfer prices) with market-equivalent values

is desirable, in principle, when the distortions are large

and when availability of data (such as adjustments by

customs or tax officials or from partner economies)

makes it feasible to do so. Selection of the best market-

equivalent values to replace book values is an exercise

calling for cautious and informed judgment. The treat-

ment of transfer pricing between affiliated enterprises

is elaborated in paragraphs 11.101–11.102.

3.78 The exchange of goods between affiliated enter-

prises often may be one that does not occur between

Chapter 3 g Accounting Principles

independent parties (e.g., specialized components that

are usable only when incorporated in a finished prod-

uct). Similarly, the exchange of services, such as man-

agement services and technical know-how, may have no

near equivalents in the types of transactions in services

that usually take place between independent parties.

Thus, for transactions between affiliated parties, the

determination of values comparable to market values

may be difficult, and compilers may have no choice

other than to accept valuations based on explicit costs

incurred in production or any other values assigned by

the enterprise. The valuation of management fees and

other similar cases is elaborated in paragraph 10.150.

3.79 Some noncommercial transactions, such as a

grant in kind, have no market price; however, other

noncommercial transactions may take place at implied

prices that include some element of grant or concession,

so that those prices also are not market prices. Examples

of such transactions could include negotiated exchanges

of goods between governments and government loans

bearing lower interest rates than those with similar

grace and repayment periods or other terms for purely

commercial loans. Concessional lending is described

in paragraph 12.51. In principle, an adjustment should

be made, although this may not be practical in many

cases, to record these transactions at market prices and

a transfer is recorded for the difference between the

implied price and the market price. Transactions by

general government bodies and private nonprofit enti-

ties not engaged in purely commercial undertakings are

often subject to noncommercial considerations. Trans-

fers involving the provision of goods and services also

may be provided or received, however, by other sectors

of the economy.

3.80 In cases in which a single exchange value

reflects more than one transaction category, the trans-

actions captured in the single exchange need to be par-

titioned (unbundled) into individual transactions, as

described in paragraph 3.17. In that case, the total value

of the partitioned individual transactions must equal the

market value of the exchange that actually occurred.

For example, actual exchange values involving foreign

currency may include commission for currency conver-

sion. Any portion related to currency conversion should

be recorded separately as transactions in services.

2. Valuation of other flows

3.81 Other flows in the international accounts cap-

ture changes in the international investment position of

financial assets and liabilities that are not due to trans-

actions. Holding gains and losses arise from changes in

market values of positions of financial assets and liabili-

ties. Holding gains and losses may accrue continuously.

A holding gain occurs when an asset increases in value

or a liability decreases in value; a holding loss occurs

when an asset decreases in value or a liability increases

in value. The value of holding gains and losses dur-

ing an accounting period shows net holding gains or

losses for assets and liabilities separately. In practice,

the value of holding gains and losses are calculated for

each asset and liability between two points in time: the

beginning of the period (or when the asset or liability

is acquired or incurred) and the end of the period (or

when the asset or liability is sold or extinguished).

3.82 For loans, deposits, and other accounts receivable/

payable sold at a discount, the transaction values recorded

in the financial account may differ from the nominal val-

ues recorded in the international investment position. Such

differences are recorded as valuation changes in the other

changes in financial assets and liabilities account (see also

paragraph 9.33).

3.83 Other changes in the volume of financial assets

and liabilities are recorded at the market-equivalent

prices of similar instruments. When writing off finan-

cial instruments that are valued at nominal values, the

value recorded in the other changes in financial assets

and liabilities account should correspond to their nomi-

nal value prior to being written off. For all reclassifica-

tions of assets and liabilities, values of both the new

and old instruments should be the same.

3. Valuation of positions of financial assets and

liabilities

Reference:

IMF, Monetary and Financial Statistics Compilation

Guide, paragraphs 2.42–2.67.

3.84 Positions of financial assets and liabilities

should, in general, be valued as if they were acquired

in market transactions on the balance sheet reporting

date. Many financial assets are traded in markets on a

regular basis and therefore can be valued by directly

using the price quotations from these markets. If the

financial markets are closed on the balance sheet date,

the market prices that should be used in the valuation

are those that prevailed on the closest preceding date

when the markets were open. Debt securities have a

current market value as well as a nominal value, and

for some purposes, supplementary data on the nominal

values of positions of debt securities may be useful (see

paragraph 3.88 for definition of nominal value).

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

3.85 Valuation according to the market-value equiv-

alent is needed for valuing financial assets and liabili-

ties that are not traded in financial markets or that are

traded only infrequently. For these assets and liabili-

ties, it will be necessary to estimate fair values that, in

effect, approximate market prices. The present value of

future cash flows also may be used as an approximation

to market prices, provided an appropriate discount rate

can be used.

3.86 Loan positions are recorded at nominal value.

The use of nominal values is partly influenced by prag-

matic concerns about data availability and the need to

maintain symmetry between debtors and creditors. In

addition, because loans are not intended for negotia-

bility, without an active market, estimating a market

price can be somewhat subjective. Nominal value is

also useful because it shows actual legal liability and

the starting point of creditor recovery behavior. In some

instances, loans also may be traded, often at discount,

or a fair value may exist or would be possible to esti-

mate. It is recognized that nominal value provides an

incomplete view of the financial position, particularly

when the loans are nonperforming. Therefore, infor-

mation on the nominal value of nonperforming loans

should be included as a memorandum or supplementary

item (see paragraph 7.50 for the definition of nonper-

forming loans). Loans that have become negotiable de

facto should be reclassified under debt securities (see

paragraph 5.45 for criteria for reclassification).

3.87 Positions on deposits and accounts receivable/

payable are also recorded at nominal value. They give

rise to the same issues of nominal and fair values as

loans. Deposits at banks and other deposit-taking cor-

porations in liquidation also should be recorded at their

nominal value until they are written off. If significant,

however, such deposits should be shown separately as a

supplementary item. The same treatment is applicable

for any other cases of impaired deposits (i.e., where the

deposit-taking corporation is not in liquidation but is

insolvent).

3.88 Market values, fair values, and nominal values

should be distinguished from such notions as amortized

values, face values, book values, and historic cost.

(a) Fair value is a market-equivalent value. It is

defined as the amount for which an asset could

be exchanged, or a liability settled, between

knowledgeable, willing parties in an arm’s-

length transaction. It thus represents an estimate

of what could be obtained if the creditor had sold

the financial claim.

(b) Nominal value refers to the outstanding amount

the debtor owes to the creditor, which is com-

posed of the outstanding principal amount

including any accrued interest. So the nomi-

nal value reflects the sum of funds originally

advanced, plus any subsequent advances, plus

any interest that has accrued, less any repay-

ments (which includes any payments covering

interest accrual).

Nominal value in domestic

currency of a debt instrument denominated in

foreign currency also includes holding gains or

losses arising from exchange rate changes.

of gradual elimination of the liability by regular

payments over a specified period of time. On

the date of each scheduled payment, amortized

value is the same as nominal value, but it may

differ from the nominal value on other dates

because nominal value includes interest that has

accrued and not been paid.

(d) Face value is the undiscounted amount to be paid

to the holder at maturity. It is also known as “par

value” or simply “par.” Before maturity, the mar-

ket value of a bond may be greater or less than

face value, depending on the interest rate pay-

able and the perceived risk of default. As bonds

approach maturity, market value approaches face

value. For example, if interest rates are higher

than the bond’s coupon rate, then the bond is sold

at a discount (below par). Conversely, if interest

rates are lower than the bond’s coupon rate, then

the bond is sold at a premium (above par).

(e) Book value in business accounts generally refers

to the value recorded in the enterprise’s records.

Book values may have different meanings

because their values are influenced by the timing

of acquisition, company takeovers, frequency of

revaluations, and tax and other regulations.

(f) Historic cost, in its strict sense, reflects the cost

at the time of acquisition, but sometimes it also

may reflect occasional revaluations.

3.89 The valuation of financial assets and liabilities

in data reported by enterprises or other respondents

may be based on commercial, supervisory, tax, or other

For debt instruments indexed to a “narrow” index, the nominal

value can also include holding gains and losses arising from move-

ments in the index (see paragraph 11.61(b)). For further detail on

nominal value, see External Debt Statistics: Guide for Compilers

and Users.

Chapter 3 g Accounting Principles

accounting standards that do not fully reflect the mar-

ket prices of the assets and liabilities. In such cases, the

data should be adjusted to reflect, as closely as possible,

the market value of the financial assets and liabilities

except when they are to be recorded at nominal values

(see paragraphs 3.86–3.87).

3.90 When securities are quoted on markets with

a buy-sell spread, the midpoint should be used to

value the instrument. The spread is an implicit ser-

vice of the dealer, paid by buyers and sellers (see

paragraphs 10.122–10.123). Similarly, positions in

financial assets and liabilities denominated in for-

eign currency should be valued using the midpoint

at close of business between the buying and selling

rates on the reference date.

3.91 Specific cases of valuation of positions of finan-

cial assets and liabilities, particularly when market

prices are not available or pose problems, are discussed

in Chapter 7, International Investment Position.

4. Unit of account and currency conversion

a. Unit of account

3.92 Values of nonfinancial and financial transac-

tions as well as the values of positions of financial

assets and liabilities may be expressed initially in a

variety of currencies or in other standards of value,

such as Special Drawing Rights (SDRs). The conver-

sion of these values into a reference unit of account is a

requisite for the construction of consistent and analyti-

cally meaningful accounts.

3.93 International accounts can be compiled in the

domestic currency as well as in another currency. Data

in domestic currency are needed because several other

macroeconomic and micro data are compiled in domestic

currency, except when a foreign currency is used as a legal

tender. Economic analysis often uses data from several

macroeconomic statistical systems. Conversely, data in

an international unit of account (a foreign currency) may

be needed for international liquidity management and

to address special issues for high inflation, significant

exchange rate fluctuations, and multiple exchange rates.

In addition, a standard or international unit of account is

necessary to allow for aggregation on a global or regional

basis and to facilitate international comparisons.

3.94 From the international perspective, a standard

unit of account is required for global presentation and

analysis. It is preferable that the unit of account be a

stable one; that is, values of international transactions

expressed in that unit should not be significantly affected

by changes (relative to the unit of account) in values of

currencies in which those transactions occur. Transac-

tions expressed in a unit that is stable in this sense none-

theless may reflect price changes resulting from other

causes; that is, a series expressed in a so-called stable

unit of account is not the equivalent of a volume measure

or constant price series. The theoretical ideal of a widely

recognized and perfectly stable standard unit of account

simply does not exist in practice.

b. Domestic versus foreign currency

3.95 For an economy, a domestic currency is distin-

guished from foreign currency. Domestic currency is

that which is legal tender in the economy and issued by

the monetary authority for that economy; that is, either

that of an individual economy or, in a currency union,

that of the common currency area to which the economy

belongs. All other currencies are foreign currencies.

3.96 Under this definition, an economy that uses as

its legal tender a currency issued by a monetary author-

ity of another economy—such as U.S. dollars—or of

a common currency area to which it does not belong

should classify the currency as a foreign currency, even

if domestic transactions are settled in this currency.

The term “currency” should be understood in the broad

sense (i.e., currency includes not only banknotes and

coins but all means of payments issued by financial

institutions in an economic territory). Unallocated gold

accounts and other unallocated accounts in precious

metals giving title to claim the delivery of gold or pre-

cious metal are treated as denominated in foreign cur-

rency. The treatment of unallocated accounts in other

commodities will need to be decided at the time such

cases arise in the future.

3.97 SDRs are considered to be foreign currency

in all cases, including for the economies that issue the

currencies in the SDR basket. Any other currency units

issued by an international organization, except in the

context of a currency union (see paragraph 3.95), are

considered foreign currency.

c. Currency of denomination and currency of

settlement

3.98 A distinction should be made between the cur-

rency of denomination and the currency of settlement.

The currency of denomination is determined by the cur-

rency in which the value of flows and positions is fixed

as specified in the contract between the parties. Accord-

ingly, all cash flows are determined using the currency

of denomination and, if necessary, converted into the

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

domestic currency or another unit of account for the

purpose of settlement or compilation of accounts. The

currency of denomination is important for distinguishing

transaction values and holding gains and losses.

3.99 The currency of settlement may be different

from the currency of denomination. Using a currency

in settlement that is different from the currency of

denomination simply means that a currency conversion

is involved each time a settlement occurs. The currency

of settlement is important for international liquidity

and measurement of potential foreign exchange drains.

The currency of settlement is also important for defin-

ing reserve assets (see paragraph 6.64).

3.100 The currency of denomination of equity and

investment fund shares is generally the domestic cur-

rency of the economy in which the issuer is resident.

However, when equity is issued in a currency other

than the domestic currency, then that currency is the

currency of denomination.

3.101 Debt instruments with both the amount to

be paid at maturity and all periodic payments (such

as coupons) indexed to a foreign currency are classi-

fied and treated in the international accounts as being

denominated in that foreign currency.

3.102 Some financial assets and liabilities are

denominated in more than one currency. However, if

the amounts payable are linked to one specific cur-

rency, then the liability should be attributed to that

currency. Otherwise, compilers are encouraged to dis-

aggregate such multicurrency instruments by the com-

ponent currencies.

3.103 Determining the currency of denomination

is not always clear in financial derivative contracts to

purchase or sell foreign currency using domestic cur-

rency. The decisive factor in determining the currency

of denomination for these contracts is the exposure

to currency movements. If settlement of a financial

derivative contract is linked to a foreign currency, even

though payment is required in domestic currency, then

the financial derivative is to be classified as denomi-

nated in foreign currency.

d. Currency conversion principles

3.104 Flows denominated in a foreign currency are

converted to their value in the domestic currency at the

rate prevailing when the flows take place, and posi-

tions are converted at the rate prevailing on the balance

sheet date. The midpoint between the buying and sell-

ing rates should be used at the time of transaction (for

transactions) and at the close of business on the refer-

ence date for positions.

The valuation in the domestic

currency of a purchase or sale on credit denominated in

a foreign currency may differ from the value in domes-

tic currency of the subsequent cash payment because

the exchange rate changed in the interim. Both transac-

tions should be valued at their current market values as

of the dates they actually occurred, and a holding gain

or loss resulting from the change in the exchange rate

should be recorded for the period or periods in which

the gain or loss occurs.

3.105 In principle, the actual exchange rate appli-

cable to each transaction should be used for currency

conversion. The use of a daily average exchange rate for

daily transactions usually provides a good approxima-

tion. If daily rates cannot be applied, average rates for

the shortest period should be used. Some transactions

occur on a continuous basis, such as the accrual of

interest over a period of time. For such flows, therefore,

an average exchange rate for the period in which the

flows occur should be used for currency conversion.

3.106 Derived measures (see Section H for the

definition of derived measures) relating to a period

are calculated by subtracting one type of flow from

another. In principle, therefore, derived measures of

flows in one currency (e.g., domestic currency) should

not be directly converted into another currency (e.g.,

foreign currency). First, the underlying flows them-

selves should be converted from the domestic currency

into the foreign currency. Then, the derived measures

in foreign currency can be calculated from the relevant

flows denominated in foreign currency. It is possible

that a derived measure, such as the current account

balance, denominated in one currency may be different

or even with the opposite sign from that denominated

in another currency. In addition to the variations in

exchange rates, the variations in the timing of underly-

ing flows cause the differences in a derived measure

denominated in different currencies.

3.107 Under a multiple exchange rate regime, two

or more exchange rates are applicable to different cat-

egories of transactions; the rates favor some categories

and discourage others. Such rates incorporate elements

similar to taxes or subsidies. Because the multiple rates

influence the values and the undertaking of transac-

tions expressed in domestic currency, net proceeds

implicitly accruing to authorities as a result of these

transactions are calculated as implicit taxes or subsi-

The difference between buying or selling prices and midpoint

prices represents a service charge (see paragraphs 10.122–10.123).

Chapter 3 g Accounting Principles

dies. The amount of the implicit tax or subsidy for each

transaction can be calculated as the difference between

the value of the transaction in domestic currency at

the actual exchange rate applicable and the value of

the transaction at a unitary rate that is calculated as a

weighted average of all official rates used for external

transactions. For conversion of positions of external

financial assets and liabilities in a multiple rate system,

the actual exchange rate applicable to specific assets

or liabilities at the beginning or end of the accounting

period is used.

3.108 Parallel (unofficial) or black market rates

cannot be ignored in the context of a multiple rate

regime and can be treated in different ways. For

instance, if there is one official rate and a parallel

market rate, the two should be handled separately.

Transactions in parallel markets should be converted

using the exchange rate applicable in that market. If

there are multiple official rates and a parallel rate, the

official rates and the parallel rate should be treated

as distinct markets in any calculation of a unitary

rate. Transactions effected at the parallel rate usually

should be converted separately at that rate. In some

instances, however, parallel markets may be consid-

ered effectively integrated with the official exchange

rate regime. Such is the case when most or all trans-

actions in the parallel market are sanctioned by the

authorities or when the authorities actively intervene in

the market to affect the parallel rate. In this instance,

the calculation of the unitary rate should include both

the official and parallel market rates. If only limited

transactions in the parallel market are sanctioned by

the authorities, the parallel rate should not be included

in the calculation of a unitary rate.

F. Aggregation and Netting

3.109 Transactions, other flows, and positions of

external financial assets and liabilities are presented

in the international accounts by grouping them into

several analytically meaningful categories. The clas-

sification of transactions, other flows, and positions of

financial assets and liabilities is aimed at developing

aggregates that group similar items and separate those

items that have different characteristics. Aggregates

and classifications are closely linked in that classifica-

tions are designed to produce the aggregates thought to

be most useful.

3.110 Aggregates are summations of elementary

items in a class of transactions, other flows, or posi-

tions. For example, compensation of employees is the

sum of all flows that are classified as compensation

of employees. For financial assets and liabilities, the

aggregation of position or flow data is usually done

across all institutional units within a subsector or sec-

tor. Aggregation is hierarchical in the sense that upper-

level aggregates are derived directly by summing the

lower-level aggregates.

3.111 Individual units may have the same kind of

transaction both as a credit and a debit—for exam-

ple, they may pay as well as receive interest or may

acquire foreign currency as well as sell the foreign

currency. Similarly, individual units may have the

same kind of financial instrument both as an asset

and as a liability—for example, they may have a

claim in the form of debt securities as well as a

liability in the form of debt securities.

3.112 Aggregations or combinations in which all

elementary items are shown for their full values are

called gross recordings (e.g., all interest credits are

aggregated separately from all interest debits). Aggre-

gations or combinations for which the values of some

elementary items are offset against the same items that

have an opposite sign are called net recordings (e.g.,

acquisitions of foreign currency are netted against the

sales of the foreign currency).

3.113 The international accounts follow gross

recording in the current and capital accounts. For goods

under merchanting, both purchases and resales of

goods are shown on a gross basis, although both entries

are shown under exports with a negative sign for pur-

chases (this is elaborated further in paragraph 10.44).

Gross recording is applicable in particular to income on

reverse investment where the direct investment enter-

prise owns less than 10 percent of the voting power

in the direct investor (reverse investment is described

in paragraphs 6.39–6.40). Acquisitions and disposals

of nonproduced, nonfinancial assets are recorded on a

gross basis. Capital transfers receivables and payables

are also recorded separately on a gross basis. Flows on

transactions in nonproduced, nonfinancial assets and

capital transfers are recorded on a gross basis, because

they are important in the context of cross-border analy-

sis. At the same time, the gross recording allows the

derivation of net flows, if needed, provided that a suf-

ficient level of detail is available.

3.114 In the case of flows in financial assets and liabil-

ities, the term “net” may have dual meanings (summing

all debits and credits for a financial asset type or a liability

type and netting of an asset against a liability). To avoid

confusion, this Manual adopts the following conventions:

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

(a) In the case of flows, “net recording” always

refers to aggregations for which all debit entries

of a particular asset or a particular liability are

netted against all credit entries in the same asset

type or in the same liability type (e.g., acquisi-

tions of foreign currency are netted against the

sales of the foreign currency; bond issues are

netted against redemption of bonds).

(b) When net is used together with a category of

financial instrument (net financial instrument),

such as “net financial derivatives,” netting of a

financial asset against the same type of liability

is understood.

term “net.” They are “net lending/borrowing”

and “net international investment position.”

3.115 The international accounts follow net record-

ing in the financial account and other changes in finan-

cial assets and liabilities account. Net recording, as

explained above, means aggregations or combinations

that show net changes (increases less reductions) in a

particular financial asset or a liability category on the

same side of the balance sheet. Financial assets (changes

in financial assets) should not be netted against liabili-

ties (changes in liabilities), except in certain circum-

stances as explained in paragraph 3.118.

3.116 Transactions and other flows in financial assets

and liabilities are recorded as net changes in financial

assets and net changes in liabilities, respectively. The

net recording principle should be applied at the lowest

level of classification of financial instruments taking

into account the functional, institutional sector, maturity,

and currency classifications, as applicable. Generally, the

net recording principle should be applied within a given

standard component of assets or liabilities.

3.117 In general, net recording of flows in financial

assets and liabilities are recommended in the inter-

national accounts from both the analytical and prag-

matic perspectives. Net acquisition of external financial

claims and net incurrence of external liabilities are

generally of more analytical interest than the gross

flows. Gross reporting of data may not be possible

for different classes of units and for some financial

instruments. Furthermore, transactions in some finan-

cial assets and liabilities often have to be derived from

balance sheet data because gross transactions are not

available. Nonetheless, gross flows may be a relevant

factor in analyzing aspects of the payments positions

or financial markets (e.g., securities transactions) of

economies, and such data can be used in supplementary

presentations when appropriate. For example, for direct

investment, equity increases and equity decreases may

be of analytical interest and may be shown separately

in supplementary presentations.

3.118 In some cases, a clear distinction between

assets and liabilities may not be feasible (such as for

financial derivatives in the form of forward contracts,

which could change between assets and liabilities).

In such cases, it may not be possible to apply the net

recording principle, which requires separate presenta-

tion of transactions in assets and transactions in liabili-

ties. For such financial instruments, net transactions in

assets and liabilities combined may have to be recorded

in the international accounts.

3.119 Positions of financial assets and liabilities are

recorded on a gross basis. Positions of the same type

of a financial instrument held as both a financial asset

and a liability are to be presented gross, so that assets

are recorded under assets and liabilities are recorded

under liabilities. For example, holding of short-term

debt securities as assets is presented separately from

the liability for short-term debt securities. For financial

derivatives, see also paragraph 6.60.

3.120 Consolidation is a method of presenting

statistics for a set of units as if they constituted a

single unit. Because the international accounts reflect

transactions involving residents and nonresidents and

external financial assets and liabilities, including

other flows associated with them, consolidation is not

relevant for international accounts of an individual

economy.

3.121 International accounts for a currency union,

economic union, or other regional arrangement may

be compiled by eliminating all transactions and asset-

liability relationships that occur between member econ-

omies of the region. In other words, in the international

accounts, a transaction of one economy is paired with the

same transaction as recorded for another member econ-

omy and both transactions are eliminated. For example,

if a unit in one economy owns a bond issued by a unit

in another member economy, then the stocks of bonds

held as assets and liabilities are reported excluding the

matched positions between the units of the member

economies. At the same time, interest receivable and

payable consolidated at the regional or currency union

level exclude the interest payable by residents of the

debtor economy to residents of the creditor economy in

the region or currency union. Similarly, sales of goods

and services between consolidated economies are also

eliminated. (For further information, see Appendix 3,

Chapter 3 g Accounting Principles

Regional Arrangements: Currency Unions, Economic

Unions, and Other Regional Statements.)

G. Symmetry of Reporting

3.122 Symmetry of reporting by counterparties

is important to ensure consistency, comparability,

and analytical usefulness of international accounts.

The quadruple-entry accounting system discussed in

paragraph 3.29 underlies symmetry of reporting. The

internationally agreed guidelines for definitions, clas-

sifications, time of recording and valuation principles,

and the quadruple-entry accounting system provide a

basis for conceptual consistency of reporting by both

parties or economies involved in a transaction or finan-

cial position. Correct application of these guidelines

and principles is important for bilateral comparisons,

global balances, and regional and global aggregates.

While symmetry rules apply to all financial instru-

ments, they do not fully apply to functional categories

of financial positions and transactions. For example,

transactions and positions in reserve assets are reflected

in the liabilities of counterparts in the rest of the world

under other functional categories, particularly portfolio

and other investment.

3.123 International accounts group the flow and posi-

tion data of individual units into sectoral and national

aggregates. International accounts also can be prepared

for a region and the world as a whole. Without apply-

ing strict consistency rules, it would be impossible to

give proper interpretation to various aggregates. These

requirements apply whether or not the data consolidate

flows and positions of the units they cover, and whether

or not they show any subgroups of units within the

overall total. However, consolidation is clearly impos-

sible without consistency in the basic data, and the

requirements of consistency are more obvious when

disaggregation of sectors is used.

3.124 Micro-level data on the basis of which the

international accounts are compiled do not necessarily

meet the consistency requirements needed for interna-

tional accounts. Differences in valuation, timing, and

classification may occur in many cases. Inconsistency

in valuation may often occur for barter transactions.

Different valuation bases may have been used by credi-

tors and debtors for some financial assets, such as non-

performing loans. Timing differences may occur not

only due to differences in timing zones and delays in

check-clearing systems, but also because units’ percep-

tions of the timing of changes in ownership and recog-

nition of revenues and expenses may vary.

3.125 Significant achievements have been made at

the national and international levels to come to more

uniform business accounting standards. Accordingly,

disparities between individual micro accounts have

tended to fall. Business accounting standards are geared

toward individual accounts, however, and therefore do

not necessarily ensure interunit consistency. Current

business accounting standards prescribe that loans be

treated differently depending on whether they appear

as a credit or a debit. This approach cannot be applied

in a consistent horizontal double-entry bookkeeping

system. Tax and supervisory regulations are a second

source for harmonization of accounting practices. In so

far as these rules differentiate between specific sections

of the economy, however, they also may be a cause for

discrepancies between micro accounts.

H. Derived Measures

3.126 Derived measures are not transactions or other

flows. They are economic constructs that are calculated

by subtracting one or more aggregates from one or

more other aggregates. They are important analytical

tools that summarize the values of selected flows or

stocks that have been individually recorded in the inter-

national accounts.

3.127 A derived measure cannot be obtained inde-

pendently of the other entries; as a derived entry, it

reflects the application of the general accounting rules

to the specific entries from which it is derived. Some

derived measures are essentially balancing items,

because they are obtained by subtracting the total value

of the entries on one side of an account from the total

value for the other side (e.g., net international invest-

ment position is equal to total external financial assets

minus total external liabilities).

3.128 Derived measures encapsulate a great deal of

information and include some of the most important

entries in the international accounts. However, they are

best understood and more analytically useful if consid-

ered together with the aggregates from which they are

derived.

3.129 Some important measures derived as balances

in the international accounts are as follows:

• Balance on trade in goods;

• Balance on trade in services;

• Balance on goods and services;

• Balance on goods, services, and primary income;

– current account balance;

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

• Net lending/net borrowing:

– from current and capital accounts;

– from financial account;

• Changes in net IIP arising from other flows (in total,

and for each of other changes in volume, exchange

rate changes, and other price changes); and

• Net international investment position.

This list is not comprehensive; other balances can be

derived as needed for analysis. For example, balances

on components in the financial account may be of

interest, such as net direct investment or net portfolio

investments.

Chapter 3 g Accounting Principles

CHAPTER

Economic Territory, Units,

Institutional Sectors,

and Residence

A. Introduction

Reference:

2008 SNA, Chapter 4, Institutional Units and Sectors.

4.1 This chapter is concerned with identifying statis-

tical units, grouping them (according to the institutional

sector classification), and identifying the economic ter-

ritory to which each entity is most closely connected

(according to the residence principles). The principles

for economic territory, units, institutional sectors, and

residence are harmonized across macroeconomic sta-

tistical guidelines, so this chapter identifies the general

principles as well as specific issues of relevance in an

international accounts context.

4.2 The principles in this chapter define the meaning

and coverage of each national economy. An economy

consists of the institutional units that are resident in the

economic territory of that economy. Most entities have

strong links with only one economy, so their residence

is clear, but with increasing international economic

openness, a growing number of institutional units have

connections to more than one economy.

B. Economic Territory

4.3 In its broadest sense, an economic territory can

be any geographic area or jurisdiction for which statis-

tics are required. The connection of entities to a par-

ticular economic territory is determined from aspects

such as physical presence and being subject to the juris-

diction of the government of the territory. These issues

are discussed in the residence section of this chapter

(see paragraphs 4.113–4.144).

4.4 The most commonly used concept of economic

territory is the area under the effective economic con-

trol of a single government. For the purposes of global

statistics and reporting to the IMF, it is important to

have data on all areas under control of a particular gov-

ernment, including special zones, even if for some of

the government’s own statistical purposes, those zones

are excluded or shown separately. Another kind of eco-

nomic territory is a currency or economic union, which

is dealt with in Appendix 3. Other types of economic

territory include a part of an economy, regions, or the

world as a whole. Economic territories reflect any pos-

sible scope for macroeconomic policy or analysis.

4.5 The economic territory includes:

(a) the land area;

(b) airspace;

jurisdiction is exercised over fishing rights and

rights to fuels or minerals;

(d) in a maritime territory, islands that belong to the

territory; and

(e) territorial enclaves in the rest of the world. These

are clearly demarcated land areas (such as embas-

sies, consulates, military bases, scientific stations,

information or immigration offices, aid agencies,

central bank representative offices with diplo-

matic status) that are physically located in other

territories and used by governments that own or

rent them for diplomatic, military, scientific, or

other purposes with the formal agreement of gov-

ernments of the territories where the land areas

are physically located. These areas may be shared

with other organizations, but the operations must

have a high degree of exemption from local laws

to be treated as an enclave. However, government

operations that are fully subject to the laws of the

host economy are not treated as enclaves, but as

residents of the host economy.

4.6 Economic territory has the dimensions of legal

jurisdiction as well as physical location, so that cor-

porations created under the law are part of that econ-

omy. The concepts of economic territory and residence

are designed to ensure that each institutional unit is a

resident of a single economic territory. The use of an

economic territory as the scope of economic statistics

means that each member of a group of affiliated enter-

prises is part of the economy in which it is resident,

rather than being attributed to the economy of its head

office. The focus on data for an economic territory

means that, in a few cases, a legal entity may be split

for statistical purposes into separate units in different

territories, as elaborated in paragraphs 4.26–4.49.

International organizations

4.7 The economic territory of an international orga-

nization (defined in paragraphs 4.103–4.107) consists

of territorial enclave(s) over which the organization has

jurisdiction. These enclaves are clearly demarcated land

areas or structures that the international organization

owns or rents and uses, and that are formally agreed on

with the government of the territory, or territories, in

which the enclave(s) are physically located. Each inter-

national organization is an economic territory in its own

right, covering operations from all its locations.

Special zones

4.8 Sometimes a government has a separate physical

or legal zone that is under its control, but to which, to

some degree, separate laws are applied. For example,

a free trade zone or offshore financial center may be

exempt from certain taxation or other laws. Because of

the need to view the whole economy, to have compre-

hensive global data, and to be compatible with partner

data, these special zones always should be included in

the economic statistics of that economy. While national

totals showing all economic activities in the economy

are required for international purposes, separate data

may be prepared for different subsets of the economy.

To the extent that different laws and policies may apply,

and persons, goods, and finance do not flow completely

freely between a zone and the rest of the economy, a

government may wish to have data to support sepa-

rate analysis of either or both the special zone and the

remainder of the economy.

Changes in economic territory

4.9 The scope of an economic territory may change

under several circumstances:

(a) The passing of control of a geographic area from

one government to another by mutual agreement

or under a decision of an international court or

arbitrator. These exchanges satisfy the definition

of a transaction. Accordingly, assets conveyed

from one government to the other are recorded

as an acquisition of land (in the capital account)

or equipment and buildings (in goods and ser-

vices,

respectively, if they can be separated). If

the exchange is made in exchange for payment or

extinguishing of a prior liability, the correspond-

ing entry is a financial account entry for the

agreed amount. If there is no amount payable,

the corresponding entry is a capital transfer. If

there is a mutual exchange of land or buildings,

both entries in the exchange are shown on a gross

basis (capital account for land, construction in

the goods and services account for buildings). In

addition to these cases involving the two govern-

ments, the exchange of territory could change

the territory of residence of other institutional

units. As with other changes in residence, these

would result in other changes in the volume of

assets. (The effects of changes of residence are

covered in paragraphs 9.21–9.23.)

(b) Change in the status of a particular area by

seizure. Because this change in status is not by

mutual agreement (defined in GFSM 2001 para-

graph 3.5), it is not a transaction. (However, any

institutional units that changed residence could

have other changes in financial assets and liabil-

ities; see paragraphs 9.21–9.23.)

to have a single national government may be seen

as an absorption of one territory by another or

the elimination of two territories and the creation

of another. These arrangements result in entries

in the other changes in volume account (namely,

elimination of cross-border liabilities between

the two previous constituent territories and pos-

sible reclassifications for economies having asset

or liability positions with either territory).

(d) The split of a single economic territory into

two or more territories is not in itself a transac-

tion. However, there may be associated flows

between the parties, for example, compensation

for assuming liabilities that would qualify as

transactions and be classified according to usual

definitions. There also would be entries in the

other changes in volume account for the appear-

The inclusion of international transactions in new and existing

buildings in services is discussed in paragraph 10.108.

Chapter 4 g Economic Territory, Units, Institutional Sectors, and Residence

ance of cross-border liabilities between the two

separating economies.

When such events occur, it is essential that metadata

are provided to assist users in understanding how the

territorial changes affect the data.

Joint zones

4.10 In some cases, areas are under joint administra-

tion or sovereignty, that is, an area is under the effective

economic control of two or more governments. These

areas can be called joint administration or sovereignty

zones. Because, typically, they have laws that differ from

the primary territories of the individual governments, the

zone could be considered an economic territory in its

own right. Because the number of enterprises in these

zones typically is small, however, it may be preferred to

split the enterprises in the zone between the primary ter-

ritories rather than publish separate data for the zone. The

method of splitting should be to prorate on the basis of a

relevant factor according to the circumstances, such as

some operational indicator or equal proportions for each

of the primary territories. This general guidance needs to

be applied appropriately to the economic circumstances

faced. For instance, when the enterprises that account for

the vast majority, or all, of the economic activity in the

zone are effectively operated from the economy of just

one of the sovereign authorities, it may be preferred to

treat those enterprises as residents of that economy, show-

ing the other economy as recipient of its share of property

income, taxes, and so on, and avoiding most of the com-

plexities of prorating for those enterprises. The statisti-

cal compilers of each primary territory involved should

consult with each other to adopt consistent methods with

no gaps or overlaps. Through metadata and consultations,

they may also assist compilers in counterpart economies

to ensure consistency of bilateral data.

Definition of an economy

4.11 An economy consists of all the institutional

units that are resident in a particular economic terri-

tory. The concepts of institutional units and residence

are the subject of sections C and E of this chapter,

respectively.

C. Units

4.12 Different types of institutional units are

explained in more detail in this section. Institutional

units and local enterprise groups may be used in inter-

national accounts. Statistical units other than institu-

tional units and enterprises are also described briefly

in this section.

1. General principles on institutional units

Reference:

2008 SNA, Chapter 4, Institutional Units and Sectors.

4.13 The main attributes of an institutional unit

are that:

(a) it is entitled to own goods or assets in its own

right; it is, therefore, able to exchange the owner-

ship of goods or assets in transactions with other

institutional units.

(b) it is able to take economic decisions and engage

in economic activities for which it is itself held to

be directly responsible and accountable at law.

take on other obligations or future commitments,

and to enter into contracts.

(d) either a complete set of accounts, including a bal-

ance sheet, exists for the unit, or it would be pos-

sible and meaningful, from both an economic

and legal viewpoint, to compile a complete set of

accounts if they were to be required.

Institutional units are recognized in the cases of

branches and notional resident units (as discussed in

paragraphs 4.26–4.44) even though they may not fully

satisfy criteria (a), (b), and (c).

4.14 There are two main types of units in the real

world that may qualify as institutional units:

(a) households—persons or groups of persons; and

(b) corporations (including quasi-corporations), non-

profit institutions, and government units—legal

or social entities whose existence is recognized

by law or society independently of the persons,

or other entities, that may own or control them.

a. Corporations

4.15 Corporations in the legal sense are separate

legal entities, so qualify as institutional units, except as

discussed in paragraph 4.18. In addition to corporations

in the legal sense, some arrangements that are not legal

entities in their own right may be recognized as being

institutional units, including cooperatives, limited lia-

bility partnerships that are not incorporated, notional

resident units, and other quasi-corporations. For exam-

ple, branches in separate economies from their head

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

offices and partnerships are not separate legal entities,

and so they do not satisfy criteria (a), (b), and (c) in

terms of legal capacity, but may be treated as corpora-

tions because they behave in similar ways.

Quasi-corporations

4.16 A quasi-corporation is an unincorporated busi-

ness that operates as if it were an entity separate from

its owner(s). It is treated as if it were a corporation. In

this Manual, the term “corporations” includes quasi-

corporations. Types of quasi-corporations are discussed

in paragraphs 4.26–4.49 and may include branches,

notional residents for ownership of land, trusts, and so

on. The intent behind the concept of a quasi-corpora-

tion is to separate from their owners those unincorpo-

rated enterprises that are sufficiently self-contained,

that is, that behave as if they were corporations.

4.17 For example, a partnership that includes a large

number of partners or partners from different economies

would normally have its accounts and affairs delineated

from its individual owners, and therefore qualify as a

quasi-corporation. A partnership may be limited liabil-

ity or not; however, this does not determine whether

the partnership meets the criteria to be recognized as a

quasi-corporation. As well as private businesses, quasi-

corporations can arise in the public sector when gov-

ernments produce market output, charge economically

significant prices, and have their own accounts. A quasi-

corporation in one economy may be owned by residents

of the same economy, nonresidents, or a combination of

both. Some unincorporated businesses do not satisfy the

requirements to be a quasi-corporation, typically busi-

nesses owned by members of a single household, and

where the business activities are not separated from other

household affairs. (However, the criteria for recognizing

a branch in paragraph 4.27 mean that significant cross-

border businesses will almost always be recognized as

quasi-corporations.)

Resident artificial subsidiaries

4.18 A resident artificial subsidiary is a company set

up to avoid taxes, to minimize liabilities in the event

of bankruptcy, or to secure other technical advantages

under the tax or corporation legislation in force in a par-

ticular economy. As the term is used in the 2008 SNA,

Chapter 4, Institutional Units and Sectors, an artificial

subsidiary is incorporated or created in the same econ-

omy as its parent and is merged into an institutional unit

with its owner. An entity incorporated in one economy

is never combined with a nonresident owner into a single

institutional unit. Entities in different economies are

not combined because combining across borders would

undermine the concept of the economy as the focus of

macroeconomic statistics. As well, an entity that has two

or more owners who are resident in different economies

cannot be combined with its owners.

4.19 An ancillary corporation is a wholly owned

subsidiary whose productive activities are confined to

providing services to the parent corporation or other

affiliates owned by the same parent corporation. Like

other direct investment enterprises, an ancillary cor-

poration in another economy to that of its owners is a

separate entity from its owners, even though it is not, in

practice, autonomous. Examples of ancillary services

that are sometimes undertaken through subsidiaries

abroad include transport, purchasing, sales and market-

ing, financing, various kinds of business services, com-

puting and communications, security, maintenance,

and cleaning. (For information about recording these

services, see Chapter 10, Part C, Services, and particu-

larly paragraph 10.150.)

b. Splitting and combining legal entities

4.20 Because the focus of economic statistics is on

a single economy, a legal entity may be split into sepa-

rate institutional units for statistical purposes. The step

is taken because each of the parts has such a strong

connection with the economic territory in which it is

located that it should be considered as part of that econ-

omy. In these cases, identifying separate institutional

units resident in each economy allows a more com-

prehensive view of the economies concerned. Cases

include branches, ownership of land, and other arrange-

ments discussed in paragraphs 4.26–4.44. Similarly,

households are defined such that they consist only of

individuals who are resident in the same territory, even

if individuals who are resident in different territories

share expenses and decision making. This definition

avoids a single household having members who are

resident in different economies.

4.21 As noted in paragraph 4.18, legal entities that

are residents of different economies are never combined

in the macroeconomic statistics for a single economy.

However, entities are combined in the case of an artifi-

cial subsidiary if the subsidiary and parent are resident

in the same economy. Accordingly, a corporation is

always resident in its economy of incorporation, in its

own right, or as part of an institutional unit resident in

the same economy.

4.22 Having a set of accounts (or potentially having

them, see paragraph 4.13(d)) provides an important indi-

Chapter 4 g Economic Territory, Units, Institutional Sectors, and Residence

cation of the status as a separate institutional unit. The

existence of accounts (or the records that could be used

to produce them) provides evidence of the existence of a

unit for which transactions are implemented and can be

measured. It also ensures that data can be obtained for

such units. The definition of an institutional unit has no

requirement that the unit be effectively autonomous, so a

wholly owned subsidiary corporation can be recognized

as a separate institutional unit from its parent, because

corporations satisfy the criteria for an institutional unit

in paragraph 4.13. For statistical purposes, corporations

may be combined if they are residents of the same econ-

omy (under circumstances discussed in paragraph 4.18)

and direct investment data may be collected for a local

enterprise group (discussed in paragraph 4.55).

c. Enterprises

4.23 An enterprise is defined as an institutional unit

engaged in production. Investment funds and other cor-

porations or trusts that hold assets and liabilities on behalf

of groups of owners are also enterprises, even if they are

engaged in little or no production. (As discussed in para-

graphs 10.124–10.125, institutional units that hold assets

on behalf of their owners are providers of financial ser-

vices to their owners.) An enterprise may be a corporation

(including a quasi-corporation), a nonprofit institution, or

an unincorporated enterprise. Corporate enterprises and

nonprofit institutions are complete institutional units. An

unincorporated enterprise, however, refers to a part of an

institutional unit—a household or government unit—only

in its capacity as a producer of goods and services.

d. Implementation

4.24 There may be some variation from institutional

unit definitions in practice because of data sources; for

example, arising from consolidation or use of admin-

istrative approximations. These variations should be

monitored by statistical compilers to identify possible

problems (e.g., cross-border or cross-sector consolida-

tion). It is important that both data suppliers and com-

pilers have a clear understanding of the scope of the

unit being reported—a single legal entity, a selected

group of legal entities, or all the legal entities under

common ownership. Otherwise, some values could be

omitted, double-counted, or misclassified.

2. Identification of institutional units with

cross-border elements

4.25 Artificial institutional units are sometimes iden-

tified by breaking up an actual entity. However, to avoid

excessive creation of artificial units, such cases are lim-

ited to the few circumstances discussed in this section.

a. Branches

4.26 When a nonresident unit has substantial opera-

tions over a significant period in an economic terri-

tory, but no separate legal entity for those operations, a

branch may be identified as an institutional unit. This

unit is identified for statistical purposes because the

operations have a strong connection to the location of

operations in all ways other than incorporation.

4.27 The identification of branches as separate insti-

tutional units requires indications of substantial opera-

tions that can be separated from the rest of the entity,

to avoid creating numerous artificial units. A branch is

recognized in the following cases:

(a) Either a complete set of accounts, including a

balance sheet, exists for the branch, or it is pos-

sible and meaningful, from both an economic

and legal viewpoint, to compile these accounts if

they were to be required. The availability of sep-

arate records indicates that an actual unit exists

and makes it practical to prepare statistics.

In addition, one or both of the following factors tend to

be present for a branch:

(b) The branch undertakes or intends to undertake

production on a significant scale that is based in

a territory other than that of its head office for

one year or more:

(i) if the production process involves physi-

cal presence, then the operations should be

physically located in that territory. Some

indicators of an intention to locate in the ter-

ritory include purchasing or renting business

premises, acquiring capital equipment, and

recruiting local staff; or

(ii) if the production does not involve physical

presence, such as some cases of banking,

insurance, other financial services, owner-

ship of patents, and “virtual manufacturing,”

the operations should be recognized as being

in the territory by virtue of the registration

or legal domicile of those operations in that

territory; or

the income tax system, if any, of the economy

in which it is located even if it may have a tax-

exempt status. (Usually, treatments by taxa-

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

tion authorities are a guide to the existence of

branches, because the authorities are reluctant

to exempt substantial operations within their

jurisdiction.)

4.28 The identification of branches has implica-

tions for the statistical reporting of both the parent

and branch.

The operations of the branch should be

excluded from the institutional unit of its head office

in its home territory and the delineation of parent and

branch should be made consistently in both of the

affected economies. Each branch is a direct invest-

ment enterprise. Branches most commonly arise for

financial and nonfinancial corporations, but it is also

possible that households, nonprofit institutions serving

households (NPISHs), or governments (when govern-

ment operations do not have diplomatic immunity) may

have branches.

Construction projects

4.29 Some construction projects undertaken by a

nonresident contractor may give rise to a branch (direct

investment enterprise). Construction may be carried

out or managed by a nonresident enterprise, without the

creation of a local legal entity:

(a) For major projects (such as bridges, dams, power

stations) that take a year or more to complete and

that are managed through a local site office, the

operations would usually satisfy the criteria for

identification of a branch in paragraph 4.27 and

so would not be classified as trade in services;

(b) In other cases, the construction operations may

not satisfy the conditions for recognition as a

branch, for example, for a short-term project or

one based from the home territory rather than a

local office. In those cases, the work provided

to customers resident in the territory of those

operations is classified as international trade

in construction and included in services (i.e.,

an export of services by the home base and an

import of services by the territory of operations).

Paragraphs 10.101–10.108 discuss construction

operations included under services.

Production delivered from a base

4.30 Activities such as consulting, maintenance,

training, technical assistance, and health care may be

The international accounts use of branch as a term is more limited

than common usage, where “branch” may also mean establishments,

incorporated subsidiaries, or industrial classification groups.

provided by a branch or from a home base. If opera-

tions are substantial enough to satisfy the criteria given

in paragraph 4.27, a branch would be recognized as

a direct investment enterprise. On the other hand, if

a branch is not recognized in the territory, the opera-

tions will give rise to international trade in services.

The residence of units providing services in this way is

discussed in paragraph 4.136.

4.31 Mobile equipment, such as ships, aircraft,

drilling platforms, and railway rolling stock, may

operate across more than one economic territory. The

criteria for recognition of a branch also apply in these

cases. That is, if the operations in a territory outside

the home base are substantial enough, they meet the

definition of a branch. For example, a secondary base

for servicing the fleet with long-term presence and its

own accounts may satisfy the definition of a branch.

(If they do not satisfy the definition of a branch, the

activities of the ship-operating enterprise are included

in the economy where the operator is resident; see

paragraph 4.136.)

4.32 Similarly to mobile equipment, a multiter-

ritory pipeline that passes through a territory, but is

not operated by a separate legal entity in that terri-

tory, would be recognized as constituting a branch if

there is a substantial presence, availability of sepa-

rate accounts, and so on. In cases in which such

operations are not separate institutional units (a)

there may be payment of rent to a notional unit own-

ing the land or a long-term lease of land, of the kind

discussed in paragraphs 4.34–4.40; or (b) there may

be a multiterritory enterprise of the type discussed in

paragraphs 4.41–4.44.

4.33 When a branch is identified, there are direct

investment inflows to the territory, but the provision of

goods or services to customers in that territory is a resi-

dent-to-resident transaction. In contrast, if the opera-

tions are not substantial enough to qualify as a branch,

the provision of goods or services to customers in that

territory are imports of that territory.

b. Notional resident units for land and other

natural resources owned by nonresidents

4.34 When land located in a territory is owned by a

nonresident entity, a notional resident unit is identified

for statistical purposes as being the owner of the land.

Because land and buildings produce rental services

(see paragraph 10.157), the notional unit is usually an

enterprise. A notional unit is also identified for a lease

of land, or buildings, or land and buildings together

Chapter 4 g Economic Territory, Units, Institutional Sectors, and Residence

by a nonresident for long periods. This notional resi-

dent unit is a kind of quasi-corporation. The notional

resident unit is also treated as the owner of any build-

ings, structures, and other improvements on that land

that belong to the same nonresident owner. The non-

resident is treated as owning the notional resident unit,

rather than owning the land or structures directly.

This treatment is designed so that land and other natu-

ral resources are always assets of the economy in

whose territory they are located. Otherwise, the land

would appear in another economy’s national balance

sheet. The situation in which the land is acquired or

sold for an embassy or other enclave is discussed in

paragraph 13.10.

4.35 A nonresident with a resource lease is classi-

fied as incurring rent and no notional unit is automati-

cally created. (Rent and resource leases are defined in

paragraph 11.85.) However, it is usually the case that

ownership of land and other natural resources such

as subsoil assets, noncultivated biological resources,

water, and rights to use these assets through a lease or

other permit over long periods are associated with a

branch (see paragraph 4.27). In addition, preliminary

expenses for an entity to be incorporated in the future

are to be regarded as a notional direct investment enter-

prise (see paragraph 4.47).

4.36 The operations of notional resident units include

holding the asset, paying any associated expenses (such

as insurance, repairs, and taxes), collecting rent or

rental on the asset,

and any other transactions associ-

ated with those functions. If the nonresident owner uses

the property, the notional resident unit generates rent

(in the case of unimproved land, mineral rights, and

so on, see paragraph 11.85) or rental included in travel

or operating leasing services (for land with buildings

or other improvements, see paragraphs 10.99, 10.100,

and 10.157) in kind to its owner. The corresponding

entry to the rent or rental would be income payable in

kind to the owner by the notional resident unit. The

notional resident unit should also be treated as incur-

ring expenses and taxes; payments by the nonresident

owner to meet a loss arising from these costs therefore

would be recorded as direct investment flows from the

owner to the notional resident unit. Other transactions

of the owner would not be attributed to the notional res-

ident unit, for example, any borrowing or debt service.

As a result of the limited nature of notional resident

The distinction between rent and rental is explained in para-

graphs 10.153 and 11.84–11.86.

units, making acceptable estimates for their operations

is generally feasible when they are significant.

4.37 When the ownership of land and other natu-

ral resources is associated with substantial operations,

so that the requirements in paragraph 4.27 are met, a

branch is identified. In such cases, a notional resident

unit is not identified because the branch already exists

as a resident owner.

4.38 The notional resident unit that owns land

or other natural resources may be contrasted with a

branch, which has a full set of accounts. An example is

a nonresident fishing operator having a 10-year fishing

license for the waters of a territory. If the operator has a

base in the territory, keeps separate records, and so on,

then a branch is identified, and its accounts will show

sales of fish and other transactions. Another example

could be a commercial farm owned by a nonresident

entity. In contrast, the only activity of a notional unit

will be the supply of rent or rental services arising from

the ownership of property.

4.39 When several partners own land, there may be

a quasi-corporation, as in paragraph 4.49, by virtue of

the management of the land being separate from that

of its individual owners. In that case, for statistical

purposes, the nonresident partners would own a share

in the quasi-corporation, so there would be no need

to identify an additional notional resident unit. The

notional resident unit for ownership of land is almost

always a direct investment enterprise (the exception

being for land where an individual nonresident’s voting

power was below 10 percent).

4.40 Some kinds of time-share accommodation

arrangements give rise to a notional resident unit (see

paragraph 10.100 and Table 10.3 for a discussion of

alternative arrangements).

c. Multiterritory enterprises

4.41 Some enterprises may operate as a seam-

less operation over more than one economic territory.

Although the enterprise has substantial activity in more

than one economic territory, it is run as an indivis-

ible operation with no separate accounts or decisions,

so that no separate branches can be identified. Such

enterprises may have operations including shipping

lines, airlines, hydroelectric schemes on border rivers,

pipelines, bridges, tunnels, and undersea cables. Some

NPISHs also may operate in this way.

4.42 Governments usually require separate entities

or branches to be identified in each economic territory

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

for more convenient regulation and taxation. Multiter-

ritory enterprises may be exempted from such require-

ments, but there may be arrangements, such as a formula

for payment of taxation to the respective authorities.

4.43 In the case of a multiterritory enterprise, it

is preferable that separate institutional units be iden-

tified for each economy, as discussed in paragraphs

4.26–4.33. If that is not feasible because the operation

is so seamless that separate accounts cannot be devel-

oped, it is necessary to prorate the total operations of

the enterprise into the individual economic territories.

The factor used for prorating should be based on avail-

able information that reflects the contributions to actual

operations. For example, equity shares, equal splits, or

splits based on operational factors such as tonnages or

wages could be considered. Where taxation authori-

ties have accepted the multiterritory arrangements, a

prorating formula may have been determined, which

should be the starting point for statistical purposes.

Although the situation is somewhat different from the

case of joint administration or sovereignty zones, dis-

cussed under economic territory in paragraph 4.10, the

solution of prorating may be the same.

4.44 The proration of the enterprise means that

all transactions need to be split into each component

economic territory. The treatment is quite complex to

implement. This treatment has implications for other

statistics and its implementation should always be coor-

dinated for consistency. Compilers in each of the terri-

tories involved are encouraged to cooperate to develop

consistent data, avoid gaps, and minimize respondent

and compilation burden, as well as assist counterparties

to report bilateral data on a consistent basis.

d. Joint ventures

4.45 A joint venture is a contractual agreement between

two or more parties for the purpose of executing a busi-

ness undertaking in which the parties agree to share in the

profits and losses of the enterprise as well as the capital

formation and contribution of operating inputs or costs.

It is similar to a partnership, but typically differs in that

there is generally no intention of a continuing relationship

beyond the original purpose. A joint venture does not

involve the creation of a new legal entity.

4.46 Whether a quasi-corporation is identified for

the joint venture depends on the arrangements of the

parties and legal requirements. The joint venture is

a quasi-corporation if it meets the requirements for

an institutional unit, particularly by having its own

records. Otherwise, if each of the operations are effec-

tively undertaken by the partners individually, then the

joint venture is not the institutional unit and the opera-

tions would be seen as being undertaken by the joint

venture partners separately. (In that case, there would

usually be direct investment enterprises that undertook

the joint venture operations of each of the partners.)

Because of the ambiguous status of joint ventures, there

is a risk that they could be omitted or double-counted,

so particular attention needs to be paid to them.

e. Quasi-corporations identified prior to

incorporation

4.47 A resident enterprise is identified when prelim-

inary expenses, including mining rights, license fees,

site preparation, building permits, purchase taxes, local

office expenses, and lawyers’ fees, are incurred prior

to establishing a legal entity. As a result of identify-

ing a quasi-corporation, those preparatory expenses are

recorded in the economy of the future operations as

being resident-to-resident transactions that are funded

by a direct investment inflow, rather than as sale of

nonproduced assets to nonresidents, exports of legal

services, and so on. Because of the limited scale of

these activities, assembly of acceptable data for these

enterprises is often feasible, despite the lack of incor-

poration. If the project does not subsequently go into

operation, the value of the direct investment is elimi-

nated by an entry for other changes in the volume of

assets or liabilities.

f. Trusts

4.48 Trusts are legal arrangements that have

aspects of legal identity separate from their ben-

eficiaries and trustees. Similarly, the estate of a

deceased person is held by an administrator (execu-

tor or trustee) on behalf of the beneficiaries and

is separate from the executor’s other property. A

trust is a legal device by which property is held in

the name of one party or parties (the administrator

or trustee) who is under a fiduciary obligation to

hold assets for the benefit of another party or parties

(the beneficiary or beneficiaries). (In some cases, a

person can be both trustee and beneficiary.) Founda-

tions and other fiduciary arrangements may have

similar functions. Administrators and trustees are

required to keep the trust and estate assets separate

from their personal property and they must account

to the beneficiaries for the income and assets. These

legal arrangements are treated as separate institu-

tional units—that is, as quasi-corporations—if they

are constituted in a different territory to that of any

Chapter 4 g Economic Territory, Units, Institutional Sectors, and Residence

of the beneficiaries or otherwise satisfy the defini-

tion of a quasi-corporation. This treatment is neces-

sary because it is neither meaningful nor feasible for

the trust assets to be allocated to the beneficiaries

and then be combined with the assets of beneficia-

ries who are resident in another economy.

Trusts

can be used for businesses, asset management, and

nonprofit institutions. (Related issues are nominee

accounts, covered in paragraph 4.160, and depository

receipts, covered in paragraph 4.161.)

g. Other unincorporated enterprises

4.49 As stated in paragraph 4.16, a quasi-corporation

is an unincorporated business that operates as if it were

an entity separate from its owners. There is almost always

a quasi-corporation if the operations are in a separate

economy from at least one of their owners, because taxa-

tion, other laws, and convenience are all factors that tend

to prevent the affairs of residents of different economies

from being mixed. This treatment is applied whether a

branch, trust, limited liability or other type of partnership,

or other legal structure is used.

h. Flexible corporate structures with little or no

physical presence

4.50 Special purpose entities (SPEs) or vehicles,

international business companies, shell companies,

shelf companies, and brass plate companies are all

labels that are applied to flexible legal structures in

particular jurisdictions, which offer various benefits

that may include any or all of low or concessional tax

rates, speedy and low-cost incorporation, limited regu-

latory burdens, and confidentiality. Although there is

no internationally standard definition of such compa-

nies, typical features of these entities are that their

owners are not residents of the territory of incorpora-

tion, other parts of their balance sheets are claims on or

liabilities to nonresidents, they have few or no employ-

ees, and they have little or no physical presence.

4.51 Some purposes that such structures are used

for include (a) holding and managing wealth for indi-

viduals or families, (b) holding assets for securitization,

panies (such a company may be called a conduit), (d)

as holding companies that own shares in subsidiaries

but without actively directing them, (e) as securitiza-

tion vehicles, (f) as ancillary companies in different

Indeed, the beneficiaries may be uncertain (with a discretionary

trust) or even unborn.

economies to that of their parent, and (g) carrying out

other financial functions. The “captive financial insti-

tutions and money lenders” institutional sector class

is applicable to many of these entities, as discussed in

paragraphs 4.82–4.87. Although these entities do not

have a standard international definition, the possibil-

ity of recording them separately according to national

definitions is discussed in paragraph 4.87.

4.52 These entities are always treated as separate

institutional units if they are resident in a different ter-

ritory to that of their owners.

3. Statistical units other than institutional

units and enterprises

Reference:

2008 SNA, Chapter 5, Enterprises, Establishments and

Industries.

Establishments

4.53 An establishment is an enterprise, or part of an

enterprise, that is situated in a single location and in

which only a single productive activity is carried out or

in which the principal productive activity accounts for

most of the value added. The breaking up of enterprises

into one or more establishments is useful because some

enterprises are large and complex, with different kinds

of economic activity undertaken in different locations.

The establishment is particularly useful as a unit for

production statistics. Because the establishments of

a multiestablishment enterprise are part of the same

legal entity, financial transactions and positions cannot

always be attributed to a particular location or activity,

so the use of the institutional unit concept is appropriate

for statistics covering financial transactions and posi-

tions, such as the balance of payments and IIP.

Local and global enterprise groups

4.54 Groups of enterprises are sometimes iden-

tified in defining and classifying direct investment.

Although enterprises are the basic unit of economic

statistics, a single owner or group of owners may have

control of more than one enterprise, so they may act

in a concerted way and the transactions between the

enterprises may not be driven by the same concerns as

“arm’s-length” transactions, that is, those with unre-

lated enterprises.

4.55 Enterprise groups may be either global or local.

A global enterprise group refers to an investor and all

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

the enterprises under that investor, whereas the local

(or territory-specific) enterprise group refers to an

investor and the legal entities under that investor

that are resident in the reporting economy. Business

accounting may cover groups of related corporate

entities (consolidated accounts) including entities

that are resident in different economies. However,

entities in different economies are not aggregated

for macroeconomic statistics that have a focus on an

economy. The concepts of global enterprise groups

and local enterprise groups are used in the OECD

Benchmark Definition of Foreign Direct Investment.

The global enterprise group is also called a multina-

tional enterprise.

4.56 Local enterprise groups may be used for com-

piling and presenting direct investment statistics. For

example, if direct investment is initially channeled

to a holding company and then on to a manufactur-

ing subsidiary, then it may shed light to classify the

direct investment in manufacturing rather than in a

holding company operation, which is just the initial

investment. The implications of combining entities

in different institutional sectors need to be carefully

considered.

D. Institutional Sectors

References:

2008 SNA, Chapter 4, Institutional Units and Sectors.

IMF, MFSM 2000, Chapter 3, Institutional Units and

Sectors.

IMF, GFSM 2001, paragraphs 2.28–2.62 (for general

government and public sectors).

1. General principles

4.57 Institutional units are grouped into institu-

tional sectors. The units in each sector have similar

economic objectives, functions, and behavior. The

institutional sector classification is mainly applied to

resident units, but it also could be applied to compiling

supplementary data on the sector of the nonresident

counterpart. For example, in an economy that received

international aid, there may be interest in separating

data on aid provided by other governments from aid

provided by private sources.

4.58 When an ancillary corporation is a separate

institutional unit, according to the criteria in paragraph

4.19, it is classified as financial or nonfinancial accord-

ing to the activities it undertakes, rather than according

to the predominant sector of the company or companies

it serves.

4.59 The SNA institutional sector classification is

shown in Table 4.1. The international accounts insti-

tutional sector classification is shown in Table 4.2.

It has the same sectors and subsectors as the SNA

institutional sector classification shown in Table 4.1,

but with order and groupings to allow greater back-

ward compatibility with the BPM5 classification and

a shorter list of sectors for economies in which it is

not practical to implement the full classification. The

other sectors category includes both financial and

nonfinancial sectors, so it is recommended that, at

least, the financial corporations be identified sepa-

rately. The full institutional sector detail is required

for international accounts to be fully integrated with

monetary, flow of funds, and other financial data.

Public corporations may be identified separately on

a supplementary basis, as discussed in paragraphs

4.108–4.112.

4.60 Transactions in financial instruments recorded

in the balance of payments raise particular issues con-

cerning attribution of institutional sector. The eco-

nomic owner of the asset, the creditor, is invariably

one party to any change of economic ownership of the

asset. Therefore, for assets, sector attribution by credi-

tor and by transactor coincide. A claim on a resident

debtor, however, may change ownership between a

resident creditor and a nonresident creditor so that the

domestic sector of the debtor may not coincide with

that of the transactor. For instance, the issuer may

be a resident in one institutional sector, the seller a

resident in another institutional sector, and the buyer

a nonresident.

4.61 Although the sector classification for IIP lia-

bilities is clearly according to the issuer, for the sector

data in the financial account, there are both practical

and analytical considerations over whether the sec-

tor allocation should be determined according to the

issuer or the seller. By convention, the sector of the

debtor is the one that determines the classification of

the change of ownership that has occurred, because the

original nature of the liability is generally considered

more significant than the identity of the resident seller

of the claim. These issues are discussed in the context

of partner economy data in paragraphs 4.152–4.154

and 14.24.

The same issues apply for financial instru-

An additional factor for institutional sector data is that, in the

national accounts, data for the sector of the seller will show a dis-

posal of an asset.

Chapter 4 g Economic Territory, Units, Institutional Sectors, and Residence

ments issued by a resident that are sold by a nonresident

holder to a resident buyer.

2. Definitions of institutional sectors and

subsectors

a. Nonfinancial corporations

4.62 Nonfinancial corporations are corporations

whose principal activity is the production of mar-

ket goods or nonfinancial services. These include

legally constituted corporations, branches of non-

resident enterprises, quasi-corporations, notional

resident units owning land, and resident nonprofit

institutions that are market producers of goods or

nonfinancial services.

b. Financial corporations

Reference:

IMF, Monetary and Financial Statistics Compilation

Guide, Chapter 3, Institutional Units and Sectors.

4.63 Financial corporations consist of all corpo-

rations and quasi-corporations that are principally

engaged in providing financial services, including

insurance and pension fund services, to other institu-

tional units. The production of financial services is the

result of financial intermediation, financial risk man-

agement, liquidity transformation, or auxiliary finan-

cial services. In other manuals, financial corporations

are sometimes called financial institutions.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 4.1. SNA Classification of Institutional Sectors

(Includes 2008 SNA codes)

S1 Total economy

S11 Nonfinancial corporations

S12 Financial corporations

S121 Central bank

S122 Deposit-taking corporations, except the central bank

S123 Money market funds (MMFs)

S124 Non-MMF investment funds

S125 Other financial intermediaries, except insurance corporations and pension funds

S126 Financial auxiliaries

S127 Captive financial institutions and money lenders

S128 Insurance corporations

S129 Pension funds

S13 General government

General government classification—alternative A

S1311 Central government

S1312 State government

S1313 Local government

S1314 Social security funds

General government classification—alternative B

S1321 Central government

S1322 State government

S1323 Local government

S14 Households

S15 Nonprofit institutions serving households

S2 Rest of the world

May be classified in the same way as resident institutional sectors, with the addition of:

International organizations

International financial organizations

Central bank of currency union

Other

International nonfinancial organizations

Note:

The SNA sector classification also includes scope for a subsector for foreign-controlled corporations, defined similarly, but not identically, to direct

investment subsidiaries. It also allows for separate identification of nonprofit institutions and for-profit institutions within the corporations sectors.

Supplementary “of which” items may be provided for public corporations.

Additional subsector may be identified for monetary authorities, where needed, as discussed in paragraph 4.70.

Including social security funds of this level of government.

If the reporting economy is a member state of a currency union.

4.64 Financial corporations can be divided into

three broad classes, namely, financial intermediaries,

financial auxiliaries, and other financial corporations:

(a) Financial intermediaries consist of deposit-

taking corporations, investment funds, other

financial intermediaries, insurance corporations,

and pension funds. Financial intermediation is a

productive activity in which an institutional unit

incurs liabilities on its own account for the pur-

pose of acquiring financial assets by engaging in

financial transactions on the market. Financial

intermediaries as institutional units collect funds

from lenders and transform or repackage them

(with respect to maturity, scale, risk, and the like)

in ways that suit the requirements of borrowers.

Through financial intermediation, funds are chan-

neled between parties with a surplus on one side

and those with a need for funds on the other. A

financial intermediary does not simply act as an

agent for these other institutional units but places

itself at risk by acquiring financial assets and

incurring liabilities on its own account.

(b) Financial auxiliaries are institutional units prin-

cipally engaged in serving financial markets, but

they do not take ownership of the financial assets

and liabilities they handle or regulate.

units providing financial services, where most

of their assets or liabilities are not available on

open financial markets. These corporations are

included in the captive financial institutions and

money lenders subsector.

4.65 The SNA further identifies nine subsectors of

the financial corporations subsector (shown in Table

4.1 and as discussed in the following paragraphs).

They are used in the following ways in international

accounts:

(a) The standard components use three subsectors:

the central bank, deposit-taking corporations

except the central bank, and the other seven

subsectors combined as “other financial cor-

porations.” Additional details can be compiled

according to circumstances.

(b) The functional category classification of debt

positions between affiliated financial intermedi-

aries is defined in terms of the first five subsec-

tors of the financial sector—that is, the central

bank, deposit-taking corporations except the cen-

tral bank, money market funds (MMFs), other

investment funds, and other financial intermedi-

aries (except insurance corporations and pension

Chapter 4 g Economic Territory, Units, Institutional Sectors, and Residence

Table 4.2. BPM6 Classification of Institutional Sectors

Central bank

Deposit-taking corporations except the central bank

General government

Other sectors

Other financial corporations

Money market funds (MMFs)

Non-MMF Investment funds

Other financial intermediaries except insurance corporations and pension funds (ICPFs)

Financial auxiliaries

Captive financial institutions and money lenders

Insurance corporations

Pension funds

Nonfinancial corporations, households, and NPISHs

Nonfinancial corporations

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

Additional subsector may be identified for monetary authorities, where needed, as discussed in paragraph 4.70.

Supplementary “of which” items may be provided for public corporations, as discussed in paragraphs 4.108–4.112.

funds, ICPFs). Such debt is excluded from direct

investment, as discussed in paragraph 6.28.

4.66 Although the financial corporations sector

and its subsectors are defined in terms of economic

function, data sources may tend to follow regulatory

definitions. Differences between regulatory and statis-

tical definitions should be monitored, and adjustments

made, where necessary.

Central bank

4.67 The central bank is the financial institution

(or institutions) that exercises control over key aspects

of the financial system. It carries out such activities

as issuing currency, managing international reserves,

transacting with the IMF, and providing credit to

deposit-taking corporations. The central bank of a cur-

rency union is classified as a central bank in the data for

the currency union as a whole; in the data of individual

member states, it is part of the rest of the world sector.

Central banks in some economies also accept deposits

from or provide credit to entities in other sectors.

4.68 The central bank subsector includes the

following:

(a) central banks, which in most economies are sep-

arately identifiable institutions that are subject to

varying degrees of government control, engage

in differing sets of activities, and are designated

by various names (e.g., central bank, reserve

bank, national bank, or state bank);

(b) currency boards or independent currency author-

ities that issue national currency that is fully

backed by foreign exchange reserves; and

institutional units and primarily perform central

bank activities.

If an institutional unit is mainly engaged in central

banking activities, the entire unit is classified in the

central bank subsector. Many central banks regulate or

supervise other deposit-taking corporations and other

financial corporations, and these central bank activi-

ties also are included in the central bank subsector.

However, units that are affiliated with the government

or with other sectors and are mainly engaged in regu-

lating or supervising financial units are classified as

financial auxiliaries rather than as units in the central

bank subsector. Private units that perform activities

such as check-clearing operations are assigned to other

financial corporations subsectors depending on their

activities, rather than to the central bank.

4.69 A few economies do not have central banks.

Typical central banking activities that are performed

by general government and cannot be separated into

specific institutional units are treated as part of general

government and are not allocated to the central bank

subsector.

4.70 In economies in which some central banking

functions are performed wholly or partly outside the

central bank, particularly holding reserve assets, con-

sideration should be given to compiling supplementary

data for the monetary authorities sector, as defined in

paragraph 6.66. The concept of monetary authorities

underlies reserves assets.

Deposit-taking corporations, except the

central bank

4.71 Deposit-taking corporations, except the central

bank have financial intermediation as their principal

activity. To this end, they have liabilities in the form of

deposits or financial instruments (such as short-term

certificates of deposit) that are close substitutes for

deposits. In general, the following financial intermedi-

aries are classified in this subsector:

(a) commercial banks, “universal” banks, and “all-

purpose” banks;

(b) savings banks (including trustee savings banks

and savings and loan associations);

banks;

(d) rural credit banks and agricultural credit banks;

(e) cooperative credit banks and credit unions;

(f) traveler’s check companies that mainly engage in

financial activities; and

(g) specialized banks or other financial institutions

if they take deposits or issue close substitutes for

deposits.

4.72 The liabilities of deposit-taking corporations to

residents are typically included in measures of broad

money. The money-issuing sector may be identified

on a supplementary basis to assist in reconciliation

with monetary data. It consists of the central bank

plus deposit-taking corporations plus other institu-

tions included in the definition of broad money (e.g.,

MMFs in some cases). Deposit-taking corporations

that engage exclusively (or almost exclusively) with

nonresidents, often called offshore banks or offshore

banking units, are included in deposit-taking corpo-

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

rations, but they may be excluded from the money-

issuing sector because their liabilities are not included

in broad money. MMFs are separate from deposit-

taking corporations and should be identified separately

in the circumstances discussed in paragraph 4.73.

Money market funds

4.73 MMFs are collective investment schemes that

raise funds by issuing shares or units to the public.

The proceeds are invested primarily in money market

instruments, MMF shares and units, transferable debt

instruments with a residual maturity of less than one

year, bank deposits, and instruments that pursue a rate

of return that approaches the interest rates of money

market instruments. MMF shares can be transferred

by check or other means of direct third-party payment.

Because of the nature of the instruments that MMFs

invest in, their shares or units may be regarded as close

substitutes for deposits. When MMFs are included

in monetary aggregates, showing MMFs as an extra

subsector will assist comparability. (The correspond-

ing specialized financial instrument—MMF shares or

units—is discussed in paragraph 5.29.)

Non-MMF investment funds

4.74 Non-MMF investment funds are collective

investment schemes that raise funds by issuing shares

or units to the public. The proceeds are invested pre-

dominantly in long-term financial assets and nonfinan-

cial assets (usually real estate). Investment fund shares

or units are generally not close substitutes for deposits.

They are not transferable by means of check or third-

party payments. Some funds may be limited to certain

investors only, whereas others are available to the public

generally. Investment funds can be open or closed ended.

Open-ended funds or open funds are those whose shares

or units are, at the request of the holders, repurchased or

redeemed directly or indirectly out of the undertaking’s

assets. Closed-ended, closed, or exchange-traded funds

are those with a fixed share capital, where investors

entering or leaving the fund must buy or sell existing

shares. Investment funds may be constituted as follows:

(a) under the law of contract (as common funds managed

by management companies), (b) under trust law (as unit

trusts), (c) under a statute (as investment companies), or

(d) otherwise with similar effect. Some investment funds

invest in other funds (“funds of funds”). Pension funds

are excluded; they are part of the insurance companies

and pension funds subsector. Real estate investment

trusts are included. Investment fund shares are shown

as a financial instrument (as defined in paragraph 5.28).

Fund managers of investment funds are financial auxil-

iaries (paragraph 4.80(h)).

4.75 Hedge funds are a kind of investment fund.

Hedge fund is a term that covers a heterogeneous range

of collective investment schemes, typically involving

high minimum investments, light regulation, and a

wide range of investment strategies. However, special

purpose government funds, usually called sovereign

wealth funds, are more likely to be classified as captive

financial institutions than as investment funds, given

the nature of their liabilities, if classified as a financial

corporation (see the footnote to paragraph 4.92).

Other financial intermediaries, except insurance

corporations and pension funds

4.76 Other financial intermediaries, except ICPFs,

consist of financial corporations and quasi-corporations

that are engaged in providing financial services by incur-

ring liabilities, in forms other than currency, deposits, or

close substitutes for deposits, on their own account for

the purpose of acquiring financial assets by engaging in

financial transactions on the market, and that are not

included in another subsector. It is a feature of a financial

intermediary that operations for both sides of the balance

sheet are carried out in open markets.

4.77 In general, the following financial intermediar-

ies are classified in this subsector:

(a) financial corporations engaged in the securitiza-

tion of assets;

(b) underwriters, and securities and derivative deal-

ers (on own account). In contrast, security bro-

kers and other units that arrange trades between

buyers and sellers but do not purchase and hold

securities on their own account are classified as

financial auxiliaries (see paragraph 4.80(b));

ing financial leasing, as well as personal or com-

mercial finance;

(d) central clearing counterparties, which provide

clearing and settlement of market transactions in

securities and derivatives. Clearing refers to the

process of offsetting obligations and entitlements

vis-à-vis counterparties to transactions so that

settlement—which involves the actual exchange

of securities, derivatives, and funds—can occur

more efficiently on a net basis. The central clear-

ing counterparties involve themselves in the

transaction and mitigate counterparty risk;

Chapter 4 g Economic Territory, Units, Institutional Sectors, and Residence

(e) specialized financial corporations that assist

other corporations in raising funds in equity and

debt markets and provide strategic advisory ser-

vices for mergers, acquisitions, and other types

of financial transactions. (These corporations are

sometimes called “investment banks.”) In addi-

tion to assisting with the raising of funds for their

corporate clients, such corporations invest their

own funds, including in private equity, in hedge

funds dedicated to venture capital, and in collater-

alized lending. However, if such corporations take

deposits or close substitutes for deposits, they are

classified as deposit-taking corporations; and

(f) any other specialized financial corporations that

provide short-term financing for corporate merg-

ers and takeovers; export and import finance;

factoring companies; and venture capital and

development capital firms.

4.78 Securitization involves raising funds by selling

a security backed by specific assets or income streams.

For example, an originating mortgage lender could sell

a portfolio of loans to a special purpose vehicle that

issues units sold to investors. The originator may con-

tinue to provide administrative services, but the vehi-

cle is the legal owner of the portfolio. Such vehicles

are included in “other financial intermediaries, except

ICPFs” if the entity is the legal owner of a portfolio

of assets, sells a new financial asset that represents an

interest in the portfolio, and has or potentially has a full

set of accounts. However, in cases in which the origina-

tor issues asset-backed securities on its own books, then

securitization may take place without the creation of a

separate entity. When the portfolio is not transformed,

or the vehicle does not bear market or credit risks, then

it can be combined with its parent (if resident in the

same economy) or treated as a captive intermediary

(if in a different economy to that of its parent). Asset-

backed securities are discussed as financial instruments

in paragraph 5.47.

Financial auxiliaries

4.79 Financial auxiliaries consist of all financial

corporations that are principally engaged in activities

associated with transactions in financial assets and

liabilities or with providing the regulatory context for

these transactions but in circumstances that do not

involve the auxiliary taking ownership of the financial

assets and liabilities being transacted.

4.80 In general, the following financial corporations

are classified in the financial auxiliaries subsector:

(a) insurance brokers, salvage administrators, and

insurance and pension consultants;

(b) loan brokers, securities brokers that arrange trades

between security buyers and sellers but that do not

purchase and hold securities on their own account,

investment advisers, and so on (securities dealers

that trade in securities on their own account are

other financial intermediaries);

securities;

(d) corporations whose principal function is to

guarantee, by endorsement, bills and similar

instruments;

(e) corporations that arrange derivative and hedging

instruments, such as swaps, options, and futures

(without issuing them);

(f) stock exchanges, insurance exchanges, and com-

modity and derivative exchanges;

(g) other corporations providing infrastructure for

financial markets, such as securities depository

companies, custodians, clearing offices,

and

nominee companies;

(h) fund managers of pension funds, mutual funds,

and so on (but not the funds they manage);

(i) nonprofit institutions recognized as independent

legal entities serving financial corporations, but

that are not themselves providing financial ser-

vices, for example, bankers’ associations;

(j) holding companies that exercise some aspects of

managerial control over their subsidiaries (see

paragraph 4.85);

(k) foreign exchange bureaus and money transfer

operators;

(l) resident offices of foreign banks that do not

accept deposits or extend credit on their own

account;

(m) corporations primarily involved in operation

of electronic payment mechanisms that do not

incur liabilities against the instruments (if they

do incur liabilities against the instruments, then

they are other financial intermediaries except

ICPFs); and

Clearing offices are classified as financial auxiliaries when

they facilitate transactions without acting as the counterparty; in

contrast, central clearing counterparties, as discussed in paragraph

4.77(d) are counterparties and thus are classified as intermediaries

rather than auxiliaries.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

(n) central supervisory authorities of financial inter-

mediaries and financial markets when they are

separate institutional units.

4.81 Corporations facilitating financial transactions,

such as central clearing counterparties, stock exchanges,

derivative exchanges, and repurchase agreement settlement

institutions are financial intermediaries, if they generally

act as principals to the counterparties to the underlying

transactions; otherwise they are financial auxiliaries.

Captive financial institutions and money lenders

4.82 Captive financial institutions and money lend-

ers consist of institutional units providing financial

services other than insurance, where most of either

their assets or liabilities are not transacted on open

financial markets. It includes entities transacting only

within a limited group of units, such as with subsidiar-

ies or subsidiaries of the same holding corporation, or

entities that provide loans from own funds provided

by only one sponsor. Other financial intermediaries,

except ICPFs (discussed in paragraphs 4.76–4.77) are

distinguished from captive financial institutions and

money lenders in that the latter serve a limited group

only for at least one side of their balance sheet.

4.83 In general, the following financial corporations

are classified in this subsector:

(a) institutional units with the function of simply

holding assets, such as trusts, estates, agencies

accounts, and some “brassplate” companies;

(b) institutional units that provide financial services

exclusively with own funds, or funds provided

by a sponsor to a range of clients and incur the

financial risk of the debtor defaulting. Examples

are moneylenders and corporations engaged in

lending (e.g., student loans, import and export

loans) from funds received from a sponsor such

as a government unit or nonprofit institution;

lending;

(d) financial corporations, such as SPEs, that raise

funds in open markets to be used by affiliated

corporations (in contrast to securitization vehi-

cles, see paragraph 4.78); and

(e) conduits, intragroup financiers, and treasury

functions when these functions are undertaken

by a separate institutional unit.

Captive insurance companies and pension funds are not

included in this subsector.

Holding companies

4.84 Holding companies are included in this subsec-

tor, financial auxiliaries, or nonfinancial corporations,

according to which functions they undertake. One type

of holding company is a unit that holds equity in one or

more subsidiaries but does not undertake any manage-

ment activities. These companies are described in the

International Standard Industrial Classification of All

Economic Activities (ISIC), Rev. 4, in section K class

6420 as follows:

This class includes the activities of holding

companies, i.e. units that hold the assets (own-

ing controlling-levels of equity) of a group of

subsidiary corporations and whose principal

activity is owning the group. The holding com-

panies in this class do not provide any other

service to the businesses in which the equity

is held, i.e. they do not administer or manage

other units.

Such units are captive financial institutions and are

included in the financial corporations sector even if

all the subsidiaries are nonfinancial corporations. The

subsidiaries may be resident in the same economy or in

other economies.

4.85 Another type of unit referred to as a holding

company is the head office that exercises some aspects

of managerial control over its subsidiaries. The head

office sometimes may have noticeably fewer employ-

ees, and at a more senior level, than its subsidiaries,

but it is actively engaged in production. These types of

activities are described in ISIC, Rev. 4, in section M

class 7010 as follows:

This class includes the overseeing and manag-

ing of other units of the company or enterprise;

undertaking the strategic or organizational

planning and decision making role of the com-

pany or enterprise; exercising operational con-

trol and managing the day-to-day operations of

their related units.

Such units are allocated to the nonfinancial corpora-

tions sector unless all or most of their subsidiaries are

financial corporations, in which case they are treated

by convention as financial auxiliaries. The subsidiaries

may be resident in the same economy or in other econo-

mies. Other entities that hold and manage subsidiaries

may have substantial operations in their own right, in

which case the holding company functions may be sec-

ondary, so they would be classified according to their

predominant operations.

Chapter 4 g Economic Territory, Units, Institutional Sectors, and Residence

Conduits

4.86 A conduit is an entity that raises funds on open

financial markets for passing on to other affiliated

enterprises. Often, the conduit’s liabilities are guar-

anteed by a parent company. If a conduit issues new

financial instruments, which could be debt securities,

shares, or partnership interests, that represent a claim

on the conduit, it is acting as a captive financial insti-

tution. (Conduits are a case of “pass-through funds,”

discussed in paragraph 6.34.)

Wealth-holding entities

4.87 Institutional units that solely hold assets and lia-

bilities, along with the associated property income, for

their owners are classified as captive financial institutions.

Some SPEs and trusts perform these functions. SPEs

are discussed further in paragraphs 4.50–4.52. Although

there is no internationally standard definition of SPEs,

in economies in which they are important they may be

identified separately, according to either a national com-

pany law definition, or in terms of a functional descrip-

tion, possibly referring to their limited physical presence

and ownership by nonresidents. In economies with large

direct investment flows through resident SPEs, it is rec-

ommended that these flows be shown as a supplementary

item, so that they can be identified separately.

Insurance corporations

4.88 Insurance corporations consist of incorpo-

rated, mutual, and other entities whose principal func-

tion is to provide life, accident, health, fire, or other

forms of insurance to individual institutional units or

groups of units or reinsurance services to other insur-

ance corporations. Captive insurance is included, that

is, an insurance company that serves only its owners.

Deposit insurers, issuers of deposit guarantees, deposit

protection schemes, and other issuers of standardized

guarantees that are separate entities and act like insurers

by charging premiums and have reserves are classified

as insurance corporations. (The relevant specialized

instruments—nonlife insurance technical reserves, and

life insurance and annuity entitlements—are discussed

in paragraphs 5.64–5.65.)

Pension funds

4.89 Pension liabilities arise when members of

households participate in a social insurance scheme

that will provide income in retirement (and often ben-

efits for death or disability). Such schemes may be

organized by employers or by government; they also

may be organized by insurance corporations on behalf

of employees; or separate institutional units may be

established to hold and manage the assets to be used to

meet the pension obligations and to distribute the pen-

sions. Pension schemes may be operated by a separately

constituted pension fund or a fund that is part of the

employer, or they may be unfunded. The pension fund

subsector consists of only those social insurance pen-

sion funds that are institutional units separate from the

units that create them.

4.90 Social security schemes are not included in

pension funds, although they sometimes may have pen-

sion entitlement liabilities if they provide pensions to

public sector employees. In the case of unfunded pen-

sion schemes, general government and corporations

other than pension funds may have pension entitlement

liabilities. Nonautonomous pension funds are not sepa-

rated from the entity of which they are part. (Pension

entitlements as a type of financial asset or liability are

discussed in paragraph 5.66.)

c. General government

4.91 Government units are unique kinds of legal

entities established by political processes and have

legislative, judicial, or executive authority over other

institutional units within a given area. Viewed as insti-

tutional units, the principal functions of government

are to assume responsibility for the provision of goods

and services to the community or individual households

and to finance their provision out of taxation or other

incomes; to redistribute income and wealth by means

of transfers; and to engage in nonmarket production. In

general terms:

(a) A government usually has the authority to raise

funds by collecting taxes or compulsory trans-

fers from other institutional units.

(b) Government units typically make three differ-

ent kinds of outlays. The first group consists of

actual or imputed expenditures on the free provi-

sion to the community of collective services, such

as public administration, defense, law enforce-

ment, public health, and so on. The second group

consists of expenditures on the provision of goods

and services for free or at prices that are not eco-

nomically significant. The third group consists of

transfers to other institutional units that are made

to redistribute income or wealth.

Within a single territory, many separate government

units may exist when there are different levels of gov-

ernment, specifically central, state, or local govern-

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

ment. In addition, social security funds also constitute

government units.

4.92 The general government sector consists of depart-

ments, branches, agencies, foundations, institutes, non-

market nonprofit institutions controlled by government,

and other publicly controlled organizations engaging in

nonmarket activities. As discussed in paragraph 4.5, the

operations of a government that are located abroad and

that are largely exempt from the laws of the territory

in which they are located, such as embassies, consul-

ates, and military bases, are a part of the home gov-

ernment. Government units are mainly involved in the

production of goods and services that may be provided

free of charge or sold at prices that are not economi-

cally significant. Government-controlled enterprises that

(a) produce market output (i.e., charge prices that are

economically significant), and (b) have complete sets of

accounts are excluded from general government and are

included as public enterprises in the appropriate nonfi-

nancial or financial corporations sector. The requirement

that prices be economically significant means that prices

must be high enough to have an impact on the demand

for, and supply of, a good or service.

Government entities resident abroad

4.93 If a government uses an entity that is resident in

the economic territory of another government to carry

out general government activities (i.e., fiscal activities,

rather than for a public corporation, as defined in para-

graph 4.108), that entity is not included as part of the

general government in either its economy of residence

or the economy of the government that uses the entity.

Such entities are not treated in the same way as embas-

sies and other territorial enclaves if they are created

and operate under the laws of the host economy. As

noted in paragraph 6.20(d), governments may be direct

investors in these cases. However, as noted in para-

graphs 8.24–8.26, 11.40, and 12.48, special imputations

of transactions and positions between the government

and the entity are adopted to ensure that any fiscal

operations undertaken through nonresident entities are

reflected in the transactions and positions of the gov-

ernment concerned.

The classification of a “special purpose government fund” con-

trolled by government in the general government or financial cor-

porations sectors is determined according to the criteria set out in

paragraphs 4.63–4.92, such as whether they charge economically

significant prices for their services. If the fund is an entity incorpo-

rated abroad or quasi-corporation located abroad, it is classified as

a separate institutional unit in the financial corporations sector resi-

dent in its economy of incorporation. See also paragraphs 6.93–6.98

for more information on “special purpose government funds.”

Restructuring agencies

4.94 Restructuring agencies are entities set up to

sell corporations and other assets, and to reorganize

companies. They also may be used for defeasance of

impaired assets or repayment of liabilities of insol-

vent entities, often in the context of a banking crisis.

Restructuring agencies are involved in such activities

as managing liabilities and their repayment, managing

impaired assets and their sale on the market, and in the

financing of the process.

4.95 When the restructuring agency is government

funded and is considered not to be putting itself at risk,

for example, because the debt liabilities it manages are

disproportionately large relative to the fair value of its

assets, then it is considered to be operating for fiscal

purposes, rather than on a commercial basis, so that

the agency is part of the general government sector.

For instance, if a restructuring agency deliberately pur-

chases assets at above-market prices with direct or indi-

rect financial support from the government and does

not place itself at risk, it is considered to be operating

for fiscal purposes and therefore should be classified in

the general government sector. Otherwise, it is classified

as a financial corporation according to the nature of its

operations, usually in the subsector other financial inter-

mediaries except ICPFs. For instance, if the restructuring

agency borrows on the market at its own risk to acquire

financial or nonfinancial assets that it actively manages,

the unit should be classified as a financial corporation.

Asset management companies that acquire, manage, and

dispose of impaired bank assets, and that are considered

to be putting themselves at risk, are classified this way.

d. Households

Reference:

2008 SNA, Chapter 24, The Households Sector.

4.96 A household is defined as a group of persons

who share the same living accommodation, who pool

some or all of their income and wealth, and who con-

sume certain types of goods and services collectively,

mainly housing and food. Households often coincide

with families. However, members of a family are not

always members of the same household, if they live

separately. Equally, members of the same household

do not necessarily have to belong to the same family if

they share resources and consumption.

4.97 Households may be of any size and take a

wide variety of different forms in different societies

or cultures depending on tradition, religion, education,

Chapter 4 g Economic Territory, Units, Institutional Sectors, and Residence

climate, geography, history, and other socioeconomic

factors. Institutional households include persons in

retirement homes, jails, hospitals, and religious orders.

4.98 Although each member of a household is a

legal entity, the household is an appropriate unit for

statistical purposes because many economic decisions

are made at the household level and transactions within

the household are outside the scope of economic sta-

tistics. The members of a household are all residents

in the same economic territory. A person who pools

income with the household in one economic territory,

but is resident of another economic territory, is not clas-

sified as a member of that household. A single person

can constitute a household.

4.99 The households sector includes enterprises

owned by household members that do not satisfy the

definition of a quasi-corporation. For example, if the

business affairs of a household are not separable from

the personal consumption of household members,

then the business would not satisfy the requirements

for a quasi-corporation to have the ability to produce

accounts. (Some unincorporated businesses are treated

as quasi-corporations, as discussed in paragraphs 4.34–

4.40 and 4.49.)

e. Nonprofit institutions serving households

Reference:

2008 SNA, Chapter 23, Non-profit Institutions in the

SNA.

4.100 NPISHs are entities mainly engaged in pro-

viding goods and services to households or the com-

munity at large free of charge or at prices that are not

economically significant (and thus are classified as

nonmarket producers), except those that are controlled

and mainly financed by government units. Examples

include charities, relief and aid organizations financed

by voluntary transfers, as well as trade unions, profes-

sional or learned societies, consumers’ associations,

religious institutions, and social, cultural, and recre-

ational clubs that do not charge economically signifi-

cant prices. They may be corporations, foundations,

trusts, or other unincorporated entities.

4.101 NPISHs are mainly financed from contri-

butions, subscriptions from members, or earnings on

holdings of real or financial assets. The NPISH sector

is a subset of nonprofit institutions. Those that charge

economically significant prices are included in the

financial or nonfinancial corporations or households

sectors, as relevant. Additionally, nonprofit institutions

serving businesses, such as chambers of commerce and

trade associations, are included in the corporations sec-

tors (see paragraph 12.57 on their membership dues).

When this Manual refers to nonprofit institutions, it

includes all nonprofit institutions.

f. Rest of the world

4.102 The rest of the world consists of all nonresi-

dent institutional units that enter into transactions with

resident units or that have other economic links with

resident units. The rest of the world sector is identified

in the national accounts, while it is the counterparty in

all international accounts items.

International organizations

4.103 International organizations have the following

characteristics:

(a) The members of an international organization are

either national states or other international orga-

nizations whose members are national states;

they thus derive their authority either directly

from the national states that are their members or

indirectly from them through other international

organizations.

(b) They are entities established by formal political

agreements between their members that have the

status of international treaties; their existence is

recognized by law in their member countries.

ous purposes:

• International financial organizations—these

entities conduct financial intermediation at

an international level (i.e., channeling funds

between lenders and borrowers in different

economies). A central bank to a group of

economies (including currency union central

banks) is an example of an international finan-

cial organization. Other examples are the IMF,

World Bank Group, BIS, and regional devel-

opment banks; and

• Other international organizations—these enti-

ties provide nonmarket services of a collective

nature for the benefit of their member states,

such as peacekeeping, education, science, pol-

icy issues, and other research.

4.104 International organizations may be global or

regional. An international agency responsible for func-

tions normally undertaken by general government, such

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

as administration and policing, is classified as an inter-

national organization, but it may be useful to identify

such agencies separately in statistics.

4.105 International organizations are treated as

not being resident of the territories in which they are

located. This treatment is because they are generally

exempted from, or are only partially subject to, national

laws or regulations, and so they are not considered to

be part of the national economy of the territory, or ter-

ritories, in which they are located.

4.106 International organizations may be presented

as an institutional sector in some cases. First, they may

appear in data for a currency union or economic union, in

which case, international organizations of the union are

residents of the union as a whole. Second, they may be

of relevance when data by sector of counterparty are pre-

pared, for example, for sources of current transfers. Such

data would be of particular interest in economies in which

international organizations have a substantial presence.

4.107 In contrast to international organizations,

enterprises owned jointly by two or more governments

are not treated as international organizations but like

other enterprises. The distinction is based on whether

the organization produces for the market and is impor-

tant because of the different treatments for the residence

of international organizations and enterprises. Separate

pension funds for the staff of international organizations

are treated as pension funds, rather than as international

organizations. Therefore, the residence of these pension

funds is determined in accord with paragraph 4.141.

g. Additional detail for public corporations

Reference:

2008 SNA, Chapter 4, Institutional Units and Sectors,

and Chapter 22, The General Government and

Public Sectors.

4.108 A corporation is a public corporation if a gov-

ernment unit, another public corporation, or some com-

bination of government units and public corporations

controls the entity, where control is defined as the ability

to determine the general corporate policy of the cor-

poration. The expression “general corporate policy” as

used here is understood in a broad sense to mean the key

financial and operating policies relating to the corpora-

tion’s strategic objectives as a market producer. (This use

of public corporation as a term should be distinguished

from the use of the same term to refer to a public corpo-

ration whose shares are traded on public markets.) Public

corporations may be shown as “of which” items for the

financial and nonfinancial corporations sectors or sub-

sectors as supplementary items, when relevant.

4.109 Because governments exercise sovereign powers

through legislation, regulations, orders, and the like, care

needs to be applied in determining whether the exercise

of such powers amounts to a determination of the general

corporate policy of a particular corporation and therefore

control of the corporation. Laws and regulations applica-

ble to all units as a class or to a particular industry should

not be viewed as amounting to control of these units. The

ability to determine the general corporate policy does

not necessarily include the direct control of the day-to-

day activities or operations of a particular corporation.

Because the arrangements for the control of corporations

can vary considerably, it is neither desirable nor feasible

to prescribe a definitive list of factors to be taken into

account. The following eight indicators, however, will nor-

mally be the most important factors to consider:

(a) ownership of the majority of the voting interest;

(b) control of the board or other governing body;

personnel;

(d) control of key committees of the entity;

(e) golden shares and options (golden shares give the

holder a decisive vote, even without a majority

of shares);

(f) regulation and control;

(g) control by a dominant customer; and

(h) control attached to borrowing from the

government.

4.110 Although a single indicator could be sufficient

to establish control, in other cases, a number of separate

indicators may collectively indicate control. A decision

based on the totality of all indicators must necessarily

be judgmental in nature. International accounts com-

pilers should consult with government finance statisti-

cians to ensure consistent treatments.

4.111 Public-private partnerships are long-term con-

tracts, whereby a private entity acquires or builds an

asset, operates it for a period, and then hands it over

to a government. The private entity may be a direct

investment enterprise. These schemes may be called

private finance initiatives; build, own, operate, transfer

(BOOT) schemes; and so on. As with leases, the eco-

nomic owner of the assets related to such an arrange-

ment is determined by assessing which unit bears the

majority of the risks and which unit is expected to

Chapter 4 g Economic Territory, Units, Institutional Sectors, and Residence

receive a majority of the rewards of the assets. More

details are available in 2008 SNA, Chapter 22.

4.112 Corporations subject to the control of a gov-

ernment that is resident in a different economy from

that government are not classified as public corpora-

tions. They receive this treatment because they are not

public companies related to the government of their

economy of residence. These corporations differ from

embassies and military bases in that they are subject

to local laws and so should be seen as part of their

economy of location.

E. Residence

1. General principles

Reference:

2008 SNA, Chapter 4, Institutional Units and Sectors,

and Chapter 26, The Rest of the World Accounts.

4.113 The residence of each institutional unit is the

economic territory with which it has the strongest con-

nection, expressed as its center of predominant eco-

nomic interest. Each institutional unit is a resident of

one and only one economic territory determined by

its center of predominant economic interest. Specific

criteria for determining residence are given below. The

definitions given below are designed to apply the con-

cept of center of predominant economic interest. These

definitions should be used in preference to a discre-

tionary choice between different possible aspects of

economic interest.

4.114 An institutional unit is resident in an economic

territory when there exists, within the economic terri-

tory, some location, dwelling, place of production, or

other premises on which or from which the unit engages

and intends to continue engaging, either indefinitely

or over a finite but long period of time, in economic

activities and transactions on a significant scale. The

location need not be fixed so long as it remains within

the economic territory. Actual or intended location for

one year or more is used as an operational definition;

although the choice of one year as a specific period is

somewhat arbitrary, it is adopted to avoid uncertainty

and facilitate international consistency.

4.115 In overview, residence of selected entities is

as follows, subject to the more detailed elaboration in

paragraphs 4.116–4.144:

(a) The residence of individual persons is determined

by that of the household of which they are a part

and not by their place of work. All members of

the same household have the same residence as

the household itself, even though they may cross

borders to work or otherwise spend periods of

time abroad. If they work and reside abroad so

that they acquire a center of predominant eco-

nomic interest abroad, they cease to be members

of their original households.

(b) Unincorporated enterprises that are not quasi-

corporations are not separate institutional units

from their owners and, therefore, have the same

residence as their owners. (However, the crite-

ria for recognizing a branch in paragraph 4.27

mean that significant cross-border businesses

will almost always be recognized as quasi-

corporations.)

may be expected to have a center of economic

interest in the economy in which they are legally

constituted and registered. Corporations may be

resident in economies different from their share-

holders and subsidiaries may be resident in dif-

ferent economies from their parent corporations.

When a corporation, or unincorporated enter-

prise, maintains a branch, office, or production

site in another territory to engage in a significant

amount of production over a long period of time

(usually one year or more) but without creating

a corporation for the purpose, the branch, office,

or site is considered to be a quasi-corporation

(i.e., a separate institutional unit) resident in the

territory in which it is located.

(d) For entities, such as many SPEs, that have few if

any attributes of location, the residence is deter-

mined by their place of incorporation.

(e) When a nonresident has ownership of land and

buildings, and natural resources other than land,

the assets are deemed to be owned by a notional

resident institutional unit in the economy of loca-

tion, even if they do not engage in other eco-

nomic activities or transactions in the economy.

All land, buildings, and natural resources other

than land are therefore owned by residents.

2. Residence of households

4.116 Although many people are clearly strongly

connected to only one economy, others have substantial

economic interests in two or more economic territo-

ries. Factors such as location of dwellings, employment,

asset holdings, citizenship, migration status, income tax

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

status, income received, expenditure, business interests,

and location of dependent family members may point

to different economies. To identify the economy of

residence when there are connections to two or more

economies, the following definition is used to identify

the center of predominant economic interest.

4.117 A household is resident in the economic terri-

tory in which household members maintain or intend to

maintain a dwelling or succession of dwellings treated

and used by members of the household as their prin-

cipal dwelling. Being present for one year or more in

a territory or intending to do so is sufficient to qualify

as having a principal dwelling there. If there is uncer-

tainty about which dwelling is the principal dwelling, it

is identified from the length of time spent there, rather

than other factors such as presence of other family

members, cost, size, or length of tenure.

4.118 Individuals who belong to the same household

must be residents of the same territory. If a member of

an existing household ceases to reside in the territory

where his or her household is resident, the individual

ceases to be a member of that household. As a result of

this definition, the use of households as the institutional

unit is compatible with residence being determined on

an individual basis.

4.119 Further to the general principles, some other

factors are used to determine residence of particular cat-

egories. These categories are students, medical patients,

ship’s crew, as well as national diplomats, military per-

sonnel, staff of scientific stations, and other civil ser-

vants employed abroad in government enclaves (these

enclaves are discussed in paragraph 4.5(e)). In these

cases, some other connections are considered to be more

important in determining residence. In the case of sig-

nificant population movements between two particular

territories, compilers in each territory should cooperate

to ensure consistent definitions and measurement.

Students

4.120 People who go abroad for full-time study gener-

ally continue to be resident in the territory in which they

were resident prior to studying abroad. This treatment is

adopted even though their course of study may exceed a

year. However, students change to being residents of the

territory in which they are studying when they develop

an intention to continue their presence in the territory of

study after the completion of the studies. For students,

the rationale for not changing the territory of residence is

that the movement to the different territory is considered

to have a temporary motivation, that is, their center of

predominant economic interest remains with the home

territory. The residence of accompanying dependents of

students is determined in the same manner as the per-

sons they accompany. The tuition and other expenditure

of students in their host economies are included in travel

(see paragraph 10.89).

Patients

4.121 People who go abroad for the purpose of

medical treatment maintain their predominant center

of interest in the territory in which they were resident

before they received the treatment, even in the rare

cases in which complex treatments take a year or more.

As with students, the movement is considered to have a

temporary motivation. The residence of accompanying

dependents of patients is determined in the same man-

ner as the persons they accompany.

Crew of ships and so on

4.122 Crew of ships, aircraft, oil rigs, space sta-

tions, or other similar equipment that operate outside

a territory or across several territories are treated as

being resident in their home base territory. The home

base is determined from where they spend most time

other than undertaking their duties. The home base is

regarded as a stronger connection than the location of

the mobile equipment or its operator, even though most

of the time may be spent at the latter location.

Diplomats, military personnel, and so on

4.123 National diplomats, peacekeeping and other

military personnel, and other civil servants employed

abroad in government enclaves, as well as members

of their households are considered to be residents of

the economic territory of the employing government.

Those enclaves—military bases, embassies, and the

like, as discussed in paragraph 4.5(e)—form part of

the economic territory of the employing government.

They continue to be residents in their home economies

even if they live in dwellings outside the enclaves. The

expenditure of diplomats and so on in their host econo-

mies is included in government goods and services

n.i.e. (see paragraph 10.177). Other employees, such as

locally recruited staff, are resident in the location of

their principal dwelling.

International organization staff

4.124 Staff of international organizations, including

those with diplomatic status and military personnel,

Chapter 4 g Economic Territory, Units, Institutional Sectors, and Residence

are resident in the territory of their principal dwelling.

The treatment of international organization staff is dif-

ferent from national diplomats and others discussed in

the previous paragraph because the latter continue to be

paid from and directed by their home government and

tend to have shorter postings and rotate back to their

economy of origin.

Cross-border workers

4.125 Border workers, seasonal workers, and other

short-term workers cross borders for a short period to

undertake a job. No special treatment is adopted, so

their residence is determined according to the criteria

in paragraph 4.117. Border workers are employed per-

sons who cross from one territory to another to attend

their place of employment. Seasonal workers cross the

border for particular periods, such as the harvest or

tourist seasons to attend a place of employment. Other

short-term employment may occur for a particular

task, such as a construction project, repairs, delivery

of advice, and so on. In each case, the residence of the

persons concerned is based on the principal dwelling,

rather than the territory of employment.

Highly mobile individuals

4.126 Some individuals have close connections with

two or more territories, for example, they have dwellings

in more than one territory in which they spend signifi-

cant amounts of time. For individuals who do not have

continuous actual or intended presence in any one terri-

tory for one year, the territory of the principal dwelling

they maintain is the key consideration. In cases of no

principal dwelling, or two or more principal dwellings in

different economies, the territory of residence is deter-

mined on the basis of the territory in which the predomi-

nant amount of time is spent in the year. Although these

individuals need to be classified as residents of a single

economy for statistical purposes, additional information

may be needed in recognition of strong ties to another

economy. The statistical result of classifying long-term

guest workers as residents of the host economy is appro-

priate, however, in that their income and consumption in

the host territory are not treated as international trans-

actions, only the amounts actually sent to the home

economy are. The alternative would involve artificial

rerouting—the income credits and travel debits would be

attributed to the home territory.

4.127 Nevertheless, it may be desirable for compil-

ers to provide supplementary data on groups of non-

residents that have significant links with the economy,

for example, by remitting funds to family members

remaining there or by intending to return there with

savings or pension entitlements. Similarly, it may be

desirable to have supplementary data on those who

are classified as residents of the economy, but main-

tain significant links to other economies. Appendix 5

discusses some supplementary presentations for flows

associated with some of these mobile individuals.

Refugees

4.128 No special treatment is adopted for refugees.

Their residence will change from their home territory

to the territory of refuge, if they have stayed or intend to

stay in their place of refuge for one year or more, even if

that residence is involuntary or transient, and its future

status is unclear.

Application of residence principles

4.129 In practice, residence principles are generally

not applied to specific individuals, but to broad groups

of people. As a result, factors such as intention to stay

for one year or more are typically inferred from pat-

terns of similar groups in the past. Some administrative

data sources may vary somewhat from statistical defi-

nitions of residence. If the variations are significant,

some adjustment may be made, or the administrative

definition may be considered as an acceptable approxi-

mation in practice.

4.130 The determination of residence results in how

the income, expenditure, and financial positions of

the households concerned are treated in international

accounts statistics. Table 4.3 provides a brief summary

of some of the implications for the international accounts

of whether a household is classified as resident or non-

resident of the reporting economy for different types of

flows. For example, a nonresident student studying in a

territory is shown as being a source of service credits

for education, housing, food, other goods and services,

and possibly transfer debits, if the student is receiving

a scholarship from the host economy. For a resident

student, these transactions would be out of scope of the

international accounts. The effect of changes of resi-

dence of persons is discussed in paragraph 4.165.

3. Residence of enterprises

4.131 As a general principle, an enterprise is resi-

dent in an economic territory when the enterprise is

engaged in a significant amount of production of goods

or services from a location in the territory. Additional

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

principles are spelled out in paragraphs 4.134–4.136.

As stated in paragraph 4.23, an enterprise is an institu-

tional unit engaged in production and may be a corpora-

tion or quasi-corporation, a nonprofit institution, or an

unincorporated enterprise (part of household sector).

4.132 In contrast to individuals and households,

which may have connections to two or more economies,

enterprises are almost always connected to a single

economy. Taxation and other legal requirements tend

to result in the use of a separate legal entity for opera-

tions in each legal jurisdiction. In addition, a separate

institutional unit is identified for statistical purposes

in cases in which a single legal entity has substantial

operations in two or more territories (e.g., for branches,

land ownership, and multiterritory enterprises, as noted

in paragraphs 4.26–4.44). As a result of splitting such

legal entities, the residence of each of the subsequently

identified enterprises is clear. The introduction of the

terminology “center of predominant economic interest”

does not mean that entities with substantial operations

in two or more territories no longer need to be split.

4.133 It is generally required that production take

place or is planned to take place in the territory over a

period of a year or more for a quasi-corporation to be

identified. All enterprises must be resident somewhere,

however, so if an actual institutional unit’s only activity

is a production process that is undertaken over a shorter

period, the unit is resident in the territory of location of

the production.

Corporations with little or no physical presence

4.134 A legal entity is resident in the economic ter-

ritory under whose laws the entity is incorporated or

registered. If it is a resident artificial subsidiary, it is

combined with a parent resident in the same economy

to form an institutional unit (paragraph 4.18) or, for

some purposes, combined into a local enterprise group

(paragraph 4.55). However, it must not be combined

with entities resident in other economies. If it has sub-

stantial operations in another economy, a branch may

be identified there (paragraph 4.26). In some cases,

a corporation has little or no physical presence, for

example, its administration is entirely contracted out to

other entities. Banking, insurance, investment funds (as

distinct from their managers), securitization vehicles,

and some SPEs often operate this way. Similarly, with

virtual manufacturing, all the physical processes are

outsourced to other units.

4.135 A single corporation might be registered

in several jurisdictions, for example, incorporation,

income tax, value-added tax, and particular regula-

tions, and a jurisdiction may have been agreed on for

settling disputes involving the enterprise. In such cases,

the jurisdiction of the laws that govern the creation and

continued existence of the entity should be used as the

criterion for determining residence. If there is no incor-

poration or registration, legal domicile is used as a cri-

terion. The incorporation and registration represents a

substantial degree of connection to the economy, asso-

Chapter 4 g Economic Territory, Units, Institutional Sectors, and Residence

Table 4.3. Selected Effects of a Household’s Residence Status on the Statistics of the Host Economy

Resident Nonresident

Economic flow or position (e.g., long-term guest worker) (e.g., short-term guest worker)

Compensation of employees received from Not international transaction Primary income

enterprises in the reporting economy

Personal expenditure in the reporting economy Not international transaction Services, mainly travel

Transfers to relatives in home economy Current or capital transfers Resident-resident transfer within home

economy, so outside balance of payments

(However, possible financial account

transactions if made from bank in host

economy)

A resident institutional unit’s financial claims on Not in international accounts Included in international accounts

or liabilities to the household

Land and buildings in host economy Not included in international Direct investment liability of the reporting

investment position economy in notional resident unit

Land and buildings in home economy Direct investment asset in notional Not included in international investment

resident unit position

ciated with jurisdiction over the enterprise’s existence

and operations. In contrast, other connections such as

ownership, location of assets, or location of managers

or administration may be less clear-cut.

Production delivered from a base

4.136 In some cases, an enterprise has a location that

is used as a base to deliver services to other locations.

For example, this mode is used for transport (discussed

under mobile equipment in paragraph 4.31) and also may

be used for delivery of many kinds of services, such

as on-site repairs, short-term construction, and many

types of business services. In such cases, the residence of

the enterprise is determined from its base of operations,

rather than the point of delivery or location of mobile

equipment, unless the activities at the point of delivery

are sufficiently substantial to amount to a branch, as

defined in paragraph 4.27. For example, an institutional

unit that operates ships on the high seas and various ter-

ritorial waters has its residence determined according to

the criteria in paragraphs 4.131–4.135, and the economy

of residence is not necessarily the same as the location

where the ships spend the most time or the territory of

registration of the ships. Additionally, the enterprise that

operates the ships is not necessarily the same as the

enterprise that owns the ships, such as where the ship

operator has an operating lease from the ship owner,

who is resident in another economy. The residence of

the enterprise that owns the ship is determined accord-

ing to the criteria in paragraphs 4.131–4.135. Flags of

convenience used by enterprises do not determine the

residence of the operator, and indeed a single shipping

operator may have ships registered in several econo-

mies. Similarly, the residence of enterprises that charter

ships is determined by the location of its own base of

operations, rather than the flags or locations of particular

ships. The base of operations does not necessarily equate

to the location from which the enterprise is managed. A

company operating mobile equipment may be legally

domiciled in one economy but managed from another

economy.

4.137 Table 4.4 provides a brief summary of some

of the implications for the international accounts of

whether an enterprise is treated as a resident enterprise

or as a nonresident for different types of flows and

positions. The possibility of change of residence by

enterprises is discussed in paragraph 4.167.

4. Residence of other institutional units

a. General government

4.138 General government includes operations out-

side the home territory, such as embassies, consulates,

military bases, and other enclaves of foreign govern-

ments, including those providing training and other

forms of assistance. Usually, these operations are not

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 4.4. Selected Effects of the Residence Status of an Enterprise Owned by a Nonresident on the

Statistics of the Host Economy

Resident enterprise Nonresident enterprise

Economic flow or position (e.g., long-term construction project) (e.g., short-term construction project)

Sales by enterprise to residents Not international transaction Imports of goods and services

Purchases by enterprise from residents Not international transaction Exports of goods and services

Compensation of employees payable to residents Not international transaction if receivable Compensation of employees

of host economy

Compensation of employees payable to residents Compensation of employees Not transaction of host economy

of home economy

Net operating surplus Dividends payable or reinvested earnings Not international transaction

(enterprise is a direct investment

enterprise)

Injections of funds by owners Direct investment liabilities of the reporting Not international transaction

economy (enterprise is a direct investment

enterprise)

A resident institutional unit’s financial claims on Not included in international accounts Included in international accounts

or liabilities to the enterprise

separate institutional units, but even if they were, they

are residents of their home territory, rather than the

host territory in which they are physically located. This

treatment is adopted because they usually have some

degree of immunity from the host territory’s laws and

are deemed under international law to be extensions of

the home government’s territory. However, an entity

created by a government under the laws of the host

jurisdiction is an enterprise resident in the host economy

and not part of the general government sector in either

economy. (See also paragraph 4.93 for further discus-

sion of such cases.) The residence of the employees of

these operations is discussed in paragraph 4.123.

b. International organizations

4.139 International organizations are defined in

paragraphs 4.103–4.107. International organizations are

resident in an economic territory of their own, and not

of the economy in which they are physically located.

This treatment applies to both international organiza-

tions located in only one territory and those located in

two or more territories. The residence of the employees

of these operations is discussed in paragraph 4.124.

4.140 An international organization that operates

peacekeeping and other military forces or that acts as

the interim administration in a territory remains classi-

fied as an international organization and is nonresident

in that territory, even if it undertakes general govern-

ment functions. In cases in which these organizations

are significant, it may be desirable to identify them

separately.

4.141 A separately constituted pension fund of an

international organization is not treated as an inter-

national organization, but it is regarded as a financial

corporation. Its residence is determined according to

the general principles in paragraphs 4.131–4.135—that

is, it is a resident of the territory in which it is located,

and if it lacks a physical presence, it is a resident of the

economy in which it is incorporated or registered.

c. Regional international organizations

4.142 Some international organizations cover a

group of economies in a particular region, such as with

economic or currency unions. If statistics are prepared

for that region as a whole, these regional organizations

are residents of the region as a whole, even though they

are not residents of any member economy (see Appen-

dix 3 for further information in the case of currency

and economic unions).

4.143 When producing global or regional totals,

international organizations are combined with national

data when deriving global and regional totals, such as

for the international transactions and positions com-

piled by the IMF.

d. NPISHs

4.144 An NPISH has a center of economic interest

in the economy in which the institution was legally cre-

ated and is officially recognized and recorded as a legal

or social entity. In practice, residence of the vast major-

ity of NPISHs may be determined without ambiguity.

When an NPISH is engaged in charity or relief work

on an international scale, it may maintain substantial

operations for individual territories that may amount

to branches (see discussion in paragraph 4.27). Such

a branch is usually financed largely or entirely by cur-

rent or capital transfers from abroad. NPISHs are not

international organizations, which are limited to those

created by governments.

F. Issues Associated with Residence

1. Assets and liabilities held by groups that

include both residents and nonresidents

4.145 Some financial assets have owners who are

residents of different economic territories. Examples

include joint bank accounts or other cases in which an

account holder authorizes relatives to withdraw funds

from the account. In these cases, the allocation between

the owners may be unclear:

• In the case of deposits of emigrant workers in their

home economies that are freely usable by fam-

ily members resident in the home economies, a

convention can be adopted to treat these assets as

being held by residents of the home economy.

• Similarly, for deposits of emigrant workers in the

host economy that are freely usable by family mem-

bers, a convention can be adopted to treat these as

being held by a resident of the host economy.

(See Monetary and Financial Statistics Compilation

Guide, paragraph 3.46.)

Compilers may adopt another treatment if better infor-

mation is available. Because these accounts may be

used to make transfers, it is important that such transac-

tions are recognized at either the time of deposit or time

of withdrawal (depending on the convention adopted).

It is also important that compilers discuss methods with

Chapter 4 g Economic Territory, Units, Institutional Sectors, and Residence

the compilers of monetary and financial statistics and

compilers in the counterpart economy with a view to

adopting consistent and realistic treatments in cases in

which the values are significant.

2. Data by partner economy

4.146 The primary presentation of international

accounts shows positions and transactions with all non-

residents as a total, but data on positions and transactions

with nonresidents broken down into individual partner

economies or groups of economies are of considerable

interest. (The possible split of data by partner institu-

tional sector is discussed in paragraph 4.57.) Data may

be provided for the balance of payments or IIP as a

whole, or for particular components, such as goods, ser-

vices, direct investment, or portfolio investment. As well

as for economic analysis, partner data make bilateral

comparisons possible and, hence, assist in identifying

data problems. For example, partner data are an essential

element of the IMF’s Coordinated Portfolio Investment

Survey and Coordinated Direct Investment Survey as

well as the BIS’s international banking statistics.

4.147 Partner data are often prepared for groups of

economies or a mix of groupings and major individual

partner economies. (Because partner economies are

often grouped into regions, the data are sometimes

called regional statements.) It is desirable to follow

standard lists of economies and regions, such as those of

the United Nations or IMF. The partner data published

may be aggregated to groups of economies because of

confidentiality and to avoid categories with minimal

values. In addition to economies and regions, categories

for international organizations as counterparties are

needed. Partner data are also necessary to consolidate

data from member states into data for a currency union.

Additional information on partner data is dealt with in

paragraphs A3.21–A3.28.

4.148 The basic principle for data by partner econ-

omy is based on the economy of residence of the coun-

terparty to the transaction or financial position. The

same principles for determining residence, as discussed

in Section E of this chapter, are applicable, but they are

often more difficult to apply because the information

is not known to the resident counterparty. In a number

of cases listed in paragraphs 4.149–4.164, the main

potential source of information may fall short of the

preferred basis. In each case, such divergences should

be noted by compilers and their significance assessed

to determine whether adjustments are needed. The bal-

ance of payments statement as a whole is conceptually

balanced because each transaction involves two equal

flows; however, bilateral balance of payments may not

balance (even in theory) (see paragraph A3.73).

a. Agents

4.149 An agent is a party who acts on behalf of

or as a representative for another party. Transactions

arranged by an agent on behalf of a principal should

be attributed to the principal, not to the agent. For

example, if an agent issues tickets on behalf of an air-

line resident in another economy, the transactions and

positions related to those tickets are attributed to the

airline. However, an agent also may undertake transac-

tions on its own account, including the agency services

it provides to the principal.

b. Goods

4.150 In line with the change of ownership prin-

ciple, the residence of the seller or purchaser of the

good is the preferred concept for identification of the

partner. In practice, available data may be based on the

economy of origin,

consignment, destination, or other

criteria that, in some cases, may differ from the econ-

omy of the seller or purchaser. In general, the economy

of final destination (for the partner to exports) is con-

sidered to be more likely to correspond with the party

taking ownership of the goods. Similarly, the economy

of origin (for the partner to imports) is considered to

be more likely to correspond with the party convey-

ing ownership of the goods. However, economy of ori-

gin, destination, and consignment can be misleading

as to ownership in cases of merchanting and goods

processed on a fee basis. In those cases, adjustments

should be considered to accord with the change of own-

ership principle as much as possible.

c. Freight and insurance

4.151 Freight and insurance beyond the frontiers of

the exporter are imputed in international accounts sta-

tistics as being payable by the importer, even if payable

by the exporter, wholesaler, or other third party. In

practice, data may be recorded on other bases, such as

the economy of source or destination of the goods car-

ried, or the registration of the ship. In cases in which

this occurs, adjustments for the effect of these factors

should be made, where possible.

Economy of origin is defined in International Merchandise

Trade Statistics: Concepts and Definitions, paragraph 139, as where

the goods were wholly produced, or where there was “substantial

transformation” in cases of production taking place in two or more

economies.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

d. Financial instruments

4.152 Partner data on asset positions are classified to

the partner economy according to the residence of the

issuer, not other factors such as the place of issue, the

residence of a guarantor, or the currency of issue. Simi-

larly, partner data on liability positions are classified

according to the residence of the holders. In practice,

identification of counterparty for securities positions,

income, and transactions is difficult for various reasons,

including that (a) the issuer is not always aware of current

holders of securities, (b) transactors in securities markets

may not be aware of the identity of the counterparty, and

securities positions may be payable by a financial inter-

mediary that created a “short” or reverse position in the

security rather than by the issuer of the security.

4.153 Classification of balance of payments transac-

tions in financial instruments by partner raises some

additional issues to those for the IIP, in terms of data

availability and user interest. These issues arise when

an existing instrument is sold by a holder to another

party. Such transactions involve only an exchange of

assets, in contrast to the initial issue of a new instru-

ment, which involves the creation of a new liability.

This situation applies not only to securities, but also to

other instruments that are traded, such as loans, depos-

its, banknotes, and coin.

4.154 For balance of payments transactions, the

partner attribution could be made on the basis of the

parties to the transaction (namely, the buyer and the

seller, the so-called transactor approach), or for assets

owned, the residence of the issuer (the so-called debtor-

creditor approach). In these cases, it is acceptable to

adopt a convention for partner attribution of assets

owned based on the residence of either the counterparty

to the transaction or the issuer. On practical grounds,

the information available does not always permit iden-

tification of the two parties to the transaction. As noted

in paragraph 14.24, both the debtor-creditor and trans-

actor bases could be of analytical interest. (See also

paragraphs 3.7–3.8.)

e. Securities

4.155 The partner attribution of a liability position or

issue of a liability is made on the basis of the residence

of the issuer. In cases in which a security is issued in

a market other than where the issuer is resident, there

is a need for particular attention. For example, for debt

securities, the security identification number could be

based on the economy of issue.

f. Direct investment

4.156 For direct investment, there can be chains of

voting power, such as when a direct investor in Econ-

omy A has a subsidiary in Economy B, which in turn

has a subsidiary in Economy C. In this case, for the

direct investment in Economy C

(a) the economy of immediate ownership is Econ-

omy B; and

(b) the ultimate investing economy is Economy A.

As a basic principle, direct investment transactions

and positions by partner economy should be reported

according to the immediate host or investing economy,

based on the direct relationships between the parties

rather than based on the residence of the ultimate part-

ner economies or transactors. The partner allocation is

based on the economy of the debtor (for transactions in

securities, this is the economy of the issuer) rather than

that of the counterpart transactor, if different. However,

a resident and a nonresident must engage in a transac-

tion with one another for the transaction to be included

in the balance of payments.

4.157 Supplementary data on direct investment posi-

tions may be prepared according to ultimate source and

host economy (destination). The OECD Benchmark

Definition of Foreign Direct Investment, fourth edi-

tion, provides further information for the identification

of ultimate source. When direct investment is chan-

neled through intermediate entities, such as holding

companies or SPEs, there may be particular interest in

supplementary data, such as the following:

(a) in original source economies, data on the basis of

the ultimate host economy;

(b) in final recipient economies, data on the basis

of the ultimate investing economy or ultimate

controlling parent; and

through funds excluded (see paragraph 6.33).

In the case of round tripping, as discussed in paragraph

6.46, the ultimate investing economy and ultimate host

economy are the same.

g. Stripped securities

4.158 Stripped securities (or strips) may be treated as

the liability of the original issuer if there is no new secu-

rity, or of the party creating the stripped securities if a new

security is created (as discussed in paragraph 5.50).

Chapter 4 g Economic Territory, Units, Institutional Sectors, and Residence

h. Securities repurchase agreements

4.159 The treatment of securities under reverse trans-

actions, such as repurchase agreements, is discussed in

paragraphs 5.52–5.54. Under that treatment, securities

under reverse transactions are regarded as still being

owned by the security-providing party, because there is

no change of economic ownership.

i. Nominee accounts and custodians

4.160 Nominees are a legal device for holding assets

for confidentiality or convenience reasons. The assets

held in nominee accounts should be attributed to the

beneficial owner, not the nominee. However, for issu-

ers of securities, it may be difficult to identify whether

nominees hold assets in their own right or as nominees.

Furthermore, if the assets are held by a nominee, it is

recognized that it may be difficult to identify the ben-

eficial owner.

j. Depository receipts

4.161 Depository receipts are securities that repre-

sent ownership of securities held by a depository (see

paragraph 5.23 for further information). The economy

of issue of the underlying securities is different from the

economy in which the depository receipts are issued.

Depository receipts allow investors to acquire an inter-

est in companies in other economies, while still using

the payment and settlement systems and registration

procedures of another economy. Depository receipts are

treated as being a claim on the issuer of the underlying

security, not that of the issuer of the depository receipt.

k. Gold bullion included in monetary gold

4.162 Gold bullion that has no counterpart liability

is shown as unallocated in position data on assets by

counterpart. For partner data on transactions, if a con-

vention based on issuer is adopted, the transaction can be

assigned to an unallocated or residual partner economy.

l. Special drawing rights

4.163 These instruments are discussed in paragraphs

5.34–5.35. SDRs are based on a cooperative arrange-

ment among the members of the SDR Department and

other participants. The membership (SDR Department

participants) incurs the asset and liability positions unto

itself. Given that claims on and liabilities to members in

the SDR system are attributed on a cooperative basis, an

unallocated or residual partner category is used as the

counterparty to SDR holdings and SDR allocations.

m. Quasi-corporations

4.164 When an actual entity is split into separate

institutional units (such as for joint administration

zones, branches, notional resident units, and multiterri-

tory enterprises, as noted in paragraphs 4.10 and 4.26–

4.44), they should be split consistently in partner data

for statistics in the economy of the counterparties.

3. Changes in residence of institutional units

a. Change in residence of individuals

4.165 Households or their individual members can

change their territory of residence. Because all mem-

bers of a household are residents of the same territory,

the movement of an individual may require that the

person leave one household and become a member

of another household. The change in the residence by

an owner of an asset or by someone who has a liabil-

ity requires a reclassification, because no exchange

is made between two parties and, accordingly, no

transaction occurs. (The entries are discussed in para-

graphs 9.21–9.22.)

b. Assets moved between entities

4.166 For what are called “corporate migrations,”

two situations can occur: one in which assets are moved

between entities and another in which the corporation

itself changes residence. When a company is said to

relocate to another jurisdiction, it usually involves

transactions to move assets from a corporation in one

economy to a related corporation in a different economy

(see paragraphs 8.19–8.22, “corporate inversion and

other restructuring”). That is, the ownership of assets is

moved, rather than the entity changing residence.

c. Change in residence of entities other than

persons

4.167 In contrast, in some rare cases, an entity

changes its residence (i.e., without moving assets to

ownership by another entity). These cases could arise

from exchanges of territory between governments.

Additionally, corporation or trust law in some cases

allows entity emigration or immigration (e.g., it could

be permitted within an economic union, but is not gen-

erally the case for most jurisdictions). The effects on

the IIP would be treated as other changes in volume in

the same way as for the change in residence of an indi-

vidual, recorded in the other changes in financial assets

and liabilities account. (These cases are discussed in

paragraph 9.23.)

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

4. Alternatives to the residence concept

4.168 With globalization, an increasing number of

entities have connections to two or more economies.

Some additional data sets provide alternatives to the

residence concept, such as those based on ownership

(as in data on the activities of multinational enterprises,

as discussed in Appendix 4, and consolidated bank-

ing statistics) and provide additional information, such

as on resident workers who send remittances abroad

(as discussed in Appendix 5). In consolidated banking

statistics, banking groups and their global operations

are reported as a single entity (i.e., all the controlled

affiliates of an enterprise are allocated to the economy

of the head office).

Chapter 4 g Economic Territory, Units, Institutional Sectors, and Residence

CHAPTER

Classifications of Financial

Assets and Liabilities

5.1 This chapter discusses the classifications of

financial assets and liabilities used in the international

accounts. These classifications are applied to positions,

the associated income and financial account transac-

tions, and other changes involving financial assets and

liabilities. Classifications are used to group similar

components and to separate components with different

characteristics. The international accounts functional

categories and their relationship to the instruments

classification are discussed in Chapter 6.

A. Definitions of Economic Assets and

Liabilities

References:

2008 SNA, Chapter 11, The Financial Account, and

Chapter 13, The Balance Sheet.

IMF, MFSM 2000, Chapter 4, Classification of Finan-

cial Assets.

IMF, Monetary and Financial Statistics Compilation

Guide, 2008.

IMF, Financial Soundness Indicators: Compila-

tion Guide, 2006, Appendix IV, Reconciliation

Between the Guide’s Methodology and National

and Commercial Accounting.

BIS, ECB, and IMF, Handbook on Securities Statistics

(forthcoming).

1. Economic assets in general

5.2 Economic assets are resources over which own-

ership rights are enforced and from which future eco-

nomic benefits may flow to the owner. They include fixed

assets, such as equipment and research and development,

that are used repeatedly or continuously in production

over more than one year. They also include inventories,

valuables, nonproduced assets, and financial assets.

5.3 Every economic asset has an owner. The eco-

nomic owner of the asset is the party who has the risks

and rewards of ownership. Rewards of ownership usu-

ally include the right to use, rent out, or otherwise gen-

erate income, or to sell the asset. The risks include the

potential losses caused by damage, theft, and holding

losses; that management, transfer, or maintenance costs

are greater than anticipated; and, in the case of financial

assets, default of the counterparty. Ownership may be

subject to costs such as maintenance and taxes. Usu-

ally, the economic owner is the same as the legal owner,

but they may differ in cases such as financial leases.

Under some legal arrangements, elements of the risks

and rewards are split between different parties, so it is

necessary to identify which party has the bulk of risks

and rewards to identify the economic ownership. 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, using it,

or providing it temporarily to another entity. It may be

tangible or intangible. Different kinds of economic ben-

efits that may be derived from an asset include:

(a) the ability to use assets, such as buildings or

machinery, in production;

(b) the generation of services, for example, renting

out produced assets to another entity;

and dividends received by the owners of finan-

cial assets); and

(d) the potential to sell and thus realize holding

gains.

In the special case of a short position, a negative asset

is identified, as discussed in paragraph 7.28.

5.4 The classification system of economic assets

recognized in macroeconomic data sets is shown in

Table 5.1. In the international accounts, produced assets

are covered in the goods and services account, nonpro-

duced nonfinancial assets in the capital account, and

financial assets and liabilities in the financial account

and IIP. This chapter deals with the classification of

financial assets and liabilities.

2. Financial instruments

5.5 Financial instruments consist of the full range

of financial contracts made between institutional units.

Financial instruments may give rise to financial claims

(as discussed in paragraph 5.6) or not (as discussed in

paragraphs 5.10–5.13).

3. Claims

5.6 A claim is a financial instrument that gives

rise to an economic asset that has a counterpart

liability. Claims arise from contractual relationships

entered into when one institutional unit promises to

provide funds or other resources to another in the

future. (Usually, funds or resources are supplied at

the beginning of the relationship, but not in the case

of futures contracts.) The only financial instrument

that does not give rise to a claim is gold bullion that

is included in monetary gold. (The term claim is used

in a different sense in the context of insurance; see

paragraph 5.64(b).)

5.7 Each claim is a financial asset that has a cor-

responding liability. The existence of two parties to a

claim means that it can arise in a cross-border situation.

Equity is regarded as a claim as it represents a claim of

the owner on the residual value of the entity.

5.8 Nonfinancial assets do not have a corresponding

liability. For example, emission rights and commodities

may be traded on organized markets similar to those of

traded financial assets, but do not have a corresponding

liability. In contrast, a financial derivative relating to a

commodity price does have a counterpart liability and

is a financial asset.

4. Financial assets

5.9 Financial assets consist of claims and the gold

bullion component of monetary gold. Financial assets

consist of equity and investment fund shares, debt

instruments, financial derivatives and employee stock

options, and monetary gold. Financial assets can be

delineated from financial instruments in that:

(a) some instruments do not give rise to financial

assets, as discussed in paragraphs 5.10–5.14.

Examples of instruments not recognized as

assets are one-off guarantees not yet activated

and unrealized commitments such as lines of

credit, loan commitments, and letters of credit;

and

(b) when held as monetary gold, gold bullion is a

financial asset that is not created by an instru-

Chapter 5 g Classifications of Financial Assets and Liabilities

Table 5.1. Economic Asset Classification

(Includes 2008 SNA codes)

Asset classes Examples

AN Nonfinancial assets

AN1 Produced assets

AN11 Fixed assets Tangible assets: dwellings; other buildings and structures; machinery and

equipment; weapons systems; cultivated biological resources.

Intangible assets: research and development; mineral exploration; computer

software and databases; entertainment, literary, and artistic originals.

AN12 Inventories Materials and supplies, work-in-progress, finished goods, goods for resale.

AN13 Valuables Precious metals and stones, antiques, and other art objects.

AN2 Nonproduced assets

AN21 Natural resources Land and subsoil assets, noncultivated biological resources, water

resources, radio spectra.

AN22 Contracts, leases, and licenses Marketable operating leases, permissions to use natural resources,

permissions to undertake specific activities, entitlement to future goods

and services on an exclusive basis.

AN23 Goodwill and marketing assets Brand names, mastheads, trademarks.

AF Financial assets See Table 5.3.

ment and that does not represent a claim on

another entity. It is considered to be a financial

asset because of its role as a means of interna-

tional payments and store of value for use in

reserve assets. (The unallocated gold account

component of monetary gold does have a coun-

terpart claim; it is discussed in paragraph 5.74.)

5. Other financial instruments not recognized

as financial assets

5.10 Contingent assets and liabilities are contrac-

tual financial arrangements between institutional units

that do not give rise to unconditional requirements

either to make payments or to provide other objects

of value. They are not recognized as financial assets

or liabilities prior to the condition(s) being fulfilled.

However, by conferring certain rights or obligations

that may affect future decisions, they can produce an

economic impact on the parties involved. As a result,

supplementary information may be provided on sig-

nificant contingent assets or liabilities. A contingent

claim sold to another party is classified under contracts,

leases, and licenses; is not included in the IIP; and has

no counterpart liability.

5.11 Although the value of future payments arising

from equity, financial derivatives, index-linked instru-

ments, insurance reserves, and provisions for standard-

ized guarantees is uncertain, they are recognized as

financial assets rather than as contingent assets. In

these cases, the liability exists, but the amounts pay-

able depend on subsequent events.

5.12 One-off guarantees of payment by third parties

are contingent because payment is required only if the

principal debtor defaults. However, provisions for calls

under standardized guarantees are not considered to be

contingent because of the more predictable expectation

of payment under standardized guarantees. (Defini-

tions of standardized and one-off guarantees are given

in paragraph 5.68.)

5.13 Lines of credit, letters of credit, and loan com-

mitments assure that funds will be made available, but

no financial asset (i.e., loan) is created until funds are

actually advanced. Letters of credit are promises to

make payment only when certain documents speci-

fied by contract are presented. Note issuance facilities

assure that parties will be able to sell short-term securi-

ties that they issue and that the financial corporations

providing the facility will purchase any notes not sold

in the market. Only if the financial corporation provid-

ing the facility makes funds available will it acquire

an actual asset, to be recorded in its balance sheet.

Uncalled share capital is contingent unless there is an

obligation to pay the amount.

5.14 Sums set aside in business accounting to pro-

vide for future liabilities or for future expenditures are

not recognized as liabilities. Only actual current liabili-

ties to another party or parties are explicitly included

in financial assets and liabilities. When the anticipated

liability becomes actual, it is recognized. A future

stream of revenue, such as future tax collections or roy-

alties receipts, is not recognized as a financial asset.

6. Other issues

5.15 Securities are debt and equity instruments that

have the characteristic feature of negotiability. That

is, their legal ownership is readily capable of being

transferred from one unit to another unit by delivery

or endorsement. While any financial instrument can

potentially be traded, securities are designed to be

traded, usually on organized exchanges or “over the

counter.” (The over-the-counter market involves par-

ties negotiating directly with one another, rather than

on a public exchange.) Negotiability is a matter of the

legal form of the instrument. Some securities may be

legally negotiable, but there is not, in fact, a liquid

market where they can be readily bought or sold. Listed

financial derivatives, such as warrants, are sometimes

considered to be securities.

5.16 A discussion of Islamic banking instruments

and how they can be treated in terms of the classifica-

tion of financial assets and liabilities can be found in

Appendix 2 of MFSM 2000.

B. Classification of Financial Assets and

Liabilities by Type of Instrument

1. Introduction to classification of particular

financial assets and liabilities

5.17 This Manual uses three broad categories of

financial assets and liabilities: (1) equity and investment

fund shares, (2) debt instruments, and (3) other financial

assets and liabilities. The 2008 SNA and this Manual use

an additional, more detailed classification of financial

assets and liabilities. The classification is based primar-

ily on the legal characteristics that describe the form of

the underlying relationship between the parties to an

instrument, which are also related to their liquidity and

economic purpose. Although financial innovation leads

to the emergence of new types of instruments, the clas-

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

sification is intended to provide broad categories that

allow for international comparability and the inclusion of

new instruments within the existing categories.

5.18 Table 5.2 shows the SNA instruments classi-

fication and the corresponding type of income they

generate. The linking of income with the correspond-

ing assets and liabilities facilitates calculation of rates

of return, which are useful for both analysis and data

verification. Table 5.3 shows the 2008 SNA classifica-

tion and the corresponding broad categories.

2. Equity and investment fund shares

5.19 Equity and investment fund shares have the

distinguishing feature that the holders own a residual

claim on the assets of the institutional unit that issued

the instrument. Equity represents the owners’ funds in

the institutional unit. In contrast to debt, equity does

not generally provide the owner with a right to a prede-

termined amount or an amount determined according

to a fixed formula.

5.20 Investment fund shares have a specialized

role in financial intermediation as a kind of collective

investment in other assets, so they are identified sepa-

rately. Additionally, the treatment of portfolio invest-

ment income differs, in that reinvested earnings are

imputed for investment fund shares (as shown in para-

graphs 11.37–11.39).

a. Equity

5.21 Equity consists of all instruments and records

that acknowledge claims on the residual value of a corpo-

ration or quasi-corporation, after the claims of all credi-

tors have been met. Equity is treated as a liability of the

issuing institutional unit (a corporation or other unit).

5.22 Ownership of equity in legal entities is usually

evidenced by shares, stocks, participations, depository

receipts, or similar documents. Shares and stocks have

the same meaning. Participating preferred shares are

those that provide for participation in the residual value

on the dissolution of an incorporated enterprise. Such

Chapter 5 g Classifications of Financial Assets and Liabilities

Table 5.2. Returns on Financial Assets and Liabilities: Financial Instruments and Their Corresponding

Type of Income

(Includes 2008 SNA codes)

Financial Instrument Type of Income Receivable/ Payable on Instrument

Equity and investment fund shares

AF51 Equity D42 Distributed income of corporations

D43 Reinvested earnings

D41 Interest

AF511+AF512 Listed and unlisted shares D421 Dividends

D43 Reinvested earnings

D41 Interest

AF519 Other equity D422 Withdrawals from income of quasicorporations

D43 Reinvested earnings

D41 Interest

AF52 Investment fund shares/units D443 Investment income attributable to investment fund

shareholders (dividends and reinvested earnings)

Debt instruments

AF12 Special drawing rights D41 Interest

AF2 Currency and deposits D41 Interest

AF3 Debt securities D41 Interest

AF4 Loans D41 Interest

AF6 Insurance, pension, and standardized guarantee schemes D44 Other investment income

AF81 Trade credit and advances D41 Interest

AF89 Other accounts receivable/payable D41 Interest

Other financial assets and liabilities

AF11 Monetary gold

D41 Interest

AF7 Financial derivatives and employee stock options None

Reinvested earnings—direct investment equity only.

By convention, lending fees on equity securities, gold loans, and gold swaps are classified as interest (see paragraph 11.67).

Monetary gold consists of gold bullion and unallocated gold accounts. Gold bullion has no counterpart liability. However, the counterpart liability of unal-

located gold accounts is in deposits.

shares are also equity securities, whether or not the

income is fixed or determined according to a formula.

(For nonparticipating preferred shares, see paragraph

5.46.) In addition to the purchase of shares, the value

of equity can be affected by a range of factors, such as

share premiums, accumulated reinvested or retained

earnings, or revaluations. In addition, a direct inves-

tor may increase its equity in an affiliate by providing

goods and services (see paragraph 8.17) or assuming

debt (see paragraph 8.45(c)).

5.23 Depository receipts are securities that repre-

sent ownership of securities listed in other economies.

Depository receipts listed on one exchange represent

ownership of securities listed on another exchange, and

ownership of the depository receipts is treated as if it

represents direct ownership of the underlying securi-

ties. Depository receipts facilitate transactions in secu-

rities in economies other than their home listing. The

underlying securities may be equity or debt securities.

5.24 Equity may be split on a supplementary basis

into:

(a) listed shares,

(b) unlisted shares, and

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 5.3. 2008 SNA Financial Instruments Classification (with Corresponding

BPM6 Broad Categories)

(Includes 2008 SNA codes)

2008 SNA Financial Assets and Liabilities Classification Broad international accounts category (BPM6)

AF11 Monetary gold

Gold bullion }Other financial assets

Unallocated gold accounts } and liabilities

AF12 Special drawing rights Debt instruments

AF2 Currency and deposits }Debt instruments

AF21 Currency }

AF221 Interbank positions }

AF229 Other transferable deposits }

AF29 Other deposits }

AF3 Debt securities Debt instruments

AF4 Loans Debt instruments

AF5 Equity and investment fund shares }Equity

AF51 Equity }

AF511Listed shares }

AF512 Unlisted shares }

AF519 Other equity }

AF52 Investment fund shares/units }

AF521 Money market fund shares/units }

AF522 Other investment fund shares/units }

AF6 Insurance, pension, and standardized guarantee schemes }Debt instruments

AF61 Nonlife insurance technical reserves }

AF62 Life insurance and annuity entitlements }

AF63 Pension entitlements }

AF64 Claims of pension funds on pension managers }

AF65 Entitlements to nonpension benefits }

AF66 Provisions for calls under standardized guarantees }

AF7 Financial derivatives and employee stock options }Other financial assets

AF71 Financial derivatives } and liabilities

AF711 Forward-type contracts }

AF712 Options }

AF72 Employee stock options }

AF8 Other accounts receivable/payable }Debt instruments

AF81 Trade credit and advances }

AF89 Other accounts receivable/payable }

Both listed and unlisted shares are equity securities

(securities are defined in paragraph 5.15). Listed shares

are those listed on an exchange and may sometimes be

referred to as quoted shares. Unlisted shares may some-

times be referred to as private equity

(venture capital

often takes this form).

5.25 The existence of quoted prices of shares listed

on an exchange means that current market prices are

usually readily available. In addition to the valuation

aspects, listed and unlisted shares tend to be issued

by different types of corporations (subsidiaries and

smaller businesses) and typically have different regula-

tory requirements.

5.26 Other equity is equity that is not in the form of

securities. It can include equity in quasi-corporations,

such as branches, trusts, limited liability and other part-

nerships, unincorporated funds, and notional units for

ownership of real estate and other natural resources. The

ownership of many international organizations is not in

the form of shares and so is classified as other equity

(although equity in the BIS is in the form of unlisted

shares). Ownership of currency union central banks is

included in other equity (see paragraph A3.44).

5.27 The general principles of valuation given in

paragraphs 3.84–3.91 apply to equity. However, because

prices may not be observable for unlisted shares and

other equity positions, other methods are noted in para-

graphs 7.15–7.18.

b. Investment fund shares or units

5.28 Investment funds are collective investment

undertakings through which investors pool funds for

investment in financial or nonfinancial assets or both.

These funds issue shares (if a corporate structure is

used) or units (if a trust structure is used). Investment

funds include money market funds (MMF) and non-

MMF investment funds, discussed further in para-

graphs 4.73–4.74. Investment fund shares or units refer

to the shares issued by mutual funds and unit trusts,

rather than the shares they may hold.

5.29 MMFs are investment funds that invest only

or primarily in short-term money market securities

such as treasury bills, certificates of deposit, and com-

mercial paper. MMF shares and units sometimes are

functionally close to transferable deposits, for example,

Private equity refers to the source of equity funds being on

private markets; however, private equity may be used to invest in

listed shares, including to take over publicly listed companies, and

delist them.

accounts with unrestricted check-writing privileges. If

MMF shares are included in broad money in the report-

ing economy, they should be recorded as a separate

item to allow reconciliation with monetary statistics.

(See also paragraph 4.73 on MMFs as a subsector.)

5.30 Investment funds invest in a range of assets,

such as debt securities, equity, commodity-linked

investments, real estate, shares in other investment

funds, and structured assets. Data on the composition

of their assets could be useful in economies in which

investment funds are significant.

3. Debt instruments

Reference:

IMF and others, External Debt Statistics: Guide for

Compilers and Users, paragraphs 2.3–2.11.

5.31 Debt instruments are those instruments that

require the payment of principal and/or interest at

some point(s) in the future.

Debt instruments con-

sist of SDRs, currency and deposits, debt securities,

loans, insurance technical reserves, pension and related

entitlements, provision for calls under standardized

guarantees, and other accounts receivable/payable. The

term debt instrument is applicable to both the liability

and the corresponding claim. Some instruments, such

as currency and some deposits, pay no interest. With

insurance and pension schemes, the income flow is

called investment income attributable to policyholders,

rather than interest.

5.32 Debt instruments can be contrasted with equity

and investment shares in the nature of the liability

and risk. Whereas equity gives a residual claim on

the assets of the entity, a debt instrument involves an

obligation to pay an amount of principal and/or inter-

est usually according to a predefined formula, which

usually means that the creditor has a more limited risk

exposure. Provided that the debtor is solvent, debt obli-

gations are largely fixed or linked by a formula to some

other variable, such as a market interest rate or the price

of a selected item. In contrast, the return on equity is

largely dependent on the economic performance of the

issuer. Because of the different nature of risk, debt is an

important grouping for analysis. Financial derivatives,

Interest payments are periodic payments of interest costs. All

other payments on debt instruments are principal payments. Further

information is available in External Debt Statistics: Guide for Com-

pilers and Users, Chapter 2, The Measurement of External Debt:

Definition and Core Accounting Principles, and Appendix III, Glos-

sary of External Debt Terms.

Chapter 5 g Classifications of Financial Assets and Liabilities

both forwards and options, are distinguished from debt

instruments because no principal amount is advanced

that is required to be repaid, and no interest accrues

on any financial derivative instrument. That is, unlike

financial derivatives, debt instruments have a principal

amount, usually associated with the supply of financial

or other resources.

5.33 Because debt instruments involve an obligation

to repay principal, short- or long-term classification

(according to either original or remaining maturity)

is of analytical significance. The maturity splits are

explained in paragraphs 5.103–5.105.

a. Special drawing rights

5.34 SDRs are international reserve assets created

by the IMF and allocated to members to supplement

existing official reserves. SDRs are held only by the

monetary authorities of IMF members and a limited

number of international financial institutions that are

authorized holders. SDR holdings represent uncondi-

tional rights to obtain foreign exchange or other reserve

assets from other IMF members. (For more informa-

tion, see paragraph 7.83.)

5.35 Holdings of SDRs by an IMF member are

recorded as an asset, while the allocation of SDRs is

recorded as the incurrence of a liability of the member

receiving them (because of a requirement to repay the

allocation in certain circumstances, and also because

interest accrues). The holdings and allocations should

be shown gross, rather than netted.

b. Currency and deposits

Currency

5.36 Currency consists of notes and coins that are

of fixed nominal values and are issued or authorized by

central banks or governments.

5.37 Some countries issue gold coins, which are

held for intrinsic value, or commemorative coins,

which are held for numismatic value. If not in active

circulation, such coins are not classified as financial

assets but as goods (except for gold coins that are clas-

sified as monetary gold; see paragraph 6.78). Simi-

larly, central bank or central government holdings of

unissued or demonetized currency are not financial

assets. (Acquisition of unissued currency by a mon-

etary authority from a printer or coin manufacturer is

included in goods; see paragraph 10.17(a).)

5.38 Foreign currency in circulation, including as

legal tender, is shown as a currency asset of the resident

holder and as a liability of the issuer. Transactions that

take place between residents settled in foreign currency

in circulation are domestic transactions. Currency as

an instrument, as discussed in this section, can be con-

trasted with the classification of all kinds of instruments

as being either domestic currency or foreign currency

(as discussed further in paragraphs 3.98–3.103).

Deposits

5.39 Deposits include all claims that are (a) on

the central bank, deposit-taking corporations other

than the central bank, and, in some cases, other insti-

tutional units; and (b) represented by evidence of

deposit. A deposit is usually a standard contract, open

to the public at large, that allows the placement of a

variable amount of money. The nominal value of depos-

its is usually fixed in terms of the currency in which

the deposits are denominated. In some cases, deposits

may have their value expressed in terms of an index or

linked to a commodity price, for example, gold, oil, or

share prices. Unallocated accounts for precious metals

are also deposits, except for unallocated gold accounts

held by monetary authorities for reserves purposes,

for which the asset holding is included in monetary

gold (with the counterpart liability being recorded as a

deposit—see paragraph 5.77).

5.40 Deposits are distinguished from loans on the

basis of the representation in the documents that evidence

them. There may be cases in which the distinction is

unclear, because the parties are uncertain or take differ-

ent views. When one party is a deposit-taking corporation

and the other is not, a possible convention is that an asset

position of a deposit-taking corporation is classified as

a loan by both parties. Similarly, a liability of a deposit-

taking corporation to another type of entity is classified

as a deposit by both parties. Classification of interbank

positions as deposits is discussed in paragraph 5.42.

Transferable deposits

5.41 Transferable deposits consist of all deposits

that are (a) exchangeable for banknotes and coins on

demand at par and without penalty or restriction and

(b) directly usable for making payments by check, draft,

giro order, direct debit or credit, or other direct pay-

ment facility. Some types of deposit accounts embody

only limited features of transferability. For example,

some deposits have restrictions such as on the number

of third-party payments that can be made per period or

on the minimum size of the individual third-party pay-

ments. An overdraft arising from the overdraft facility

of a transferable deposit account is classified as a loan.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Interbank positions

5.42 Interbank positions can be shown as a separate

component of deposits. In some cases, the instrument

classification of interbank positions may be unclear, for

example, because the parties are uncertain or one party

considers it as a loan and the other a deposit. There-

fore, as a convention to ensure symmetry, all interbank

positions other than securities and accounts receivable/

payable are classified under deposits.

Other deposits

5.43 Other deposits consist of all claims, other

than transferable deposits, that are represented by

evidence of deposit. Other deposits include savings

and fixed-term deposits, and nonnegotiable certifi-

cates of deposit. (Negotiable certificates are classi-

fied as debt securities.) Restricted deposits, defined as

those for which withdrawals are restricted on the basis

of legal, regulatory, or commercial requirements, are

included in other deposits, as well as shares or simi-

lar evidence of deposit issued by savings and loan

associations, building societies, credit unions, and

the like. Liabilities under securities repurchase agree-

ments that are included in national measures of broad

money are also other deposits (while liabilities under

other repurchase agreements are included in loans).

Reserve position in the IMF (see paragraph 6.85) is

included in other deposits.

c. Debt securities

5.44 Debt securities are negotiable instruments

serving as evidence of a debt. They include bills,

bonds, notes, negotiable certificates of deposit, com-

mercial paper, debentures, asset-backed securities,

money market instruments, and similar instruments

normally traded in the financial markets. Bills are

defined as securities that give the holders the uncon-

ditional rights to receive stated fixed sums on a speci-

fied date. Bills are generally issued at discounts to

face value that depend on the rate of interest and the

time to maturity and are usually traded in organized

markets. Examples of short-term securities are trea-

sury bills, negotiable certificates of deposit, bankers’

acceptances, promissory notes, and commercial paper.

Debt securities give the holders the unconditional

right to fixed or contractually determined variable

payments (i.e., earning of interest is not dependent on

earnings of the debtors. Depository receipts whose

underlying securities are debt securities are debt secu-

rities (see paragraph 5.23).

Possible reclassification of traded loans as securities

5.45 Loans that have become negotiable from one

holder to another are to be reclassified from loans to

debt securities under certain circumstances. For such

reclassification, there needs to be evidence of second-

ary market trading, including the existence of market

makers, and frequent quotations of the instrument, such

as provided by bid-offer spreads.

Nonparticipating preferred stocks and

convertible bonds

5.46 Nonparticipating preferred stocks or shares are

those that pay a fixed income but do not provide for

participation in the distribution of the residual value of

an incorporated enterprise on dissolution. These shares

are classified as debt securities. (See also paragraph 5.22

concerning participating preferred shares.) Bonds that

are convertible into equity should be classified as debt

securities prior to the time that they are converted.

Asset-backed securities

5.47 Asset-backed securities, collateralized debt

obligations, and collateralized mortgage obligations

are arrangements under which payments of interest

and principal are backed by payments on specified

assets or income streams. They are backed by mort-

gages, home equity loans, student loans, and other

debts as well as pools of leased property. Securi-

tization of these assets provides liquidity in assets

that are otherwise not so liquid.

Asset-backed secu-

rities may be issued by a specific holding unit or

vehicle, which issues securities that are sold to raise

funds to pay the originator for the underlying assets.

Asset-backed securities are classified as debt securi-

ties because the security issuers have a requirement

to make payments, while the holders do not have

a residual claim on the underlying assets; if they

did, the instrument would be equity or investment

funds shares. Asset-backed securities are backed by

various types of financial assets (e.g., mortgages

and credit card loans), nonfinancial assets, or future

income streams—such as the earnings of a musi-

cian or a government’s future revenue—that are not

recognized as economic assets in macroeconomic

statistics.

Another term used is “structured finance.” This refers to the

repackaging of existing financial assets—securities, loans, or other

assets—into new instruments that are structured to meet the liquid-

ity, creditworthiness, and return preferences of particular investors.

These arrangements may incorporate financial derivatives.

Chapter 5 g Classifications of Financial Assets and Liabilities

Bankers’ acceptances

5.48 Bankers’ acceptances involve the acceptance

by a financial corporation, in return for a fee, of a

draft or bill of exchange and the unconditional prom-

ise to pay a specific amount at a specified date. Much

international trade is financed this way. Bankers’

acceptances are classified under the category of debt

securities. Bankers’ acceptances represent uncondi-

tional claims on the part of the holder and an uncon-

ditional liability on the part of the accepting financial

corporation; the financial corporation’s counterpart

asset is a claim on its customer. Bankers’ acceptances

are treated as financial assets from the time of accep-

tance, even though funds may not be exchanged until

a later stage.

Index-linked securities

5.49 Index-linked securities are those for which the

principal or coupons or both are linked to another

item, such as a price index or the price of a com-

modity. These securities are classified as variable-rate

instruments (see paragraph 5.113). Issues for the mea-

surement of revaluations and interest are discussed in

paragraphs 9.34 and 11.59–11.65, respectively.

Stripped securities

5.50 Stripped securities are securities that have

been transformed from a principal amount with cou-

pon payments into a series of zero-coupon bonds,

with a range of maturities matching the coupon pay-

ment date(s) and the redemption date of the prin-

cipal amount(s). They are also called strips. The

function of stripping is that investor preferences for

particular cash flows can be met in ways that are

different from the mix of cash flows of the original

security. Stripped securities may have a different

issuer from the original issuer—in which case new

liabilities are created. Following are the two cases of

stripped securities:

• When a third party acquires the original securities

and uses them to back the issue of the stripped

securities. Then new funds have been raised and a

new financial instrument is created.

• When no new funds are raised and the payments on

the original securities are stripped and separately

marketed by the issuer or through agents (such as

strip dealers) acting with the issuer’s consent.

(Paragraph 11.58 discusses how interest on stripped

securities is calculated on an accrual basis.)

d. Loans

5.51 Loans are financial assets that (a) are created

when a creditor lends funds directly to a debtor, and

(b) are evidenced by documents that are not negotiable.

This category includes all loans, including those under

overdraft facilities, except accounts receivable/payable,

which are treated as a separate category of financial

assets. Loans that have become debt securities (as

noted in paragraph 5.45) are also excluded from loans.

This category includes installment loans, hire-purchase

credit, and loans to finance trade credit. Claims on

or liabilities to the IMF (including use of IMF credit)

that are in the form of loans are also included in this

category (see also paragraph 6.85 on the treatment of

loans provided to the IMF General Resources Account;

and Annex 7.1 on loans and credit from the IMF). An

overdraft arising from the overdraft facility of a trans-

ferable deposit account is classified as a loan. However,

undrawn lines of credit are not recognized as a liability.

The distinction between loans and deposits is discussed

under deposits in paragraph 5.40.

Securities repurchase agreements and gold swaps

Reference:

BIS, Securities Lending Transactions: Market Devel-

opment and Implications, CPSS Publications No.

32, July 1999.

5.52 A securities repurchase agreement is an

arrangement involving the provision of securities in

exchange for cash with a commitment to repurchase the

same or similar securities at a fixed price. The commit-

ment to repurchase may be either on a specified future

date (often one or a few days hence, but also further

in the future) or an “open” maturity. Repos, securities

lending with cash collateral, and sale-buybacks are dif-

ferent terms for arrangements with the same economic

effect as a securities repurchase agreement—all involve

the provision of securities as collateral for a loan or

deposit. A repo is used as a term from the perspective

of the security provider, while a reverse repo is used

from the perspective of the security taker. Securities

repurchase agreements are a subset of reverse transac-

tions (as discussed in paragraphs 7.58–7.61).

5.53 The supply and receipt of funds under a securi-

ties repurchase agreement is treated as a loan or deposit.

It is generally a loan, but it is classified as a deposit if it

Negotiability is defined in paragraph 5.15. Loans may be traded,

but their legal form is not designed for negotiability in the same way

as debt securities.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

involves liabilities of a deposit-taking corporation and

is included in national measures of broad money. If a

securities repurchase agreement does not involve the

supply of cash (i.e., there is an exchange of one security

for another, or one party supplies a security without

collateral), there is no loan or deposit. Margin calls in

cash under a repo are also classified as loans.

5.54 The securities provided as collateral under

securities lending, including a securities repurchase

agreement, are treated as not having changed economic

ownership, as discussed in paragraph 7.58. This treat-

ment is adopted because the cash receiver is still subject

to the risks or rewards of any change in the price of the

security. (The same treatment is adopted for repurchase

agreements without cash collateral, in which case there

is no transaction in the securities and no loan.)

5.55 A gold swap involves an exchange of gold for

foreign exchange deposits with an agreement that the

transaction be reversed at an agreed future date at an

agreed gold price. The gold taker (cash provider) usu-

ally will not record the gold on its balance sheet, while

the gold provider (cash taker) usually will not remove

the gold from its balance sheet. In this manner, the

transaction is analogous to a repurchase agreement and

should be recorded as a collateralized loan or deposit.

Gold swaps are similar to securities repurchase agree-

ments except that the collateral is gold.

Financial leases

References:

2008 SNA, Chapter 17, Cross-Cutting and Other Spe-

cial Issues, Part 5, Contracts, leases and licences.

International Accounting Standards Board, Interna-

tional Financial Reporting Standards, Interna-

tional Accounting Standard 17, Leases.

5.56 A financial lease is a contract under which

the lessor as legal owner of an asset conveys substan-

tially all the risks and rewards of ownership of the

asset to the lessee. In other words, the lessee becomes

the economic owner of the asset. Under a financial

lease, the lessor is shown as making a loan to the lessee

with which the lessee acquires the asset. Thereafter the

leased asset is shown on the balance sheet of the lessee

and not of the lessor; the corresponding loan is shown

as an asset of the lessor and a liability of the lessee.

Gold swaps should not be confused with a swap giving rise to a

financial derivative. The two types of arrangements have different

risk transfer implications; under a gold swap, the economic owner-

ship of the gold does not change hands (see paragraph 5.91).

5.57 Examples of situations that would normally

lead to a lease being classified as a financial lease

include that:

(a) the lease transfers legal ownership to the lessee

at the end of the lease term; or

(b) the lease has the option for the lessee to acquire

legal ownership at the end of the lease term at a

price that is sufficiently low that the exercise of

the option is reasonably certain; or

nomic life of the asset; or

(d) at inception, the present value of the lease pay-

ments amount to substantially all of the value of

the asset; or

(e) if the lessee can cancel the lease, the lessor’s

losses are borne by the lessee; or

(f) gains or losses in the residual value of the resid-

ual asset accrue to the lessee; or

(g) the lessee has the ability to continue the lease for

a secondary period for a payment substantially

lower than market value.

These examples may not be conclusive that substan-

tially all of the risks have been conveyed; for example,

if the asset is conveyed to the lessee at the end of the

lease at its fair value at that time, then the lessor holds

substantial risks of ownership. Financial leases are

also called finance leases or capital leases, highlight-

ing that the motivation is to finance acquisition of

the asset. Accounting practices generally recognize

financial leases in the same manner as this definition.

In addition to financial leases recognized in busi-

ness accounts, a treatment akin to financial leases

is adopted for some public-private partnerships

(see

2008 SNA, Chapter 22, The General Government and

Public Sectors).

5.58 The treatment of financial leases is designed

to move away from the legal arrangements to capture

the economic reality of such arrangements, by treating

assets under a financial lease as if they were purchased

and owned by the user. For example, if a bank leases

an aircraft to an aviation company, at the time the com-

pany is deemed to take economic ownership of the

aircraft, it is shown as an asset in the balance sheet of

For example, a build, own, operate, transfer scheme could be

found to assign the risks and rewards of ownership to the govern-

ment, so the private partner would be treated as a provider of a

financial lease.

Chapter 5 g Classifications of Financial Assets and Liabilities

the aviation company, while the loan is recorded as a

liability. That is, the IIP will show a loan between the

aviation company and the bank.

5.59 The debt liability at the inception of the lease

is defined as the value of the asset and is financed

by a loan of the same value, a liability of the lessee.

The loan is repaid through payments during the con-

tract (which consist of interest, principal, and, if a

financial intermediary is involved, FISIM (financial

intermediation services indirectly measured) ele-

ments) and any residual payment at the end of the

contract (or alternatively, by the return of the good

to the lessor). Appendix 6b provides references to

where financial leases are discussed in various parts

of this Manual.

5.60 Financial leases may be distinguished from

other kinds of leases identified in macroeconomic sta-

tistics because substantially all the risks and rewards of

ownership are transferred from the legal owner of the

good (the lessor) to the user of the good (the lessee).

Other kinds of leases are as follows:

(a) Operating leases. An operating lease is one in

which the legal owner of a produced asset is also

the economic owner and has the operating risks

and rewards from ownership of the asset. One

indicator of an operating lease is that it is the

responsibility of the legal owner to provide any

necessary repair and maintenance of the asset.

Under an operating lease, the asset remains on

the balance sheet of the lessor. Operating leases

give rise to services, as discussed in more detail

in paragraphs 10.153–10.157.

(b) Resource leases. A resource lease is an agree-

ment whereby the legal owner of a natural

resource that has an infinite life makes it avail-

able to a lessee in return for a regular payment,

which is recorded as rent. The resource contin-

ues to be recorded on the balance sheet of the

lessor even though it is used by the lessee. Other

arrangements involving natural resources may

amount to an outright sale of a natural resource

to the lessee (such as spectrum licenses for a

long period; see paragraph 13.9). Some leases

of natural resources, such as mining licenses

held by nonresidents lead to the imputation of

a notional resident unit (see paragraphs 4.34–

4.40), so that the lease is between residents, and

the international transactions associated with the

lease are recorded as being for direct investment

equity in the notional unit.

lease other than a financial lease that meets the

definition of an economic asset is shown in the

capital account as a nonproduced nonfinancial

asset, as discussed in paragraphs 13.11–13.15.

Financial or finite risk reinsurance

5.61 Financial or finite risk reinsurance is defined

as a kind of insurance policy that involves no or very

limited transfer of risk. Depending on how much risk is

transferred, it could be classified as a loan or an insur-

ance policy. For example, an insurance company may

have a finite risk reinsurance policy that allows it to

borrow funds in the event of incurring large values of

claims. Because those amounts are repayable, however,

the policy has a financing function and amounts drawn

under the policy are classified as a loan. In contrast, if

the amounts under the policy are not repayable, then

risk is transferred to the reinsurer, so it has a risk pool-

ing function and is a part of insurance.

e. Insurance, pension, and standardized

guarantee schemes

5.62 Insurance, pension, and standardized guaran-

tee schemes consist of the following:

(a) nonlife insurance technical reserves;

(b) life insurance and annuity entitlements;

pension managers, and entitlements to nonpen-

sion funds; and

(d) provisions for calls under standardized

guarantees.

5.63 These reserves, entitlements, and provisions

represent liabilities of the insurer, pension fund, or

issuer of standardized guarantees, and a corresponding

asset of the policyholders or beneficiaries. The aggre-

gate values of liabilities can be estimated actuarially

because the company or fund has a pool of liabilities,

but the value is less clear for the asset holders. The

insurers, pension funds, and guarantors usually hold a

range of assets to allow them to meet their obligations;

however, these are not necessarily equal to the provi-

sion and entitlement liabilities.

Nonlife insurance technical reserves

5.64 Nonlife insurance technical reserves consist of

the following:

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

(a) Reserves for unearned insurance premiums,

which are prepayment of premiums. Premiums

are usually paid at the beginning of the period

covered by the policy. On an accrual basis, the

premiums are earned through the policy period,

so that the initial payment involves a prepayment

or advance. It also includes reserves for unex-

pired risks.

(b) Reserves against outstanding insurance claims,

which are amounts identified by insurance

corporations to cover what they expect to pay

out arising from events that have occurred

but for which the claims are not yet settled.

Other reserves, such as equalization reserves,

may be identified by insurers. However, these

are recognized as liabilities and correspond-

ing assets only when there is an event that

gives rise to a liability. Otherwise, equaliza-

tion reserves are internal accounting entries

by the insurer that represent saving to cover

irregularly occurring catastrophes, and thus

do not represent any existing corresponding

claims for policyholders.

Both nonlife direct insurance and reinsurance are

included in this item. Insurance and its terminology are

explained in more detail in Appendix 6c.

Life insurance and annuity entitlements

Reference:

2008 SNA, Chapter 17, Cross-Cutting and Other Spe-

cial Issues, Part 1, The treatment of insurance.

5.65 This category consists of reserves of life insur-

ance companies and annuity providers for prepaid

premiums and accrued liabilities to life insurance poli-

cyholders and beneficiaries of annuities. Life insurance

and annuity entitlements are used to provide benefits to

policyholders upon the expiry of the policy, or to com-

pensate beneficiaries upon the death of policyholders,

and thus are kept separate from shareholders’ funds.

These entitlements are regarded as liabilities of the

insurance companies and assets of the policyholders and

beneficiaries. Annuities entitlements are the actuarial

calculation of the present value of the obligations to pay

future income until the death of the beneficiaries.

Pension entitlements

Reference:

2008 SNA, Chapter 17, Cross-Cutting and Other Spe-

cial Issues, Part 2, Social insurance schemes.

5.66 Pension entitlements show the extent of finan-

cial claims both existing and future pensioners hold

against either their employer or a fund designated by the

employer to pay pensions earned as part of a compen-

sation agreement between the employer and employee.

The economy of residence of pension schemes may

differ from that of some of their beneficiaries, in par-

ticular, for border workers, guest workers who return

home, people who retire to a different economy, staff of

international organizations, and employees of transna-

tional enterprise groups that have a single pension fund

for the whole group. In addition to liabilities of pen-

sion funds, liabilities of unfunded pension schemes are

included in this category. There are assumptions and

different methods in the measurement of pension fund

entitlements, so the nature of coverage and estimation

should be stated in metadata. As well as pensions, some

schemes may have other related liabilities, such as for

health benefits, which are included under entitlements

to nonpension benefits. In addition to its pension enti-

tlement liabilities to its beneficiaries, a pension fund

may sometimes have a claim on the employer, other

sponsor, or some other party such as an administrator

of the scheme. On the other hand, the sponsor or some

other party may have a claim on a surplus of the fund.

Such claims are shown under claims of pension funds

on pension managers.

5.67 Potential payments by social security schemes

may not be recognized as financial assets or liabilities.

However, if a social security fund also acts as a pension

scheme (as is sometimes the case for benefits for pres-

ent and former government employees), those pension

obligations are included under this category, but not the

pension fund’s social security obligations.

Provisions for calls under standardized guarantees

Reference:

2008 SNA, Chapter 17, Cross-Cutting and Other Spe-

cial Issues, Part 3, The treatment of loan guaran-

tees in the SNA.

5.68 Standardized guarantees are defined as those

that are not provided by means of a financial deriva-

tive (such as credit default swaps), but for which the

probability of default can be well established. These

guarantees cover similar types of credit risk for a large

number of cases. Examples include guarantees issued

by governments on export credit or student loans. Gen-

erally it is not possible to estimate precisely the risk of

any one loan being in default, but it is possible to make

a reliable estimate of how many out of a large number

Chapter 5 g Classifications of Financial Assets and Liabilities

of such loans will default. It is therefore possible for

a guarantor to determine suitable fees to charge for

a guarantee working on the same sort of principle as

an insurance corporation for which the fees received

in respect of many policies cover the losses by a few.

Standardized guarantees can be contrasted with two

other types of guarantees:

(a) Guarantees that are financial derivatives (as

defined in paragraph 5.80). Guarantees that meet

the definition of financial derivatives protect,

on a guarantee-by-guarantee basis, the lender

against certain types of risk arising from a credit

relationship by paying the guarantor a fee for

a specified period. The guarantees covered are

such that experience in the market allows the

guarantor to apply standard master legal agree-

ments or to make a reasonable estimate of the

likelihood of the borrower defaulting and to cal-

culate suitable terms for the financial derivative.

Credit default swaps are included in financial

derivatives as options.

(b) One-off guarantees. One-off guarantees occur

in situations in which the conditions of the loan

or of the security that is guaranteed are so par-

ticular that it is not possible for the degree of

risk associated with it to be calculated with

any degree of precision. These guarantees are

not recognized as economic assets until their

activation, that is, when the event occurs that

makes the guarantor responsible for the liability.

These are contingent assets until activated (see

paragraph 5.12). (See paragraphs 8.42–8.45 on

flows associated with their activation.) However,

one-off guarantees granted by governments to

corporations in financial distress and that have a

very high likelihood of being called are treated

as if they were activated at inception (see para-

graph 13.34).

f. Other accounts receivable/payable

5.69 Other accounts receivable/payable consist of

(a) trade credit and advances and (b) other.

Trade credit and advances

5.70 Trade credit and advances consist of (a) credit

extended directly by the suppliers of goods and services

to their customers

and (b) advances for work that is in

Trade credit is sometimes described as supplier credit or suppli-

er’s credit.

progress (or is yet to be undertaken) and prepayment

by customers for goods and services not yet provided.

5.71 Trade credit and advances arise when payment

for goods or services (other than FISIM and prepay-

ment of insurance services)

is not made at the same

time as the change in ownership of a good or provision

of a service. If a payment is made before the change

of ownership, there is an advance. For example, down

payments or holding deposits (where ownership of the

funds changes hands) are included in trade advances.

Changes of ownership for high-value capital goods may

give rise to trade credit and advances, only if there is

a difference in timing between the change of owner-

ship and progress payments (see paragraphs 3.44 and

10.28). If goods or services under barter arrangements

do not change ownership at the same time as the corre-

sponding goods or services, an entry is made for trade

credit and advances.

5.72 Trade credit and advances do not include loans

to finance trade made by an institutional unit other

than the supplier of the good or service, as they are

included under loans.

Trade bills drawn on an importer

and provided to an exporter, which are subsequently

discounted by the exporter with a financial institution,

might be regarded by the importer as the direct exten-

sion of credit by the exporter, but once they are dis-

counted they become a claim by a third party on the

importer. In cases in which an instrument is provided to

the exporter with such characteristics that it is a nego-

tiable instrument, it should be classified as a security. A

supplier may also sell trade claims other than trade bills

to a factoring company, in which the claim is reclassi-

fied from trade credit to accounts receivable/payable.

Other accounts receivable/payable—other

5.73 The other category of other accounts receiv-

able/payable includes accounts receivable or payable

other than those included in trade credit and advances

or other instruments. It includes liabilities for taxes,

purchase and sale of securities, securities lending fees,

gold loan fees, wages and salaries, dividends, and social

contributions that have accrued but not yet paid. It also

FISIM accrued but not yet paid is included with the relevant

debt instrument, like interest (see paragraph 7.41). Prepayment of

insurance premiums is included in insurance technical reserves (see

paragraph 5.64).

Trade-related credit is identified as a concept in External Debt

Statistics: Guide for Compilers and Users, Chapter 6, Further Exter-

nal Debt Accounting Principles. It consists of trade credit as well as

trade bills and credit provided by third parties to finance trade. It

should be compiled as a supplementary item, where significant.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

includes prepayments of those items. Interest accrued

should be recorded with the financial asset or liabil-

ity on which it accrues, not as other accounts receiv-

able/payable. However, for securities lending and gold

loan fees, which are treated as interest by convention

(see paragraphs 11.67–11.68), the corresponding entries

are included under other accounts receivable/payable,

rather than with the instrument to which they relate.

4. Other financial assets and liabilities

a. Monetary gold

5.74 Monetary gold is gold to which the monetary

authorities (or others who are subject to the effective

control of the monetary authorities) have title and is

held as reserve assets. Gold includes gold bullion and

unallocated gold accounts with nonresidents that give

title to claim the delivery of gold. Gold bullion takes

the form of coins, ingots, or bars with a purity of at

least 995 parts per 1,000, including such gold held in

allocated gold accounts.

5.75 All monetary gold is included in reserve assets

or is held by international financial organizations.

Monetary authorities and reserve assets are discussed

further in Chapter 6, Functional Categories, Section F.

Gold bullion included in monetary gold is a financial

asset for which there is no corresponding liability. Gold

bullion not held as reserve assets is not a financial asset

and is included in nonmonetary gold, within the goods

and services account, see paragraphs 10.50–10.54. In

some cases, a central bank may own gold bullion that

is not held as reserves (such as sometimes occurs when

it acts as a monopoly reseller of mined gold).

Gold accounts

Allocated gold accounts

5.76 Allocated gold accounts provide ownership of

a specific piece of gold. The ownership of the gold

remains with the entity placing it for safe custody.

These accounts typically offer the purchasing, storing,

and selling of investment-grade bars and coin to order.

Accounts of this type constitute full outright owner-

ship of the gold. When held as reserve assets, allocated

gold accounts are classified as monetary gold. When

not held as reserve assets, allocated gold accounts are

treated as representing ownership of a good.

Unallocated gold accounts

5.77 In contrast, unallocated gold accounts repre-

sent a claim against the account operator to deliver

gold. For these accounts, the account provider holds

title to a reserve base of physical (allocated) gold

and issues claims to account holders denominated in

gold. When held as reserve assets, unallocated gold

accounts are classified as monetary gold. Unallocated

gold account assets not held as reserve assets, and

all unallocated gold account liabilities, are classi-

fied as deposits. Gold accounts can be distinguished

from accounts that are linked (indexed) to gold but do

not give title to claims for the delivery of gold; such

accounts are not part of monetary gold. They are clas-

sified according to their nature as a financial instru-

ment, usually as deposits.

Relationship to nonmonetary gold

5.78 In contrast to monetary gold, which is a finan-

cial asset, nonmonetary physical gold is a good. (Para-

graphs 10.50–10.54 deal with nonmonetary gold in the

goods and services account.) Similarly, other precious

metals are goods, not financial assets. Monetary gold

is treated differently because of its role as a means of

international payments and store of value for use in

reserve assets. Changes in the classification between

monetary and nonmonetary gold are shown in the other

changes in assets and liabilities account, as discussed in

paragraphs 9.18–9.20.

b. Financial derivatives and employee stock

options

5.79 Financial derivatives and employee stock

options are financial assets and liabilities that have

similar features, such as a strike price and some of the

same risk elements. However, although both transfer

risk, employee stock options are also designed to be a

form of remuneration.

Financial derivatives

5.80 A financial derivative contract is a financial

instrument that is linked to another specific financial

instrument or indicator or commodity and through

which specific financial risks (such as interest rate

risk, foreign exchange risk, equity and commodity

price risks, credit risk, and so on) can be traded in

their own right in financial markets. Transactions and

positions in financial derivatives are treated separately

from the values of any underlying items to which they

are linked.

5.81 The risk embodied in a financial derivative

contract can be traded either by trading the contract

Chapter 5 g Classifications of Financial Assets and Liabilities

itself, as is possible with options, or by creating a new

contract embodying risk characteristics that match, in

a countervailing manner, those of the existing con-

tract. The latter practice, which is termed offsetability,

occurs in forward markets. Offsetability means that it

is often possible to eliminate the risk associated with

a derivative by creating a new but “reverse” contract

having characteristics that countervail the risk under-

lying the first derivative. Buying the new derivative is

the functional equivalent of selling the first derivative

because the result is the elimination of the underlying

financial risk. The ability to countervail the under-

lying risk in the market is therefore considered the

equivalent of tradability in demonstrating value. The

outlay that would be required to replace the existing

derivative contract represents its value; actual offset-

ting is not required.

5.82 In many cases, derivatives contracts are settled

by payments of net amounts in cash, rather than by

the delivery of the underlying items. Once a financial

derivative reaches its settlement date, any unpaid over-

due amount is reclassified as accounts receivable/pay-

able, as its value is fixed, and thus the nature of the

claim becomes debt.

5.83 The following types of financial arrangements

are not financial derivatives:

(a) A fixed-price contract for goods and services

is not a financial derivative unless the contract

is standardized so that the market risk therein

can be traded in financial markets in its own

right. For example, an option to purchase an air-

craft from the manufacturer is not classified as a

financial derivative; if the option to purchase is

transferable, and is in fact transferred, the trans-

action is recorded under contracts, leases, and

licenses, discussed in paragraphs 13.11–13.12.

(b) Insurance and standardized guarantees are not

financial derivatives. Insurance involves the

collection of funds from policyholders to meet

future claims arising from the occurrence of

events specified in insurance policies. That is,

insurance and standardized guarantees are used

to manage event risk primarily by the pooling,

not the trading, of risk. However, some guaran-

tees other than standardized guarantees meet the

definition of financial derivatives (as covered in

paragraph 5.68).

guarantees and letters of credit, are not financial

assets (as discussed in paragraphs 5.10–5.13).

(d) Instruments with embedded derivatives are not

financial derivatives. An embedded derivative

arises when a derivative feature is inserted in a

standard financial instrument and is inseparable

from the instrument. If a primary instrument,

such as a security or loan, contains an embedded

derivative, the instrument is valued and classified

according to its primary characteristics—even

though the value of that security or loan may well

differ from the values of comparable securities

and loans because of the embedded derivative.

Examples are bonds that are convertible into

shares, and securities with options for repayment

of principal in currencies that differ from those

in which the securities were issued. However,

detachable warrants are treated as separate finan-

cial derivatives, because they can be detached and

sold in financial markets.

(e) Timing delays that arise in the normal course of

business and may entail exposure to price move-

ments do not give rise to financial derivatives.

Timing delays include normal settlement periods

for spot transactions in financial markets.

5.84 There are two broad types of financial

derivatives—options and forward-type contracts.

Options

5.85 In an option contract (option), the purchaser

acquires from the seller a right to buy or sell (depend-

ing on whether the option is a call (buy) or a put (sell))

a specified underlying item at a strike price on or

before a specified date. The purchaser of an option pays

a premium to the writer of the option. In return, the

buyer acquires the right but not the obligation to buy

(call option) or sell (put option) a specified underlying

item (real or financial) at an agreed-on contract price

(the strike price) on or before a specified date. (On a

derivatives exchange, the exchange itself may act as the

counterparty to each contract.)

5.86 Options can be contrasted with forward-type

contracts in that:

(a) at inception, there is usually no up-front payment

for a forward-type contract and the derivative

contract begins with zero value, whereas there is

If the owner of the primary instrument subsequently creates

a new but reverse financial derivative contract to offset the risk of

the embedded derivative, the creation of this new financial deriva-

tive contract is recorded as a separate transaction, and it does not

affect the recording of transactions and positions in the primary

instrument.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

usually a premium paid for an option represent-

ing a nonzero value for the contract;

(b) during the life of the contract, for a forward-type

contract, either party can be creditor or debtor,

and it may change, whereas for an option, the

buyer is always the creditor and the writer is

always the debtor; and

forward-type contract, whereas for an option it is

determined by the buyer of the option.

5.87 Warrants are a form of financial derivative

option giving the owner the right but not the obliga-

tion to purchase from the issuer of the warrant a fixed

amount of an underlying asset, such as equities and

bonds, at an agreed contract price for a specified period

of time or on a specified date. Although similar to

other traded options, a distinguishing factor is that

the exercise of the warrants can create new securities,

thus diluting the capital of existing bond or sharehold-

ers, whereas traded options typically grant rights over

assets that are already available.

Forward-type contracts

5.88 A forward-type contract (forward) is an

unconditional contract by which two counterparties

agree to exchange a specified quantity of an underly-

ing item (real or financial) at an agreed-on contract

price (the strike price) on a specified date. Forward-

type contracts include futures and swaps (other than

as discussed in paragraph 5.91). Forward-type contract

is used as a term because the term “forward” is often

used more narrowly in financial markets (often exclud-

ing swaps).

5.89 Futures are forward-type contracts traded on

organized exchanges. The exchange facilitates trading

by determining the standardized terms and conditions

of the contract, acting as the counterparty to all trades,

and requiring margin to be deposited and paid to miti-

gate against risk. Forward rate agreements and for-

ward foreign exchange contracts are common types of

forward-type contracts.

5.90 At the inception of a forward-type contract,

risk exposures of equal market value are exchanged, so

a contract typically has zero value at that time. As the

price of the underlying item changes, the market value

will change, although it may be restored to zero by

periodic settlement during the life of the forward. The

classification of a forward-type contract may change

between asset and liability positions.

Other issues associated with financial derivatives

Swap contracts

5.91 A swap contract involves the counterparties

exchanging, in accordance with prearranged terms,

cash flows based on the reference prices of the under-

lying items. Swap contracts classified as forward-type

contracts include currency swaps, interest rate swaps,

and cross-currency interest rate swaps. Under a swap

contract, the obligations of each party may arise at

different times, for example, an interest rate swap

for which payments are quarterly for one party and

annual for the other. In such cases, the quarterly

amounts payable by one party prior to payment of the

annual amount payable by the other party are recorded

as transactions in the financial derivative contract.

Other types of arrangements also called swaps but

not meeting the definition above include gold swaps

(see paragraphs 5.55 and 7.58 for a discussion of their

treatment), central bank swap arrangements (see para-

graphs 6.102–6.104), and credit default swaps (see

paragraph 5.93).

5.92 For foreign currency financial derivative swap

contracts, such as currency swaps, it is necessary

to distinguish between a transaction in a financial

derivative contract and transactions in the underly-

ing currencies. At inception, the parties exchange the

underlying financial instruments (usually classified

under other investment). At the time of settlement,

the difference in the values, as measured in the unit

of account at the prevailing exchange rate, of the

currencies swapped are allocated to a transaction

in a financial derivative, with the values swapped

recorded in the relevant other item (usually other

investment).

Credit derivatives

5.93 Credit derivatives are financial derivatives

whose primary purpose is to trade credit risk. They

are designed for trading in loan and security default

risk. In contrast, the financial derivatives described in

the previous paragraphs are mainly related to market

risk, which pertains to changes in the market prices of

securities, commodities, interest, and exchange rates.

Credit derivatives take the form of both forward-type

(total return swaps) and option-type contracts (credit

default swaps). Under a credit default swap, premiums

are paid in return for a cash payment in the event of

a default by the debtor of the underlying instrument.

Like other financial derivatives, credit derivatives are

frequently drawn up under standard master legal agree-

Chapter 5 g Classifications of Financial Assets and Liabilities

ments and involve collateral and margining procedures,

which allow for a means to make a market valuation.

Margins

5.94 Margins are payments of cash or deposits of

collateral that cover actual or potential obligations

incurred. The required provision of margin reflects

market concern over counterparty risk and is standard

in financial derivative markets, especially futures and

exchange-traded options. The classification of margins

depends on whether they are repayable or nonrepayable:

(a) Repayable margin consists of cash or other collat-

eral deposited to protect a counterparty against

default risk. Ownership of the margin remains

with the unit that deposited it. Repayable mar-

gin payments in cash are classified as deposits

(if the debtor’s liabilities are included in broad

money) or in other accounts receivable/payable.

When a repayable margin deposit is made in a

noncash asset (such as securities), no transac-

tion is recorded because no change in economic

ownership has occurred.

(b) Nonrepayable margin payments reduce the finan-

cial liability created through a derivative. In orga-

nized exchanges, nonrepayable margin (sometimes

known as variation margin) is paid daily to meet

liabilities recorded as a consequence of the daily

marking of derivatives to market value. The entity

that pays nonrepayable margin no longer retains

ownership of the margin or has the right to the

risks and rewards of ownership. Nonrepayable

margin payments are classified as transactions in

financial derivatives.

These principles for the classification of margins also

apply more generally to margin calls relating to posi-

tions in other financial assets.

Supplementary detail

5.95 Possible additional supplementary breakdowns

on financial derivatives are by type:

(a) options; and

(b) forward-type contracts.

These types of derivatives are defined in paragraphs

5.85 and 5.88, respectively. Additional supplementary

breakdowns on financial derivatives also are by market

risk categories:

(a) foreign exchange;

(b) single-currency interest rate;

(d) commodity;

(e) credit; and

(f) other.

In practice, however, individual derivatives may

straddle more than one risk category. In such cases,

derivatives that are simple combinations of exposures

should be reported separately in terms of their indi-

vidual components. Derivatives that cannot be readily

broken down into separable risk components should

be reported in only one risk category. The allocation

of such products with multiple exposures should be

determined by the underlying risk component that is

most significant. However, if there is doubt about the

correct classification of multiexposure derivatives, the

allocation by risk component should be made accord-

ing to the order of precedence adopted by the BIS:

commodities, equities, foreign exchange, and single-

currency interest rate.

Employee stock options

5.96 Employee stock options are options to buy

the equity of a company, offered to employees of the

company as a form of remuneration. In a few cases,

the company that issues the option is a resident of a

different economy from the employee (e.g., where the

employer is a branch or subsidiary of the company to

which the option relates). Employee stock options have

similar pricing behavior to financial derivatives, but

they have a different nature—including arrangements

for the granting and vesting dates—and purpose (i.e.,

to motivate employees to contribute to increasing the

value of the company, rather than to trade risk). If a

stock option granted to employees can be traded on

financial markets without restriction, it is classified as

a financial derivative.

5.97 In some cases, stock options may be provided

to suppliers of goods and services to the enterprise.

Although these are not employees of the enterprise,

for convenience they are also recorded under employee

stock options because their nature and motivation is

similar. (Whereas the corresponding entry for stock

options granted to employees is compensation of

employees as discussed in paragraph 11.20, the cor-

responding entry for stock options granted to suppliers

is the goods and services supplied.)

5.98 For transactions associated with the issue of

employee stock options, see paragraph 8.41.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

C. Arrears

5.99 An additional subclassification can be made for

instruments in arrears. Arrears are defined as amounts

that are both unpaid and past the due date for payment.

Only the amounts past due are classified as arrears—

for example, in the case of overdue installments, only

the overdue part is in arrears.

5.100 Arrears related to exceptional financing are

shown as memorandum items in all cases. (Exceptional

financing is defined and discussed in Appendix 1.)

5.101 Arrears not related to exceptional financing

may be recorded as a supplementary category in total

and under the specific financial asset or liability class

affected. Separate data on arrears may be of analyti-

cal interest when there is evidence of a high or rapidly

rising value of arrears. Measures of other aspects of

impairment of loans and other financial claims are dis-

cussed in paragraphs 7.45–7.54.

5.102 Arrears may be associated with either (a) re-

classification of an existing instrument when a change

in terms is triggered by the provisions of the original

contract, or a change of the nature of the claim when

the settlement of a financial derivative becomes over-

due (see paragraph 5.82); or (b) the creation of a new

instrument as a result of renegotiated terms (also dis-

cussed in paragraph 8.58). In either case, amounts not

paid when due should be included in arrears. A liability

ceases to be in arrears if all overdue payments are met.

The accrual treatment of arrears is discussed in para-

graphs 3.56–3.57.

D. Classification by Maturity

5.103 The maturity of a debt instrument is classified

as either short-term or long-term:

(a) Short-term is defined as payable on demand or

with a maturity of one year or less. (Payable on

demand refers to a decision by the creditor; an

instrument where the debtor can repay at any

time may be short- or long-term.)

(b) Long-term is defined as having a maturity of

more than one year or with no stated maturity

(other than on demand, which is included in

short-term).

This classification provides information on the liquid-

ity dimensions of debt. Currency is included in short-

term maturity. Because of the nature of the relationship

between the parties, in the case in which the maturity is

unknown, all intercompany lending (which is defined in

paragraph 6.26) may be classified as long-term maturity

by convention. Insurance reserves, pension entitlements,

and standardized guarantee provisions can potentially

be classified by the maturity; however, if data are not

available, a convention that they are all long-term can be

adopted. When securities contain an embedded option

with a date on which or after which the debt can be put

(sold) back to the debtor by the creditor, the maturity

is determined without reference to these embedded put

options. If significant in presenting remaining maturity

data (see paragraph 5.105), supplementary data could

be provided on long-term securities whose maturity is

within one year or less assuming early repayment at the

option date. Financial derivatives could also potentially

be classified according to maturity.

5.104 Maturity may relate to:

(a) original maturity (i.e., the period from issue until

the final contractually scheduled payment); or

(b) remaining maturity (i.e., the period from the

reference date until the final contractually

scheduled payment). This is also called residual

maturity.

In this Manual, original maturity is used in the stan-

dard components, while remaining maturity is used in

Table A9-IV of Appendix 9 and is encouraged for some

position data.

5.105 Data on both original and remaining maturity

bases are accommodated by using the following split:

(a) short-term on an original maturity basis;

(b) long-term due for payment within one year or

less; and

year.

Item (b) can be combined with item (a) to derive lia-

bilities due within a year, that is, short-term debt on a

remaining maturity basis. Alternatively, item (b) can be

combined with (c) to derive long-term debt on an origi-

nal maturity basis. The remaining maturity breakdown

is recommended in this Manual for outstanding debt

liabilities to nonresidents by sector and instrument (see

Table A9-IV of Appendix 9).

E. Classification by Currency

5.106 A financial asset or liability may be classified

as domestic currency or foreign currency, according to

its unit of account, denomination, or settlement. These

terms are discussed in paragraphs 3.95–3.97.

Chapter 5 g Classifications of Financial Assets and Liabilities

5.107 Table A9-I of Appendix 9 provides a format for

presenting the currency composition of outstanding debt

claims and liabilities using the currency of denomina-

tion. This table includes a currency breakdown of reserve

assets into currencies held that are in the SDR basket and

those that are not. In recognition that for some sectors,

such as nonfinancial corporations and households, there

may be difficulties in obtaining comprehensive data from

reporters, the table includes an “unallocated” row.

5.108 In Table A9-I of Appendix 9, by convention,

SDR holdings, reserve position in the IMF, and mon-

etary gold are to be classified as reserve assets in the

SDR basket. It also includes financial derivatives with

nonresidents to receive and to pay foreign currency. A

financial derivatives contract to purchase foreign cur-

rency with domestic currency is classified as a financial

derivative to receive foreign currency. If instead the con-

tract is to purchase domestic currency with foreign cur-

rency at a future date, this is a financial derivative to pay

foreign currency. Similarly, an option to buy foreign cur-

rency (sell domestic currency) is classified as a financial

derivative to receive foreign currency, and vice versa.

The decisive factor in determining whether the financial

derivative is to be classified as to receive or to pay for-

eign currency is the exposure to currency movements.

Thus, if payment of a financial derivatives contract is

linked to a foreign currency, even though payment is

required in domestic currency, the financial derivative is

to be classified as a contract to pay foreign currency, and

vice versa. If a single financial derivatives contract both

pays and receives foreign currency, the notional amount

should be included under both categories (i.e., to pay and

to receive foreign currency).

F. Classification by Type of

Interest Rate

5.109 Debt instruments may be classified as either

variable-rate or fixed-rate. This breakdown may be useful

for some analysis, in that variable-rate instruments are sub-

ject to fluctuation in income flows in response to changes

in market conditions, while fixed-rate securities are more

subject to changes in prices. The split may be considered

as possible supplementary information, as in External

Debt Statistics: Guide for Compilers and Users.

There may be analytical interest in distinguishing the financial

derivatives data in Table A9-I between positions in options and posi-

tions in forwards, as in Table A9-III in Appendix 9.

Paragraph 5.95 provides further detail on the classification of

financial derivatives contracts by risk categories when there is doubt

about the correct classification of multiexposure derivatives.

5.110 Variable-rate debt instruments are those for

which interest is linked to a reference index—for exam-

ple, LIBOR (London interbank offered rate), or the

price of a specific commodity, or the price of a specific

financial instrument that normally changes over time

in a continuous manner in response to market condi-

tions. All other debt instruments should be classified as

fixed-rate. An interest rate that is adjusted, but only at

intervals of more than a year, is considered to be fixed.

Interest that is adjusted each one year or less is consid-

ered to be variable.

5.111 Interest on debt that is linked to the credit

rating of another borrower should be classified as

fixed-rate, because credit ratings do not change in a

continuous manner in response to market conditions,

whereas interest on debt that is linked to a reference

price index should be classified as variable-rate, pro-

vided that the prices that are the basis for the reference

index are primarily market determined.

5.112 The classification of a financial asset or liabil-

ity can change over time, for example, if it switches

from fixed- to variable-rate interest. In the period when

a fixed rate is applied, the financial asset or liability is to

be classified as fixed-rate debt. After the rate switches

to variable, it is classified as variable-rate debt.

5.113 Index-linked instruments are classified as

being variable-rate. For these instruments, the princi-

pal or coupons or both are indexed to some variable, for

example, to a general or specific price index. Because

index-linked instruments have variable aspects, an

instrument is classified as variable-rate if the index-

ation applies to the principal or coupons, or both (not-

withstanding the treatment of interest discussed in

paragraphs 11.59–11.65). However, a foreign-currency-

linked instrument (as discussed in paragraph 11.50(b))

is treated as being denominated in the foreign currency,

rather than indexed to it.

5.114 If interest is linked to a reference index, com-

modity price, or financial instrument price but is fixed

unless the reference index or price passes a particular

threshold, it should be regarded as fixed-rate. But if there-

after interest becomes variable, then it should be reclassi-

fied as a variable-rate instrument. Alternatively, if interest

is variable-rate until it reaches a predetermined ceiling or

floor, the instrument becomes fixed-rate debt when that

ceiling or floor is reached. If the income stream of a vari-

able-rate instrument is swapped with the income stream

of a fixed-rate instrument, the swap is recorded as giving

rise to a financial derivative, while the classification of the

original debt instruments is unchanged.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

CHAPTER

Functional Categories

A. Introduction

6.1 The functional categories

are the primary clas-

sification used for each of financial transactions, posi-

tions, and income in the international accounts. Five

functional categories of investment are distinguished in

the international accounts:

(a) direct investment,

(b) portfolio investment,

employee stock options,

(d) other investment, and

(e) reserve assets.

6.2 The functional categories are built on the clas-

sification of financial assets and liabilities discussed in

Chapter 5, but with an additional dimension that takes

into account some aspects of the relationship between

the parties and the motivation for investment. The

functional categories are designed to facilitate analysis

by distinguishing categories that exhibit different eco-

nomic motivations and patterns of behavior.

6.3 While linked to the classification of financial

assets and liabilities, the functional categories highlight

features that are particularly relevant for understanding

cross-border financial flows and positions. For exam-

ple, a loan can appear under direct investment or other

investment, but the different nature of the relationship

between the parties in these two cases has analytical

significance because the risks and motivations behind

the transaction may be different.

6.4 A different relationship exists between the

counterparties for portfolio investors compared with

direct investors. Direct investment is related to con-

trol or a significant degree of influence, and tends to

The term functional classification is also used in different con-

texts in other areas of statistics, such as the classification of the

functions of government.

be associated with a lasting relationship. As well as

funds, direct investors may supply additional contri-

butions such as know-how, technology, management,

and marketing. Furthermore, enterprises in a direct

investment relationship are more likely to trade with

and finance each other.

6.5 In contrast to direct investors, portfolio inves-

tors typically have less of a role in the decision making

of the enterprise with potentially important implica-

tions for future flows and for the volatility of the price

and volume of positions. Portfolio investment differs

from other investment in that it provides a direct way

to access financial markets, and thus it can provide

liquidity and flexibility. It is associated with financial

markets and with their specialized service providers,

such as exchanges, dealers, and regulators. The nature

of financial derivatives as instruments through which

risk is traded in its own right in financial markets sets

them apart from other types of investment. Whereas

other instruments may also have risk transfer ele-

ments, these other instruments also provide financial

or other resources.

6.6 Reserve assets are shown separately because

they serve a different function and thus are managed

in different ways from other assets. Reserve assets

include a range of instruments that are shown under

other categories when not owned by monetary authori-

ties. As reserve assets, however, they have the distinct

motive to meet balance of payments financing needs

and undertake market intervention to influence the

exchange rate.

6.7 Monetary and financial statistics and flow of

funds data primarily use the instruments classifica-

tion, as shown in Chapter 5, so it is desirable that

data on the same basis can be derived from the inter-

national accounts for compatibility. Table 6.1 shows

the linkages between the financial assets classifica-

tion shown in Chapter 5 and the functional categories

shown in this chapter.

100

B. Direct Investment

References:

Organization for Economic Cooperation and Develop-

ment (OECD), OECD Benchmark Definition of

Foreign Direct Investment, fourth edition.

IMF, Coordinated Direct Investment Survey Guide.

1. Definition of direct investment

6.8 Direct investment is a category of cross-border

investment associated with a resident in one economy

having control or a significant degree of influence on the

management of an enterprise that is resident in another

economy. As well as the equity that gives rise to control

or influence, direct investment also includes investment

associated with that relationship, including investment in

indirectly influenced or controlled enterprises (paragraph

6.12), investment in fellow enterprises (see paragraph

6.17), debt (except selected debt set out in paragraph

6.28), and reverse investment (see paragraph 6.40). The

Framework for Direct Investment Relationships (FDIR)

provides criteria for determining whether cross-border

ownership results in a direct investment relationship,

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 6.1. Link between Financial Assets Classification and Functional Categories

Functional categories

______________________________________________

2008 SNA Financial Assets and Liabilities Classification DI PI FD OI RA

AF1 Monetary gold and SDRs

AF11 Monetary gold

Gold bullion X

Unallocated gold accounts X

AF12 Special drawing rights X

AF2 Currency and deposits

AF21 Currency X X

AF221 Interbank positions X X

AF229 Other transferable deposits X X X

AF29 Other deposits X X X

AF3 Debt securities XX X

AF4 Loans X X X

AF5 Equity and investment fund shares

AF51 Equity

AF511 Listed shares X X X

AF512 Unlisted shares X X x

AF519 Other equity X x

AF52 Investment fund shares/units

AF521 Money market fund shares/units x X X

AF522 Other investment fund shares/units x X x X

AF6 Insurance, pension, and stand. guarantee schemes

AF61 Nonlife insurance technical reserves x X

AF62 Life insurance and annuity entitlements x X

AF63 Pension entitlements X

AF64 Claims of pension funds on pension managers X X

AF65 Entitlements to nonpension benefits X

AF66 Provisions for calls under standardized guarantees X X

AF7 Financial derivatives and employee stock options

AF71 Financial derivatives

AF711 Forward-type contracts X X

AF712 Options X X

AF72 Employee stock options X

AF8 Other accounts receivable/payable

AF81 Trade credit and advances X X

AF89 Other accounts receivable/payable X X

Note: DI—direct investment; PI—portfolio investment; FD—financial derivatives (other than reserves) and employee stock options; OI—other investment; RA—

reserve assets. X shows applicable functional categories (x shows cases considered to be relatively uncommon) for the most detailed instrument categories.

SDRs: Assets = Reserve assets; Liabilities = Other investment.

Unlisted shares must be liquid, as stated in paragraph 6.87.

101

based on control and influence.

The definition of direct

investment is the same as in the fourth edition of the

OECD Benchmark Definition of Foreign Direct Invest-

ment, which provides additional details on the FDIR and

the collection of direct investment data. Appendix 6a,

Topical Summary—Direct Investment, provides refer-

ences to paragraphs in which different aspects of direct

investment are discussed in this Manual.

a. Definition of a direct investment relationship

6.9 A direct investment relationship arises when

an investor resident in one economy makes an invest-

ment that gives control or a significant degree of

influence on the management of an enterprise that is

resident in another economy. Operational definitions

of control and influence are given in paragraph 6.12.

Enterprises in a direct investment relationship with

each other are called affiliates or affiliated enter-

prises. In addition, all enterprises that are under the

control or influence of the same direct investor are

considered to be in a direct investment relationship

with each other.

6.10 Because there is control or a significant degree

of influence, direct investment tends to have differ-

ent motivations and to behave in different ways from

other forms of investment. As well as equity (which is

associated with voting power), the direct investor may

also supply other types of finance, as well as know-

how. Direct investment tends to involve a lasting rela-

tionship, although it may be a short-term relationship

in some cases. Another feature of direct investment

is that decisions by enterprises may be made for the

group as a whole.

b. Definitions of direct investor and direct

investment enterprise

6.11 A direct investor is an entity or group of

related entities that is able to exercise control or a

significant degree of influence over another entity that

is resident of a different economy. A direct investment

enterprise is an entity subject to control or a signifi-

cant degree of influence by a direct investor. In some

cases, a single entity may be, at the same time, a direct

The coverage of direct investment is determined from the rela-

tionship between the owner and issuer of the financial instrument.

That is, it is not determined from the relationship between the

buyer and the seller of the instrument. For example, if a direct

investor buys shares in its direct investment enterprise from an

unrelated party, the direct investor will classify the purchase as

direct investment.

investor, a direct investment enterprise, and a fellow

enterprise (defined in paragraph 6.17(c)) in its relation-

ships to other enterprises.

c. Definitions of control and influence—definitions

of immediate and indirect relationships

6.12 Control or influence may be achieved directly

by owning equity that gives voting power in the enter-

prise, or indirectly by having voting power in another

enterprise that has voting power in the enterprise.

Accordingly, two ways of having control or influence

are identified:

(a) Immediate direct investment relationships

arise when a direct investor directly owns equity

that entitles it to 10 percent or more of the vot-

ing power in the direct investment enterprise.

• Control is determined to exist if the direct

investor owns more than 50 percent of the vot-

ing power in the direct investment enterprise.

• A significant degree of influence is determined

to exist if the direct investor owns from 10 to

50 percent of the voting power in the direct

investment enterprise.

(b) Indirect direct investment relationships arise

through the ownership of voting power in one

direct investment enterprise that owns voting

power in another enterprise or enterprises, that

is, an entity is able to exercise indirect control

or influence through a chain of direct investment

relationships. For example, an enterprise may

have an immediate direct investment relationship

with a second enterprise that has an immediate

direct investment relationship with a third enter-

prise. Although the first enterprise has no equity

in the third enterprise, it may be able to exercise

indirect control or influence, according the FDIR

criteria specified in paragraph 6.14.

In addition to direct investment relationships between

two enterprises that arise because one enterprise con-

trols or influences the other, there are also direct invest-

ment relationships between two enterprises that do not

control or influence each other, but that are both under

the control or influence of the same investor (i.e., fellow

enterprises, as discussed in paragraph 6.17).

6.13 In practice, effective control or influence may

arise in some cases with less than these percentages.

These definitions should be used in all cases, however,

for international consistency and to avoid subjective

judgments.

Chapter 6 g Functional Categories

102

6.14 The principles for indirect transmission of con-

trol and influence through a chain of ownership for the

purposes of paragraph 6.12(b) are as follows:

(a) Control can be passed down a chain of ownership

as long as control exists at each stage.

(b) Influence can be generated at any point down a

chain of control.

control but not beyond.

Whereas the FDIR applies a criterion of 10 per-

cent or more of voting power for immediate direct

investment, transmission through chains of owner-

ship is not linked to a particular equity share, but a

chain of control. For example, a chain of ownership

of enterprises with each link involving 60 percent

of the voting power involves a chain of control,

even though the indirect equity by the top enterprise

is 36 percent at the second level (i.e., 60 percent

of 60 percent), 21.6 percent at the third level (i.e.,

60 percent of 36 percent), and so on. The appli-

cation of these principles may be understood more

readily by numerical examples—see Box 6.1 and

the OECD Benchmark Definition of Foreign Direct

Investment.

d. Definitions of subsidiaries, associates, fellow

enterprises, and affiliates

6.15 In regard to its relationship with a direct inves-

tor, a direct investment enterprise is either a subsidiary

or an associate:

(a) A subsidiary is a direct investment enterprise

over which the direct investor is able to exercise

control.

(b) An associate is a direct investment enterprise over

which the direct investor is able to exercise a sig-

nificant degree of influence, but not control.

Control and influence are defined in paragraph 6.12

and may arise from an immediate relationship or

in indirect relationship through a chain of owner-

ship. The terms subsidiary and associate refer to both

incorporated and unincorporated enterprises. The

FDIR makes no distinction on the basis of incorpora-

tion, so directly owned branches are always treated

as subsidiaries.

6.16 Under the FDIR, an entity is a direct investor in

another entity where the second entity is

(a) an immediate subsidiary of the direct investor;

(b) an immediate associate of the direct investor;

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Each enterprise is resident in a different economy from

the others. Shaded boxes are direct investment enter-

prises of the Direct Investor A (so all are affiliates of

each other).

For further examples, see the OECD Benchmark Defini-

tion of Foreign Direct Investment. In particular, it consid-

ers more complex situations, such as where an enterprise

receives investment from two members of the same group.

Box 6.1. Examples of Identification of Direct Investment Relationships under FDIR

Direct Investor

Immediate subsidiary of A

Immediate subsidiary of B

Subsidiary of A

Immediate associate of B

Associate of A

Immediate subsidiary of D

Associate of A

Immediate associate of D

Not affiliated with A

Immediate associate of A

Immediate subsidiary of G

Associate of A

Immediate associate of G

Not affiliated with A

Immediate subsidiary of H

Associate of A

Immediate associate of H

Not affiliated with A

103

(also considered to be an indirect subsidiary of

the direct investor);

(d) a subsidiary of an associate of the direct investor

(also considered to be an indirect associate of the

direct investor); or

(e) an associate of a subsidiary of the direct investor

(also considered to be an indirect associate of the

direct investor).

However, no direct investor–direct investment enter-

prise relationship exists in cases in which the entity is

an associate of an associate of the direct investor. In

this case, the ability of the investor to influence the

management of the entity is considered to have become

too diluted to be significant.

(These principles are illustrated in Box 6.1.)

6.17 Affiliates of an enterprise consist of:

(a) its direct investor(s), both immediate and

indirect;

(b) its direct investment enterprises, whether sub-

sidiaries (including branches and other quasi-

corporations), associates, and subsidiaries of

associates, both immediate and indirect; and

that are under the control or influence of the

same immediate or indirect investor, but nei-

ther fellow enterprise controls or influences the

other fellow enterprise. Often the direct investor

and fellow enterprises are all in different econo-

mies, but sometimes the direct investor is in the

same economy as one of the fellow enterprises

(in which case, it is not a direct investor in that

fellow enterprise). This situation is more likely

to arise in economies that do not use a local

enterprise group as the statistical unit for direct

investment purposes.

All affiliates are in a direct investment relationship

with each other. The term affiliated enterprises is also

used, because affiliates are almost always enterprises

(the exception is a direct investor that is an individual,

household, or government).

6.18 Some practical difficulties may be encountered

in applying the FDIR in full, and thus similar methods—

such as the participation multiplication method and the

direct influence and indirect control method-may be

adopted. For details, see OECD Benchmark Definition

of Foreign Direct Investment and the IMF’s Coordinated

Direct Investment Survey Guide.

e. Requirements for a direct investment

relationship

6.19 Voting power is obtained as a result of owner-

ship of equity. When decisions are made on a one-share

one-vote basis, voting power is in the same proportion as

the ownership of ordinary shares. In some cases, voting

power can be exercised without commensurate owner-

ship of shares. For instance, for unincorporated entities,

including foundations, there are no shares in the sense of

a tradable instrument. Additionally, voting power may be

greater or less than percentage of shares held when there

are “golden shares” or dual classes of shares (i.e., in cases

in which nonvoting shares or some shares have higher

weights that allow one or more parties to exercise vot-

ing power disproportionately to their share ownership).

However, voting power is not recognized if temporarily

obtained through repurchase agreements (because no

change in the economic ownership of the shares has

occurred) or through the holding of warrants (because

the warrant holder does not possess voting power until

the warrants are exercised). In addition, as elaborated in

the FDIR, one entity may obtain voting power indirectly

in an enterprise by owning shares in an intermediate

entity or through chains of intermediate entities that, in

turn, own shares in the enterprise.

6.20 A direct investor could be:

(a) an individual or household;

(b) an enterprise, incorporated or unincorporated,

public or private;

(d) a government or international organization. Spe-

cial treatments for governments that have direct

investment enterprises for fiscal purposes are

discussed in paragraphs 8.24–8.26;

(e) a nonprofit institution in an enterprise that oper-

ates for profit; however, the relationship between

two nonprofit institutions is excluded from direct

investment;

(f) an estate, trustee in bankruptcy, or other trust;

(g) any combination of two or more of the above.

6.21 For two or more individuals or other entities

to be considered a combination, and thus be regarded

as a single direct investor, they must be in a direct

investment relationship or have a family relationship

(in the case of individuals). The different individuals

or other entities must be resident in the same economy

as each other. They cannot include any investor that is

Chapter 6 g Functional Categories

104

a resident of the same economy as the direct investment

enterprise. Equity ownership in an enterprise held by a

group of related investors acting in combination can be

summed to establish either control or influence. How-

ever, equity held by an associate is not summed with

that from any other enterprise to establish either control

or influence because influence is not able to be passed

unless there is control of the next affiliate (this concept

is illustrated in Box 6.2).

6.22 A government may be a direct investor. Spe-

cial treatments of positions and transactions apply

when a government has a direct investment enterprise

that is used for fiscal purposes, discussed further in

paragraphs 8.24–8.26. If a government equity holding

could qualify as both direct investment and reserve

assets, it is included in direct investment, whereas

debt instruments are classified as reserve assets pro-

vided that the reserve asset criteria are met (see also

paragraph 6.98).

6.23 A nonprofit institution may not be a direct

investment enterprise, as it is not created with the inten-

tion of repatriating earnings to its investor. However, a

nonprofit institution may be a direct investor in a for-

profit entity.

6.24 A direct investment enterprise is always a cor-

poration, which as a statistical term includes branches,

notional resident units, trusts, other quasi-corporations,

and investment funds, as well as incorporated entities.

Because a direct investment enterprise is owned by

another entity, households or governments can be direct

investors, but they cannot be direct investment enter-

prises. A public corporation, as defined in paragraphs

4.108–4.112, in some instances also may be a direct

investment enterprise.

2. Coverage of direct investment flows and

positions

6.25 Direct investment covers most financial transac-

tions and positions between affiliates resident in differ-

ent economies. Investment income associated with direct

investment positions is also included in direct investment.

The exceptions are noted in paragraphs 6.28–6.32.

a. Coverage of debt between affiliates

Definition of intercompany lending

6.26 Intercompany lending is used to describe

direct investment debt positions between affiliated

enterprises. It includes debt instrument transactions

and positions other than those excluded by paragraph

6.28; it is not limited to loans. As shown in Tables

I and III in Appendix 9, Standard Components and

Selected Other Items, and External Debt Statistics:

Guide for Compilers and Users, intercompany lending

is identified separately from other debt for debt analy-

sis, because this lending has different implications for

risk and vulnerability compared with debt between

unrelated parties. Splits of intercompany lending by

type of instrument and maturity are supplementary

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Economy 1

5 percent

Economy 2 100 percent

5 percent

Economy 3 100 percent

Economy 4 5 percent

Economy 5 25 percent

A is a direct investor in D because its own immediate

ownership of voting power in D, in combination with its

control over B and C’s stakes in D, means that A has 15

percent of the voting power in D.

For the same reason, B is also a direct investor in D

(10 percent of voting power).

C is not a direct investor in D; however, it is a fellow

enterprise of D (because C and D have A and B as direct

investors in common).

D is a direct investor in E, however E is not in a

direct investment relationship with A, B, or C, because

in combination, they do not control D, and D does not

control E.

If A’s voting power in B were only 49 percent, A

would not be a direct investor in D, because it does not

have control over B, so A’s and B’s stakes in D are not

combined.

Box 6.2. Direct Investment Relationships

with Combination of Investors

105

items that allow comparability with national accounts

and financial statistics.

6.27 Although debt and other claims that do not

involve voting power are not relevant to defining a direct

investment relationship, they are included in direct invest-

ment transactions and positions if a direct investment

relationship exists between the parties. Debt instruments

other than monetary gold, SDRs, currency, interbank

positions, and pension and related entitlements poten-

tially can be included in direct investment. However

transactions between affiliates in financial assets issued

by an unrelated third party are not direct investment

transactions. Insurance technical reserves are included in

direct investment when the parties are in a direct invest-

ment relationship. For example, reserves may arise from

reinsurance contracts between affiliated insurance cor-

porations. They also arise with captive direct insurance.

(A captive insurance company writes insurance policies

largely or entirely with its owners and other affiliates.)

Coverage of debt between selected affiliated

financial corporations

6.28 Debt between selected affiliated financial cor-

porations is not classified as direct investment because

it is not considered to be so strongly connected to the

direct investment relationship. The financial corpora-

tions covered by this case are:

(a) deposit-taking corporations (both central banks

and deposit-taking corporations other than the

central bank);

(b) investment funds; and

corporations and pension funds.

In other words, the usual direct investment defini-

tions apply for captive financial institutions and money

lenders, insurance corporations, pension funds, and

financial auxiliaries. (These subsectors are defined in

Chapter 4, Section D; debt instruments are defined in

paragraphs 5.31–5.33.) All debt positions between the

selected types of affiliated financial corporations are

excluded from direct investment and are included under

portfolio or other investment. Both affiliated parties

must be one of the selected types of financial corpora-

tions, but they need not be the same type.

b. Coverage of other financial instruments

6.29 Financial derivatives and employee stock

options are excluded from direct investment and

included in the functional category financial deriva-

tives (other than reserves) and employee stock options.

6.30 Investment funds may be direct investors or

direct investment enterprises. A “fund of funds” is

an investment fund that invests in other investment

funds and thus may become a direct investor in one of

the funds. In a master-feeder fund arrangement, one

or more investment funds (feeder funds) pool their

portfolio in another fund (the master fund). In this

case, a feeder fund that has 10 percent or more of the

voting power in the master fund would meet the FDIR

definition of a direct investor. Similarly, retail funds

that hold 10 percent or more of voting power in an

enterprise are direct investors.

6.31 Direct investment may include real estate

investment, including investment properties and vaca-

tion homes. As discussed in paragraphs 4.26–4.40,

branches or notional units are identified when nonresi-

dents own real estate and other natural resources. The

normal ownership threshold for influence or control

under the FDIR is applied. Because it may have differ-

ent motivations and economic impact from other direct

investment, if real estate investment is significant, com-

pilers may wish to publish data on such investment

separately on a supplementary basis.

6.32 Equity in international organizations is excluded

from direct investment, even in cases in which voting

power is 10 percent or more, so equity contributions are

included in portfolio investment (if in the form of secu-

rities) or other investment—equity (if not in the form of

securities). Equity in international organizations would

not generally qualify as reserve assets because of the

lack of ready availability (see paragraph 6.69).

c. Pass-through funds

6.33 “Pass-through funds” or “funds in transit”

are funds that pass through an enterprise resident

in an economy to an affiliate in another economy,

so that the funds do not stay in the economy of

that enterprise. These funds are often associated

with direct investment. Such flows have little impact

on the economy they pass through. Special purpose

entities, holding companies, and financial institu-

tions that serve other nonfinancial affiliates are par-

ticularly associated with funds in transit, but other

enterprises may also have pass-through funds in

direct investment flows.

6.34 Pass-through funds are included in direct

investment in standard presentations because:

Chapter 6 g Functional Categories

106

(a) they are an integral part of a direct investor’s

financial transactions and positions with affili-

ated enterprises;

(b) the exclusion of these funds from direct invest-

ment would distort and substantially understate

direct investment financial flows and positions

at aggregate levels; and

promotes symmetry and consistency among

economies.

However, for the economies through which the funds

pass, it is useful to identify inflows and outflows not

intended for use by the entity concerned. At the time

of writing, there are no standard definitions or meth-

ods to distinguish pass-through funds from other direct

investment flows. Compilers in economies that have

large values of pass-through funds should consider the

compilation of supplementary data on funds in transit,

based on national definitions.

d. Effect of domestic ownership links on direct

investment relationships

6.35 To identify direct investment relationships,

the FDIR does not exclude ownership links between

enterprises resident in the same economy. Although

any transactions and positions between enterprises in

the same economy are not included in international

accounts, it is possible that a direct investor may have

a chain of control or influence in which one link in

the chain is a resident-to-resident relationship. Such

a relationship does not preclude a direct investment

relationship between two enterprises that are resident

in different economies from each other. (This case is

illustrated in Box 6.3.)

e. Beginning and ending direct investment

relationships

6.36 The whole of the transaction that reaches or

surpasses the threshold of 10 percent or more of voting

power is included under direct investment. Any trans-

actions before that point are not generally classified

as direct investment (with the exception of reverse

investment—defined in paragraph 6.37(b)—and

investment in other affiliates). Any prior positions are

shown as being reclassified at the time that the direct

investment relationship comes into existence (reclas-

sifications are discussed in paragraphs 9.13–9.20). For

example, if the direct investor previously had 9 per-

cent of voting power, then acquired 2 percent more,

there would be a direct investment transaction by the

purchaser involving 2 percent of voting power, and the

reclassification entries in the other changes in financial

assets and liabilities account would show a reduction

of portfolio investment involving the previously held

9 percent and a corresponding increase in direct invest-

ment. Subsequent transactions up to and including a

transaction that takes the voting power below 10 per-

cent are classified as direct investment. Once the direct

investment equity threshold has been crossed (either

upward or downward), any debt positions between the

parties should also be changed by a reclassification

entry in the other changes in volume account.

3. Types of direct investment transactions and

positions

6.37 In the standard components, direct investment is

classified according to the relationship between the inves-

tor and the entity receiving the investment, namely:

(a) investment by a direct investor in its direct

investment enterprise (whether in an immediate

relationship or not);

(b) reverse investment by a direct investment enter-

prise in its own immediate or indirect direct

investor, as explained in paragraphs 6.39–6.40;

and

low enterprises, as explained in paragraph 6.17.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Economy 1

Economy 2

Economy 3

A wholly owns B, which wholly owns C, which wholly

owns D.

In this example, despite the domestic link between B

and C, A and B are each in a direct investment relation-

ship with D.

Box 6.3. Direct Investment Relationship

Involving Domestic Link

107

6.38 These three categories reflect different types

of relationships and motivations. For example, the

interpretation of a direct investor acquiring direct

investment assets is different from a direct invest-

ment enterprise acquiring direct investment assets.

While the first type of investment involves influence

or control, this may not be the case for the other two

types, because the investor is not a direct investor. It

is important for compilers to monitor trends in the

second and third types to identify if they are becom-

ing significant.

a. Reverse investment

6.39 A direct investment enterprise may acquire

an equity or other claim on its own immediate or

indirect direct investor. These transactions may

occur as a way of withdrawing investment, or as

a way of organizing finance within a transnational

group. For example, for an enterprise that borrows on

behalf of its parent company and in cases in which

treasury functions are concentrated in a subsidiary

(see paragraphs 4.83(d) and 4.86), the subsidiary

may lend money to its direct investor.

6.40 Reverse investment arises when a direct invest-

ment enterprise lends funds to or acquires equity in its

immediate or indirect direct investor, provided it does

not own equity comprising 10 percent or more of the

voting power in that direct investor. In contrast, if two

enterprises each have 10 percent or more of the vot-

ing power in the other, there is not reverse investment,

rather there are two mutual direct investment relation-

ships. That is, each enterprise is both a direct investor

and direct investment enterprise of the other.

6.41 Data on reverse investment and investment

between fellow enterprises should be separately pub-

lished, where significant, to assist users in understand-

ing the nature of direct investment. Issues associated

with income on reverse investment and investment

between fellow enterprises are covered in paragraphs

11.99–11.100.

b. Presentation of data according to the

directional principle

6.42 The directional principle is a presentation

of direct investment data organized according to the

direction of the direct investment relationship. It can

be contrasted with the asset and liability presentation

of aggregates used in standard components in this

Manual, which are organized according to whether the

investment relates to an asset or liability. The difference

between the asset-liability and directional presenta-

tions arises from differences in the treatment of reverse

investment and some investment between fellow enter-

prises. The directional principle can be applied to the

IIP, financial account, and investment income. Under

the directional principle, direct investment is shown as

either direct investment abroad or direct investment in

the reporting economy:

(a) Direct investment abroad covers assets and

liabilities between resident direct investors and

their direct investment enterprises. It also cov-

ers assets and liabilities between resident and

nonresident fellow enterprises if the ultimate

controlling parent is resident. Direct investment

abroad is also called outward direct investment.

(b) Direct investment in the reporting economy

includes all liabilities and assets between resi-

dent direct investment enterprises and their direct

investors. It also covers assets and liabilities

between resident and nonresident fellow enter-

prises if the ultimate controlling parent is nonres-

ident. Direct investment in the reporting economy

is also called inward direct investment.

6.43 The treatment of fellow enterprises under the

directional principle is as follows:

• In principle, all assets and liabilities between fellow

enterprises are shown in direct investment abroad

when the ultimate controlling parent is a resident.

In that case, control and influence is exercised

from the economy of the resident, so it is useful to

view an investment in a fellow enterprise abroad in

the same way as outward investment.

• In principle, all assets and liabilities between fel-

low enterprises are shown in direct investment in

the reporting economy when the ultimate control-

ling parent is a nonresident. In this case, control and

influence are exercised from another economy, so it

is useful to view investment with the fellow enter-

prise abroad in the same way as inward investment.

• However, if the residence of the ultimate con-

trolling parent is unknown, assets are treated as

direct investment abroad and liabilities are treated

as direct investment in the reporting economy.

This treatment is allowed for practical reasons. It

is recognized that, in some cases, economies may

not be able to implement the preferred or “in prin-

ciple” basis of presentation in their direct invest-

ment data, because they cannot identify ultimate

controlling parents.

Chapter 6 g Functional Categories

108

c. Analytical use of the different presentations of

direct investment

6.44 Data on both the asset and liability presenta-

tion and the directional principle presentation are use-

ful for different kinds of analysis.

• Data on an asset and liability basis are consistent

with monetary, financial, and other balance sheet

data, and thus facilitate comparison between the

data sets. These data are needed on an immediate

counterparty basis to adequately monitor flows

and positions. For instance, if a jurisdiction of

convenience that is the home to large SPEs were

to experience a currency or other financial crisis,

data users would find data sets that look through

the SPEs (or that net data for SPEs without sepa-

rate identification of gross levels) to be of limited

help. SPEs and other entities may transform debt

to equity, a long-term instrument to short-term,

local currency to foreign currency, fixed to vari-

able rates, and so on, and these transformations

alter risk characteristics in important ways.

• Data on a directional principle basis assist in

understanding the motivation for direct investment

and take account of control and influence. In the

directional presentation, reverse investment can

be seen as equivalent to the withdrawal of invest-

ment. The directional principle may be particu-

larly useful for an economy with large values of

pass-through funds or round tripping, because the

large investment flows into and out of an economy

may not be of primary interest to analysts of direct

investment.

6.45 The calculations and relationship between the

asset and liability and the directional presentations

are shown in Box 6.4. In this Manual, the directional

presentation appears as supplementary items. Under

the directional principle, direct investment abroad and

direct investment in the reporting economy include

both assets and liabilities, and thus, negative values

may arise.

4. Other issues concerning direct investment

transactions, positions, and income

a. Round tripping

6.46 Round tripping involves funds from an entity

in one economy being invested in an entity resident in

a second economy, that are then invested in another

entity in the first economy. The entity in the second

economy often has limited operations of its own. (There

may be two or other intermediate economies with round

tripping.) Its special nature means that, where it is sig-

nificant, compilers should consider publishing supple-

mentary information on the extent of round tripping.

(Round tripping results in an economy being its own

ultimate host economy or ultimate investing economy

in partner data.)

b. Relationships other than direct investment

6.47 Some relationships involve cooperation between

enterprises that resemble direct investment relations.

However, such cases should not be classified as direct

investment unless they meet the definition involving

control or influence through voting power. For example,

there may be representation on the board of directors,

a common board of directors but no formal relation-

ship, participation in policymaking processes, material

intercompany transactions, interchange of managerial

personnel, provision of technical information, or provi-

sion of long-term loans at lower than existing market

rates. Creditors of an insolvent company may exercise

influence or even effectively control it, but they would

not qualify as direct investors unless their debt is con-

verted to equity with voting power. Furthermore, an

enterprise may have substantial foreign ownership but

no individual investor or group of related investors may

have a direct investment stake.

c. Additional detail for direct investment

6.48 The financial instrument, maturity, and currency

classifications in Chapter 5 can be used for direct invest-

ment. Compilers should break down debt instruments

relating to direct investment relationships according to

the SNA/MFSM instrument classification on a supple-

mentary basis. The split by type of instrument is neces-

sary for reconciliation with financial account, flow of

funds, and sector balance sheets, because these data use

the instrument classification and not the international

accounts functional classification. However, because of

the relationship between the two parties, the strictness

of terms, and risks and vulnerability aspects of direct

investment-related debt may differ from those of other

debt. For those reasons, intercompany lending is identi-

fied separately in External Debt Statistics: Guide for

Compilers and Users (see also paragraph 6.26).

6.49 Classification by partner economy is discussed

in paragraphs 4.146–4.164, with paragraphs 4.156–4.157

dealing with direct investment. Partner data for direct

investment can be classified according to either the

immediate or ultimate investor or host economy. The

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

109

institutional sector classification (described in Chapter

4, Section D) may also be applied to direct investment.

These issues are discussed further in the OECD Bench-

mark Definition of Foreign Direct Investment.

6.50 Classification by kind of economic activity

(industry) may be of interest for direct investment. The

ISIC or some regional or national equivalent can be

used to compile data on the kind of economic activity.

Although this classification is not used for other func-

tional categories, it is useful for direct investment. It

is preferable to prepare estimates on both inward and

outward direct investment on a dual basis, based on the

industry of the direct investment enterprise and the indus-

try of the direct investor. If data on only one basis can be

prepared, the preferred industry classification is that of

the direct investment enterprise. Industrial classification

applies to units, rather than transactions. Often in direct

investment data, the industry classification is applied

to economy-specific enterprise groups, or to economy-

specific enterprise groups in a single institutional sector.

If a direct investment enterprise or enterprise group is

involved in different economic activities, it is classified

according to the predominant activity.

Chapter 6 g Functional Categories

The standard components for direct investment posi-

tions and transactions are shown in the table below. They

may be rearranged to support different kinds of presenta-

tion and analysis.

Box 6.4. Derivation of Data under the Directional Principle

Components of Direct Investment (Asset/Liability Presentation)

Assets Liabilities

Of direct investors in direct investment enterprises Of direct investment enterprises to direct investor

A1 Equity L1 Equity

A2 Debt instruments L2 Debt instruments

Of direct investment enterprises in direct investor— Of direct investor to direct investment enterprises—

Reverse investment Reverse investment

A3 Equity L3 Equity

A4 Debt instruments L4 Debt instruments

Of resident fellow enterprises in fellow enterprises Of resident fellow enterprises to fellow enterprises

abroad abroad

A5 Equity L5 Equity

A5.1 Equity (if ultimate controlling parent is resident

) L5.1 Equity (if ultimate controlling parent is nonresident

)

A5.2 Equity (if ultimate controlling parent is nonresident

) L5.2 Equity (if ultimate controlling parent is resident

)

A6 Debt instruments L6 Debt instruments

A6.1 Debt instruments (if ultimate controlling parent is L6.1 Debt instruments (if ultimate controlling parent is

resident

) nonresident

)

A6.2 Debt instruments (if ultimate controlling parent is L6.2 Debt instruments (if ultimate controlling parent is

nonresident

) resident

)

That is, resident in the compiling economy.

That is, not resident in the compiling economy.

Asset/liability presentation

Direct investment assets:

Equity: A1 + A3 + A5;

Debt instruments: A2 + A4 + A6

Direct investment liabilities:

Equity: L1 + L3 + L5;

Debt instruments: L2 + L4 + L6

Directional principle presentations

In principle:

Direct investment abroad (outward direct investment):

Equity: A1 – L3 + A5.1 – L5.2;

Debt instruments: A2 – L4 + A6.1 – L6.2

Direct investment in the reporting economy (inward

direct investment):

Equity: L1 – A3 + L5.1 – A5.2;

Debt instruments: L2 – A4 + L6.1 – A6.2

Acceptable practical alternative:

Direct investment abroad:

Equity: A1 – L3 + A5;

Debt instruments: A2 – L4 + A6

Direct investment in the reporting economy:

Equity: L1 – A3 + L5;

Debt instruments: L2 – A4 + L6

110

d. Further issues concerning direct investment

6.51 In addition to the classification issues in this

chapter, direct investment is discussed in the chapters

concerning positions, financial account transactions,

and primary income (Chapters 7, 8, and 11, respec-

tively). The cross-cutting issues and links are shown in

Appendix 6a.

6.52 Some aspects of direct investment—other than

those directly related to balance of payments and inter-

national investment position data—may be of interest,

particularly in the host economy, from analytical and

policymaking points of view. While the international

accounts data show the cross-border flows and stocks,

another aspect of the impact of direct investment is on

domestic variables such as employment, sales, value

added, and gross fixed capital formation. These statis-

tics are called Activities of Multinational Enterprises

and are discussed in Appendix 4.

6.53 The foreign-controlled corporations subsec-

tor in the SNA overlaps with direct investment. The

foreign-controlled corporations subsector includes all

subsidiaries and branches resident in the economy, as

well as any associates or other enterprises resident in

the economy that are under de facto foreign control.

C. Portfolio Investment

6.54 Portfolio investment is defined as cross-

border transactions and positions involving debt or

equity securities, other than those included in direct

investment or reserve assets. Securities are defined in

paragraph 5.15. The negotiability of securities is a way

of facilitating trading, allowing them to be held by dif-

ferent parties during their lives. Negotiability allows

investors to diversify their portfolios and to withdraw

their investment readily. Investment fund shares or units

(i.e., those issued by investment funds) that are evi-

denced by securities and that are not reserve assets or

direct investment are included in portfolio investment.

Although they are negotiable instruments, exchange-

traded financial derivatives are not included in portfo-

lio investment because they are included in their own

separate category.

6.55 Equity not in the form of securities (e.g., in

unincorporated enterprises) is not included in portfolio

investment; it is included in direct or other investment.

Equity in time-share accommodation evidenced by a

security is usually portfolio investment (although hold-

ings that provided 10 percent or more of voting power

would be direct investment, and holdings not in the form

of securities and not included in direct investment would

be other investment). In a few cases identified in para-

graph 6.28, debt securities representing claims on affili-

ated enterprises are included in portfolio investment.

6.56 Portfolio investment covers, but is not limited

to, securities traded on organized or other financial

markets. Portfolio investment usually involves finan-

cial infrastructure, such as a suitable legal, regulatory,

and settlement framework, along with market-making

dealers, and a sufficient volume of buyers and sellers.

However, acquisition of shares in hedge funds, private

equity funds, and venture capital are examples of portfo-

lio investment that occurs in less public and more lightly

regulated markets. (However, shares in these funds are

included in direct investment when the holdings reach

the 10 percent threshold, and in other equity in other

investment when investment is not in the form of a secu-

rity and not included in direct investment or reserve

assets.) Portfolio investment is distinctive because of the

nature of the funds raised, the largely anonymous rela-

tionship between the issuers and holders, and the degree

of trading liquidity in the instruments.

6.57 Portfolio investment may be presented by

instrument, original or remaining maturity, or institu-

tional sector. Further information on portfolio invest-

ment is included in Chapter 7 (concerning positions),

Chapter 8 (concerning financial account transactions),

and Chapter 11 (concerning primary income).

D. Financial Derivatives (Other Than

Reserves) and Employee Stock Options

6.58 The definition of the functional category

financial derivatives and employee stock options (other

than reserves) largely coincides with the correspond-

ing financial instrument class, which is discussed in

detail in paragraphs 5.79–5.98. The difference in cover-

age between the functional category and the financial

instrument is that financial derivatives associated with

reserve asset management are excluded from the func-

tional category and included in reserve assets (see para-

graph 6.91). This category is identified separately from

the other categories because it relates to risk transfer,

rather than supply of funds or other resources.

6.59 Unlike other functional categories, no primary

income accrues on financial derivatives. Any amounts

accruing under the contract are classified as revalua-

tions and are included in the other changes in assets

and liabilities account. (These entries are discussed in

paragraphs 9.30–9.31.) In addition, as noted in the foot-

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

111

note to paragraph 10.121, an intermediary may provide

services associated with transactions in derivatives.

6.60 Recording of financial derivatives separately for

both assets and liabilities is encouraged for both positions

and transactions. However, it is recognized that measur-

ing transactions on a gross basis may not be feasible, in

which case net reporting is acceptable. Information on

financial derivatives (other than reserves) and employee

stock options is included in Chapter 7 (concerning posi-

tions), Chapter 8 (concerning financial account trans-

actions), and Chapter 9 (concerning revaluations); no

investment income arises (see paragraph 11.95).

E. Other Investment

6.61 Other investment is a residual category that

includes positions and transactions other than those

included in direct investment, portfolio investment, finan-

cial derivatives and employee stock options, and reserve

assets. To the extent that the following classes of financial

assets and liabilities are not included under direct invest-

ment or reserve assets, other investment includes:

(a) other equity;

(b) currency and deposits;

from the IMF);

(d) nonlife insurance technical reserves, life

insurance and annuities entitlements, pension

entitlements, and provisions for calls under stan-

dardized guarantees;

(e) trade credit and advances;

(f) other accounts receivable/payable; and

(g) SDR allocations (SDR holdings are included in

reserve assets).

6.62 Other equity is included in other investment,

when it is not direct investment or reserve assets. Other

equity, as defined in paragraph 5.26, is not in the form

of securities, so it is not included in portfolio investment.

Participation in some international organizations is not in

the form of securities and so it is classified as other equity.

In most cases, equity in quasi-corporations for branches

and notional units for ownership of land is included in

direct investment; however, it is included in other invest-

ment if the share of voting power is less than 10 percent.

6.63 Other investment may be split by financial

asset or liability class, original or remaining maturity,

or institutional sector. Information on other investment

is included in Chapter 7 (concerning valuation of posi-

tions, particularly loans), Chapter 8 (concerning finan-

cial account transactions), and Chapter 11 (concerning

primary income).

F. Reserves

Reference:

IMF, International Reserves and Foreign Currency

Liquidity: Guidelines for a Data Template.

1. Reserve assets

a. General definition

6.64 Reserve assets are those external assets that

are readily available to and controlled by monetary

authorities for meeting balance of payments financing

needs, for intervention in exchange markets to affect

the currency exchange rate, and for other related pur-

poses (such as maintaining confidence in the currency

and the economy, and serving as a basis for foreign

borrowing).

Reserve assets must be foreign currency

assets and assets that actually exist. Potential assets are

excluded. Underlying the concept of reserve assets are

the notions of “control,” and “availability for use,” by the

monetary authorities.

The composition of reserve assets

and reserve-related liabilities is shown in Box 6.5.

b. Residence

6.65 In accordance with the residence concept,

reserve assets, other than gold bullion, must be claims

on nonresidents. Conversely, the authorities’ foreign

currency claims on residents, including claims on resi-

dent banks, are not reserve assets. Nonetheless, foreign

currency claims on resident banks can be at the dis-

posal of the monetary authorities and can be readily

mobilized to meet demand for foreign exchange. Such

claims are presented as a supplementary item to the

IIP. For the explanation of residence, see Chapter 4,

Section E.

A more complete picture of monetary authorities’ international

liquidity position is given in International Reserves and Foreign

Currency Liquidity: Guidelines for a Data Template (Guidelines).

The Guidelines address a number of key issues, and are drawn on

in this text.

For dollarized economies, the need to hold reserves for the pur-

pose of intervention in exchange markets is not relevant for defining

the reserve assets of these economies. Dollarization and euroization

are defined in paragraph A3.10.

Monetary authorities may sometimes employ fund managers to

manage reserve assets. In such arrangements, the fund managers are

acting as agents and are paid a fee for their services.

Chapter 6 g Functional Categories

112

c. Definition of monetary authorities

6.66 The functional concept of monetary authori-

ties is essential for defining reserve assets. Monetary

authorities encompass the central bank (which sub-

sumes other institutional units included in the central

bank subsector, such as the currency board) and cer-

tain operations usually attributed to the central bank

but sometimes carried out by other government institu-

tions or commercial banks, such as government-owned

commercial banks. Such operations include the issuance

of currency; maintenance and management of reserve

assets,includingthoseresultingfromtransactionswith

theIMF;andoperationofexchangestabilizationfunds.

Ineconomiesinwhichextensivereserveassetsareheld

outside of the central bank, supplementary information

should be provided on the institutional sector of hold-

ings of those reserve assets.

d. Control

6.67 In general, only external claims actually owned

bythemonetaryauthoritiescanbeclassifiedasreserve

assets.Nonetheless,ownershipisnottheonlycondition

that confers control. In cases in which institutional units

(other than the monetary authorities) in the reporting

economyholdlegaltitletoexternalforeigncurrency

assetsandarepermittedtotransactinsuchassetsonly

on terms specified by the monetary authorities or only

with their express approval. In such cases, the assets

can be considered reserve assets because they are under

thedirectandeffectivecontrolofthemonetaryauthori-

ties. To be counted in reserve assets, the conditions to

be met are that:

• theresidententitycantransactonlyinthoseclaims

with nonresidents on the terms specified by the

monetary authorities or only with their express

approval; and

• the authorities have access on demand to these

claims on nonresidents to meet balance of pay-

ments financing needs and other related purposes;

and

• apriorlaworanotherwiselegallybindingcontrac-

tual arrangement confirms this agency role of the

residententitythatisactualanddefiniteinintent.

6.68 If such assets are included under reserve assets,

to avoid double counting, they should not also be clas-

sifiedasassets,ortransactionsinassets,inothercom-

ponentsoftheIIPandbalanceofpayments.Theyare

classified within reserve assets depending on their

nature(e.g.,depositsandsecuritiesareclassifiedas

such). Except in unusual circumstances, direct and

effectivecontrolisnottobeconstruedasextending

beyondassetsownedbydeposit-takingcorporations.

e. Availability for use

6.69 Reserveassetsmustbereadilyavailableinthe

most unconditional form. A reserve asset is liquid in

that the asset can be bought, sold, and liquidated for

foreign currency (cash) with minimum cost and time,

andwithoutundulyaffectingthevalueoftheasset.

Notimelimitisprovided,buttoqualifyasreserves,anasset

shouldbeavailableinaveryshortperiodoftimegiventhespeed

at which experience suggests a foreign exchange need can arise in

adverse circumstances.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Reserve assets

Monetary gold

Gold bullion

Unallocated gold accounts

Of which: Monetary gold under swap for cash

collateral

Special drawing rights

Reserve position in the IMF

Other reserve assets

Currency and deposits

Claims on monetary authorities

Claims on other entities

Securities

Debt securities

Short-term

Long-term

Equity and investment fund shares or units

Of which: Securities under repo for cash

collateral

Financial derivatives

Other claims

Reserve-related liabilities to nonresidents

(memorandum items)

Short-term (on a remaining maturity basis)

Credit and loans from the IMF

Debt securities

Deposits

Loans

Repo loans

Other loans

Other short-term foreign currency liabilities to

nonresidents

—————

(SeealsoAppendix9TableVforadditionalsupplementary

items for reserve-related liabilities.)

In the IIP only.

Box 6.5. Components of Reserve Assets

and Reserve-Related Liabilities

113

This concept refers to both nonmarketable assets, such

as demand deposits, and marketable assets, such as

securities for which there are ready and willing sell-

ers and buyers. The ability to raise funds by using the

asset as collateral is not sufficient to make an asset a

reserve asset. Some deposits and loans can be liquid

and included in reserve assets, although they are not

necessarily marketable.

6.70 To be readily available to the authorities to

meet balance of payments financing needs and other

related purposes under adverse circumstances, reserve

assets generally should be of high quality.

f. Further clarifications on reserve assets

6.71 As a consequence of their purpose of meeting

balance of payments financing needs, and supporting

the exchange rate, reserve assets must be both denomi-

nated and settled in foreign currency. Denominated is

defined to mean the currency in which the contract is

specified. (Currency of denomination and currency of

settlement are discussed in paragraphs 3.98–3.103.)

6.72 Furthermore to be liquid, reserve assets must

be denominated and settled in convertible foreign cur-

rencies, that is, currencies that are freely usable for

settlements of international transactions.

In addition,

assets denominated in gold and SDRs may qualify as

reserve assets.

6.73 In some instances, economies may hold assets

denominated in the currency of a neighboring econ-

omy because the economy’s risk exposures are closely

related to their neighbor given the composition of their

international trade, even though the currency may not

be widely traded. These assets should be excluded from

reserve assets (and included under the appropriate func-

tional category and instrument) if the currency does not

meet the definition of a convertible foreign currency

set out in paragraph 6.72, but supplementary data can

be provided. Such circumstances are envisaged when

an economy is highly dependent on a larger regional

neighbor for its international trading activity.

6.74 Assets that are denominated in or indexed to

the domestic currency but settled in foreign currency

cannot be reserve assets, because the value of such

assets would decline along with the domestic currency

in the circumstance of a domestic currency crisis.

The term “freely usable” is not used in a restrictive sense to cover

the currencies in the SDR basket only.

It is possible but unlikely that such dependence could arise with

an economy that is not a neighbor.

6.75 An existing asset that is committed for a

future use but not encumbered can be included pro-

vided that the asset is readily available to meet a bal-

ance of payments financing need (and other related

purposes stated in paragraph 6.64). An asset should

not be denied as a reserve asset simply because the

use to which the asset is to be put is a foreseeable one.

However, when an asset is not readily available—such

as an asset whose use is blocked—the asset should not

be counted as reserve assets.

g. Classification of reserve assets

6.76 Reserve assets consist of monetary gold, SDR

holdings, reserve position in the IMF, currency and

deposits, securities (including debt and equity securi-

ties), financial derivatives, and other claims (loans and

other financial instruments).

6.77 Monetary gold, SDR holdings, and reserve

position in the IMF are considered reserve assets

because they are assets readily available to the mon-

etary authorities in unconditional form. Currency and

deposits, securities, and other assets in many instances

are equally available and therefore qualify as reserve

assets.

6.78 Monetary gold is gold to which the monetary

authorities (or others who are subject to the effec-

tive control of the monetary authorities) have title and

is held as reserve assets. It consists of gold bullion

(including gold coins, ingots, bars with a purity of at

least 995/1,000, and gold bullion held in allocated gold

accounts, regardless of the location of the account)

and unallocated gold accounts with nonresidents that

give title to claim the delivery of gold.

Gold bullion is

usually traded on organized markets or through bilat-

eral arrangements between central banks. To qualify as

reserve assets, gold accounts must be readily available

upon demand to the monetary authorities.

6.79 Allocated and unallocated gold accounts are

to be distinguished from accounts that are linked to

gold (accounts indexed to gold) but do not give title

to claim delivery of gold. The latter are classified as

currency and deposits and are included within reserve

assets provided they meet the criteria of reserves.

6.80 If the monetary authorities deposit gold bul-

lion in an unallocated gold account, the gold bullion is

However, transactions with residents in gold bullion are not

recorded in the balance of payments (see paragraph 9.18).

See paragraphs 5.76–5.77 for definitions of allocated and unal-

located gold accounts.

Chapter 6 g Functional Categories

114

demonetized (see paragraph 9.18) and this is recorded

in the other changes in assets account of the mone-

tary authorities. If the account is with a nonresident,

a transaction in nonmonetary gold is recorded in the

goods and services account. However, transactions

in gold bullion as reserve assets between monetary

authorities and with international financial institutions

are recorded as transactions in gold bullion and are

not recorded as other changes in assets. If the unallo-

cated gold account is with a nonresident and available

on demand, a transaction in currency and deposits is

recorded and then reclassified to monetary gold (unal-

located gold accounts) if held as a reserve asset.

How-

ever, if the deposit is with another monetary authority

or an international financial institution, a transaction in

unallocated gold accounts is recorded.

6.81 To minimize risks of default in gold lending

transactions,

monetary authorities can require ade-

quate collateral instead of cash (such as securities)

from the depository. Such securities collateral received

should not be included in reserve assets, thereby pre-

venting double counting as the gold lent remains an

asset of the monetary authorities.

6.82 Allocated and unallocated gold accounts with

nonresidents out on swap by the monetary authorities

for cash collateral are either (a) included as reserve

assets of the original owner with the loan generated

reported as a reserve-related liability (a memorandum

item) if a liability is to a nonresident,

or (b) excluded

from reserve assets and either demonetized (gold bul-

lion) or reclassified as other investment, currency and

deposits, assets (unallocated gold accounts). In either

case, any loan liability to a nonresident is recorded

within “other investment,” with the foreign currency

received (provided it is a claim on a nonresident), and

recorded as an increase in currency and deposits within

reserve assets.

The value of allocated and unallocated

Similarly, interest accruing on unallocated gold accounts is

recorded as a transaction in currency and deposits within reserve

assets by the monetary authority. If national practice is to include

such interest under monetary gold, the amount of interest accruing

is reclassified in the other changes in assets account.

Sometimes known as gold deposits or gold loans.

If the securities received as collateral are repoed out for cash,

a repo transaction should be reported, as discussed below under

“securities.”

If the liability is to a resident, the liability is not in the balance of

payments or IIP, but it is reported under repo loans in other foreign

currency liabilities (see Table V in Appendix 9).

If the foreign currency received from a nonresident is a claim on

a resident entity, the corresponding entry to the loan liability to the

nonresident is a reduction in currency and deposit liabilities of the

resident entity, as the transaction reduces the claim of the nonresi-

dent on the resident entity.

gold accounts included in reserve assets and out on

swap (see paragraphs 7.58–7.59) for cash collateral is

identified in the IIP to facilitate an assessment of the

level of reserves adjusted for the swap activities.

6.83 Any unallocated gold account liabilities of

resident entities to nonresident monetary authorities

are to be classified as other investment, currency and

deposits.

6.84 SDR holdings are reserve assets created by the

IMF and are equivalent to liquid balances in convertible

currencies in nearly every respect. Further information

on SDRs is provided in paragraphs 5.34–5.35.

6.85 Reserve position in the IMF is the sum of

(a) the “reserve tranche,” that is, the foreign currency

(including SDRs) amounts that a member country may

draw from the IMF at short notice;

and (b) any indebt-

edness of the IMF (under a loan agreement) in the

General Resources Account that is readily available to

the member country, including the reporting country’s

lending to the IMF under the General Arrangements

to Borrow (GAB) and the New Arrangements to Bor-

row (NAB). While a member country must present

a declaration of balance of payments–related need to

make a purchase in the reserve tranche (reduction in

reserve position), the IMF does not challenge a mem-

ber’s request for reserve tranche purchases. Convertible

currencies from a reserve tranche purchase may be

made available within days.

6.86 Deposits refer to those available on demand;

deposits with a fixed term that are redeemable on

demand or at very short notice without unduly affect-

ing the value of the deposit can be included. Deposits

included in reserve assets are those held in foreign

central banks, the BIS, and other nonresident deposit-

taking corporations, and deposit agreements with IMF

Trust Accounts that are readily callable to meet a

balance of payments financing need. Because short-

term loans provided by the monetary authorities to

other central banks, the BIS, and other deposit-tak-

ing corporations are much like deposits, it is difficult

Reserve-tranche positions in the IMF are liquid claims of mem-

bers on the IMF that arise not only from the reserve asset payments

for quota subscriptions but also from the sale by the IMF of their

currencies to meet the demand for use of IMF resources by other

members in need of balance of payments support. Repayments of

IMF resources in these currencies reduce the liquid claim of the

member whose currency was supplied. In Table A9-I-1 in Appendix

9 on currency composition, the reserve tranche positions in the IMF

should be classified in the “SDR basket.” The domestic currency

component of the quota is considered in economic terms to be of a

contingent nature and so is not classified as an asset or liability in

the international accounts.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

115

in practice to distinguish the two. For this reason,

by convention, and consistent with the treatment of

interbank positions (see paragraph 5.42), the report-

ing of deposits in reserve assets should include short-

term foreign currency loans that are redeemable upon

demand, made by the monetary authorities to these

nonresident deposit-taking corporations. Short-term

foreign currency loans that are available on demand

without unduly affecting the value of the asset, and

made by the monetary authorities to nonresident non-

deposit-taking corporations, and long-term loans to

IMF Trust Accounts that are readily repayable to meet

a balance of payments financing need can qualify as

reserve assets (“other claims”). But other long-term

loans by the monetary authorities to nonresidents not

readily available to meet balance of payments financ-

ing needs are not reserve assets.

6.87 Securities include liquid and marketable equity

and debt securities issued by nonresidents; long-term

securities (such as 30-year U.S. Treasury bonds) are

included. Unlisted securities (i.e., securities not listed

for public trading) are, in principle, excluded unless the

securities are liquid.

6.88 Securities that have been transferred under

repurchase agreements, or similar agreements by the

monetary authorities for cash collateral are assets of the

original authorities and are either (a) included as reserve

assets of the original owner with the loan generated

reported as a reserve-related liability (a memorandum

item) if a liability is to a nonresident,

or (b) excluded

from reserve assets and reclassified as portfolio invest-

ment assets. In either case, any loan liability to a non-

resident is recorded within “other investment,” with the

foreign currency received, provided it is a claim on a

nonresident, and is recorded as an increase in currency

and deposits within reserve assets. The value of securi-

ties included in reserve assets and out on repo (or similar

arrangements, see paragraph 7.58) for cash collateral is

identified in the IIP to facilitate an assessment of the

level of reserves adjusted for the repo activities.

6.89 In the case of reverse repos, the funds provided

to the counterparty should be recorded as a decrease

in currency and deposits within reserve assets, but if

the claim (i.e., repo asset) is liquid and available upon

demand to the monetary authorities, then it is considered

part of the reserve assets in “other claims” (or “deposits”

if classified in national measures of broad money).

If the liability is to a resident, the liability is not in the balance of

payments or IIP, but it is reported under repo loans in other foreign

currency liabilities (see Table V in Appendix 9).

6.90 When securities are lent or borrowed in

exchange for other securities and no cash is exchanged,

no transaction should be reported. Securities lent are

the assets of the original authorities, and securities col-

lateral received are not included as reserve assets of the

receiving monetary authorities.

6.91 Financial derivatives are recorded in reserve

assets only if the derivatives pertain to the manage-

ment of reserve assets, are integral to the valuation

of such assets, and are under the effective control of

the monetary authorities. Because they pertain to the

management of assets, these transactions and positions

are recorded on a net basis (assets less liabilities) at

market value.

6.92 Other claims include loans to nonresident

non-deposit-taking corporations, long-term loans to an

IMF Trust Account that are readily repayable to meet

a balance of payments financing need (see paragraph

6.86), loans arising from a reverse repo (unless classi-

fied as deposits) (paragraph 6.89), and other financial

assets not included previously but that are foreign cur-

rency assets that are available for immediate use (such

as nonnegotiable investment fund shares or units as

described in paragraph 6.101).

h. Selected cases

Special purpose government funds

6.93 Some governments create special purpose gov-

ernment funds, usually called sovereign wealth funds

(SWFs). Created and owned by the general government

for macroeconomic purposes, SWFs hold, manage, or

administer assets to achieve financial objectives, and

employ a set of investment strategies which include

investing in foreign financial assets. The funds are

commonly established out of balance of payments

surpluses, official foreign currency operations, the

proceeds of privatizations, fiscal surpluses, and/or

receipts resulting from commodity exports. The estab-

lishment of a special purpose government fund raises

the issue of whether or not the external assets held in

the fund should be included in reserve assets.

6.94 A key determination is whether some legal

or administrative guidance results in the assets being

encumbered in a way that precludes their ready avail-

ability to the monetary authorities.

6.95 If the special purpose government fund’s exter-

nal assets are on the books of the central bank, or an

agency of the central government, that allows the mon-

etary authorities control over the disposition of funds,

Chapter 6 g Functional Categories

116

then the presumption is that the assets are reserve assets

(provided all other criteria for being a reserve asset are

met). On the other hand, if the funds are held in a long-

term fund with a separate legal identity, the presump-

tion is that they should not be included in reserve assets,

not least because the ready availability criterion is less

likely to be met.

6.96 In some cases, while assets are invested in

a separate investment corporation, there may be an

agreement that such assets can be readily called back if

needed. In other cases, funds could be withdrawn dur-

ing the annual budgetary process.

6.97 Any final determination of whether an asset can

be classified as a reserve asset or not, depends on an

examination of the circumstances: namely, is the asset

readily available to the monetary authorities and is there

a liquid claim of a resident entity on a nonresident in

foreign currency? But in the absence of legal or adminis-

trative impediments, and given the fungibility of assets,

even assets that had been earmarked as part of a special

purpose government fund—but that could be used to meet

balance of payments financing needs and other related

purposes—are reserve assets (subject to the other criteria

being met, including, importantly, the control of the mon-

etary authorities over the disposition of the funds).

6.98 Assets held in special purpose government

funds that meet the definition of reserve assets are

classified within reserve assets depending on their

nature. So, if the special purpose government funds

hold deposits, securities, and other reserve assets, these

are classified as such within reserve assets. Assets held

in a resident special purpose government fund that are

claims on nonresidents but do not meet the criteria to be

classified as reserve assets are classified in the finan-

cial account and IIP under the appropriate instrument

and functional category. If special purpose government

funds own direct investment equity and debt securities

that could be classified in either direct investment or

reserves assets, as general guidance, in the hierarchy of

the balance of payments and IIP between direct invest-

ment and reserve assets, the equity securities should be

classified as direct investment ahead of reserve assets,

and debt securities should be classified as reserve assets

ahead of direct investment.

Pooled assets

6.99 As a means of reserve assets management,

monetary authorities from different economies might

cooperatively invest through an asset pool. Such pooled

asset arrangements are collective investment schemes

under which funds provided by participants are held in

an investment vehicle (usually nonresident of the par-

ticipants’ economies) that conducts investments. The

participants have a claim on the collective investment

scheme. Some pooled asset arrangements may have

features that constrain the use of the claim as a reserve

asset. To determine whether the claim on the pooled

asset arrangement meets the definition of reserve

assets, as with special purpose government funds, an

examination of the legal and institutional framework of

the arrangement is needed.

6.100 As with other reserve assets, the claim on the

asset pool needs to be readily available to the mon-

etary authorities and to be a liquid claim in foreign cur-

rency on nonresidents. In addition, other factors should

be considered in determining whether the claim is a

reserve asset. These include the following:

• The ability to use pooled assets to raise external

liquidity in foreign currency. Even if the claim

is in foreign currency, a high concentration of the

underlying assets in claims on the domestic econ-

omy that constrains the ability of that economy

to generate external liquidity or that results in the

foreign currency value of the instrument being sig-

nificantly affected in a time of crisis (such as a

high concentration in domestic currency assets)

would cause considerable doubt as to whether the

instrument could be included in reserve assets.

• Whether the assets are truly foreign currency

claims. An asset pool might be structured such

that, while the assets are denominated in foreign

currency, the monetary authority has a de facto

claim in the domestic currency. In this instance,

it is inappropriate to classify the asset as a reserve

asset for the reasons described in paragraph 6.74.

6.101 Pooled assets are classified within reserve

assets depending on their nature. For instance, if the

participant can readily transact in these claims only

by selling its claim back to the investment vehicle, the

claim might need to be classified as a nonnegotiable

investment fund share (an “other claim”). Pooled assets

that are claims on nonresidents but that do not meet

the criteria to be classified as reserve assets are classi-

fied in the financial account according to their nature

(most probably an equity asset) under the appropriate

functional category.

Central bank swap arrangements

6.102 Assets created under reciprocal facilities (swap

arrangements) for the temporary exchange of deposits

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

117

between the central banks of two economies warrant

mention. Deposits (in foreign exchange) acquired by

the central bank initiating the arrangement are treated

as reserve assets because the exchange provides the

central bank with assets that can be used to meet the

economy’s balance of payments financing needs and

other related purposes. Reciprocal deposits acquired

by the partner central bank also are considered reserve

assets, as long as they meet the general criteria for being

reserve assets, if they are denominated and settled in a

convertible currency.

6.103 Reciprocal currency arrangements between

central banks may also take the form of a securi-

ties repurchase agreement. In this case, one central

bank transfers securities (sometimes denominated

in its domestic currency) to another central bank in

exchange for foreign currency, with the transactions

later reversed, typically three months in the future.

Such transactions should be treated as collateralized

loans, with the central bank that initiated the trans-

action paying corresponding interest on the foreign

currency received. The cash-taking central bank can

therefore include the foreign currency received in its

reserve assets if the criteria for reserve assets are met.

The cash-providing central bank should not include

the securities received as collateral in its reserve assets

as the securities are treated as not having changed

economic ownership (see paragraph 5.54). See also

paragraph 6.90 on securities lending or borrowing

transactions in reserve assets.

6.104 When a central bank acquires or disposes of

a liquid foreign currency claim on a nonresident from

a domestic bank (e.g., through an exchange of foreign

and domestic currency deposits, a change in reserve

requirements on foreign currency deposits, or other

domestic transactions that increase or change the com-

position of reserve assets), this is recorded through the

other changes in volume account. It is not recorded in

the balance of payments, however, given that the trans-

action is between two residents (see paragraph 3.6).

i. Foreign assets that do not qualify as

reserve assets

6.105 Lines of credit that could be drawn on and for-

eign exchange resources that could be obtained under

swap agreements are not reserve assets because they do

not constitute existing claims. Real estate owned by the

monetary authorities is not to be included in reserve

assets because real estate is not considered a liquid asset.

Silver bullion, diamonds, and other precious metal and

stones are not included in reserve assets because they

are considered goods and not financial assets.

6.106 Capital subscriptions to international organi-

zations that are not readily available to the monetary

authorities do not meet the definition of reserve assets.

These subscriptions are included in other investment,

unless they are in the form of securities, in which case

they are classified as portfolio investment.

6.107 Pledged assets are typically not readily avail-

able. Those pledged assets that are encumbered and

therefore are not readily available should be excluded

from reserve assets. Encumbered assets are distinguished

from reserve assets that are pledged under securities

lending arrangements and repurchase agreements.

6.108 An example of pledged assets is collateral

used for third-party loans and third-party payments. If

these assets are encumbered, they should be excluded

from reserve assets. However, assets may be pledged

as collateral to provide guarantees in the event of

default by another entity, or for lines of credit, and

may not be encumbered until events occur to trigger

the pledge. Such assets can be included in reserve

assets until encumbered. Other examples of pledged

assets that are to be excluded from reserve assets

include (a) assets pledged by the monetary authorities

to investors as a condition for the investors to invest

in securities issued by domestic entities (such as cen-

tral government agencies), if such pledged assets are

considered encumbered; and (b) assets lent by the

monetary authorities to a third party that are not avail-

able until maturity.

6.109 The pledged assets should be excluded only to

the extent of the value of the pledge; in other words, if

the pledge is valued at 100, the maximum amount to be

excluded from reserve assets is 100.

6.110 In some circumstances, assets held as reserve

assets may be “frozen,” such as by a foreign govern-

ment within whose jurisdiction the assets are located,

restricting their availability. In such circumstances, the

reserve assets that are affected are to be reclassified to

the relevant functional category, such as “other invest-

ment” if bank deposits are “frozen.”

6.111 Foreign currency claims that are transferred

to the monetary authorities by other institutional units

in the reporting economy just prior to certain account-

ing or reporting dates, with accompanying reversals

of such transfers soon after those dates (commonly

known as “window dressing”), should not be counted

as reserve assets.

Chapter 6 g Functional Categories

118

6.112 Net creditor positions in regional payments

arrangements that involve reciprocal lines of credit—a

characteristic of loan arrangements (see paragraph

5.51)—are classified as loans in other investment

and

are not included in reserve assets, except in circumstances

in which they are considered readily available to the mon-

etary authorities to meet a balance of payments need

and other related purposes. Net asset balances in bilat-

eral payments agreements have much in common with

other types of tied loans that authorities make to stimulate

exports, provide aid, or further other aspects of govern-

ment policy. Such bilateral payments agreement balances

are therefore conventionally excluded from reserve assets.

Also, owing to their nature, working balances of govern-

ment agencies are not included in reserve assets.

j. Other issues

6.113 Assets owned by the monetary authorities that

do not meet the criteria to be classified as reserve assets

are classified in the financial account under the appro-

priate instrument and functional category.

6.114 Currency unions and economies that adopt

another currency (such as dollarization and euroiza-

tion) raise specific issues for the concept of reserve

assets. These issues are discussed in Appendix 3.

2. Reserve-related liabilities

6.115 Reserve-related liabilities are defined as

foreign currency liabilities of the monetary authori-

ties that can be considered as direct claims by

nonresidents on the reserve assets of an economy.

Though not identified as such in the standard compo-

nents of the balance of payments and IIP, where they

are included in other categories (notably portfolio

Net debtor positions in such arrangements are also classified

as loans.

and other investment), reserve-related liabilities are

important to monitor. Reserve-related liabilities can

be presented by instrument and maturity (see Appen-

dix 9, Table V). Short-term reserve-related liabilities

on a remaining maturity basis are a memorandum

item to the IIP (as shown in Box 6.5). Some econo-

mies may choose to present the full table of foreign

currency assets and liabilities in Appendix 9, Table

V, separately identifying the short-term reserve-

related liabilities.

6.116 The value of the SDR allocation and loans

from the IMF to monetary authorities are included

in reserve-related liabilities. Other liabilities covered

include:

• Foreign currency loan and deposit liabilities of

the monetary authorities to nonresidents, includ-

ing those arising from foreign currency swaps with

other central banks, loans from BIS, and from

other deposit-takers;

• Foreign currency loan liabilities to nonresidents

associated with securities that the monetary

authorities have repoed out;

• Foreign currency securities issued by the monetary

authorities and owed to nonresidents; and

• Other foreign currency liabilities to nonresidents,

including foreign currency accounts payable and

financial derivatives—recorded on a net basis (lia-

bilities less assets)—settled in foreign currency

and associated with, but not within the definition

of, reserve assets (see paragraph 6.91). Such finan-

cial derivatives could include those that are not

sufficiently liquid or are not integral to the valua-

tion of reserves assets.

Liabilities to residents and liabilities that are both

denominated and settled in domestic currency are not

included.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

119

CHAPTER

International Investment Position

A. Concepts and Coverage

References:

2008 SNA, Chapter 13, The Balance Sheet.

IMF, Monetary and Financial Statistics Manual 2000.

IMF, International Investment Position: A Guide to

Data Sources.

IMF and others, External Debt Statistics: Guide for

Compilers and Users.

7.1 The international investment position (IIP) is a

statistical statement that shows at a point in time the

value and composition of

(a) financial assets of residents of an economy that

are claims on nonresidents and gold bullion held

as reserve assets, and

(b) liabilities of residents of an economy to non-

residents.

The difference between an economy’s external finan-

cial assets and liabilities is the economy’s net IIP, which

may be positive or negative.

7.2 The IIP is a subset of the national balance sheet.

The net IIP plus the value of nonfinancial assets equals

the net worth of the economy, which is the balancing

item of the national balance sheet. The classification of

nonfinancial assets is shown in Table 5.1 and linked to

corresponding income items in Table 5.2.

7.3 The IIP relates to a point in time, usually at the

beginning of the period (opening value) or end of the

period (closing value).

7.4 This chapter explains the coverage, presentation,

classification, timing, and valuation issues for the IIP,

and its relationship to transactions accounts and other

changes in assets and liabilities account.

7.5 The content of the IIP can be presented in sev-

eral different ways. Table 7.1 shows an overview of

the structure and components of the IIP by functional

category and broad financial instruments. This presen-

tation emphasizes how changes in the IIP result from

financial account transactions (discussed in Chapter

8) and other changes in financial assets and liabilities

(discussed in Chapter 9) during a period.

7.6 Table 7.2 provides another presentation that

emphasizes the breakdown of the IIP by institutional

sector and functional category. Institutional sectors in

the IIP refer to the resident sector, not the counterpart

sector (i.e., the sector of the domestic holder or lender

for assets, and the sector of the domestic issuer or bor-

rower for liabilities).

Additional detail

7.7 This edition of the Manual reflects the increasing

emphasis on the IIP in international accounts compila-

tion and analysis. There has been growing recognition

of the role of balance sheet analysis in understand-

ing sustainability and vulnerability, including currency

mismatches, the implications of sector and interest

rate composition of debt, and the effect of the matu-

rity structure on liquidity. IIP data are useful for other

purposes, such as measuring rates of return, analyzing

economic structure, and studying the relationship to

domestic sources of financing.

7.8 Consequently, a currency composition and

remaining maturity analysis of the IIP are encouraged

as additional information. To meet this goal, memoran-

dum and supplementary tables have been introduced in

Appendix 9, and are shown after the standard compo-

nents. These tables provide a presentation of currency

composition of assets and liabilities by sector with a

distribution by principal foreign currencies, including

the U.S. dollar, euro, yen, and others, together with a

breakdown by original maturity. The tables also pro-

vide information on the remaining maturity of long-

term debt liabilities, with a breakdown by sector. These

tables are consistent with the standard components of

the IIP and with the presentation adopted in External

Debt Statistics: Guide for Compilers and Users.

120

For additional information

7.9 Several other guides provide specialized guid-

ance on particular aspects of the IIP and related statis-

tics, namely:

• BIS, Guide to the International Financial Statis-

tics (BISPaperNo.14,February2003);

• IMF, Coordinated Direct Investment Survey

Guide;

• IMF, Coordinated Portfolio Investment Survey

Guide;

• IMF and others, External Debt Statistics: Guide

for Compilers and Users;

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 7.1. Integrated International Investment Position Statement

(Including functional categories, instruments, and link to financial and other changes accounts)

Other changes in financial

assets and liabilities account

_____________________________

Financial

Changes in position due to:

_____________________________

account

Other Other

Beginning __________ changes Exchange price End of

of period IIP Transactions in volume rate changes changes period IIP

Assets

By functional category

Direct investment

Portfolio investment

Financial derivatives (other than reserves) and ESOs

Other investment

Reserve assets

By instrument

Equity and investment fund share/units

Debt instruments

Special drawing rights

Currency and deposits

Debt securities

Loans

Insurance, pension, standardized guarantee schemes

Other accounts receivable/payable

Other financial assets and liabilities

Monetary gold

Financial derivatives and ESOs

Total assets

________________________________________________________________________________________________________________

Liabilities

By functional category

Direct investment

Portfolio investment

Financial derivatives (other than reserves) and ESOs

Other investment

By instrument

Equity and investment fund share/units

Debt instruments

Special drawing rights

Currency and deposits

Debt securities

Loans

Insurance, pension, standardized guarantee schemes

Other accounts receivable/payable

Other financial assets and liabilities

Financial derivatives and ESOs

Total liabilities

________________________________________________________________________________________________________________

Net IIP

Note: This table is expository; for Standard Components, see Appendix 9.

ESO = employee stock option; IIP = international investment position.

121

• IMF, International Investment Position: A Guide

to Data Sources;

• IMF, International Reserves and Foreign Currency

Liquidity: Guidelines for a Data Template; and

• OECD, OECD Benchmark Definition of Foreign

Direct Investment.

These guides are based on the same core principles,

with additional elements including more detail, alter-

native valuations, discussion of implementation issues,

and additional items, such as contingencies, guaran-

tees, and other off-balance-sheet items.

1. Definition of economic assets

Reference:

2008 SNA, Chapter 10, The Capital Account.

7.10 The IIP covers the subset of financial assets

and liabilities that have an international character. In

most cases, the international character of a financial

asset or liability arises because, of the two parties, one

is a resident and the other is nonresident. The gold bul-

lion component of monetary gold is the only case of a

financial asset with no counterpart liability. The scope

and definitions of different types of economic assets is

given in paragraphs 5.2–5.14.

7.11 The concept of ownership of assets in the IIP

is based on economic ownership, as defined in para-

graph 3.41. The economic owner is the party who

has the risks and rewards of holding the asset. Own-

ership of financial assets can be complex in some

legal arrangements, for example, the lessor under a

financial lease has the legal title, while the lessee

has most of the risks and benefits of ownership. (For

further details on financial leases, see paragraphs

5.56–5.59 and 7.57.)

2. Classification

7.12 Possible dimensions for the classification of the

IIP are:

(a) Functional category—direct investment, port-

folio investment, financial derivatives (other

than reserves) and ESOs, other investment, and

reserve assets, as defined in Chapter 6;

(b) Financial instrument—according to the broad

groupings (equity and investment fund shares,

debt instruments, and other financial assets and

Chapter 7 g International Investment Position

Table 7.2. Overview of the International Investment Position

(With resident institutional sector breakdown)

Assets Liabilities

___________________________________________________ ___________________________________________________

Households Households

Total and General Financial Nonfinancial Nonfinancial Financial General and Total

economy NPISHs government corporations corporations corporations corporations government NPISHs economy

Direct investment

Portfolio investment

Financial derivatives

(other than

reserves) and

employee

stock options

Other investment

Reserve assets

Total assets/liabilities

Net IIP

Note: This table is expository; for Standard Components, see Appendix 9.

IIP = international investment position; NPISHs = nonprofit institution serving households.

Memorandum items:

Fair value of loan assets (or nominal value of nonperforming loan assets)

Short-term reserve-related liabilities

Currency composition

122

liabilities) or the full breakdown, as defined in

Chapter 5;

central bank, deposit-taking corporations except

the central bank, general government, and other

sectors; other sectors is split between other

financial corporations and the remaining non-

financial subsectors (nonfinancial corporations,

households, and NPISHs), as defined in Chap-

ter 4, Section D. Additional subsectoring of the

financial and nonfinancial sectors may be under-

taken when analytically relevant;

(d) Maturity (in the case of debt instruments)—short-

term or long-term, by original and remaining

maturity, as defined in paragraphs 5.103–5.105;

(e) Currency—domestic or foreign currency, as

defined in paragraphs 3.95–3.97 for debt and

3.100 for equity; and (in the case of financial

derivatives) to receive or pay foreign currency,

as defined in paragraph 5.108; and

(f) Interest rate structure (in the case of debt instru-

ments)—variable- or fixed-rate, as defined in

paragraphs 5.109–5.114.

Sector, maturity, and currency are relevant to studies of

sustainability, vulnerability, and exposure to exchange

rate changes (after taking into account any hedging).

The remaining maturity is important to the debtor, but

it is less relevant for the creditor with liquid instru-

ments, in that the assets can be sold before maturity.

In addition to the institutional sector of the resident

party, as in (c), the institutional sector of nonresident

counterparty may also be of interest in some cases (e.g.,

governments may wish to distinguish between other

governments, international organizations, and other

sources of their borrowing).

7.13 A consistent classification should be used as far

as possible for IIP and other related accounts. The stock

of assets and liabilities, financial account transactions,

and other changes in financial assets and liabilities all

relate to the same instruments, so a consistent clas-

sification is necessary for a comprehensive analysis

of relationships between them. Similarly, a consistent

level of detail for income (and possibly holding gains

or losses, for some purposes) and positions allows the

estimation of rates of return. Although the international

accounts functional classification of assets and liabili-

ties is not used in the SNA or financial statistics, the

instrument and institutional sector classifications are

the same. The inclusion of instrument and sector detail

in IIP data facilitates understanding and checking the

linkages with other data sets such as monetary and

financial statistics.

B. Direct Investment

7.14 Direct investment is defined in paragraphs

6.8–6.24. Other aspects of direct investment are cov-

ered in paragraphs 6.25–6.41. The directional principle

presentation of direct investment can be used in the IIP

on a supplementary basis, as discussed in paragraphs

6.42–6.45 and Box 6.4. Other specific issues concern-

ing direct investment in the IIP are discussed in the

following paragraphs.

1. Valuation of unlisted and other equity

References:

OECD, OECD Benchmark Definition of Foreign Direct

Investment, fourth edition.

IMF, Coordinated Direct Investment Survey Guide.

7.15 Shares and other equity can be readily valued

at their current prices when they are regularly traded on

stock exchanges or other financial markets. However,

there may be no observable market prices for positions

in equity not listed on a stock exchange (i.e., items (b)

and (c) in paragraph 5.24). This situation often arises for

direct investment enterprises, private equity, equity in

unlisted and delisted companies, listed but illiquid com-

panies, joint ventures, and unincorporated enterprises.

7.16 When actual market values are not available, an

estimate is required. Alternative methods of approxi-

mating market value of shareholders’ equity in a direct

investment enterprise include the following:

(a) Recent transaction price. Unlisted instruments

may trade from time to time, and recent prices,

within the past year, at which they were traded

may be used. Recent prices are a good indica-

tor of current market values to the extent that

conditions are unchanged. This method can

be used as long as there has been no mate-

rial change in the corporation’s position since

the transaction date. Recent transaction prices

become increasingly misleading as time passes

and conditions change.

These are not ranked according to preference, and each would

need to be assessed according to the circumstances and the plausi-

bility of results.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

123

(b) Net asset value. Appraisals of untraded equity

may be conducted by knowledgeable manage-

ment or directors of the enterprise, or provided

by independent auditors to obtain total assets

at current value less total liabilities (excluding

equity) at market value. Valuations should be

recent (within the past year) and should prefer-

ably include intangible assets.

present value of unlisted equity can be estimated

by discounting the forecast future profits. At its

simplest, this method can be approximated by

applying a market or industry price-to-earnings

ratio to the (smoothed) recent past earnings of

the unlisted enterprise to calculate a price.

This

method is most appropriate in which there is a

paucity of balance sheet information but earn-

ings data are more readily available.

(d) Market capitalization method. Book values

reported by enterprises can be adjusted at an

aggregate level by the statistical compiler. For

untraded equity, information on “own funds at

book value” (see paragraph 7.16(e)) can be col-

lected from enterprises, and then adjusted with

ratios based on suitable price indicators, such as

the ratio of market capitalization to book value

for listed companies in the same economy with

similar operations. Alternatively, assets that

enterprises carry at cost (such as land, plant,

equipment, and inventories) can be revalued to

current period prices using suitable asset price

indices.

(e) Own funds at book value. This method for valuing

equity uses the value of the enterprise recorded

in the books of the direct investment enterprise,

as the sum of (a) paid-up capital (excluding

any shares on issue that the enterprise holds in

itself and including share premium accounts);

(b) all types of reserves identified as equity in

the enterprise’s balance sheet (including invest-

ment grants when accounting guidelines con-

sider them company reserves); (c) cumulated

reinvested earnings; and (d) holding gains or

losses included in own funds in the accounts,

whether as revaluation reserves or profits or

losses. The more frequent the revaluation of

The earnings measure and earnings in the price-to-earnings ratio

should be defined in the same way. It is preferable that measures of

earnings and ratios exclude one-off factors, such as asset sales, as

such factors could distort the calculation.

assets and liabilities, the closer the approxima-

tion to market values. Data that are not revalued

for several years may be a poor reflection of

market values.

(f) Apportioning global value. The current market

value of the global enterprise group can be based

on the market price of its shares on the exchange on

which its equity is traded, if it is a listed company.

Where an appropriate indicator may be identified

(e.g., sales, net income, assets, or employment), the

global value may be apportioned to each economy

in which it has direct investment enterprises, on

the basis of that indicator, by making the assump-

tion that the ratio of net market value to sales,

net income, assets, or employment is a constant

throughout the transnational enterprise group.

(Each indicator could yield significantly different

results from the others.)

7.17 In cases in which none of the above meth-

ods are feasible, less suitable data may need to be

used as data inputs. For example, cumulated flows

or a previous balance sheet adjusted by subsequent

flows may be the only sources available. Because

these sources use the prices of previous periods,

they should be adjusted for subsequent price devel-

opments, for example, by using aggregate share price

or asset price indexes and by taking into account

exchange rate movements, where relevant. The use

of unadjusted summing of past transactions is not

recommended. Equity represents owners’ funds.

The means through which equity can be generated

may take various forms, such as share issues, equity

injections without any commensurate issue of shares

(sometimes called “contributed surplus” or “capital

contributions”), share premiums, accumulated rein-

vested earnings, or revaluation. Although these cat-

egories should be taken into account when cumulated

flows are used to measure the value of equity, the

different categories are all components of equity and

need not be identified separately.

7.18 If the current market price is not directly

observable, the decision about the methods to adopt

should take into account the availability of information

as well as judgments as to which available method best

approximates market values. Different methods may

be suitable for different circumstances and a standard

ranking of the alternative methods is not proposed for

valuing instruments when current market prices are not

directly observable. Compilers should be transparent

and should state clearly the method(s) used. Methods

Chapter 7 g International Investment Position

124

for valuation of direct investment equity positions are

discussed in more detail in the OECD Benchmark Defi-

nition of Foreign Direct Investment. These methods

may also be useful for valuation of other unlisted equity

securities and other equity.

7.19 The value of a direct investment enterprise’s

nonequity liabilities may exceed its assets—this situ-

ation can occur most commonly in the early or final

stages of its existence.

2. Entities that borrow on behalf of

their affiliates

Reference:

OECD, OECD Benchmark Definition of Foreign Direct

Investment, fourth edition.

7.20 An entity resident in one economy may bor-

row funds on behalf of affiliated enterprises in one

or more other economies. The affiliates may include

holding companies, parent companies, direct invest-

ment enterprises, and fellow enterprises. Examples

include SPEs, sometimes called conduits, which may

be used to undertake the borrowing, or an entity with

substantial activities of its own may do the borrowing.

In these cases, the liability is often guaranteed by the

parent or a fellow enterprise. Alternatively, the affili-

ated enterprise may commit future revenue streams.

Regulatory or taxation benefits may be factors behind

such arrangements. In these cases, the creditor records

a claim on the entity that directly undertakes the bor-

rowing. That is, the creditor does not show its claim

as being on the enterprise that ultimately receives the

funds or makes the guarantee.

7.21 When funds raised are passed on by the bor-

rowing entity to an affiliated enterprise, the initial bor-

rowing entity has a claim on the affiliated enterprise.

This arrangement can be assumed to give rise to a

loan, unless there is evidence that it is a debt security

or equity. This borrowing can arise for pass-through

funds (discussed in paragraphs 6.33–6.34), conduits

(paragraph 4.86), and SPEs and similar legal structures

(paragraph 4.87). In many cases, such investment is

reverse investment or investment between fellow enter-

prises, as discussed in paragraphs 6.39–6.41 and 6.43,

respectively.

7.22 Special rules apply to an entity owned or con-

trolled by general government when that entity is resi-

dent in another territory and is used for fiscal purposes.

These rules are discussed in paragraphs 8.24–8.26.

3. Quasi-corporations

7.23 The identification of institutional units for

branches, notional resident units for ownership of land

and natural resources, some joint ventures, and prepara-

tory operations prior to incorporation and other quasi-

corporations is discussed in paragraphs 4.26–4.49. The

effect of the identification of such institutional units is

that owners are shown as having a claim on the institu-

tional unit, rather than as directly owning the various

individual assets.

7.24 Owners’ claims on quasi-corporations that are

resident in other economies are usually classified as

direct investment. In the rare cases in which the propor-

tion of equity in land or a joint venture is less than 10

percent, the claim is classified as other investment—

other equity.

7.25 Equity in quasi-corporations should be valued

as equal to the market value of the quasi-corpora-

tions’ assets less the market value of liabilities other

than equity to both residents and nonresidents. (This

method would mean that quasi-corporations have no

residual net worth.) Alternatively, equity in quasi-cor-

porations may be valued using the same methods as

used for direct investment equity, discussed in para-

graphs 7.16–7.17.

C. Portfolio Investment

1. Equity with dividends declared payable but

not yet paid

7.26 In market quotations, dividends declared pay-

able but not yet paid are taken into account in the

share price. After the point of time when ownership

of shares is determined for the purposes of payment of

dividends, the shares go “ex dividend.” (Ex dividend

is the point at which the shares no longer carry the

right to the most recently declared dividend; so the

dividend becomes separated from the share and the

price falls to reflect that.) After that time, dividends

declared should be included in accounts receivable/

payable until payment is made.

2. Debt instruments with accrued interest

7.27 Accrued interest not yet paid on debt securi-

ties should be included in the outstanding amount of

the financial asset or liability. Accrued interest not

yet paid includes interest that has accrued and that

is not yet due for payment or that is due for payment

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

125

but in arrears. Accrued interest not yet paid should

not be reported separately (such as in other accounts

receivable/payable). In market quotations, a value

including interest that has accrued but is not yet

payable is called the “dirty price” and is suitable for

valuation of items in the IIP (provided interest due

and not yet paid is also included). In contrast, the

“clean price” requires accrued interest not yet paid

to be added for use in the IIP. Methods of calculating

the accrual of interest are discussed in paragraphs

11.48–11.76.

3. Short positions

7.28 Short positions occur when an institutional

unit sells securities for which it is not the economic

owner. For example, a security subject to a repurchase

agreement may be on-sold by the security-receiving

party (see paragraphs 5.52–5.54 on repurchase agree-

ments). Delivery to the purchaser is made through

the use of a borrowed security. The party with the

short position records a negative value for the hold-

ing of the asset. The short position is shown as a

negative asset, rather than a liability. (Short positions

have been included on the research agenda for further

work; see paragraph 1.43.)

4. Unlisted debt and equity securities

7.29 Positions in unlisted portfolio investment

equity securities without an observable market price

may be valued using methods discussed in paragraphs

7.16–7.17 for direct investment equity. Some listed

debt securities also may have no quoted prices, for

example, if the market is illiquid or the security ceases

trading due to suspension, default, or bankruptcy. A

market price can be estimated for such debt securi-

ties by discounting future cash flows using a discount

rate that takes into account the risk of default (present

value approach).

5. Debt securities at nominal values

7.30 Whereas the basic valuation method for debt

securities is the market value, the nominal value is

encouraged as a supplementary item. External Debt

Statistics: Guide for Compilers and Users recom-

mends that both valuations be used. The nominal

value of debt securities is a useful measure of value

from the viewpoint of the debtor, because at any

moment, it is the amount that the debtor owes to the

creditors.

6. Zero-coupon and deep-discount bonds

7.31 A zero-coupon bond has a single payment at matu-

rity and no coupon payments. The bond is sold at a dis-

count from face (or par) value, and at maturity, an amount

equal to face value is repaid. The difference between the

discounted issue price and the face value reflects the

market rate of interest at the time of issue—the longer the

maturity of the bond and the higher the market interest

rate, the greater the discount against the face value. The

accrual of interest on zero-coupon bonds is discussed in

paragraph 11.55 and is illustrated in Box 11.2.

7.32 A deep-discount bond is a bond that has a low

coupon compared with the market rate of interest, so

that it is issued at a considerable discount to face value.

Like the zero-coupon bond, the difference between the

issue price and face value accrues as interest over the life

of the bond, and the market value of the bond increases

as the interest accrues. The accrual of interest on deep-

discount bonds is discussed in paragraph 11.56.

D. Financial Derivatives (Other Than

Reserves) and Employee Stock Options

7.33 Financial derivatives and ESOs are valued at

market prices prevailing on balance sheet recording

dates. If market price data are unavailable, other fair

value methods (such as option models or present val-

ues) may be used to value them. Compilers are gener-

ally constrained to use the parties’ own accounts.

7.34 For an option (including warrants), the

market value recorded is the current value of the

option—that is, the prevailing market price. In the

absence of a prevailing market price, the estimated

cost of buying out the rights of the option holder

should be used. The counterpart liability is attribut-

able, by convention, to the writer of the option and

is valued at the current cost of buying out the rights

of the option holder. For a warrant, the counterpart

liability of the issuer is the current outlay required

to buy out the exercise rights of the holder. A for-

ward-type contract is recorded at market value; when

payments are effected, a transaction is recorded and

the change in the value of the asset and associated

liability is reflected in the position (see paragraph

5.81 for discussion of offsetability).

7.35 A key characteristic of many derivative con-

tracts is that the counterparties make commitments

to transact, in the future and at agreed-on prices, in

underlying items. The present value (or market price)

Chapter 7 g International Investment Position

126

of a financial derivative is derived from the difference

between the agreed-on contract price of an underlying

item and the prevailing market price (or the market

price expected to prevail), appropriately discounted,

for that item. For options, the price depends on the

potential price volatility of the underlying instrument,

the time to maturity, interest rates, and the difference

between the strike price and the market price of the

underlying item. The value of a swap contract is derived

from the difference, appropriately discounted, between

expected gross receipts and gross payments.

7.36 The market value of a forward-type contract can

switch from an asset position to a liability position (and

vice versa) between reporting dates. The switch is a result

of movement in the price of the underlying item(s) from

which the value of the forward-type contract is derived.

When a switch in position occurs (and there are no settle-

ment payments), the market value of the gross asset or

liability position at the close of the previous accounting

period is revalued to zero, and the gross liability or asset

position is revalued from zero to the market value at the

end of the present accounting period.

7.37 Gross asset and gross liability data should be

compiled by summing, respectively, the values of all

individual contracts in asset positions and the values of

all individual contracts in liability positions. Financial

derivatives, by preference, should be reported sepa-

rately for both assets and liabilities, as discussed in

paragraphs 3.119 and 6.60. Notional values of financial

derivatives are presented according to the formats shown

in Appendix 9, Tables I–III. The notional value (some-

times called notional amount or nominal amount) of a

financial derivative is the amount underlying a finan-

cial derivative contract that is necessary for calculat-

ing payments or receipts on the contract. This amount

may or may not be exchanged. The notional values are

useful for analysis because they provide information

about the risk exposure and assist in understanding the

link between financial derivatives and the underlying

to which they relate.

7.38 Cumulation of transactions should never be used

to estimate financial derivative positions. Transactions

relate largely to those in options and to settlements. Set-

tlements eliminate positions, while the value of deriva-

tives positions emerges largely from revaluation.

7.39 ESOs are valued consistently with the cumu-

lated compensation of employees until the vesting date

(see paragraphs 11.20–11.21); thereafter, they are val-

ued at market prices (see paragraph 9.30). ESOs can be

measured from a market value of equivalent options or

according to an options-pricing model, such as Black-

Scholes. International accounting standards give guid-

ance on methods, and recording in the international

accounts normally will follow business accounts.

E. Other Investment

1. Valuation of nonnegotiable instruments

a. Nominal value

7.40 Nonnegotiable instruments include loans,

deposits, and other accounts receivable/payable. The

primary valuation for positions in these instruments

is nominal value, which is defined in paragraph 3.88.

In the case of other equity included in other invest-

ment, valuation methods for unlisted direct and port-

folio investment equity may be used, as discussed in

paragraphs 7.16–7.17 and 7.25.

7.41 Accrued interest not yet paid should be included

in the outstanding amount of the financial asset or liabil-

ity, rather than being classified separately (such as in

other accounts receivable/payable). Accrued interest not

yet paid also includes FISIM accrued and not yet paid.

7.42 Nominal values are not adjusted for expected

losses or for changes in interest rates. The market value

may differ from the nominal value primarily due to

changes in market interest rates and the possibility

that some liabilities may not be repaid. The possible

divergence between nominal and market values arises

for loans, but it can also arise for deposits and other

accounts receivable/payable.

7.43 The use of nominal values for some nonnego-

tiable instruments, instead of market-equivalent values, in

the IIP is partly influenced by pragmatic concerns about

data availability and also by consistency in reporting by

debtors and creditors. Nominal valuation is also useful in

its own right, however, because it shows actual legal liabil-

ity and the starting point of creditor recovery behavior.

7.44 The nominal value can be reduced by a write-

off, restructuring, or debt forgiveness:

• Liabilities are canceled or written off, in part or

in full, by the creditor as uncollectible, usually

because of the bankruptcy or liquidation of the

debtor, as discussed in paragraphs 9.8–9.11.

• In a formal debt reorganization, the old liability is

regarded as being extinguished and a new liability

created. (See Appendix 2, Debt Reorganization

and Related Transactions.)

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

127

b. Additional data on loans and other

nonnegotiable instruments

7.45 While nominal value is the primary valuation

method for nonnegotiable instruments, it provides an

incomplete view of the financial position of the credi-

tor, particularly in cases in which the instruments are

impaired. Consequently, additional items are included

for loans to give additional information. The possible

items are:

(a) fair value,

(b) nonperforming loans, and

These items are discussed in paragraphs 7.48–7.53. Data

on debt in arrears are discussed in paragraphs 5.99–5.102.

These are alternative indicators that can be used to assess

the effect of impairment and other variations between

nominal values and market-equivalent values. Fair value

expresses a market-equivalent valuation of the position.

Nonperforming loans indicate the value of the loans that

are impaired, and loan loss (bad debt) provisions show

amounts that are deducted from the nominal value to

account for expected losses in business accounts.

7.46 The fair value of loans is shown as a memo-

randum item for creditors. If fair value data for loans

are not available, the nominal value of nonperform-

ing loans should be provided as a memorandum item.

These memorandum items are included for assets but

not liabilities. If fair value data are available, nonper-

forming loans is a supplementary item. Data on loan

loss (or bad debt) provisions and arrears also may be

provided on a supplementary basis.

7.47 The same issue of impairment arises for deposits

and trade credit. For example, an insolvent bank may have

closed its doors, so that its deposits may be worth less than

their nominal value, so alternative measures for deposits

and trade credit may be prepared, where relevant.

c. Fair value

Reference:

International Financial Reporting Standards, Interna-

tional Accounting Standard 39 Financial Instru-

ments: Recognition and Measurement.

7.48 Fair value is defined as the amount for which

an asset could be exchanged, or a liability settled,

between knowledgeable, willing parties in an arm’s-

length transaction. That is, fair value represents a

market-equivalent value, namely, an estimate of what

could have been realized if the creditor had sold the

loan. It is the preferred indicator of the effect of loan

impairment as it represents an attempt to measure the

realizable value. The fair value of loan assets is shown

as a memorandum item for assets, where available.

7.49 The calculation of fair value takes into account

expected loan losses. In addition, in the case of fixed-rate

loans, it takes into account changes in market interest

rates. In practice, the availability of fair value estimates

of loans is limited by business accounting practice. A

recent transaction in the loan or one of similar term,

credit risk, and so on provides a good guide to the fair

value. As the time since the transaction becomes longer

and conditions change, such transactions values become

historic prices and not market-equivalent values.

d. Nonperforming loans

7.50 Nonperforming loans are defined as those for

which:

(a) payments of principal and interest are past due

by three months (90 days) or more, or

(b) interest payments equal to three months’ (90

days’) interest or more have been capitalized

(reinvested into the principal amount) or pay-

ment has been delayed by agreement,

forming even in the absence of a 90-day past

due payment, such as when the debtor files for

bankruptcy.

7.51 Nonperforming loans are recorded at nomi-

nal value, which allows them to be compared with the

total value of loans at nominal value. The value should

include accrued interest not yet paid. Loans continue

to be included in nonperforming loans until written

off (see paragraphs 9.8–9.11), forgiven (see paragraphs

13.22–13.23), reorganized (see paragraph 9.29 and

Appendix 2), or they become performing loans.

7.52 The three-month (or 90-day) criterion is the

time period most widely used, although other periods

are used. When the standard definition of nonperform-

ing loans is not used, other definitions based on regula-

tory frameworks are acceptable. Because identification

of nonperforming loans is a bank regulatory concept, it

may not be used widely by other creditors. The nominal

value of nonperforming loan assets is a memorandum

If the loan is rescheduled, it is classified as a new instrument (see

paragraph 7.53). Rescheduling interest arrears is not sufficient for

the loan to have been considered rescheduled, see paragraph A2.12.

See Financial Soundness Indicators Compilation Guide, para-

graph 4.84.

Chapter 7 g International Investment Position

128

item when loan assets at fair value are not available;

otherwise, it is a supplementary item.

7.53 Information on replacement loans may be pro-

vided in addition to nonperforming loans. Replacement

loans include loans arising from rescheduling or refi-

nancing the original loan and loans provided to make

payments on the original loan. Although these loans

may be granted on “easier” than normal commercial

terms, provided the terms and conditions of the replace-

ment loan are complied with by the debtor, and subject

to national supervisory guidance, the replacement loan

is not classified as nonperforming.

e. Loan loss provisions

7.54 Loan loss provisions, also called bad debt provi-

sions, are internal accounting entries made by creditors to

take into account possible loan losses. These provisions

may be used as an indicator of the difference between

nominal values and fair values. International accounting

standards allow for various approaches to derive these

provisions, so procedures may differ between enterprises

and between economies. Loan loss provisions may vary

from the loss of value of nonperforming loans, for exam-

ple, because there is adequate collateral for a nonper-

forming loan, or there is an expectation that a proportion

of performing loans will default later.

f. Deposits and other accounts

receivable/payable

7.55 Positions in deposits and other accounts

receivable/payable give rise to the same issues of

nominal and fair values as loans. For example, depos-

its may be held at a bank in liquidation, or trade

credit liabilities may include those owed by insolvent

debtors. These instruments should be recorded at

their nominal value. However, if there is a significant

difference between the nominal and fair value, indi-

cators similar to those for loans should be shown as

supplementary items.

g. Metadata on indicators of impairment

7.56 In view of the range of options concerning mea-

sures of impairment of loans and other nonnegotiable

instruments, it is particularly important that metadata

provide information on the definitions and sources

used. As accounting procedures become more widely

standardized, more prescriptive guidance may be given

in statistical manuals for the adoption of particular

indicators of impairment of loans.

2. Financial leases

7.57 A financial lease is defined in paragraph 5.56.

The treatment of financial leases is designed to capture

the economic reality of the arrangements. It moves away

from the legal form by treating goods under a financial

lease as if they were purchased and owned by the user.

The financial lease is shown as a loan from the lessor

to the lessee that is used to finance the acquisition of a

fixed asset by the lessee. Financial leases affect goods,

services, income, financial transactions, and positions.

3. Recording of positions associated with

securities repurchase agreements and other

reverse transactions

7.58 Reverse transactions are arrangements that

involve a change of legal ownership of securities or

gold with a commitment to repurchase the same or

similar securities or gold either on a specified date or

with open maturity. They include securities repurchase

agreements, gold swaps, securities lending, and gold

loans. The commitment to reverse the change in legal

ownership in the future at a fixed price means that the

original owner retains the risks and rewards of changes

in the price of the asset. Accordingly, there is consid-

ered to be no change of economic ownership of the

security or gold, so no transaction in that security or

gold is recorded, and ownership of the asset as shown

in the IIP is unchanged.

7.59 A reverse transaction may be with or without

the supply of cash. If cash is supplied, as in a repur-

chase agreement (repo or securities lending with cash

collateral), and in return the other party supplies secu-

rities, the arrangement is regarded as giving rise to a

loan or deposit. (The classification of the cash supplied

is discussed in paragraphs 5.52–5.54.) Analogously to

repos, a gold swap for cash is treated as being a loan

with the gold as collateral, and there is no change in the

economic ownership of the gold.

7.60 There may be problems in attributing secu-

rities ownership when using custodians as a data

source, because custodians may not know whether

securities being held are under a repurchase agree-

ment or not.

7.61 If a party that receives securities under a reverse

transaction on-sells the securities to a third party, then

it has a short position. The treatment of short positions

is discussed in paragraph 7.28. Fees payable to one of

the parties under a reverse transaction are discussed in

paragraphs 11.67–11.68.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

129

4. Overnight deposits

7.62 Overnight deposits (or sweep accounts) involve

funds that are moved back and forth overnight. In some

cases, these overnight accounts are held in another

economy. The funds are returned at the beginning of

the next working day and may then be moved back at

the close of business. Positions should be measured after

funds are moved at the end of the day. The calculation of

major statistical aggregates—including external asset and

liability positions and financial transactions—can differ

substantially depending on whether they are measured

before, or after, funds are moved. By measuring posi-

tions and transactions after the funds have been moved,

consistency is ensured between the measure of interest

flows and of positions. In addition, major data users are

interested in the size and location of these stocks and

flows for risk assessment and other purposes.

5. Insurance technical reserves, pension

and annuity entitlements, and standardized

guarantees reserves

7.63 These reserves include:

(a) prepayment of premiums and reserves for out-

standing claims for nonlife insurance (both

reported claims and for claims incurred and not

reported). Equalization reserves (explained fur-

ther in paragraph 5.64(b)) for events that have

occurred are included, whereas reserves for

events that have not occurred are excluded;

(b) entitlements of beneficiaries under life insurance

policies and pension schemes; and

7.64 Insurance technical reserves are regarded as

liabilities of the insurance companies and assets of the

policyholders and beneficiaries. For economies that are

major insurance service exporters or importers, cross-

border insurance reserves may be significant. For econo-

mies that are major sources or destinations of temporary

workers or that are sources or destinations for retirees

who change residence, life insurance and pension entitle-

ments may be important elements of the IIP. Insurance

technical reserves may be classified as direct investment

in the cases discussed in paragraph 6.27.

7.65 The nature of the pension entitlements liabilities

of the pension fund and the corresponding asset of the

beneficiaries depend on the nature of the pension plan:

(a) A defined contribution scheme is one in which

the benefits are defined exclusively in terms of

the level of the fund built up from the contri-

butions made over the employee’s working life

and the increases in value that result from the

investment of these funds by the manager of the

pension scheme. The entire risk of the scheme to

provide an adequate income in retirement is thus

borne by the employee. The liability of a defined

contribution fund, and the corresponding assets

of the beneficiaries, are equal to the current mar-

ket value of the assets of the fund, including any

claims on the employer. Defined contribution

plans are always funded.

(b) A defined benefit scheme is one in which the

benefits payable to the employee on retirement

are determined by the use of a formula, either

alone or as a minimum amount payable. The

liability of a defined benefit scheme, and the cor-

responding assets of the beneficiaries, are equal

to the present value of the promised benefits. In

defined benefit schemes, benefits to the policy-

holder are guaranteed, but the scheme may be

funded or unfunded.

7.66 The calculation of the value of pension entitle-

ments may be direct or actuarial. Obligations of unfunded

pension schemes are recognized as liabilities, based on

actuarial estimates of the accrued liability to benefi-

ciaries under the scheme. Potential payments by social

security schemes are not recognized as financial assets

or liabilities. (See paragraphs 5.66–5.67 for more detail

about pension entitlements as a financial instrument.)

7.67 Provisions for calls under standardized guar-

antees are calculated in a similar way as described for

nonlife insurance technical reserves. They are equal to

the present value of expected calls under outstanding

guarantees, net of any recoveries the guarantor expects

to receive from the defaulting parties.

7.68 To the extent that these reserves, entitlements,

and provisions are measured from the accounts of

insurance companies, pension schemes, and issuers

of standardized guarantees, they may need to be split

between liabilities to residents and nonresidents accord-

ing to a suitable indicator such as premiums payable.

The priority attached to the estimation of cross-border

These amounts may represent an overstatement of the assets and

liabilities. For example, financial institutions make 1,000 loans of

20 units each that are covered by standardized guarantees, of which

estimated claims are 200. The combined assets (and combined

liabilities) of all the parties involved would be shown as 20,200,

consisting of 20,000 loans and 200 in expected calls under the

guarantees, even though only a maximum of 20,000 could ever be

realized. The overstatement arises because the loans are recorded at

nominal value.

Chapter 7 g International Investment Position

130

proportions of insurance reserves depends on their sig-

nificance in each economy.

F. Reserves

7.69 At the appropriate reference dates, reserve

assets are valued in the main at current market

prices. Monetary gold is valued at the prevailing

market price, SDRs are valued at market rates calcu-

lated by the IMF, and deposits and loans are valued

at nominal values.

7.70 SDR holdings are a reserve asset, while the allo-

cation of SDRs to IMF members is shown as the incur-

rence of a liability by the recipient and included in other

investment. Therefore, for an economy that holds only its

original allocation, its reserve assets are increased by the

value of SDR holdings, but its net IIP is unchanged.

7.71 Reserve-related liabilities are shown as a mem-

orandum item to the IIP on a short-term (remaining

maturity) basis (see Appendix 9, Table V). They are

defined in paragraphs 6.115–6.116. A comprehensive

picture of foreign currency assets and liabilities of

monetary authorities and central government, includ-

ing positions with residents as well as nonresidents,

can be presented according to the format in Table V in

Appendix 9.

7.72 Positions with the IMF include reserve assets,

reserve-related liabilities, other investment, and

off-balance-sheet liabilities (these are elaborated in

Annex 7.1).

7.73 Some governments have large special pur-

pose government funds—usually known as sovereign

wealth funds—as discussed in paragraphs 6.93–6.98.

Some of these assets may be included in reserve

assets or possibly in other functional categories.

Where such a fund is significant, the special pur-

pose government fund’s foreign assets not included

in reserve assets can be shown separately as supple-

mentary items.

G. Off-Balance-Sheet Liabilities

7.74 As noted in paragraphs 5.10–5.14, some actual

and potential obligations are not recognized as liabilities

in the IIP. Examples include potential liabilities under

one-off guarantees, unfulfilled loan commitments, and

other explicit contingent liabilities (for further discus-

sion, see Chapter 9, Contingent Liabilities, of External

Debt Statistics: Guide for Compilers and Users). If such

obligations to nonresidents are significant, compilers

should provide supplementary data in terms of the maxi-

mum exposure loss by type of contingent liability.

Annex 7.1

Positions and Transactions with the IMF

Quotas

7.75 IMF member countries are assigned a quota on

joining the IMF. The subscription of the quota consists

of two components:

(a) Foreign exchange component. A member is

required to pay 25 percent of its quota in SDRs

or in foreign currencies acceptable to the IMF.

This 25 percent portion is a component of the

member’s reserve assets. In the balance of pay-

ments, subscribing this portion is shown as a

transaction involving a reduction in other reserve

assets (credit) offset by an increase in the reserve

tranche position in the IMF (debit).

(b) Domestic currency component. The other 75

percent of the quota is payable in the member’s

own currency at a designated depository, nor-

mally the member’s central bank. The payment

is made either in domestic currency (IMF No. 1

and No. 2 Accounts) or by issuance of a prom-

issory note (IMF Securities Account). The No.

1 Account is used for the IMF’s operational

transactions (e.g., purchases and repurchases),

whereas the No. 2 Account is used for the pay-

ment of local administrative expenses incurred

by the IMF in the member’s currency. The

promissory notes are encashable by the IMF

on demand. The domestic portion of the quota

payment is not recorded in the member’s bal-

ance of payments or in the IIP (see paragraph

6.85), except for the No. 2 account (see below).

No interest is payable on either the deposit

account or the note.

7.76 There are periodic reviews of the size of mem-

ber quotas. Recording transactions that reflect a change

in a member’s quota is the same as the recording that

takes place when the quota is initially paid.

Reserve position in the IMF

7.77 Reserve position in the IMF of a coun-

try equals the sum of the reserve tranche plus any

indebtedness of the IMF (under a loan agreement) in

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

131

the General Resources Account that is readily avail-

able to the member country (for further details, see

paragraph 6.85). The reserve tranche represents the

member’s unconditional drawing right on the IMF,

created by the foreign exchange portion of the quota

subscription, plus increases (decreases) through the

IMF’s sale (repurchase) of the members’ currency to

meet the demand for use of IMF resources by other

members in need of balance of payments financing. A

member’s reserve position in the IMF constitutes part

of its reserve assets in the IIP.

7.78 To use its reserve tranche in the IMF, a mem-

ber may purchase foreign exchange from the IMF

with its own currency, provided that it has a balance

of payments need. The domestic currency, equal to

the value of the foreign exchange, is paid into the

IMF’s No. 1 Account with the member’s central bank

or through the issuance to the IMF of a promissory

note recorded in the IMF’s Securities Account. The

transaction is recorded in the balance of payments as a

reduction in the member’s reserve tranche in the IMF,

which is offset by an increase in the member’s other

reserve assets.

Credit and loans from the IMF

7.79 A member may make use of IMF credit or

Poverty Reduction and Growth Facility (PRGF) loans

to acquire additional foreign exchange from the IMF.

Economically, the use of IMF credit and PRGF loans

results in the same outcome—that is, the member

entering into these agreements has access to foreign

exchange in return for agreeing to meet a set of con-

ditions. Both IMF credit and loans are classified as

loans under other investment, although the two types of

arrangements are executed in different ways:

• A PRGF loan results in the member borrowing for-

eign exchange with a commitment to repay. Such

loans do not affect the IMF No. 1 Account.

• When a member country uses IMF credit, it “pur-

chases” foreign exchange from the IMF in return

for its domestic currency. Use of IMF credit is

shown as the member’s liability (in SDRs) in the

balance of payments and IIP, whereas the sale

of domestic currency to the IMF in the No. 1

Account is not shown as a balance of payments

transaction or in the IIP. Liabilities under IMF

credit arrangements are extinguished when the

member uses foreign exchange to “repurchase” its

domestic currency.

7.80 For use of IMF credit, if the value of the mem-

ber’s domestic currency changes in relation to the SDR,

“maintenance of value payments” are made once a year

in the No. 1 Account in domestic currency to maintain a

constant SDR liability. Because the liability is denomi-

nated in SDRs, the maintenance of value payments are

not entered as transactions in the balance of payments.

7.81 A member may also extend credit or make loans

to the IMF that are not considered to be a part of the

Reserve position in the IMF. Such a situation arises, for

example, in the circumstance where a member’s claim

on the IMF is not immediately encashable at a time of

balance of payments need.

Remuneration

7.82 The IMF pays its members “remuneration”

quarterly on the basis of their reserve tranche posi-

tion, except for a small portion related to prior quota

payments in gold that are interest-free resources

to the IMF. This remuneration is classified on an

accrual basis as investment income–reserve assets–

interest (credit), which is offset by an increase in

reserve assets (debit).

IMF No. 2 Account

7.83 As discussed above, the IMF No. 2 Account is

used by the IMF for administrative payments. Unlike the

No. 1 Account, it is reflected in the balance of payments of

a member as a liability. Transactions involving the No. 2

Account are recorded as increases or decreases in this lia-

bility and are offset by the source of funds (in the case of

an increase) or the use of funds (in the case of a decrease).

For example, when the IMF transfers funds from the No.

1 Account to the No. 2 Account in a member economy,

the member’s balance of payments shows an increase in

its reserve tranche (debit). The increase reflects the reduc-

tion in IMF holdings of the member’s currency in the No.

1 Account and is offset by an increase in the member’s

other investment liabilities relating to currency and depos-

its (credit). When the IMF uses funds from the No. 2

Account to pay for the acquisition of goods and services,

the balance of payments of the member shows a reduction

in this account (debit) and an offset (credit) under govern-

ment goods and services n.i.e.

Special drawing rights

7.84 The SDR is an international reserve asset cre-

ated by the IMF in 1969. It is administered by the SDR

Department of the IMF, which is required by the IMF’s

Chapter 7 g International Investment Position

132

Articles of Agreement to keep its accounts strictly sepa-

rate from the General Resources Account. The SDR is

not a claim on the IMF. Rather, the membership of the

SDR Department incurs the asset or liability position.

Further information is covered in other chapters:

• SDRs are instruments as defined in paragraphs

5.34–5.35.

• SDR allocations received by a country are

reported as liabilities under other investment

(paragraph 6.61) and reserve-related liabilities

(paragraph 6.116).

• SDR holdings are classified as reserve assets (para-

graph 6.84).

Further information on IMF operations

For more information on IMF operations, see the

IMF’s Financial Organization and Operations of the

IMF, Pamphlet Series No. 45.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

133

CHAPTER

Financial Account

A. Concepts and Coverage

Reference:

2008 SNA, Chapter 11, The Financial Account.

8.1 The financial account records transactions that

involve financial assets and liabilities and that take

place between residents and nonresidents. The finan-

cial account indicates the functional categories, sectors,

instruments, and maturities used for net international

financing transactions. The financial account is clas-

sified according to the instrument and functional cat-

egories, as discussed in Chapters 5 and 6, respectively.

Table 8.1 shows some main headings in the financial

account. The left-hand column of Table 8.1 shows the

net acquisition of financial assets and the right-hand

column shows the net incurrence of liabilities. In the

presentation in Table 8.1, assets are shown before lia-

bilities, in accord with the order used in the IIP and

general practice. (However, if the double-entry record-

ing for the balance of payments as a whole needs to be

emphasized, the liabilities could be shown in the first

column. That presentation would be consistent with

corresponding entries being on opposite sides of the

accounts—e.g., a current account credit usually has an

increase in financial assets or reduction in liabilities as

its corresponding entry.)

8.2 Entries in the financial account can be corre-

sponding entries to goods, services, income, capital

account, or other financial account entries. For exam-

ple, the corresponding entry for an export of goods is

usually an increase in financial assets, such as currency

and deposits or trade credit. Alternatively, a transaction

may involve two financial account entries. Sometimes,

the financial account transaction involves the exchange

of one asset for another, for example, a bond may be

exchanged for currency and deposits. In other cases, the

transaction may involve the creation of a new financial

asset and corresponding liability.

8.3 The overall balance on the financial account is

called net lending/net borrowing. Net lending means

that, in net terms, the economy supplies funds to the rest

of the world, taking into account acquisition and disposal

of financial assets and incurrence and repayment of lia-

bilities. (Net borrowing means the opposite.) Despite the

lending-oriented terms, net lending/net borrowing is a

balance that takes into account equity, financial deriva-

tives, and monetary gold, as well as debt instruments.

Also, net lending includes reduction of liabilities and

net borrowing includes reduction in assets. Net lending/

net borrowing can be derived from either the sum of the

balances on the current and capital accounts or from the

balance on the financial account. In concept, the values

should be equal. For a surplus of credits over debits in

the current and capital accounts, there is a balancing net

acquisition of financial assets or reduction of liabilities,

which is shown in the financial account. Net lending/net

borrowing of the international accounts is also equal to

the net lending/net borrowing for the sum of the resident

sectors of the national accounts.

8.4 It may be of interest to show balances for com-

ponents of the financial account. For example, ana-

lysts may be interested in net flows for each functional

category—such as net direct investment derived as net

acquisition of direct investment assets less net incur-

rence of direct investment liabilities.

8.5 The financial account and the other changes in

assets and liabilities account show the contribution to

changes between the opening and closing stocks of finan-

cial assets and liabilities. (This relationship is also shown

in Table 7.1.) These linkages of the financial account

with the IIP and other changes accounts are made more

transparent by the use of consistent classifications.

8.6 As shown in Table 8.1, the financial account

shows net acquisition of financial assets and net incur-

rence of liabilities. Net acquisition of financial assets

can be labeled net changes in financial assets, which is

134

wider in that it includes changes resulting from other

flows, as well as transactions. Similarly, net incurrence

of liabilities can be called net changes in liabilities.

Net recording

8.7 Net recording in the financial account means

aggregations whereby all debit entries of a particular

asset or a particular liability are netted against all credit

entries in the same asset type or in the same liability

type. However, changes in financial assets should not

be netted against changes in liabilities, with the pos-

sible exception for financial derivatives noted in para-

graph 8.34 and in the balancing item. To illustrate the

correct use of netting, acquisition of portfolio invest-

ment in equity is netted against the sales of that type of

equity; new bonds issued are netted against redemption

of bonds issued; but acquisition of bond assets is not

netted against incurrence of bond liabilities. The net

recording principle should be applied at the lowest level

of classification of financial instruments, taking into

account the functional category, institutional sector,

maturity, and currency classifications, where applica-

ble. In contrast to the net recording used in the financial

account, the current and capital accounts are recorded

on a gross basis, as explained in paragraph 3.113.

8.8 Net recording of flows in financial assets and

liabilities are recommended in the international accounts

for both analytical and pragmatic reasons. Financial

markets are typified by large turnover. The focus of the

financial account is on the net changes in each of exter-

nal financial claims and liabilities due to transactions.

Also, gross reporting of data may not be possible for cer-

tain classes of units and for some financial instruments.

Gross recording on a supplementary basis

8.9 Data on gross flows are useful for analyzing

market turnover and market behavior, and for measur-

ing service fees generated. Often, a small net value may

be the outcome of large gross flows. Where practical

to do so, data on drawings and repayments on loans or

acquisitions or disposals of other instruments could be

made available to users on a supplementary basis. The

data could be provided comprehensively or only for

particular components.

Timing and valuation

8.10 General principles for the time of record-

ing for financial account entries are discussed in

paragraphs 3.54–3.59. Transactions involving finan-

cial assets are recorded when economic ownership

changes. Some financial liabilities, such as trade

credit and advances, are the result of a transaction

in nonfinancial items. In these cases, the financial

claim is deemed to arise at the time the correspond-

ing nonfinancial flow occurs.

8.11 In some cases, the parties to a transaction

may perceive ownership to change on different dates

because they acquire the documents evidencing the

transaction at different times. This variation usually is

caused by the time taken for delivery of documents and

processing of transactions. The amounts involved in

such “float” may be substantial in the case of transfer-

able deposits and other accounts receivable or payable.

If no precise date can be fixed, the date on which the

creditor receives payment or some other financial claim

can be adopted as a convention.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 8.1 Overview of the Financial Account

Net acquisition of financial assets Net incurrence of liabilities

Direct investment

Portfolio investment

Financial derivatives (other than reserves)

and employee stock options

Other investment

Reserve assets

Total

Of which:

Equity and investment fund shares

Debt instruments

Other financial assets and liabilities

Net lending /net borrowing (from financial account)

Note: This table is expository; for Standard Components, see Appendix 9.

135

8.12 Financial account transactions in general are

recorded at market values, as discussed in paragraphs

3.68–3.80. (Market values are defined in paragraph

3.70.)

8.13 The value of financial instruments should

be recorded exclusive of any commissions, fees, ser-

vice charges, regulatory levies, and taxes, whether

charged explicitly, included in the purchaser’s price,

or deducted from the seller’s proceeds. Commissions

and dealers’ margins, as discussed in paragraphs

10.120–10.123, are payable in return for the provision

of financial services, so they should be excluded from

the instrument price and included in services, where

applicable. Therefore, the buyer and seller record

financial account transactions, at the same mid-price,

that is, the midpoint between the buyer’s price and the

seller’s price.

B. Direct Investment

8.14 Direct investment is defined in paragraphs

6.8–6.24. Specific issues in direct investment are

discussed in the following paragraphs. Direct invest-

ment from direct investor to direct investment

enterprise, reverse investment, and between fellow

enterprises are identified separately. Presentation

of direct investment financial flows according to

the directional principle is discussed in paragraphs

6.42–6.45 and Box 6.4.

1. Reinvestment of earnings

8.15 Reinvestment of earnings arising from a direct

investor’s equity in its direct investment enterprise is

recorded as an imputed financial account entry. It is

the corresponding entry and equal to reinvested earn-

ings, which is an item in the primary income account

(defined in paragraphs 11.33–11.36; it is the direct

investor’s share of the retained earnings or net saving

of the direct investment enterprise, before reinvested

earnings payable are deemed distributed). The finan-

cial account entry is shown separately under direct

investment equity.

8.16 Reinvestment of earnings may be negative

in some cases, for example, in case of losses by the

direct investment enterprise or if dividends payable in

a period are larger than net earnings in that period. Just

as positive reinvested earnings are treated as being an

injection of equity into the direct investment enterprise

by the direct investor, negative reinvested earnings is

treated as a withdrawal of equity.

2. Direct investment flows in kind

8.17 Goods, services, and other resources may be

supplied by or to affiliated enterprises at above or

below market prices, or with no payment. For example,

a direct investor may supply machinery and equipment

to its direct investment enterprise. As discussed in

paragraphs 3.77–3.78, 10.35, and 11.101–11.102, when

such flows are able to be valued, in principle there is a

corresponding entry for direct investment. When goods

and services are supplied below cost by a direct inves-

tor to a direct investment enterprise, if there is no other

indication about the motivation, it can be assumed to

be for the purposes of building up the direct investor’s

equity in the direct investment enterprise.

3. Mergers and acquisitions

8.18 Mergers arise when two or more companies

agree to combine into a single operation. Acquisitions

involve the purchase of one company or group of com-

panies by another company or group of companies

(though not all the shares may be acquired by the pur-

chaser). Mergers and acquisitions data are not identi-

fied as standard components within direct investment.

Nonetheless, there may be interest in such data because

the nature of mergers and acquisitions may differ from

other direct investment—for example, they may not

provide any new financing for the firms involved but

rather represent a change in investors. See OECD

Benchmark Definition of Foreign Direct Investment,

Annex 9, which discusses the definition and collection

of data on merger and acquisition transactions.

4. Corporate inversion and other restructuring

8.19 Corporate inversion describes the corporate

restructuring of a transnational enterprise group such

that the original parent company in one economy

becomes a subsidiary of the new parent in another

economy. In addition, ownership of a group of enter-

prises may be shifted to the new parent company. Such

arrangements may be called corporate relocations,

headquarters relocations, or corporate restructuring.

The process may take place over more than one period.

Although corporate inversion has a similar economic

effect to a change of residence of the parent company

(as discussed in paragraphs 4.167 and 9.21), it differs

in that inversion is achieved by transactions in assets

between different entities, rather than by a single entity

changing its residence. So, corporate inversion results

in financial transactions being recorded in the financial

account. However, some other types of restructuring

Chapter 8 g Financial Account

136

may involve other changes in volume, for example, the

appearance or disappearance of entities.

8.20 While the economy of the direct investor is

changed by corporate inversion, the operational struc-

ture and ultimate shareholders remain effectively

unchanged, but the new parent company has the benefit

of the taxation and regulatory environment of its econ-

omy of incorporation. Because inversions can involve

large values in the financial account but with little or no

movement in resources, there may be analytical interest

in separating them from other direct investment. If not

prevented by confidentiality, supplementary data could

be provided.

8.21 In these cases, the assets of the original parent

company are treated as having been returned to the

shareholders of the parent company through the with-

drawal of equity and then as being reinvested in the

new parent company at the same value. That is, there

is a rearrangement of balance sheets through transac-

tions in equity in the financial account of equal value

with no change in net lending or borrowing. (These

entries may include both portfolio and direct invest-

ment.) With some forms of restructuring, the direct

investment enterprises of the old parent may become

the direct investment enterprises of the new one.

8.22 As noted, assets may be shifted from one enter-

prise to a second enterprise because of restructuring

within an enterprise group. As with other stock swaps,

the owners are selling securities in the first enterprise

and buying securities in the second enterprise. (These

are financial account entries, not capital transfers or

other changes.)

5. Superdividends

8.23 Superdividends and liquidating dividends are

defined in paragraphs 11.28 and 11.30. They are treated

as a withdrawal of equity, rather than as income payable

to the owners. Accordingly, these amounts are excluded

from dividends and are shown as a reduction in equity

in the financial account, just as any other withdrawal

of equity. They also arise for equity other than direct

investment.

6. Borrowing for fiscal purposes

8.24 Special rules apply to an entity owned or con-

trolled by general government when that entity is resi-

dent in another territory and is used for fiscal purposes.

Such entities are resident in their economy of incorpo-

ration or registration, and not in the economy of their

owner (as discussed in paragraphs 4.134–4.135). For

example, a government may use a special purpose or

other entity to issue securities to fund its expenditure.

Fiscal purposes refers to the distinctive motivation of

the general government sector, as discussed in para-

graphs 4.91–4.92. Fiscal purposes can be distinguished

from commercial purposes, because fiscal purposes

are always oriented to serving the objectives for the

government’s home territory.

8.25 When an entity resident in one economy bor-

rows on behalf of the government of another economy,

and the borrowing is for fiscal purposes, the following

entries are made:

(a) At the time of borrowing: a transaction creating

a debt liability of the government to the bor-

rowing entity is imputed equal to the amount of

the borrowing. (The corresponding entry is an

increase in the government’s equity in the bor-

rowing entity.)

(b) At the time funds (or resources acquired with the

funds) are passed to the government (as appli-

cable): the flow of funds is shown as a transac-

tion, matched by a reduction of the government’s

equity in the borrowing entity by the same

amount.

or funds are provided by the borrowing entity

to a third party (i.e., are not passed to the gov-

ernment), where applicable: a current or capital

transfer between the government and the entity is

imputed, with the matching entry of a reduction

in the value of the government’s equity. (For a

wholly owned government entity, this imputation

has the same value as the reinvestment of earn-

ings that would have been imputed if the general

treatment for direct investment enterprises was

applicable.)

These entries are made symmetrically for both the gov-

ernment and the borrowing entity. These entries do not

affect the transactions or positions between the borrow-

ing entity and its creditors or other third parties, which

are recorded as they occur with no imputations.

8.26 The reason for having a special approach for

government entities is that, unlike in the private sec-

tor, the nonresident entity undertakes functions at the

behest of general government for public policy, not

commercial purposes. Without this approach, a mis-

leading picture of government expenditure and debt

could arise.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

137

C. Portfolio Investment

8.27 Portfolio investment is defined in paragraphs

6.54–6.57.

1. Reinvestment of earnings in investment

funds

8.28 Unlike other portfolio investment, the undis-

tributed earnings of portfolio investment in investment

funds are imputed as being payable to the owners and

then as being reinvested in the fund. The financial

account entry for reinvestment of earnings is the corre-

sponding entry to the reinvested earnings of investment

funds in the primary income account item (which is

covered in paragraphs 11.37–11.39). The treatment and

calculation of earnings are the same as for reinvested

earnings of direct investment enterprises. Reinvestment

of earnings may be negative, for example, when a fund

has paid dividends out of realized holding gains, or

when earnings accrued over previous periods are paid

as dividends.

2. Convertible bonds

8.29 The classification of convertible bonds is dis-

cussed in paragraph 5.45. When the option to convert

the bond into shares is implemented, two entries are

shown: (a) redemption of the bond and (b) the issue or

acquisition of shares.

3. Debt defeasance

8.30 Debt defeasance allows a debtor (whose debts

are in the form generally of debt securities and loans) to

remove certain liabilities from the balance sheet by pair-

ing irrevocably assets of equal value to the liabilities.

8.31 Defeasance may be carried out (a) by placing

the paired assets and liabilities in a trust account within

the institutional unit concerned, or (b) by transferring

the assets and liabilities to another institutional unit. In

the former case, there are no transactions with respect

to defeasance, and the assets and liabilities should not

be excluded from the balance sheet of the unit. In the

latter case, the transactions by which the assets and

liabilities are moved to the second statistical unit are

recorded in the financial account of the economies

concerned, provided the units are resident of different

economies, and are reported in the balance sheet of the

unit that holds the assets and liabilities. Therefore, debt

defeasance sometimes leads to a change in the institu-

tional unit that records those liabilities.

4. Share and debt buybacks

8.32 If a corporation buys its own shares, the trans-

action is classified as being a reduction in the equity

liability, rather than an acquisition of an asset. Because

a corporation cannot have a claim on itself, the liability

is deemed to be extinguished, even if the shares are not

canceled. Similarly, purchase of a debt security by its

issuer is treated as redemption of the debt.

5. Bonus shares

8.33 Sometimes corporations restructure their shares

and may offer shareholders a number of new shares for

each share previously held. This can be called stock

splits or the issue of bonus shares. In contrast to when

new shares are issued in return for additional funds,

in these cases, no new resources are provided and no

transaction is recorded.

D. Financial Derivatives (Other Than

Reserves) and Employee Stock Options

1. Financial derivatives

8.34 Financial derivatives (other than reserves) and

ESOs are defined in paragraphs 6.58–6.60. Transac-

tions involving financial derivatives may arise at incep-

tion, on secondary markets, with ongoing servicing

(such as for margin payments), and at settlement. Finan-

cial account entries for derivatives preferably should

be shown separately for each of assets and liabilities,

wherever possible, but net settlements are acceptable

when gross reporting is impractical. Any explicit or

implicit service charges should be deducted from the

value of the financial derivative. However, distinguish-

ing implicit service charges is not usually possible, in

which case, the entire value of the financial derivative

is classified as being for the financial asset.

8.35 At inception:

(a) The creation of a forward-type contract does not

generally require the recording of a transaction

in a financial derivative because risk exposures

of equal value are usually being exchanged. That

is, there is usually zero exposure and zero value

for both sides. In some cases, however, there may

be a nonzero transaction value at issue. (In addi-

tion, there may be a service charge for the issue,

as mentioned in paragraph 10.121.)

(b) The purchaser of an option pays a premium to

the seller, which is the acquisition price of the

Chapter 8 g Financial Account

138

instrument. Sometimes a premium is paid after

the inception of the contract. In that case, the

value of the premium is recorded at the inception

of the contract in the same manner as if it had

been paid then, but is shown as being financed

by accounts receivable/payable between the

writer and the purchaser.

8.36 Subsequent changes in the prices of derivatives

are recorded as holding gains or losses, not as transactions

(included as revaluation, see paragraphs 9.30–9.31).

8.37 Sales of options in secondary markets—

whether exchanges or over the counter—are valued at

market prices and recorded in the financial account as

transactions in financial derivatives.

8.38 When a contract requires ongoing servicing

(such as an interest rate swap, where each party meets

the servicing obligations that were originally held by

the other) and a cash payment is received, there is a

decrease (increase) in a financial derivative asset (lia-

bility) if, at the time of the payment, the contract is in

an asset (liability) position. If compilers are unable to

implement this approach because of market practice, all

cash receipts should be recorded as reductions in finan-

cial assets, and all cash payments should be recorded as

decreases in liabilities.

8.39 Margins are payments of cash or deposits of col-

lateral that cover actual or potential obligations incurred

through financial derivatives—especially futures or

exchange traded options. (As discussed in paragraph

5.94, repayable margins in cash are classified as deposits

or other accounts receivable/payable, and nonrepayable

margins are classified as financial derivatives.)

8.40 At settlement, either a cash payment is made

or an underlying item is delivered.

(a) When a financial derivative is settled in cash,

a transaction equal to the cash value of the set-

tlement is recorded for the derivative. In most

instances, when a cash settlement payment is

received, a reduction in a financial derivative

asset is recorded. When a cash settlement pay-

ment is made, a reduction of a financial deriva-

tive liability is recorded.

(b) When an underlying item is delivered, two trans-

actions are recorded:

• The transaction involving the underlying item

is valued at the market price at the time. The

entry for the underlying item is recorded under

the relevant heading (goods, financial instru-

ment, etc.).

• The transaction involving the derivative is

valued as the difference, multiplied by the

quantity, between the market price for the

underlying item and the strike price specified

in the derivative contract.

at the same time, and with the same counter-

party—some of the contracts being settled are

in asset positions and some are in liability posi-

tions. In this situation, transactions involving

assets should be recorded separately from those

involving liabilities, wherever possible, but net

settlements are acceptable when gross reporting

is impractical.

2. Employee stock options

8.41 An ESO is created on a given date (the “grant”

date), providing that an employee may purchase a given

number of shares of the employer’s stock at a stated

price (the “strike” price) either at a stated time (the

“vesting” date) or within a period of time (the “exer-

cise” period) immediately following the vesting date.

Transactions in ESOs are recorded in the financial

account as the corresponding entry to the compensa-

tion of employees (as discussed in paragraph 11.20) or

direct investment (paragraph 11.21). When the option is

exercised, the transaction in the ESO is recorded in the

financial account at a value that reflects the difference

between the market price of the equity and the price

paid by the buyer for the equity (see also paragraph

8.40(a) and (b)). Cancellation of ESOs is discussed

in paragraph 9.12, while revaluations are discussed in

paragraph 9.30. ESOs do not generally raise separate

issues to those for financial derivatives, but one special

case occurs when an employee of a subsidiary is issued

options for stock in the parent company. Because the

parent is not the employer, the subsidiary is shown as

acquiring the option from the parent. (If the subsidiary

pays nothing or an unrealistic value to the parent, a

value may be imputed, possibly direct investment, as

discussed in paragraph 11.101 on transfer pricing.)

E. Other Investment

1. One-off guarantees and other debt

assumption

8.42 Debt assumption means that one party takes

on the liability of another party. Debt may be assumed

under a preexisting guarantee, or without a guarantee,

such as when a government wants to assist a project

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

139

or a direct investor assumes the liabilities of its direct

investment enterprises for reputational reasons. One-

off guarantees are defined in paragraph 5.68. One-off

guarantees are recognized only as financial assets and

liabilities from the time they are activated.

8.43 The assumption of the debt may not require

repayment at once. According to the accrual principle

for time of recording, the assumption of the debt should

be recorded at the time the guarantee is activated, rather

than when actual payments are made by the guarantor.

Repayments by the new debtor and interest accrued on

the assumed debt should be recorded as these flows

occur.

8.44 The recording in the international accounts of

debt assumption through the activation of a one-off

guarantee or for other reasons varies depending on the

circumstances, as discussed in paragraph 8.45.

8.45 In all cases, the debt-assuming party records

the creation of a new liability to the creditor (financial

account entry). In addition:

(a) If the debt-assuming party does not acquire a

claim on the (original) debtor because the original

debtor no longer exists (e.g., the original debtor

has been liquidated), a capital transfer from the

debt-assuming party to the creditor is recorded

as the corresponding entry to the creation of the

liability. The original debt of the debtor to the

creditor is written off in the accounts of both the

original debtor and the creditor (other changes in

financial assets and liabilities account).

(b) If the debt-assuming party does not acquire a claim

on the (original) debtor because the debt assumer

seeks to give a benefit to the debtor (as is some-

times the case when governments assume debts),

then unless the guarantor is in a direct investment

relationship with the original debtor (see (c)), a

capital transfer from the debt-assuming party to the

original debtor is recorded. The claim on the origi-

nal debtor by the creditor is extinguished (financial

account entries).

a claim on the original debtor as a result of the

assumption of the debt (financial account entry).

Such a claim may be on the original debtor as a

debt

or as an increase in the guarantor’s equity

If the value of the debt claim received by the debt assumer is less

than the value of the debt liability assumed, as in (b) a capital trans-

fer for the difference is recorded, unless the parties are in a direct

investment relationship (see also paragraph A2.52).

in the original debtor (e.g., assumption of debt

owed by a subsidiary will improve the balance

sheet of the subsidiary and, hence, the direct

investor’s equity in the subsidiary). In this case,

the claim on the original debtor by the creditor is

extinguished (financial account entry).

(The entries are shown in Box 8.1.)

2. Insurance technical reserves, pension fund

entitlements, and provisions for calls under

standardized guarantees

8.46 Insurance, pension fund, and standardized

guarantee transactions need to be broken down into

their service, income, transfer, and financial account

elements. An overview of the statistical treatment of

insurance, pension schemes, and standardized guar-

antees is given in Appendix 6c. Insurance technical

reserves sometimes may be classified as direct invest-

ment, as discussed in paragraph 6.27. The following

paragraphs show the composition of the financial

account entries.

8.47 For nonlife insurance, insurance technical

reserves consist of prepayments of insurance premi-

ums and outstanding claims. Prepayments of premiums

result from the fact that, in general, insurance premi-

ums are paid in advance. Technical reserves against

outstanding claims are reserves that insurance enter-

prises hold to cover the amounts they expect to pay

out for claims that have been reported and are not yet

resolved and to cover estimates of claims incurred but

not yet reported—including equalization reserves that

relate to events that have occurred.

8.48 Similarly, for life insurance, pension schemes,

annuity funds, and standardized guarantee schemes,

the changes in technical reserves due to transactions

are recorded in the financial account and consist of

the amounts of the estimated obligations to beneficia-

ries and holders that accrued during the period. Pen-

sion entitlements include those under both funded

and unfunded schemes, but do not include potential

benefits under social security schemes (see paragraph

5.67). The increase in pension entitlements shown in

the financial account matches the entry in the use of

income accounts for the adjustment for change in pen-

sion entitlements plus any change in pension entitle-

ments due to capital transfers.

8.49 Totals for insurance technical reserves, pen-

sion fund entitlements, and provisions for calls under

standardized guarantees and related investment income

Chapter 8 g Financial Account

140

usually can be identified only in the accounts of insur-

ers, funds, and guarantee providers, rather than in the

accounts of their customers. For liabilities, these totals

relate to resident providers and need to be allocated

among resident and nonresident policyholders. In the

absence of specific data on the allocation of these values

to policyholders, an indicator such as premiums pay-

able may be used. For assets, the reserves, entitlements,

and provisions are liabilities of nonresidents and are not

observable by residents, so counterpart data or indicators

such as ratios of premiums to technical reserves may be

necessary. Changes in technical reserves resulting from

holding gains or losses are not transactions and therefore

are recorded in the revaluation account and not in the

financial account.

3. Special drawing rights

8.50 The allocation of SDRs to IMF members is

shown as the incurrence of a liability of the recipient

under SDRs in other investment, with a corresponding

entry under SDRs in reserve assets.

8.51 Other acquisitions and sales of SDRs are shown

as transactions in reserve assets.

4. Securities repurchase agreements and

other reverse transactions

8.52 These arrangements are defined in paragraphs

7.58–7.61. Because the risks and rewards of ownership

stay largely with the original owner, no transaction in

the security is recorded. If one party provides cash that

is repayable when the security is returned, however, the

provision of cash is classified as a loan (except when

it is a liability of a deposit-taking corporation and part

of broad money, in which case it is classified as other

deposits).

5. Currency

8.53 Transactions in issued banknotes and coin are

recorded under currency and deposits. Transactions by

residents with nonresidents using domestically issued

banknotes and coin are recorded as transactions in lia-

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

If debt-assuming party does not acquire a claim on the (original) debtor because the

original debtor no longer exists (paragraph 8.45(a)):

Original debtor: other change in volume of debt liability to creditor

Assumer: increase in debt instrument liability (credit) to creditor

capital transfer (debit) to creditor

Creditor: capital transfer (credit) from assumer

increase in debt instrument claim (debit) on assumer

other change in volume of debt claim on original debtor

If debt-assuming party does not acquire a claim on the (original) debtor because the

debt assumer seeks to give a benefit to the debtor (paragraph 8.45(b)):

Original debtor: capital transfer (credit) from assumer

reduction in debt instrument liability (debit) to creditor

Assumer: increase in debt instrument liability (credit) to creditor

capital transfer (debit) to original debtor

Creditor: reduction in debt instrument claim (credit) on original debtor

increase in debt instrument claim (debit) on assumer

If debt-assuming party acquires a claim on the original debtor (paragraph 8.45(c)):

Original debtor: increase in equity or debt liability (credit) from assumer

reduction in debt instrument liability (debit) to creditor

Assumer: increase in debt instrument liability (credit) to creditor

increase in equity or debt claim (debit) on original debtor

Creditor: reduction in debt instrument claim (credit) to original debtor

increase in debt instrument claim (debit) on assumer

In cases in paragraphs 8.45(b) and (c), three parties are involved in the transaction, so the

treatment differs from the standard double-entry system.

Box 8.1. Entries Associated with Different Types of Debt Assumption

(Showing different situations, recording party, entry, and counterparty)

141

bilities, and transactions by residents with nonresidents

using foreign-issued banknotes and coin are transac-

tions in assets. As noted in paragraphs 3.7–3.8, transac-

tions in domestic liabilities between nonresidents and

transactions in foreign assets between residents are not

recorded in the balance of payments.

6. Change of contractual terms

8.54 If the original terms of a debt (typically a loan or

debt security, but also other debt items) are changed by

renegotiation by the parties, then the treatment is that the

original liability is repaid and a new liability is created.

In contrast, if the original terms of the contract provide

that the maturity or interest rate terms or both change as a

result of an event such as a default or decline in credit rat-

ing, then this involves a reclassification. (This distinction

has an effect on net values in practice in cases in which

the original and new terms have a different principal,

different instrument classification, or different maturity

classification; otherwise, the entries cancel out.)

F. Reserve Assets

8.55 Transactions involving monetary gold are

recorded in the financial account only if they occur

between two monetary authorities for reserve purposes

or between a monetary authority and an international

financial organization. (Monetary gold is discussed in

paragraphs 5.74–5.78; and gold in the context of reserve

assets is discussed in paragraphs 6.78–6.83.)

8.56 All transactions in gold bullion other than

those included in monetary gold are recorded as non-

monetary gold in the goods and services account (dis-

cussed in paragraphs 10.50–10.54). When a monetary

authority acquires gold bullion from, or sells gold

bullion to, an institutional unit other than a monetary

authority or international financial organization, the

gold is monetized or demonetized, as discussed in

paragraphs 9.18–9.20.

8.57 Financial account transactions with the IMF

involve reserve assets, reserve-related liabilities, other

investment, and off-balance-sheet liabilities. They are

dealt with in detail in Annex 7.1.

G. Arrears

8.58 The accumulation of arrears related to excep-

tional financing (when it occurs) needs to be included

as a memorandum item to the financial account. Excep-

tional financing is defined and discussed in Appen-

dix 1. Incurring arrears does not involve a transaction,

because it is a unilateral act of one party. Therefore, it

is not shown as giving rise to entries in the standard

presentation of the financial account. However, if the

debt is renegotiated, then the original instrument is

extinguished and a new instrument is created.

8.59 In addition to arrears related to exceptional

financing, other arrears indicate potential, or actual,

problems servicing debt, and so may be shown as sup-

plementary items.

Chapter 8 g Financial Account

142

CHAPTER

Other Changes in Financial

Assets and Liabilities Account

A. Concepts and Coverage

Reference:

2008 SNA, Chapter 12, The Other Changes in Assets

Accounts.

9.1 In the international accounts, the other changes

in financial assets and liabilities account shows

changes in financial positions that arise for reasons

other than transactions between residents and non-

residents. These changes are also called “other flows.”

Examples include the unilateral cancellation of debt by

the creditor, holding gains and losses, and reclassifica-

tions (including arising from resident-to-resident trans-

actions in financial assets issued by nonresidents). In

international accounts, other changes are recorded only

for financial assets and liabilities because the inter-

national investment position relates only to external

financial assets and liabilities.

9.2 While sometimes derived as residual items,

other changes are economic events that are important

in their own right and should be shown separately

from transactions. They serve to demonstrate signifi-

cant changes to the value and composition of items in

the balance sheet due to events that have important

economic consequences.

9.3 Other changes differ from transactions in terms

of their economic nature and accounting entries. A

transaction is an interaction between two institutional

units by mutual agreement or operation of the law,

whereas other changes are changes in the value or

volume of assets and liabilities that arise from other

economic events. Each transaction involves two

accounting entries for each party, as does reclassifica-

tion, but other events recorded in this account involve

a single entry for each party. For additional aspects

of accounting for other changes, see also paragraphs

3.19–3.21 (types of other flows), 3.60 (timing), and

3.81–3.83 (valuation).

9.4 Table 9.1 shows an overview of the other changes

in financial assets and liabilities account. The balanc-

ing item for the account is net changes in net IIP arising

from other changes.

9.5 Together with the financial account, the other

changes in financial assets and liabilities explain

changes in the IIP. In other words, financial assets and

liabilities gain or lose value and appear or disappear

as a result of transactions, other volume changes, or

revaluation. This relationship can be expressed as the

following identity:

Beginning of period position

+ Transactions during the period

+ Other changes in volume during the period

+ Revaluation during the period:

Of which, due to:

• exchange rate changes and

• other price changes

= End of period position.

(Table 7.1 also shows this relationship.)

9.6 The other changes in financial assets and

liabilities account can be presented by the type of

asset or liability as well as by the type of other flow.

The classification by type of asset or liability should

be consistent with that used in the IIP and financial

account to facilitate analysis of particular assets and

a comprehensive view of asset and liability positions.

The other changes in assets and liabilities account

can also be considered in conjunction with investment

income from the income account, to obtain another

view of the return on financial assets and liabilities.

As noted in paragraph 9.32, some retained earnings

affect the owners’ equity through the other changes

account, whereas others affect equity through an

imputed transaction.

143

B. Other Changes in the Volume of

Financial Assets and Liabilities

9.7 Other changes in the volume of financial assets

and liabilities are any changes in the value of these

assets that are due neither to transactions nor to revalu-

ation. These changes include those due to cancellation

and write-offs, economic appearance and disappear-

ance of assets, reclassification, and the changes in

financial assets arising from entities changing their

economy of residence.Becauseoftheheterogeneous

natureofotherchangesinvolume,analystsmaysome-

times wish to identify the major components. Changes

involumecanoccurbecauseoftransactionsorother

changesinvolume.

1. Cancellation and write-offs

9.8 Anumberofcircumstancesmayleadtoreduc-

tion or cancellation, by other than normal repayment,

of liabilities. Debt assumption and debt forgiveness

involve transactions and are discussed in paragraphs

8.42–8.45 and 13.22–13.23, respectively. Valuation

changesassociatedwithdebtreorganizationaredealt

with in paragraph 9.29. Debt reorganization and related

issues are discussed in more detail in Appendix 2.

9.9 Changes in claims resulting from write-offs are

excludedfromthefinancialaccount.Specifically,a

creditormayrecognizethatafinancialclaimcanno

longerbecollectedbecauseofbankruptcyorother

factorsanditmayremovetheclaimfromitsbalance

sheet.

This recognition (by the creditor) should be

accountedforasotherchangesinvolumeofassets.

(The corresponding liability should also be removed

from the balance sheet of the debtor.)

Usually, debt is written off as uncollectible because of the bank-

ruptcy or liquidation of the debtor; however, it may sometimes be

written off for other reasons, such as a court order. The write-off

maybefullorpartial;partialwrite-offsmayarise,forexample,

under a court order, or if the liquidation of the debtor’s assets will

allow some of the debt to be settled. Recognition that the debt is

uncollectible should be distinguished from internal accounting pro-

visionsofthecreditorforthepossibilityofdefault(suchasadjust-

mentstofairvalue,nonperformingloans).Althoughsuchprovisions

maybeusefulforanalysis,theydonotmeanthatthedebtshouldno

longerberecognizedasexisting.

Chapter 9 g Other Changes in Financial Assets and Liabilities Account

Table 9.1. Overview of the Other Changes in Financial Assets and Liabilities Account

Revaluations

_________________________________

Other changes Exchange Other

in volume rate changes price changes

Net changes in financial assets due to other changes

Direct investment

Portfolio investment

Financial derivatives (other than reserves) and employee

stock options

Other investment

Reserve assets

Total

Of which:

Equity and investment fund shares

Debt instruments

Other financial assets and liabilities

Net changes in liabilities due to other changes

Direct investment

Portfolio investment

Financial derivatives (other than reserves) and employee

stock options

Other investment

Total

Of which:

Equity and investment fund shares

Debt instruments

Other financial assets and liabilities

Changes in net IIP arising from other changes

Note: This table is expository; for Standard Components, see Appendix 9.

144

9.10 Unilateral cancellation of a financial claim by

a debtor (debt repudiation) is not recognized. Debt for-

giveness, which is a capital transfer, usually concerns

government debt; most commercial situations where

the impossibility of debt collection is recognized by the

creditor are treated as write-offs.

9.11 Governments or other institutional units may

take possession of the assets of other institutional units,

including nonresident units, without full compensation

for reasons other than the payment of taxes, fines, or

similar levies. If the compensation falls substantially

short of the values of the assets as shown in the bal-

ance sheet, the difference should be recorded in other

changes in volume as an increase in assets for the insti-

tutional unit doing the seizing and a decrease in assets

for the institutional unit losing the asset. Such actions

are called uncompensated seizures of assets in the 2008

SNA. For seizures between residents and nonresidents

relating to nonfinancial assets, a supplementary item

can be recorded.

9.12 If an employee stock option is extinguished

between the grant and vesting dates (e.g., if the employee

departs) without an agreed settlement between the par-

ties, an other change in volume is recorded (namely,

a loss of an asset by the employee and a reduction of

liabilities by the employer).

2. Reclassifications

9.13 A reclassification entry is necessary when a

financial asset or liability changes its characteristics or

status without there having been a cross-border transac-

tion. In contrast to reclassifications, other cases—such

as changes such as conversion of a convertible bond

(see paragraph 8.29) and exercise of a warrant (see

paragraph 5.87)—are shown as transactions involving

repayment of the original instrument and creation of a

new one because they arise from bilateral agreements.

Tradable loans

9.14 A loan may become a security in the circum-

stances discussed in paragraph 5.45. In that case, the

deduction of nominal value of the old loan is a reclas-

sification, as is the appearance of the new security at

market prices.

Change in contractual terms

9.15 The original terms of a contract may provide

that the maturity and interest rate terms change as a

result of an event such as a default or decline in credit

rating; then this involves a reclassification. In contrast,

a change in the terms as a result of renegotiation by the

parties is a transaction, and thus is shown as a repay-

ment of the old instrument and issue of a new one in the

financial account.

Transactions in existing assets

9.16 Transactions in existing assets can result in

changes in the composition of assets and liabilities in

the IIP. As noted in paragraph 3.7, when a financial

instrument issued by a nonresident is sold by a resident

in one institutional sector to a resident in another sec-

tor, the composition of assets in the IIP is changed by a

reclassification entry.

Changes in functional category

9.17 As a result of a change in the relationship

between the parties or change in the liquidity of assets,

the functional category may be changed. For example,

if the relationship between the parties changes to direct

investment because an investor adds to its holdings

and so qualifies as a direct investor, the previous hold-

ings would be reclassified to direct investment. (See

also paragraph 6.36.) Another example is a loan that

is reclassified as securities (see paragraph 5.45) and so

from other investment to portfolio investment.

Monetization and demonetization of gold bullion

9.18 A special case of change in classification

occurs for gold bullion. Gold bullion can be a financial

asset (monetary gold) or a good (nonmonetary gold),

depending on the holder and the motivation for holding.

Monetization is the change in the classification of gold

bullion from nonmonetary to monetary. Demonetiza-

tion is change in the classification of gold bullion from

monetary to nonmonetary. The treatment of particular

transactions is as follows:

(a) When a monetary authority sells gold bullion

that is a reserve asset to a nonresident entity

that is not a monetary authority or international

financial organization, an entry for nonmone-

tary gold is recorded in the goods and services

account. Demonetization of the gold bullion

occurs immediately before the transaction and is

shown in the other changes in assets and liabili-

ties account of the monetary authority.

(b) When a monetary authority sells gold bullion

that is a reserve asset to a resident entity that

is not a monetary authority, there is no interna-

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

145

tional transaction. As in case (a) above, demon-

etization of the gold bullion occurs immediately

before the transaction.

lion from a nonresident that is not a monetary

authority or international financial organization,

the transaction is recorded in nonmonetary gold

in the goods and services account. Monetization

of the gold bullion occurs immediately after the

transaction and is shown in the other changes

in assets and liabilities account of the monetary

authority.

(d) When a monetary authority purchases gold bul-

lion from a resident for its reserve assets, there

is no international transaction. As in case (c)

above, monetization of the gold bullion occurs

immediately after the transaction.

(e) When buyer and seller are monetary authorities

of different economies and both hold the gold

bullion as part of their reserve assets, there is

a transaction in gold bullion (recorded in the

financial account; see paragraph 8.55). The

same treatment applies for transactions in gold

bullion between a monetary authority and an

international financial organization.

(f) If the monetary authorities deposit gold bullion

that they own in an unallocated gold account, the

gold bullion is demonetized immediately before

the transaction. If the account is with a non-

resident, a transaction in nonmonetary gold is

recorded in the goods and services account with

a corresponding entry in currency and deposits,

and then a reclassification to monetary gold—

unallocated gold accounts—if held as a reserve

asset. However, if the deposit is with another

monetary authority or an international financial

institution, transactions in monetary gold are

recorded (see paragraph 6.80).

(g) Similarly, if the monetary authorities withdraw

gold bullion from an unallocated gold account

held as a reserve asset, a reclassification to cur-

rency and deposits is recorded before the trans-

action. As the account is with a nonresident, a

transaction in currency and deposits is recorded

with a corresponding entry in nonmonetary gold

in the goods and services account. The gold bul-

lion is monetized as monetary gold—gold bul-

lion, if held as a reserve asset. However, if the

deposit is with another monetary authority or an

international financial institution, transactions

in monetary gold are recorded (see paragraph

6.80).

(h) In other cases, gold bullion is nonmonetary at

all times and any international transactions are

recorded in nonmonetary gold under goods (as

discussed in paragraphs 10.50–10.54).

(The above cases relating to a monetary authority also

apply to an international financial organization.)

Reclassification of unallocated gold accounts

9.19 Unallocated gold accounts are classified as cur-

rency and deposits unless they are held by the mon-

etary authorities as part of reserve assets. Unlike gold

bullion, unallocated gold accounts have counterpart

liabilities. To be classified as monetary gold, the unal-

located gold accounts must be held as part of reserve

assets, and so the counterpart liability is necessarily on

a nonresident.

9.20 If a monetary authority acquires an unallocated

gold account to be classified as reserve assets, it is

recorded first as a transaction in currency and deposits

and then reclassified to monetary gold (unallocated

gold accounts) as a change of classification in the other

changes in the volume of assets and liabilities account

of the monetary authority. Removing an unallocated

gold account from reserve assets is recorded as, first,

a change in classification from monetary gold to a cur-

rency and deposit in the other changes in the volume

account and then a transaction in currency and depos-

its. However, transactions between monetary authori-

ties and with international financial institutions are

recorded as transactions in unallocated gold accounts

within monetary gold if the unallocated account is held

as a reserve asset.

3. Financial assets and liabilities of persons and

other entities changing residence

9.21 The conditions under which entities can change

their economy of residence were discussed in Chap-

ter 4. When persons and other entities change their

economy of residence, their existing financial assets

and liabilities are added to or removed from the IIP

through a reclassification, not by imputing transactions

in the balance of payments. The change in the residence

does not involve a transaction between two entities,

but a change in the status of a single entity. Because

of the treatment of ownership of land and buildings,

as well as certain other cases (discussed in paragraphs

4.34–4.40), notional units may be created or eliminated

Chapter 9 g Other Changes in Financial Assets and Liabilities Account

146

as a result of the change in residence status of an owner.

The treatment of change in residence applies to all the

financial assets and liabilities, not just those that are

shifted to the new economy of residence.

9.22 In addition to change in the status of exist-

ing assets, new financial claims and liabilities may

be created by transactions around the time of change

of residence. For example, new bank accounts may

be created in the new economy of residence. In those

cases, the treatment is determined by the residence

status of the owner at the time of the transaction. If the

relation of the timing of the transaction and the change

of residence is unknown or effectively simultaneous, a

convention can be adopted, such as that the change of

residence occurs first.

9.23 Corporations sometimes change residence. Most

cases labeled as corporate migration involve moving

assets between entities (see paragraph 8.19 on corporate

inversion). However, in the exceptional case when cor-

porate change of residence occurs (see paragraph 4.167),

the change in the residence of the owner of financial

assets and liabilities is treated as a reclassification, in the

same way as a change of residence of individuals.

4. Insurance reserves, pension entitlements,

and provisions for standardized guarantee

schemes

9.24 Changes in model assumptions can give rise

to other changes in the volume of insurance reserves,

pension entitlements, and provisions for standardized

guarantee schemes. For an annuity, the relationship

between premiums and benefits is usually determined

when the contract is entered into, taking account of

mortality data available at that time. Any subsequent

changes will affect the liability of the annuity provider

towards the beneficiary, with the consequent changes

in provisions recorded as other changes in volumes.

In contrast to changes in model assumptions, changes

in pension entitlements negotiated between the parties

are transactions, so would be classified as current or

capital transfers.

C. Revaluation

9.25 Revaluations occur because of a change in the

monetary value of a financial asset or liability due to

changes in the level and structure of its price. Revalu-

ations may also be called holding gains or losses. As

the term suggests, holding gains or losses are changes

in the value of an asset that accrue purely as a result of

holding assets over time without transforming them in

any way. A holding gain occurs when an asset increases

in value or a liability decreases in value; a holding loss

occurs when an asset decreases in value or a liability

increases in value. Common causes of revaluation are,

for equity, changes in expectations of future incomes

and, for debt securities, changes in market yields and

the creditworthiness of the debtor.

9.26 Because of the importance of instruments

denominated in foreign currencies in the IIP and their

different behavior, the values of revaluation are sepa-

rated into those due to two factors:

(a) exchange rate changes and

(b) other price changes.

9.27 Exchange rate changes show all the changes

that result from exposure to the effect of exchange rates,

whereas the other price changes show other causes such

as asset price volatility. Revaluation takes into account

all price changes during the period, whether realized

or not. Holding gains and losses are realized when the

asset is sold or liability extinguished. Holding gains

and losses on unsold assets and unpaid liabilities are

unrealized, but are recorded as revaluation in the other

changes in financial assets and liabilities account.

9.28 An exact measure of the factors could be made

by tracking each instrument held, bought, or sold dur-

ing the period. In practice, an approximation can be

derived from balance sheet aggregates for each cur-

rency of denomination, to separate revaluation into

exchange rate changes and other price changes, accord-

ing to the following steps:

• Step 1: The effect of revaluation due to other price

changes is derived for each class of instrument

and currency of denomination by subtracting

changes due to transactions and other changes in

volume from the total change in positions. Because

exchange rate changes are always zero in the

currency of denomination, all revaluation when

expressed in the currency of denomination is due

to other price changes. (The currency of denomi-

nation is discussed in paragraphs 3.95–3.107.)

• Step 2: The beginning and end of period posi-

tions, and changes due to transactions, other vol-

ume changes, and revaluation due to other price

changes (as derived in Step 1) are converted to

the currency of international accounts compilation

using the appropriate exchange rates. Positions are

converted by the exchange rate at the relevant date.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

147

Ideally, transactions and other flows would be con-

verted at the exchange rate at the time of each

event or flow. In the example in Box 9.1, flows are

converted at the average exchange rate, which is

an approximation that assumes that flows, price

changes, and exchange rate movements occurred

evenly through the period. If an average exchange

rate is used, an average of daily exchange rates is

preferable as an approximation. (An average of

beginning and end of period rates could be mis-

leading when rates did not move evenly through

the period.) Currency conversion is discussed in

paragraphs 3.104–3.108.

• Step 3: The effect of revaluation due to exchange rate

changes is derived for each class of instrument and

currency of denomination by subtracting changes

due to transactions, other changes in volume, and

revaluation due to other price changes from the total

change in positions. The exchange rate effects are

always zero on instruments denominated in the cur-

rency of international accounts compilation (with

the exception set out in paragraph 9.31).

Step 1 needs to be calculated for each currency of

denomination by type of instrument, although in prac-

tice currencies that represent a small proportion of the

total may be combined. For instruments that are valued

at nominal prices, there can be exchange rate effects,

but no other price changes. A numerical example is

given in Box 9.1.

1. Debt reorganization

9.29 A debtor and creditor may change the terms of

a debt agreement. The terms may be changed such that

the value of the new claim differs from the value of the

old claim. In commercial situations, differences in val-

ues between old and new claims are generally treated

as a valuation change. Debt cancellation and write-offs

are other volume changes and were discussed in para-

graphs 9.8–9.11. However, as noted in paragraph 13.23,

if there is an intention to convey a benefit, the change

may be treated as a capital transfer. Debt reorganization

is discussed in further detail in Appendix 2.

2. Financial derivatives and employee stock

options

9.30 The exchanges of claims and obligations at the

inception of a derivative contract are financial transac-

tions creating asset and liability positions that normally

have, at inception, zero value if the instrument is a

forward-type contract and value equal to the total pre-

mium payable if the instrument is an option. Changes

in the value of derivatives due to change in the underly-

ing item are recorded as revaluation. (Changes in the

value of derivatives to or from zero are classified as

revaluation, not economic appearance or disappearance

of assets.) The settlement of a financial derivative posi-

tion is a transaction, recorded in the financial account.

Changes in the values of employee stock options at or

after the vesting date are revaluations (see paragraphs

3.59, 7.39, and 11.20). (In practice, it may be feasible to

recognize the revaluation only at exercise date.)

9.31 Financial derivatives that include a foreign

exchange risk are a case where the steps for separating

exchange rate and other revaluation, as stated in para-

graph 9.28, are not applicable. In those cases, a valua-

tion change due to exchange rate changes can arise even

in the currency of denomination of the instrument. In

some cases, such as cross-currency swaps that are also

interest rate swaps, it may not be practical to separate

exchange rate changes from other revaluation, so a con-

vention that all revaluation effects are due to exchange

rate effects may be adopted.

3. Implications of different treatments of

retained earnings

9.32 In cases where retained earnings are not

imputed as being payable to the owners, these earnings

contribute to revaluation. The SNA and international

accounts have two treatments for retained earnings:

• For direct investors’ equity in their direct investment

enterprises and for investment fund shares, retained

earnings are imputed as being payable to the owners

and reinvested as an increase in their equity. (The

primary income account entries are discussed in

paragraphs 11.33–11.47; the corresponding financial

account entries in paragraphs 8.15–8.16 and 8.28.)

Similarly, insurance and pension fund reserves and

provisions for calls under standardized guarantees

include property income attributed to policyholders.

(The primary income account entries are discussed

in paragraphs 11.77–11.84.)

• In other cases of equity, there is no imputation

of income or financial account transactions to

the owners on account of retained earnings. The

result is that the increase in the value of the equity

caused by the accumulation of retained earnings

is reflected in increased value in the IIP without a

transaction and is, therefore, shown as a result of

revaluation.

Chapter 9 g Other Changes in Financial Assets and Liabilities Account

148

4. Implications of trading of instruments that

are recorded at nominal values in positions

9.33 Nominal valuation is used for positions in

nonnegotiable instruments, namely loans, deposits,

and other accounts receivable/payable (see para-

graphs 7.40–7.44). However, when transactions in

these instruments do occur, they are valued at market

prices (see paragraph 8.12), with transaction prices

often being less than the nominal values, because

the market price takes account of the possibility of

default. To account for the inconsistency between

the market valuation of transactions and nominal

valuation of positions, the seller records other price

changes during the period in which the sale occurs,

equal to the difference between the nominal and the

transaction value and the buyer records an opposite

amount as other price changes.

5. Implications of treatment of interest

9.34 Any indexation amounts not included in inter-

est are classified as revaluation. The treatment of inter-

est on index-linked instruments is discussed in more

detail in paragraphs 11.59–11.65.

9.35 Revaluation arises from changes in market yields

on fixed-interest debt securities. The value of interest

is determined by the yield to maturity at inception (see

paragraphs 11.52–11.53), so the effect of any subsequent

change in the value of the security due to changes in mar-

ket interest rates is classified as being due to revaluation.

The steps are described in paragraph 9.28. The data in

normal text are given; the data in bold are derived.

Step 1. Derivation of other revaluation in terms of the cur-

rency of denomination of the instrument (in this case, ):

Other revaluation can be derived as 8, i.e., 50 (end of

period position) – 30 (beginning of period position) – 12

(net transactions) – 0 (other volume changes) = 8.

Step 2. Conversion of currency of denomination to the

currency used for compilation of international accounts

statistics (in this case from  to domestic currency):

Beginning of period positions are multiplied by 2; flows

by 2.5 (rate derived as the average rate on the period); and

end of period positions by 3.

Step 3. Derivation of exchange rate changes in the

currency used for compilation of international accounts

statistics: For the bonds denominated in , revaluation

due to exchange rate changes can be derived as 150 (end

of period position) – 60 (beginning of period position)

– 30 (net change due to transactions) – 20 (net change

due to other revaluation) = 40.

Box 9.1. Example of Calculation of Revaluation Due to Exchange Rate Changes

Net Revaluation

Beginning transactions Other Step 1 due to End

of period during volume other exchange of period

position period changes revaluations rate changes position

Values in currency of denomination:

Bonds denominated in  (in ) 3012 0 8 050

Exchange rate (domestic currency

per ) 2 2.5 2.5 3

Values in currency of compilation: Step 2 Step 2 Step 2 Step 2 Step 3 Step 2

Bonds denominated in 

(in dom. curr.) 60 30 0 20 40 150

(Use of average exchange rates in Step 2 is an approximation, as discussed in Step 2 of paragraph 9.28. Preferably, exchange rates at the time of the event

would be used.)

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

149

CHAPTER

Goods and Services Account

A. Overview of the Goods and

Services Account

References:

2008 SNA, Chapter 6, The Production Account.

United Nations, International Merchandise Trade Sta-

tistics: Concepts and Definitions.

United Nations and others, Manual on Statistics of

International Trade in Services.

10.1 The goods and services account shows trans-

actions in items that are outcomes of production

activities.

10.2 The focus of this account is the point at which

goods and services are exchanged between a resident

and a nonresident. In contrast, the national accounts

focus on other points, such as their production, con-

sumption, or use in capital formation.

10.3 Production is an activity in which an enter-

prise uses inputs (intermediate inputs, labor, pro-

duced and nonproduced assets) in order to transform

them to an output that can be supplied to other units.

(In a few cases, the output is supplied to the unit

itself.) The term “product” is used in the SNA to cover

both goods and services.

10.4 The corresponding entries to goods and ser-

vices flows may be in the financial, current, or capital

accounts. For items paid for at the same time as the pro-

vision of the good or service, the corresponding entry is

in the financial account, such as in currency and depos-

its. When payment is not made at the time of change

of ownership, trade credit or another form of financial

instrument (such as a bill of exchange) is established. If

payment is made before change of ownership, there is

Putting a produced asset at the disposal of another unit is also

considered to be production. It is an operating leasing service (for

tangible assets, see paragraphs 10.153–10.156) or a charge for the

use of intellectual property (for intangible assets, see Table 10.4).

an advance from the importer to the exporter. In some

cases, goods and services are exchanged for something

other than financial assets; for example, in the case

of barter, there is a corresponding entry in goods and

services. In the case of aid or gifts, the corresponding

entries are under current or capital transfers.

10.5 Table 10.1 shows the broad structure of the

goods and services account. There are balancing items

for goods, services, and the total of goods and services.

Distinction between goods and services

10.6 The distinction between goods and services

and other entries is determined by the nature of eco-

nomic value supplied. Goods and services represent

outcomes of the production process. In contrast, when

other resources, such as labor, land, or other natural

resources, or financial resources, are supplied, they

are shown in other accounts. The goods and services

account can include transactions in products that were

generated in previous periods (e.g., second-hand goods,

software, research embodied in patents, and invento-

ries) and goods and services that embody a large pro-

portion of output of other economic territories (e.g.,

re-exports and goods under merchanting).

10.7 Goods are physical, produced items over which

ownership rights can be established and whose economic

ownership can be passed from one institutional unit to

another by engaging in transactions. They may be used to

satisfy the needs or wants of households or the community

or used to produce other goods or services. The produc-

tion of a good can be separated from its subsequent sale or

resale. Goods are shown separately from services.

10.8 Services are the result of a production activity

that changes the conditions of the consuming units, or

facilitates the exchange of products or financial assets.

Services are not generally separate items over which

ownership rights can be established and cannot gener-

ally be separated from their production. However, as seen

150

later in this chapter, some knowledge-capturing products,

such as computer software and other intellectual property

products, may be traded separately from their production,

like goods. In the balance of payments goods and ser-

vices account, the valuation of goods includes transport

within the exporting economy as well as wholesale and

retail services indistinguishably in the price of the goods.

Furthermore, the value of some service items includes the

values of some goods, in the cases of travel, construction,

and government goods and services n.i.e. Some services,

particularly manufacturing services, repairs, and freight

transport, also relate to goods.

10.9 In practice, the distinction made between goods

and services sometimes takes into account other con-

siderations, such as data sources.

10.10 E-commerce is a method of ordering or deliv-

ering products at least partly by electronic means, such

as through the Internet or other computer-mediated

networks. In general, charges for electronically deliv-

ered products are usually included in services, whereas

products supplied across the border are usually classi-

fied as goods (see Table 10.4 for further details). Ship-

ping charges associated with e-commerce are allocated

in line with the FOB valuation principle. Financial

services associated with e-commerce are included in

financial services.

Transactions between affiliated enterprises

10.11 A high proportion of exchanges of goods and

services are between affiliated enterprises. This situation

gives rise to issues of treatment and valuation. For exam-

ple, where a direct investor temporarily provides equip-

ment to its direct investment enterprise, there may be an

operating lease. Additional guidance on goods deliveries

between affiliated enterprises is provided in paragraph

10.24. Management and ancillary services may also be

provided, as discussed in paragraph 10.150. These cases

may give rise to issues of valuation, as discussed in para-

graphs 3.77–3.78 and 10.35. Consequential effects on

income are discussed in paragraphs 11.101–11.102.

Price and volume data

10.12 Goods and services have price and volume

dimensions, so it is useful for analysis and data valida-

tion to have volume and price data, as well as current

price values.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 10.1. Overview of the Goods and Services Account

Exports Imports

(Credits) (Debits)

General merchandise on a balance of payments basis

Of which: Re-exports

Net exports of goods under merchanting

Goods acquired under merchanting (negative exports) n.a.

Goods sold under merchanting (exports) n.a.

Nonmonetary gold

Total goods

Balance on trade in goods

Manufacturing services on physical inputs owned by others

Maintenance and repair services n.i.e.

Transport

Tr av el

Construction

Insurance and pension services

Financial services

Charges for the use of intellectual property n.i.e.

Telecommunications, computer, and information services

Other business services

Personal, cultural, and recreational services

Government goods and services n.i.e.

Total services

Balance on trade in services

Total goods and services

Balance on goods and services

Note: This table is expository; for Standard Components, see Appendix 9.

151

B. Goods

References:

United Nations, International Merchandise Trade Sta-

tistics: Concepts and Definitions.

United Nations, International Merchandise Trade Sta-

tistics: Compilers Manual.

1. General merchandise

a. Introduction

10.13 General merchandise on a balance of pay-

ments basis covers goods whose economic ownership

is changed between a resident and a nonresident and

that are not included in the following specific catego-

ries: goods under merchanting (see paragraphs 10.41–

10.49), nonmonetary gold (paragraphs 10.50–10.54),

and parts of travel (paragraph 10.94), construction

(10.101), and government goods and services n.i.e.

(paragraph 10.173).

10.14 International merchandise trade statistics

(IMTS) are usually the main data source for general mer-

chandise in the goods and services account. The interna-

tional standards for merchandise trade data are set out in

United Nations IMTS: Concepts and Definitions. These

standards are closely linked to those in this Manual. In

practice, the data used as sources for general merchandise

include customs data, international transactions reporting

systems, other administrative data (including value-added

tax systems), surveys of traders, or combinations. Adjust-

ments to source data may be needed to account for cover-

age, timing, valuation, and classification that do not meet

balance of payments guidelines.

10.15 General merchandise is shown as a single

item in the standard components. This Manual does

not propose standards for breakdowns of goods, but

encourages presentations according to the priorities

of the compiling economy. More detailed breakdowns

could include major products (or commodities), major

product groups, industry of origin, and broad economic

categories. The international standard product (or com-

modity) classifications include the Harmonized System

(HS), the Standard International Trade Classifica-

tion, and the Central Product Classification (CPC).

In addition, or alternatively, cross-references could be

made to additional details available in other publica-

World Customs Organization, Harmonized Commodity Descrip-

tion and Coding System. United Nations, Standard International Trade

Classification. United Nations, Central Product Classification.

tions, while noting coverage, timing, valuation, and

classification differences.

10.16 IMTS cover goods “which add to or subtract

from the stock of material resources of a country by enter-

ing (imports) or leaving (exports) its economic territory”

(United Nations IMTS: Concepts and Definitions 1998,

paragraph 14). This basis differs from the change of own-

ership between residents and nonresidents required for

balance of payments, so adjustments may be needed.

b. Items to be included in general merchandise

10.17 Because there is a change of ownership of

goods between a resident and a nonresident, the fol-

lowing cases are included in the balance of payments

definition of general merchandise:

(a) Banknotes and coins not in current circulation

and unissued securities. They are valued as com-

modities, rather than at face value. Banknotes

and coins may be not in circulation because they

have not yet been issued, or they have been with-

drawn from circulation and demonetized. Sales

of coins to or between collectors at a premium

are valued at the transaction price, rather than

the face value. (Banknotes and coins in circula-

tion and issued securities are financial instru-

ments and are excluded from goods.);

(b) Electricity, gas, and water. However, charges

invoiced separately for the transmission, trans-

port, or distribution of these products are

included in services under transport and other

business services—see paragraphs 10.74 and

10.159. Allowing water to flow when that flow

is required by international law on river flows is

not an international transaction;

applications), and video and audio recordings, on

physical media, such as disks and other devices,

with a license for perpetual use are included in

general merchandise. These products are included

at their full transaction value (i.e., not at the

value of the empty disks or other storage device).

Software provided in this manner is included in

goods; other software is included in services—see

paragraphs 10.143–10.144.

(Noncustomized soft-

ware is for general use, rather than being made to

To assist in analyzing software as a whole, it may be useful to

identify separately software included in goods so as to compare or

combine it with software included in services.

Chapter 10 g Goods and Services Account

152

order. For classification of customized software

and other cases, see Table 10.4.);

(d) Goods procured in ports by carriers. Goods

such as fuels (bunkering), provisions, stores,

ballast, and dunnage procured by nonresident

transport operators in ports from resident pro-

viders are included in exports of general mer-

chandise. Similarly, goods procured by resident

transport operators from nonresident provid-

ers are included in imports. Ports are defined

widely to include sea and ocean terminals,

airports, inland waterways, and providers of

goods and services used in a territory by road

and rail transport service providers that are

residents of another economy. Goods procured

by ship’s crew, drivers, etc. for their own use

are included in travel. Maintenance and repair

costs of transport operators are transport ser-

vices covered in paragraph 10.72. Fuel costs

of small-scale transport operators are goods

procured in port by carriers rather than travel

(see paragraph 10.81);

(e) Goods supplied or acquired by carriers away

from the territory of residence of the operator.

For example, fish and other marine products

caught by ships operated by residents of the com-

piling economy and sold abroad directly should

be included. Similarly, oil and minerals retrieved

from the ocean floor by resident operators and

sold abroad directly should be included. The

goods could be acquired or sold in foreign ports

or at sea to foreign vessels;

(f) Goods acquired by a lessee under a financial

lease. Financial leases are defined in paragraph

5.56. Because the lessee is the economic owner,

a change of ownership between the seller of the

goods and the lessee is recorded at the start of

the lease. The lessor has legal title but does not

have economic ownership. In contrast, goods

under operating leases do not change ownership

to the lessee, and thus are not included in gen-

eral merchandise when delivered to the lessee.

(Operating leases are discussed in paragraphs

10.153–10.156.);

(g) Goods sent abroad without a change of own-

ership, but later sold. Goods sent abroad on

consignment or for storage, repair, exhibition,

processing, and so forth without a change of

ownership are not recorded at the time they are

sent abroad, but if they are later sold to a resident

of an economy different from that of the owner,

they should be recorded in general merchandise.

(See paragraph 10.29 for further information on

goods on consignment.);

(h) Equipment that is sold while outside the territory

of residence of its original owner. For example,

equipment originally taken out of the territory

for temporary purposes, such as construction,

exhibition, or fishing, may be subsequently sold

or given away;

(i) Illegal goods;

(j) Smuggled goods that are otherwise legal;

(k) Gifts;

(l) Parcel post where there is a change of owner-

ship;

(m) Goods lost or destroyed after ownership has

been acquired by an importer but before the

goods have crossed a frontier. (However, goods

lost or destroyed before ownership has been

acquired by an importer are excluded from mer-

chandise trade);

(n) Livestock that changes ownership;

(o) Government sales of goods to and purchases

of goods from nonresidents. Acquisitions of

military equipment from nonresidents should be

included in general merchandise. Goods supplied

by governments to their own embassies, military

bases, and so forth involve resident-to-resident

transactions and so are not covered in the inter-

national accounts. Expenditure by embassies,

military bases, and so forth is included under

government goods and services n.i.e. (see para-

graph 10.175);

(p) Goods where there is no associated payment,

such as those financed by grants or loans;

(q) Humanitarian aid in the form of goods;

(r) Goods transferred to or from a buffer stock orga-

nization;

(s) Goods acquired to be processed without passing

through the territory of the owner (see paragraph

10.65) and goods sold after processing without

passing through the territory of the owner (see

paragraph 10.66); and

(t) Any other goods where there is a change of own-

ership that was not identified from data sources.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

153

10.18 When a customs system is used as a source of

data on goods, there is a need to make adjustments to

include any goods where there is a change of owner-

ship not recorded in customs data or travel. Cases that

sometimes arise include shuttle trade (see paragraph

10.19); acquisition of ships, aircraft, and satellites;

trade between free trade zones of an economy and

residents of other economies; goods in bonded ware-

houses in economies that use the special trade system;

and amounts below customs thresholds.

10.19 Goods for resale acquired by travelers

while on visits (sometimes called shuttle trade) are

included in general merchandise. Shuttle trade cov-

ers transactions involving the purchase of goods in

an economy by travelers (nonresidents) who then

transport these goods back to their economy of

residence where they are to be sold; goods pur-

chased by travelers in their home country for resale

abroad; and goods purchased by travelers abroad

in one economy and sold abroad in a second econ-

omy. It is sometimes also called informal cross-

border trade. Because the intent of this travel is not

to acquire goods for personal use—recorded under

travel—but to engage in a business and to make a

profit, the goods acquired and sold are recorded

under general merchandise. (Other expenses

incurred by these traders are dealt with in para-

graphs 10.17(d), 10.72, and 10.81.)

10.20 Goods for own use or to give away acquired

by travelers in excess of customs thresholds and

included in customs statistics are also included in

general merchandise. For example, durable goods

(such as cars and electrical goods) and valuables

(such as jewelry) may be acquired in this way and

be brought back to the territory of residence of the

owner. This treatment is consistent with international

merchandise trade statistics, but care is needed to

avoid double counting such goods by including them

also under travel. (See paragraphs 10.86–10.90 for

goods included in travel.)

10.21 When an international transactions report-

ing system is used as a source of data on goods,

there is a need to make adjustments to include any

goods where there is a change of ownership but no

associated payment. Examples include humanitar-

ian goods as aid, goods as gifts, goods provided to

affiliated enterprises, goods under barter transac-

tions, goods under trade credit, and goods where

payment involves residents’ bank accounts held in

other economies.

c. Items to be excluded from general merchandise

because there is no international transaction

10.22 Because there is no change of ownership of

goods between a resident and a nonresident, or because

the goods have no value, the following cases are

excluded from general merchandise:

(a) Transit trade. These goods are admitted under spe-

cial customs procedures that allow the goods to

pass through the territory. They are excluded from

the general merchandise of the territory of transit;

(b) Migrants’ personal effects. The personal prop-

erty that accompanies people changing residence

is not classified as a transaction because there is

no change in ownership;

and so forth from their home authorities and

vice versa;

(d) Goods sent to an enterprise’s external operations

where those operations are not sufficiently sub-

stantial to constitute a branch. A common exam-

ple is goods sent abroad from the home base for

use in a construction project not undertaken by

a separate entity; these goods are not included in

exports of general merchandise of the territory

of the home base;

(e) Goods temporarily exported or imported without

a change of ownership. Examples include goods

for repair, as part of an operating lease, and for

storage, and animals or artifacts for participation

in exhibitions or competitions. (Such movements

of goods should be tracked, so as to identify

cases where the goods are subsequently sold,

rather than returned; see paragraph 10.17(g).

Identification of these movements may help

identify associated items, such as repair, operat-

ing leases, storage services, exhibition charges,

and competition winnings.);

(f) Goods for assembly, packing, labeling, or pro-

cessing by an entity that does not own the goods

concerned. (Both inward and outward move-

ments of such goods should be tracked, to assist

in identifying associated charges for assembly,

etc., to be recorded in manufacturing services on

physical inputs owned by others, as discussed in

paragraphs 10.62–10.71. These values also help

identify cases where the goods are subsequently

sold, rather than returned, in which case they are

identified as an export from the owner’s economy

at the time of sale.);

Chapter 10 g Goods and Services Account

154

(g) Goods acquired by a lessor under a financial

lease. Financial leases are defined in paragraph

5.56. Although the lessor has legal title, it does

not have economic ownership. (The goods are

shown as being acquired by the lessee; see para-

graph 10.17(f).);

(h) Goods with no positive value (e.g., dangerous

goods exported for disposal or storage). These

goods are not general merchandise, but could

give rise to associated disposal or storage ser-

vices; see paragraph 10.152. However, waste and

scrap with positive values are included in gen-

eral merchandise;

(i) Returned goods. In these cases, the goods were

not accepted, or a change of ownership occurred

but the parties later agreed to annul the change of

ownership. It is recommended that revised entries

should be made to exports and imports for the

period when the goods were initially recorded,

so as to remove the voided transaction especially

for returns of occasional, high-value goods. How-

ever, for statistical convenience, deductions from

exports and imports may be made in the periods

when the goods are returned for minor cases;

(j) Samples of no commercial value;

(k) Trade in goods between free trade zones and

residents of the same economy; and

(l) Any other goods that have been included in the

data source although there was no change of

ownership.

d. Items to be excluded from general

merchandise because they are included elsewhere

10.23 The following items are excluded from gen-

eral merchandise because they are included in other

components of goods and services:

(a) Goods acquired or sold by residents but that do

not enter the economic territory are shown sepa-

rately as goods under merchanting, as discussed

in paragraphs 10.41–10.49;

(b) Nonmonetary gold, as bullion and other forms,

is shown as a separate item within goods, as

discussed in paragraphs 10.50–10.54;

paragraphs 10.89–10.91;

(d) Goods locally acquired for construction under-

taken by enterprises that are nonresident in the

territory of the location of the work. These goods

are included under construction, as discussed in

paragraph 10.104;

(e) Devices, such as disks, with stored computer

software or data, that have been customized to

order are included under computer services, as

discussed in paragraph 10.143;

(f) Products such as packaged software (systems

and applications), video and audio recordings,

and so forth that are delivered on disks, mag-

netic media, or storage devices, but are obtained

with a fixed-period license to use (so that they

require ongoing periodic payments) rather than

with change of economic ownership. (These

products are included in computer or audiovi-

sual and related services; see paragraphs 10.143

and 10.163, respectively. For related products

included in goods, see paragraph 10.17(c).);

(g) Licenses to reproduce or distribute (or both)

audio and video that are conveyed by supply

of the original recording are included under

charges for the use of intellectual property n.i.e.,

as discussed in paragraph 10.137; and

(h) Customized blueprints and nonbulk newspapers

and periodicals sent on the basis of direct sub-

scription are included in information services.

(However, the bulk provision of newspapers and

periodicals is included in general merchandise.)

e. Deliveries between affiliated enterprises

10.24 Many cross-border movements in goods

are between affiliated enterprises. The goods may

be moved for processing, resale, and other purposes.

The question may arise as to whether there has been

a change of economic ownership. (For example, para-

graph 10.22(f) covers the treatment of goods deliv-

ered for processing without a change of ownership.)

Whether there has been a change in economic owner-

ship is determined according to the usual principle

that the economic owner is the party that bears the

risks and rewards of ownership. In cases where there

has been a change of possession of goods between

affiliated enterprises, but it is not known whether

there has been a change in ownership, the following

factors should be considered:

• When affiliated enterprises are separate legal enti-

ties, their transactions should be treated according

to the parties’ own arrangements as to whether

there is a change of ownership or not.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

155

• Between a quasi-corporation and its owner, legal

title is not usually available as evidence of the

nature of the movement of goods. The preferred

treatment in this case is to identify which part of

the legal entity assumes the risks and rewards of

ownership, based on evidence such as which loca-

tion has the goods recorded in its accounts and is

responsible for the sale of the goods. The treatment

should be consistent with reporting by the branch

in business accounts and enterprise or establish-

ment surveys.

f. General and special trade

10.25 International merchandise trade statistics may

be prepared on either a general or special trade basis:

• The general trade basis covers goods registered

to enter the economic territory, including bonded

warehouses and free trade zones. The general trade

system is preferred in the United Nations IMTS:

Concepts and Definitions. It is also preferable for

international accounts statistics because it captures

transactions involving goods for the whole econ-

omy and is more consistent with the coverage of

the corresponding financing entries.

• The special trade basis in the strict sense covers

goods cleared to enter the free circulation area

only. If only special trade system data are avail-

able, adjustments are needed for goods movements

into and out of bonded warehouses, export pro-

cessing zones, and commercial free zones.

g. Time of recording

10.26 Transactions involving general merchandise

should be recorded at the time of the change of own-

ership of the goods. Maximizing consistency in the

time of recording between the exporter and importer,

the change of ownership matches the time when the

corresponding financial account entries are made

(such as currency and deposits or trade credit). Goods

are considered to change ownership when the parties

enter the goods in their books as a real asset and make

a corresponding change to their financial assets and

liabilities.

10.27 IMTS: Concepts and Definitions recommends

that the time of recording be based on when the goods

enter or leave the territory, with the date of lodgment

of the customs declaration a suitable approximation. In

practice, some data sources may be based on the time

of processing the declarations, which is unsatisfactory

if there are either long or variable lags in the time taken

to process records. There will be lags between the time

of export of a good and the time of its corresponding

import arising from the period in which the goods are

at sea or in transit through other countries. Ideally for

international accounts statistics purposes, source data

would be adjusted by:

(a) removing recorded merchandise movements that

did not involve a change of ownership in the

period, and

(b) adding merchandise that changed ownership

during the period but was recorded in the source

data in earlier or later periods.

In practice, the timing of the change of ownership is

usually assumed to be approximately the same as the

time of customs recording.

High-value capital goods

10.28 The production of high-value capital goods

such as ships, heavy machinery, and other equipment

may take several months or years to complete. As with

other goods, the transaction should be recorded at the

time that economic ownership is conveyed from the

seller to the buyer. The time of ownership change is

as arranged between the parties; for example, it could

be a progressive change in line with stage payments,

or in full on delivery. The timing in data sources may

or may not coincide with the change of ownership; for

example, payments data are on the basis of stage pay-

ments, whereas customs data are on the basis of the

time that the completed item crosses the customs fron-

tier. (If change of ownership differs from time of pay-

ment, accounts receivable/payable arise, as discussed

in paragraph 5.71.)

Goods on consignment

10.29 Goods on consignment are intended for sale,

but their sale has not been arranged at the time they

are dispatched. Similarly, for goods sent for auction or

for temporary storage before sale, the change of owner-

ship may not occur until later. Such goods should not be

included in the international accounts until ownership

changes, to avoid a source of discrepancies between

the goods flow and the corresponding financial entries.

However, if it is impractical to record the transactions

in this way, they can be approximated by the time of

recording in international merchandise trade statistics.

If there is a substantial delay in the sale of the goods, it

is good practice in major cases to make adjustments to

the actual time of change of ownership.

Chapter 10 g Goods and Services Account

156

h. Valuation

10.30 The principle for valuation of general mer-

chandise is the market value of goods at the point of

uniform valuation. The point of uniform valuation is

at the customs frontier of the economy from which the

goods are first exported, that is, free on board (FOB).

Market value is discussed in paragraphs 3.67–3.80.

10.31 The terms of delivery of goods are the responsi-

bility of the buyer and seller of goods under each contract.

The arrangements made between exporters and import-

ers vary. As a result, transaction prices agreed between

exporters and importers include varying amounts of dis-

tribution costs, including none, some, or all of wholesal-

ing, transport, insurance, and taxes. An example is given

in Box 10.2. Data from international transactions report-

ing systems and business surveys use transaction prices,

and so have a variable mix of valuation bases.

10.32 IMTS use FOB-type valuation as the statisti-

cal value of exports and CIF-type for imports. FOB-

type valuations include:

(a) FOB—at port on the frontier of the exporting

country (for goods dispatched by sea or inland

waterway);

(b) “free carrier” (FCA)—at terminal on the frontier

of the exporting country (for goods dispatched

by means of transport to which FOB is not appli-

cable); and

(for goods dispatched by means of transport to

which FOB and FCA are not applicable; e.g.,

when goods are exported by railroad or pipe-

line).

(Where the customs frontier is not applicable, such as

where there is a single market, the territorial frontier is

used in its place. There may be cases where the appli-

cation of FOB-type values is problematic, such as for

goods under merchanting, nonmonetary gold changing

ownership without delivery, or goods processed and

sold in the economy of processing, so a transaction

value is used.)

10.33 CIF-type valuations include:

(a) “cost, insurance, and freight” (CIF) at the border

of the importing country; and

(b) “carriage and insurance paid” to the border of

the importing country.

10.34 To convert imports from CIF to FOB valu-

ation for international accounts purposes, the value

of freight and insurance premiums incurred from the

frontier of the exporting country to the border of the

importing country should be deducted. Ideally, CIF

to FOB adjustment for imports should be obtained

for each goods transaction, or at a detailed level. The

relationship of FOB to CIF prices varies according to

factors such as the type of good, weight, scale (bulk

or not), special needs (such as refrigeration or careful

handling), mode of transport, and the distance trav-

eled. CIF to FOB ratios change over time, due to fac-

tors such as fuel prices, competition and technology

in the transport industry, change in the proportion

of different types of goods, and changes in source

economies. For goods when the customs points of the

exporting and importing territory are contiguous, the

CIF and FOB values would be the same.

The FOB

valuation point means that export taxes are treated

as payable by the exporter and that import duties and

other taxes of the importing economy are payable by

the importer. To the extent that this is not the case,

adjustments like those for freight and insurance are

necessary.

10.35 In some cases an estimate of a market-

price equivalent price may need to be made. (See

paragraphs 3.71–3.79 for more details.) For exam-

ple, barter trade, aid goods, provision of goods and

services between affiliated enterprises, under- or

overinvoicing, goods on consignment or for auction,

or where goods change ownership but a final price

is determined later may require adjustment to the

goods value. Such adjustments may also require cor-

responding financial account items, such as trade

credit; in the case of goods supplied by direct inves-

tors to their direct investment enterprise below cost

or without charge, the corresponding entry is direct

investment equity.

10.36 Compilers should verify that realistic valu-

ations have been used in customs declarations, rather

than notional figures, such as zero, or a price that is

small or highly rounded. In the cases when the price

is determined later, subsequent adjustments should

be made to take into account the final price when it

becomes available. The recording of possible adjust-

ments is discussed further in paragraph 3.73.

However, for some merchandise trade between neighboring ter-

ritories, insurance and freight costs may be incurred between the cus-

toms frontiers, such as for air shipments, or in other cases when either

customs frontier is away from the border, such as where goods are

cleared for customs in sealed containers from the point of dispatch.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

157

i. Re-exports

10.37 Re-exports are foreign goods (goods produced

in other economies and previously imported) that are

exported with no substantial transformation from the

state in which they were previously imported.

The price

of the re-exported good may differ from its price at the

time it was originally imported, due to factors such as

transport costs, dealer’s margins, and holding gains or

losses. For goods to be included in re-exports for balance

of payments statistics, a resident must acquire then resell

the goods with the goods passing through the territory.

Goods that are bought and resold but do not pass through

the territory of the owner are included in goods under

merchanting—see paragraph 10.41. Goods in transit are

not recorded in imports or in re-exports—see also para-

graph 10.22(a). As well, goods cleared by customs, but

re-exported without coming into ownership by a resident

of that economy, should not be included in re-exports

for balance of payments statistics purposes. In contrast

to re-exports, in the case of returned goods, there is no

change of ownership or the parties later agree to annul

the change of ownership (see paragraph 10.22(i)).

10.38 In cases where the state of the imported goods

is substantially transformed, which could be indicated by

a change in HS code, goods are recorded as domestically

produced exports rather than re-exports (e.g., goods that

have been assembled or processed, or goods that have

become rags, waste, scrap, antiques). Used goods that

were previously imported and retain the same HS code,

but have suffered wear and tear, could in most cases be

included in re-exports depending on the rules of origin

that the economy applies. Whereas international recom-

mendations

on rules of origin exist, the origin of the

goods will be determined at a national level. The case

of imported goods processed without change of own-

ership is discussed in paragraphs 10.62–10.70. Goods

temporarily imported or re-exported without a change of

ownership, such as for repair or operating lease, are not

included, as discussed in paragraph 10.22(e).

10.39 Where possible, re-exports should be shown

separately as a supplementary item, particularly in econ-

omies where re-exports are a significant proportion of

exports. Because re-exported goods are not produced

in the economy concerned, they have less connection to

the economy than do other exports. Economies that are

For treatment of re-exports in IMTS, see United Nations, IMTS:

Concepts and Definitions, 1998, paragraphs 78 and 79.

World Customs Organization, International Convention on the

Simplification and Harmonization of Customs Procedures (Revised

Kyoto Convention).

major transshipment points and locations of wholesalers

often have large values of re-exports. It may be of inter-

est to derive the value of imports destined for re-export,

calculated from re-exports with any timing adjustment.

10.40 Re-imports are domestic goods imported in

the same state as previously exported, without any sub-

stantial transformation occurring on the goods while

they were outside the territory. Where significant, re-

imports may be shown separately. Re-imports tend to

arise in order to reverse a previous export, while re-

exports generally arise because of transport, storage,

or distribution through a territory other than that of

the buyer or seller. For the goods to be included in re-

imports, a nonresident must have acquired the goods,

then resell them to a resident. (In cases where there was

no change of ownership, they are omitted from imports;

e.g., goods for repair or goods sent for processing.)

2. Other goods

a. Goods under merchanting

10.41 Merchanting is defined as the purchase of

goods by a resident (of the compiling economy) from a

nonresident combined with the subsequent resale of the

same goods to another nonresident without the goods

being present in the compiling economy. Merchanting

occurs for transactions involving goods where physical

possession of the goods by the owner is unnecessary

for the process to occur. (If guidance is needed about

the meaning of same goods, the criteria in paragraphs

10.37–10.38 can be used.)

10.42 Merchanting arrangements are used for whole-

saling and retailing. They may also be used in commod-

ity dealing and for the management and financing of

global manufacturing processes. For example, an enter-

prise may contract the assembly of a good among one

or more contractors, such that the goods are acquired by

this enterprise and resold without passing through the

territory of the owner.

If the physical form of the goods

is changed during the period the goods are owned, as

a result of manufacturing services performed by other

entities, then the goods transactions are recorded under

general merchandise rather than merchanting. In other

cases where the form of the goods does not change, the

goods are included under merchanting, with the sell-

ing price reflecting minor processing costs as well as

If there is no change of ownership of the goods, there is no mer-

chanting transaction, but there may be manufacturing services on

physical inputs owned by others for a fee, as discussed in paragraphs

10.62–10.64.

Chapter 10 g Goods and Services Account

158

wholesale margins. In cases where the merchant is the

organizer of a global manufacturing process, the selling

price may also cover elements such as providing plan-

ning, management, patents and other know-how, mar-

keting, and financing. Particularly for high-technology

goods, these nonphysical contributions may be large in

relation to the value of materials and assembly.

10.43 Goods under merchanting are recorded in the

accounts of the owner in the same way as any other

goods it owns. However, the goods are shown separately

in international accounts statistics of the economy of

the merchant because they are of interest in their own

right and because they are not covered by the customs

system of that economy.

10.44 The treatment of merchanting is as follows:

(a) The acquisition of goods by merchants is shown

under goods as a negative export of the economy

of the merchant;

(b) The sale of goods is shown under goods sold

under merchanting as a positive export of the

economy of the merchant;

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Example 1—Merchanting with manufacturing services that do not change the

condition of the goods

A resident of Economy A acquires books from a resident of Economy B for 10. The resident

of Economy A has them sent to Economy C, without the books passing through Economy

A, for a resident of Economy C to put in boxes, for a charge of 3 payable by the resident of

Economy A. The books are then sold by the resident of Economy A to a resident of Economy

D for 20.

Since the goods are in the same condition, the merchanting treatment applies.

The goods and services account entries for Economy A would be:

Goods under merchanting (with Economy B) –10 CR. (negative exports)

Goods under merchanting (with Economy D) 20 CR.

Net exports of goods under merchanting 10 CR.

Manufacturing services on physical inputs owned 3 DR.

by others (with Economy C)

(The counterpart entries in Economies B and D would appear as exports and imports,

respectively, under general merchandise, because goods under merchanting is only used for

the economy of the merchant.)

Example 2—Manufacturing services that change the condition of the goods

A resident of Economy A acquires oil from a resident of Economy B for 10. The oil is sent

to Economy C, without passing through Economy A, for refining by a resident of Economy C,

for a charge of 15; the oil continues to be owned by the resident of Economy A. The oil is then

sold to a resident of Economy D for 30.

Since the goods are not in the same condition, the processing services treatment applies.

The goods and services account entries for Economy A would be:

General merchandise (with Economy B) 10 DR.

General merchandise (with Economy D) 30 CR.

Manufacturing services on physical inputs owned 15 DR.

by others (with Economy C)

(See also paragraphs 10.62–10.71 on manufacturing services and related issues associated

with processing.)

Economy B records goods exports to Economy A (10 CR.), Economy C records only manu-

facturing services exports A (not exports or imports of goods), and as noted above, Economy

D records goods imports from Economy A (not goods imports from Economy C).

In both examples, Economy C may wish to identify the values of goods received and goods

sent abroad as supplementary items.

Box 10.1. Examples of Goods under Merchanting and Manufacturing

Services on Physical Inputs Owned by Others (Processing Services)

159

goods for merchanting is shown as the item “net

exports of goods under merchanting.” This item

includes merchants’ margins, holding gains and

losses, and changes in inventories of goods under

merchanting. As a result of losses or increases

in inventories, net exports of goods under mer-

chanting may be negative in some cases; and

(d) Merchanting entries are valued at transaction

prices as agreed by the parties, not FOB.

(Box 10.1 contrasts the entries for goods under mer-

chanting with those for goods under processing.)

10.45 Merchanting items appear only as exports in

the accounts of the economy of the territory of the

merchant. In the counterpart exporting and import-

ing economies, export sales to merchants and import

purchases from merchants are included under general

merchandise.

10.46 Wholesaling, retailing, commodity dealing,

and management of manufacturing may also be carried

out under arrangements where the goods are present

in the economy of the owner, in which case they are

recorded as general merchandise, rather than as mer-

chanting. In cases where the goods do not pass through

the economy of the owner, but the physical form of the

goods changes, because they are processed in another

economy, international transactions are recorded under

general merchandise, rather than merchanting. (The pro-

cessing fee is recorded as a manufacturing service paid

for by the owner, as discussed in paragraph 10.62.)

10.47 Sometimes a purchaser may be uncertain

whether the goods will be resold to residents of the

same economy or others. In this case, intentions can

be used as an indicator, with subsequent adjustment if

intentions are not realized.

10.48 When a merchant resells goods to a resident

of the same economy as the merchant, this does not

meet the definition of merchanting. Accordingly, the

purchase of goods is shown as imports of general mer-

chandise to the economy in that case. If the entity that

purchased from a merchant in the same economy sub-

sequently resells the goods to a resident of another

economy, whether or not the goods enter the economy

of the merchant, the sales of goods are recorded in

exports of general merchandise from the economy of

the merchant. (Although such a case is very similar

to merchanting, it does not meet the definition given

above. In addition, it is impractical for the first mer-

chant to record the purchases as merchanting because

that merchant may not know whether or not the second

merchant will bring the goods into the economy.)

10.49 Merchanting of nonmonetary gold is included

under the nonmonetary gold item, discussed in para-

graphs 10.50–10.54. This treatment means that the non-

monetary gold item is comprehensive and conceptually

symmetric.

b. Nonmonetary gold

10.50 Nonmonetary gold covers all gold other than

monetary gold. Monetary gold, as defined in paragraphs

5.74–5.75, is owned by monetary authorities and held as

a reserve asset. Nonmonetary gold can be in the form of

bullion (i.e., gold bullion takes the form of coins, ingots,

or bars with a purity of at least 995 parts per 1,000,

including such gold held in allocated gold accounts), gold

powder, and gold in other unwrought or semimanufac-

tured forms. Jewelry, watches, and so forth that contain

gold are included under general merchandise, not non-

monetary gold. Nonmonetary gold sales and purchases

that are not shipped are valued at transaction prices, not

FOB. The price should include any dealer’s margins or

commissions not billed separately.

10.51 Allocated gold accounts are treated as being

arrangements for the storage of gold bullion. A change

in ownership of an allocated gold account holdings

is, therefore, treated in the same way as gold bullion

(see paragraph 9.18). For the same reason, allocated

gold accounts are not treated as deposits. If an entity

puts gold it already owns into an allocated account,

or withdraws gold from an allocated account without

selling it, no change of ownership occurs so no transac-

tion is recorded. In contrast, unallocated gold accounts

are financial assets (included under monetary gold or

deposits, depending on the holder). As a result, a deposit

of bullion to an unallocated gold account is shown as

an exchange of nonmonetary gold for a financial asset;

and a withdrawal is the reverse unless both parties

are monetary authorities or international organizations.

(See also paragraphs 5.76–5.77 on gold accounts and

9.18 on transactions in gold bullion.)

10.52 When both parties to a gold transaction are

either monetary authorities that hold the gold as reserve

assets or international financial organizations, gold

sales are recorded as monetary gold in the financial

account, as discussed in paragraph 8.55. Otherwise,

gold sales are recorded under nonmonetary gold.

10.53 Nonmonetary gold is shown separately from

other goods because of the special role of gold in

Chapter 10 g Goods and Services Account

160

financial markets, because gold sales and purchases

largely relate to existing stocks, and because the val-

ues of sales and purchases may be particularly large

in some cases, such as gold dealing centers. In many

cases, there is no physical delivery to the new owner,

because the gold is held at specialized bullion storage

centers. However, change in ownership is the criterion

for the recording of nonmonetary gold, so gold sales

and purchases should be recorded even when there is

no physical movement.

10.54 Nonmonetary gold may be held either as a

store of value or for other (industrial) purposes, such

as manufacturing of jewelry or for use in dental work.

When feasible, nonmonetary gold can be subdivided

into gold held as a store of value and other (industrial)

gold as supplementary data.

3. Reconciliation between merchandise trade

data and total goods on a balance of payments

basis

10.55 It is a good practice for compilers to produce

and publish a reconciliation table of the differences

between merchandise trade statistics and goods on a

balance of payments basis. A sample reconciliation

table is shown in Table 10.2. Such a table ensures trans-

parency and avoids confusion and doubts as a result of

different sources, coverage, classification, valuation,

timing, and so forth.

10.56 The table summarizes the steps taken in

compilation. Some of the items are discussed in more

detail in this chapter above. Annex E of IMTS: Com-

pilers Manual lists differences between IMTS and

BPM5 standards. In addition to changes from BPM5

in this Manual, other adjustments may arise if there

are differences between IMTS and the national prac-

tices for coverage of international merchandise trade

statistics.

C. Services

References:

United Nations and others, Manual on Statistics of

International Trade in Services, especially Chap-

ter III, Services Transactions Between Residents

and Non-residents.

United Nations World Tourism Organization, Inter-

national Recommendations on Tourism Statistics

and The Tourism Satellite Account: Recommended

Methodological Framework.

1. Concepts and coverage

10.57 Following the general principles in paragraph

3.47, the time of recording of service entries in the

international accounts is the time at which the service is

delivered. The provision of services should be recorded

on an accrual basis in each accounting period, that is,

they should be recorded as they are rendered. Payment

may be made up front, at the end, or as progress pay-

ments. To the extent that the time of payment differs

from the time of delivery, there may be trade advances

(financial assets/liabilities that are extinguished as the

service is provided) or trade credit (financial assets/

liabilities that arise as the service is provided).

10.58 Services provided by a consultant, indepen-

dent contractor, or employment agency are distin-

guished from compensation of employees. Paragraphs

11.11–11.13 discuss the difference between an employee

and a service provider.

10.59 Services that are “outsourced”—that is, where

a company contracts another (specialist) company to

provide services that were previously internal com-

pany functions, such as billing services or information

“help” services—should be classified to the appropriate

services item. Services supplied by “call centers” and

similar types of operations should be classified accord-

ing to the type of service provided. For example, call

centers selling products are included in trade-related

services, whereas call centers providing computer sup-

port are included in computing services.

10.60 The Manual on Statistics of International

Trade in Services (MSITS) is a source of additional

information for compilers of international trade in ser-

vices data. MSITS uses the same conceptual framework

as the 2008 SNA and this Manual.

MSITS responds to

information needs related to the General Agreement on

Trade in Services (GATS) and other trade agreements,

as well as growing information needs of governments,

business, and analysts. It describes and clarifies the

four modes through which services can be supplied

internationally. Building on the services classifica-

tion included in this Manual, MSITS provides a fur-

ther breakdown of the classification of transactions by

type of services through the Extended Balance of Pay-

ments Services (EBOPS) Classification. It also further

extends the meaning of trade in services to cover ser-

vices delivered through locally established enterprises

(see Appendix 4, Statistics on the Activities of Multina-

Details and presentation may differ. MSITS will be updated to

incorporate the 2008 changes in the SNA and this manual.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

161

tional Enterprises). For more details, see MSITS, Chap-

ter II, Conceptual Framework for the Development of

Statistics on International Trade in Services.

2. Classification

10.61 An overview of the classification of services

is shown in Table 10.1. The classification is mainly

product-based, but is transactor-based for travel, con-

struction, and government goods and services n.i.e. The

classification is according to the type of service, rather

than the unit that provides it; for example, if a bank pro-

vides pension fund services as a secondary activity, the

service is classified as pension fund services. A recon-

ciliation of the CPC and services classification is given

in MSITS. The detailed listing of CPC items included

in each service item in MSITS can be used to classify

any services not specified in the following text to the

appropriate international accounts service item.

a. Manufacturing services on physical inputs

owned by others

10.62 Manufacturing services on physical inputs

owned by others cover processing, assembly, labeling,

packing, and so forth undertaken by enterprises that

do not own the goods concerned. The manufacturing

is undertaken by an entity that does not own the goods

and that is paid a fee by the owner. In these cases, the

ownership of the goods does not change, so no general

merchandise transaction is recorded between the pro-

cessor and the owner.

10.63 Examples of processes that are often under-

taken under arrangements for manufacturing services

on physical inputs owned by others include oil refining,

liquefaction of natural gas, assembly of clothing and

electronics, assembly (excluding assembly of prefab-

ricated constructions, which are included in construc-

tion), labeling, and packing (excluding those incidental

to transport, which are included in transport services).

10.64 Manufacturing services on physical inputs

owned by others cover the transaction between the

owner and processor, and only the fee charged by the

processor is included under this item. The fee charged

may cover the cost of materials purchased by the proces-

sor. Manufacturing services on physical inputs owned

by others refer to all work done on goods by a resident

of one economy for the owner of goods who is resident

in another economy; the treatment of these services

is not conditional on whether the goods were previ-

ously or subsequently in the physical possession of the

Chapter 10 g Goods and Services Account

Table 10.2. Reconciliation between Merchandise Source Data and Total Goods on a

Balance of Payments Basis

Exports Imports

Merchandise trade statistics as provided in source data

Adjustments, as relevant

For example (with paragraph reference):

+ Goods procured in ports by carriers (10.17(d))

+ Fish catch, minerals from the seabed and salvage sold from resident-operated vessels (10.17(e))

+ Goods changing ownership entering / leaving territory illegally (10.17(i) /(j))

+/– Goods lost or destroyed in transit (10.17(m))

+ Goods acquired from other economies for processing abroad (10.65(b)) n.a.

+ Goods sold abroad after processing in other economies (10.66(b)) n.a.

+/– Goods changing ownership in customs warehouses or other zones (10.25)

– Migrants’ personal effects (10.22(b))

– Goods imported for construction projects by nonresident enterprises (10.22(d))

– Goods for repair or storage without change of ownership (10.22(e))

– Goods sent abroad or returned after processing without change of ownership (10.22(f))

– Returned goods (10.22(i))

+/– High-value capital goods, if delivery differs from change of ownership (10.28)

– CIF/FOB adjustment (10.34) n.a.

+ Net exports of goods under merchanting (10.44(c)) n.a.

+ Nonmonetary gold (10.50)

= Total goods on a balance of payments basis

This list is not comprehensive, but indicative of commonly made adjustments. Some of the adjustments listed may be unnecessary because international mer-

chandise trade statistics data for the economy may treat the item in the same way. For example, an adjustment for goods entering or leaving customs warehouses

is not necessary if data are sourced from international merchandise trade on a general trade basis.

162

owner or not. (Box 10.1 contrasts the entries for goods

under processing with those for goods under merchant-

ing. Box 10.2 discusses different types of arrangements

used for global manufacturing.)

Recording of related purchases and sales of goods

10.65 Purchases of materials by the owner (i.e.,

goods to be processed) may be obtained from residents

of the same economy as the owner, the same economy

as the processor, or a third economy. The treatment is

as follows:

(a) when the goods are acquired from residents of

the same economy as the owner, there is no inter-

national transaction; and

(b) when the goods are acquired from residents of

the same economy as the processor or a third

economy, the owner of the goods to be processed

records imports of general merchandise. (See

also paragraph 10.42 for circumstances in which

the sale could be recorded under merchanting.)

10.66 Sales of finished goods (i.e., goods after pro-

cessing) are treated as follows:

(a) when the goods are sold to residents of the same

economy as the owner, there is no international

transaction; and

(b) when the goods are sold to residents of the same

economy as the processor or a third economy,

the owner of the goods under processing records

the sale as exports of general merchandise. (The

seller could report merchanting in the case of

minor processing; see paragraph 10.42.)

Recording of related goods movements

10.67 The gross values of goods associated with

processing services can be identified as supplementary

items in economies where they are significant. Whereas

the manufacturing service is consistent with what is

recorded in business accounts and actual transactions,

the gross values of the physical movements of goods

without a change of ownership are useful for analysis

of processing activities. Values of the following items

may be identified:

(a) for customers of manufacturing services on goods

processed abroad (with no change of ownership

to the processor):

• goods supplied for processing (goods sent);

and

• goods dispatched after processing (goods

returned);

(b) for providers of manufacturing services on goods

processed in the compiling economy (with no

change of ownership to the processor):

• goods received for processing (goods received);

and

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

With the trend toward a more globalized economy, there has been growth in cross-border

production arrangements. These arrangements involve different aspects of production pro-

cesses being partly or wholly undertaken by affiliates or outsourced to unrelated entities.

There are several types of arrangements, such as:

(a) Re-exports. Re-exports can be very significant in economies that are international

centers for trading, transshipment, and processing that does not change the physical

form of the goods (such as packing and labeling). (See paragraphs 10.37–10.39.)

(b) Goods under merchanting. While sometimes used for simple wholesaling, merchant-

ing also arises when parent companies acquire ownership of goods from their own

manufacturing affiliates for resale to wholesaling affiliates or other customers,

without taking possession. (See paragraphs 10.41–10.49.)

movements of goods under these processing arrangements. (See paragraphs 10.62–

10.71.)

(d) Free trade and other special zones. (See paragraphs 4.4 and 4.8.)

For economies where some or all of these arrangements are significant, it may be useful

to use supplementary presentations that bring these processes together and/or provide more

detail, such as presenting gross flows by type of activity, in order to enhance knowledge of

economic developments.

Box 10.2. Recording of Global Manufacturing Arrangements

163

• goods dispatched after processing (goods sent).

10.68 A market-equivalent valuation for goods sup-

plied or received might be required. Gross values of the

goods are shown after processing, and again a market-

equivalent valuation might be required. The value of

goods input and dispatched could be reported either by

the customer or supplier of manufacturing services, or

from customs data:

• If the values are reported by the customers, cover-

age should be irrespective of whether the input

goods were supplied by the owner from the own-

er’s territory, the processor’s territory, or a third

territory; or whether the goods are dispatched to

the owner’s territory, the processor’s territory, or

a third territory.

• If reported from customs, coverage may be incom-

plete to the extent that some inputs and some pro-

cessed goods provided by the owner do not pass

through customs. For example, goods sourced or

sold locally will not be covered. Additionally, cus-

toms may not separately identify goods as being

subject to processing, such as if there are no duty

concessions.

There may be interest in breaking down these values by

product or product groups.

10.69 Transport costs may be incurred on move-

ments on goods undergoing processing. How these

transport services are recorded is determined from the

following factors:

(a) for goods included in general merchandise (i.e., in

the cases mentioned in paragraphs 10.65–10.66),

general principles for FOB valuation apply, so

that transport costs up to the customs frontier

are treated as being payable by the exporter and

transport costs after the frontier are treated as

payable by the importer; and

(b) for goods not included in general merchandise

(such as materials delivered from the owner to

the processor with no change of ownership),

transport costs are shown as payable according

to the arrangements of the parties; that is, the

amount is payable by the party invoiced to pay

the expense.

Other issues related to processing

10.70 The value of manufacturing services on physi-

cal inputs owned by others is not necessarily the same

as the difference between the value of goods sent for

processing and the value of goods after processing.

Possible causes include holding gains or losses, the

inclusion of overheads (such as financing, marketing,

and know-how included in the finished good price),

and measurement errors associated with the valuation

of goods movements where there is no sale.

10.71 In contrast to manufacturing services on phys-

ical inputs owned by others, manufacturing of goods on

own account means that the processor acquires owner-

ship of the goods. When ownership is acquired from a

nonresident, the gross values of the sale and purchase

of these goods are included in general merchandise.

Manufacturing on own account and manufacturing ser-

vices on physical inputs owned by others are different

arrangements for manufacturing, and it is desirable to

show them separately because the role of the manufac-

turer in designing, marketing, and financing the goods

is quite different. With globalization and outsourcing,

it is becoming more common to have parts of a produc-

tion process conducted in different economies. Show-

ing these transactions on a change of ownership basis

assists in identifying actual transactions and correctly

attributing value added due to the owner for designing,

marketing, financing, and so forth, rather than to the

party that undertakes physical processes.

b. Maintenance and repair services n.i.e.

10.72 Maintenance and repair services n.i.e. cover

maintenance and repair work by residents on goods

that are owned by nonresidents (and vice versa). The

repairs may be performed at the site of the repairer or

elsewhere. Repairs and maintenance on ships, aircraft,

and other transport equipment are included in this item.

Cleaning of transport equipment is included in trans-

port services. Construction maintenance and repairs

are excluded; they are included under construction.

Maintenance and repairs of computers are included

under computer services.

10.73 The value recorded for maintenance and repairs

is the value of the work done—not the gross value of the

goods before and after repairs. The value of maintenance

and repairs includes any parts or materials supplied by

the repairer and included in the charge. (Parts and mate-

rials charged separately should be included in general

merchandise.) As noted in paragraph 10.22, goods leav-

ing from, arriving in, and returning to a territory for

repair, processing, or other activity without a change

of ownership are excluded from general merchandise.

Maintenance and repair services n.i.e. cover both minor

repairs that maintain the good in working order and

Chapter 10 g Goods and Services Account

164

major repairs that extend the efficiency or capacity of the

good or extend its life. No distinction is made between

those repairs included by the customer in intermediate

consumption and those in capital formation.

c. Transport

10.74 Transport is the process of carriage of peo-

ple and objects from one location to another as well

as related supporting and auxiliary services. Also

included are postal and courier services. Transport

can be classified according to:

(a) mode of transport, namely, sea, air, or other

(“other” may be further broken down into rail,

road, internal waterway, pipeline, and space trans-

port as well as electricity transmission); and

(b) what is carried—passengers or freight.

In the standard components, transport is classified

according to both dimensions. A breakdown of total

transport services into freight transport, passenger

transport, and other transport alone is proposed as sim-

plified standard components for those countries that are

unable (e.g., for reasons of confidentiality) to provide

the full breakdown by mode of transport.

10.75 A transport provider may subcontract to use

the services of other operators to provide part of the

final transport service. Such services should be recorded

on a gross basis. For example, a courier service pro-

vider might contract separately to more than one trans-

port operator. Any commissions payable by providers

of transport services to an agent should be separately

recorded, as described for travel in paragraph 10.98.

Passenger services

10.76 Passenger services cover the transport of

people. The category covers all services provided in

the international transport of nonresidents by resident

carriers (credit) and that of residents by nonresident

carriers (debit). Also included are passenger services

performed within a territory by nonresident carriers.

The valuation of passenger transport should include

fees payable by the carriers to travel agencies and other

providers of reservation services. Passenger services

provided within a territory by residents to nonresidents

and provided or purchased separately from interna-

tional transport are excluded from passenger transport;

these services are included in travel.

10.77 Passenger services include fares and other

expenditure related to the carriage of passengers. They

also include any taxes levied on passenger services,

such as sales or value-added taxes. Passenger services

include fares that are a part of package tours. Cruise

fares are included in travel. Passenger services include

such items as charges for excess baggage, vehicles, or

other personal accompanying effects and food, drink, or

other items purchased on board carriers. Also included

in passenger services are rentals, charters, and leases of

vessels, aircraft, coaches, or other commercial vehicles

with crews for the carriage of passengers. Excluded are

rentals or charters that are financial leases (included

in loans), and rentals and time charters without crew

(included in operating leasing services).

Freight services

10.78 Freight services cover the transport of objects

other than people. The treatment of freight services is

a consequence of adopting FOB as the uniform valu-

ation principle for goods. As discussed in paragraphs

10.31–10.34, FOB valuation is as at the customs frontier

of the exporting economy, so:

(a) all freight costs up to the customs frontier are

shown as incurred by the exporter, and

(b) all freight costs beyond the customs frontier are

shown as incurred by the importer.

In addition to freight on exports and imports, freight

transport services may relate to goods where there is no

change of ownership, such as goods sent for storage or

processing and migrants’ personal effects.

10.79 When actual arrangements for paying freight

costs differ from FOB terms of delivery, rerouting is

needed, as defined in paragraph 3.16. Rerouting of freight

services may mean that a transaction that is actually

between two residents is treated as a transaction between

a resident and a nonresident, and vice versa, as shown in

Box 10.3. The timing of the provision of freight services

may differ from the timing of the change of ownership of

those goods, such as goods sent abroad on consignment

where the sale occurs in a different accounting period

from when the goods crossed the exporter’s customs

frontier. In principle, freight services should be recorded

in the period they are rendered but are attributed to the

importer in the period when the goods are purchased.

However, in practice, the aggregated nature of record-

ing of freight services and lack of information on indi-

vidual freight movements means that timing adjustments

to deal with this issue may not be feasible, material, or

appropriate (e.g., if the importer pays for the service in

the period it is rendered).

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

165

Other transport services

10.80 Other transport services include services

that are auxiliary to transport and not directly pro-

vided for the movement of goods and persons. The

category includes cargo handling charges billed

separately from freight, storage and warehousing,

packing and repackaging, towing not included in

freight services, pilotage and navigational aid for

carriers, air traffic control, cleaning performed in

ports and airports on transport equipment, salvage

operations, and agents’ fees associated with passen-

ger and freight transport (e.g., freight forwarding and

brokerage services).

10.81 Some related activities are excluded from

transport: freight insurance (included in insurance

services); goods procured in ports by nonresident

carriers (included in goods); maintenance and repairs

on transport equipment (included in maintenance

and repair services n.i.e.); and repairs of railway

facilities, harbors, and airfield facilities (included in

construction).

Postal and courier services

10.82 Postal and courier services cover the pick-up,

transport, and delivery of letters, newspapers, peri-

odicals, brochures, other printed matter, parcels, and

Chapter 10 g Goods and Services Account

A piece of equipment costs 10,000 units at the factory

at which it was produced in Economy A. It costs 200 to

transport it to the customs frontier of Economy A, 300 to

transport it from the customs frontier of Economy A to the

customs frontier of Economy B, where a customs duty of

50 is levied, and it costs 100 to deliver it from the customs

frontier to the customer. (For simplicity, insurance of the

equipment during transport is not covered in the example.)

Under all contractual arrangements between the par-

ties, the FOB value is 10,200 and the CIF value is 10,500.

However, how the services are recorded depends on the

arrangements for paying the transport costs and the resi-

dence of the transport provider. A few of the possible

arrangements are discussed below:

Example 1:

The parties contract on an FOB basis (i.e., the invoice

price is 10,200; the exporter is responsible for costs up

to the frontier of A and the importer is responsible for

subsequent costs). In this case, no rerouting needed. All

freight is shown as being provided by the actual provider

and payable by the actual invoiced party.

Example 2:

The parties contract on an “ex works” basis (i.e., the

invoice price is 10,000; the buyer pays for transport from

the seller’s premises).

• The freight from the factory to the customs frontier of

Economy A is provided by a resident of Economy A.

The 200 payable, which is actually a service provided

by a resident of Economy A and payable by a resident

of Economy B, must be rerouted to be shown as a

resident-to-resident transaction within A, as all costs

up to the frontier of the exporting economy are treated

as being payable by the exporter and included in the

price of the goods.

• The freight from the factory to the customs frontier of

Economy A is provided by a resident of Economy B.

The 200 payable, which is actually a domestic service

transaction within Economy B, must be rerouted as

being a service provided from B to A, as all costs up

to the frontier of the exporting economy are treated as

being payable by the exporter.

Example 3:

The parties contract on a CIF basis (i.e., the invoice

price is 10,500). The 300 payable for freight from the

customs frontier of Economy A to that of Economy B is

rerouted, because the contract makes it payable by the

exporter, but it is treated as payable by the importer in

balance of payments statistics (i.e., following FOB valu-

ation). As a result, if the freight provider is a resident of

A, a domestic transaction within A is treated as being a

balance of payments transaction. Conversely, if the freight

provider is a resident of B, an international transaction is

treated as being a domestic transaction within B.

It is not normally possible to study every contract, so

general patterns of freight cost arrangements need to be

identified. When contract terms other than FOB are used,

actual payment arrangements for freight may need adjust-

ments to meet the FOB valuation convention.

In all cases where apparently domestic transactions are

rerouted to be recorded as international transactions, or

vice versa, goods trade must be recorded on a consistent

basis, so that the financial payment from B to A equals

the sum of its goods and services imports, both before and

after re-routing adjustments. (If the goods are recorded

at FOB values, the adjustments to freight bring them

into consistency with goods; if the goods are recorded

at transaction values, the goods values need correspond-

ing adjustments.) Rentals, charters, or operating leases of

vessels, aircraft, freight cars, or other commercial vehi-

cles with crews for the carriage of freight are included in

freight services. Also included are towing and services

related to the transport of oil platforms, floating cranes,

and dredges. Financial leases of transport equipment are

excluded from transport services (see paragraphs 5.56–

5.59 and 10.17(f)).

Box 10.3. Numerical Examples of the Treatment of Freight Services

166

packages, including post office counter and mailbox

rental services.

10.83 Postal services also include post office coun-

ter services, such as sales of stamps and money orders,

poste restante services, telegram services, and so forth.

Excluded are financial services rendered by postal

administration entities, such as postal giro, banking

and savings account services (recorded under financial

services), mail preparation services (recorded under

other business services), and administration services

related to postal communication systems (included in

telecommunication services). Postal services are sub-

ject to international agreements, and the service entries

between operators of different economies should be

recorded on a gross basis. Postal services provided to

travelers are included in travel.

10.84 Courier services include express and door-to-

door delivery. Express delivery services might include,

for example, on-demand pick-up or time-definite deliv-

ery. Excluded are the movement of mail carried by

air transport enterprises (recorded under transport, air,

freight), storage of goods (recorded under transport,

other, auxiliary and supporting services), and mail

preparation services (recorded under other business

services, other).

10.85 The principles for recording postal and cou-

rier services on exports and imports of merchandise

are the same as for other freight services, as discussed

in Box 10.3. This treatment is a consequence of the

FOB valuation of the goods concerned. The princi-

ples for recording postal and courier services on other

items, such as documents, personal effects, and goods

for repair, are that the service is payable by the party

responsible for payment. Courier services may encom-

pass combinations of road, sea, air, and other methods

of transport.

d. Travel

10.86 Travel credits cover goods and services for

own use or to give away acquired from an economy

by nonresidents during visits to that economy. Travel

debits cover goods and services for own use or to give

away acquired from other economies by residents dur-

ing visits to these other economies. The goods and

services may be purchased by the persons concerned

or by another party on their behalf. For example, busi-

ness travel may be paid or reimbursed by an employer,

tuition and living costs of a student may be paid by a

government, or health costs may be paid or reimbursed

by a government or insurer. Goods and services sup-

plied by the producer without charge are also included,

such as tuition and board provided by a university.

10.87 The standard component breakdown of travel

is between business and personal travel, with supple-

mentary data for groups of special interest, such as bor-

der, seasonal, and other short-term workers. A separate

supplementary breakdown of travel into types of goods

and services is suggested (see paragraph 10.95).

10.88 Unlike most other service categories, travel

is not a specific type of service, but a transactor-based

component that covers an assortment of goods and ser-

vices. In the case of travel, the consumer moves to

another territory to consume the goods and services

that he or she acquires. For these reasons, travel is not

identified as a service in the CPC. Goods and services

provided to visitors while on their trips that would oth-

erwise be classified under another item such as postal

services, telecommunications, local transport, hire of

equipment, or gambling are included under travel.

10.89 Goods or services acquired by persons under-

taking study or medical care while outside their terri-

tory of residence are included in travel. Acquisitions

of goods and services by border, seasonal, and other

short-term cross-border workers in their economy of

employment are also included in travel.

Acquisitions

of goods and services by diplomats, consular staff, mil-

itary personnel, and so forth and their dependents (but

not locally engaged staff and their dependents) in the

territory in which they are posted are included under

government goods and services n.i.e.

10.90 Travel excludes goods for resale, which are

included in general merchandise. The acquisition of

valuables (such as jewelry), consumer durable goods

(such as cars and electric goods), and other consumer

purchases for own use or to give away that are included

in customs data in excess of customs thresholds is

included in general merchandise. (The inclusion of these

goods in general merchandise is discussed in paragraph

10.18.) Valuables and consumer durables that have not

been included in general merchandise data should be

included in travel (e.g., locally acquired goods kept

in a vacation home). Travel includes local transport

(i.e., transport within the economy being visited and

provided by a resident of that economy), but excludes

international transport (which is included in passenger

transport; see paragraph 10.76).

These acquisitions are not considered as tourism expenditure,

so showing them separately as supplementary items allows travel

data from the balance of payments to be reconciled with tourism

statistics.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

167

Business travel

10.91 Business travel covers goods and services

acquired for personal use by persons whose primary

purpose of travel is for business. Examples include

the expenditure of carrier crews stopping off or lay-

ing over; government employees on official travel;

employees of international organizations on offi-

cial business; employees traveling on behalf of their

employer (except for diplomatic staff, etc., employed

in government enclaves, whose expenditure in their

territory of physical location is included in government

goods and services n.i.e., as discussed in paragraph

10.178); self-employed nonresidents traveling for busi-

ness purposes; and seasonal, border, and other short-

term workers who are not resident in the economy in

which they are employed. The business activities may

include production or installation work, sales cam-

paigns, market exploration, commercial negotiations,

missions, conference, conventions, other meetings, or

other business purposes on behalf of an enterprise

resident in another economy.

10.92 Business travel includes the goods and ser-

vices acquired for personal use by persons whose

main purpose of travel is for business (including

goods and services for which business travelers are

reimbursed by employers) but not the sales or pur-

chases that they may conclude on behalf of the enter-

prises they represent.

10.93 A supplementary item may be provided to

show the total credits and debits for acquisition of goods

and services by border, seasonal, and other short-term

workers.

Personal travel

10.94 Personal travel covers goods and services

acquired by persons going abroad for purposes other

than business, such as vacations, participation in rec-

reational and cultural activities, visits with friends

and relatives, pilgrimage, and education- and health-

related purposes. Where important, there may be sup-

plementary items to break down personal travel into

subcomponents:

(a) health-related (e.g., medical services, other

health care, food, accommodation, local trans-

port, acquired by those traveling for medical

reasons);

(b) education-related (e.g., tuition, food, accommo-

dation, local transport, health services, acquired

by nonresident students); and

includes health expenditure by those not travel-

ing for health or educational purposes.)

The residence of international patients and students is

discussed in paragraphs 4.120–4.121. Health and edu-

cational services not included in travel are discussed in

paragraph 10.167.

Other issues related to travel

10.95 A separate supplementary breakdown of travel

may be provided according to product group, namely:

(a) goods,

(b) local transport services,

(d) food-serving services, and

(e) other services.

This breakdown allows for closer links with tourism

satellite accounts as well as supply and use tables.

Further information on tourism statistics is presented

in United Nations, Tourism Satellite Account: Rec-

ommended Methodological Framework

and United

Nations World Tourism Organization, International

Recommendations for Tourism Statistics. To highlight

the link between travel and passenger transport ser-

vices and tourism statistics, an approximation to tour-

ism expenditure may be shown as a supplementary item

that identifies relevant tourism-related goods and ser- identifies relevant tourism-related goods and ser-tourism-related goods and ser-

vices in the travel and passenger transport items.passenger transport items.

10.96 Travel covers stays of any length provided there

is no change of residence. (Principles for determining

residence of households are shown in paragraphs 4.116–

4.130.) In some cases, it may be useful to break down

travel by length of stay. For example, expenditure of

those who do not remain overnight may be shown on a

supplementary basis if this is significant.

10.97 In line with the accrual principle, goods and

services acquired during the visit but paid for earlier or

later are included in travel. Goods and services may be

The tourism satellite account has the concept of usual environ-

ment as an additional criterion to that of residence. As a result,

acquisitions of goods and services by border, seasonal, and other

short-term cross-border workers in their economy of employment

can be identified separately in travel for compatibility with tourism

statistics.

This supplementary item includes all personal travel and that

part of business travel that does not cover expenditure of border,

seasonal, and other short-term workers, as well as passenger trans-

port services.

Chapter 10 g Goods and Services Account

168

acquired by being paid for by the person going abroad,

paid for on his or her behalf, or provided without a quid

pro quo (e.g., free room and board received, in such case

there is also a corresponding transfer), or produced on

own account (as in some cases of notional units for own-

ership of real estate and time-share accommodation).

10.98 Travel services may be arranged through a

travel agent, tour operator, time-share exchange agent,

or other provider. In some of these cases, the agent may

pay the travel providers an amount that deducts a mar-

gin or commission. If the agent is a resident of the same

economy as the customer, then the margin or commis-

sion is a resident-to-resident transaction, and the net

amount payable to service providers resident in other

economies (after the margin or commission receivable

by the agent is deducted) is included in travel. In other

cases, the nonresident provider of the services may pay

the resident agent’s commission and the gross amount

is payable by the customer to nonresidents, and thus is

included in travel. Fares for cruises provided by opera-

tors resident in economies other than that of the passen-

ger are included in travel (not passenger transport).

10.99 In the case of a nonresident owner of land and

buildings, any accommodation services provided by

the identified notional unit to its owner (see paragraph

4.36) are shown in travel.

10.100 The term “time-share” covers a wide range

of arrangements. They can be classified in the three

categories, as described in Table 10.3:

(a) The acquisition of deeded ownership, or a similar

arrangement, is equivalent to the acquisition of

a notional direct investment enterprise. In this

case, after deeded ownership is acquired, accom-

modation services provided to the owner should

be imputed based on market prices, which in

turn gives rise to direct investment income on

equity. (An example of a similar arrangement is

a long-term lease that is of such duration that it

represents an effective change in ownership.)

(b) Payments for rights to use a property under a

membership system time-sharing arrangement,

where the right to use the time share is not trans-

ferable (the third category shown in the table),

is equivalent to prepaying for accommodation

services (recorded in trade credit and advances).

After initial acquisition, the prepayment is drawn

down, and imputed accommodation services

should be recorded in travel.

carries a transferable right should be accounted

for as prepaying for accommodation services

(recorded in trade credit and advances), identical

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 10.3. Treatment of Alternative Time-Share Arrangements

Type of Arrangement Classification Up-Front Payment Transaction in Asset Periodic Flow

Deeded ownership Ownership of land and Direct investment in Equity of the time-share Accommodation services

buildings notional unit in economy holder (direct investment) in travel (imputed based

where the time share is on equivalent market

located prices) and investment

income (income on

equity)

Right to use Transferable right to use Prepayment of Trade credit and Accommodation

(amounts to economic accommodation advances services in travel

asset) + +

Contracts, leases, and Nonproduced nonfinancial

licenses (only recognized asset (capital account)

when resold, difference

between selling price

and value of prepaid

accommodation services,

recorded in capital

account)

Membership system Membership is non- Prepayment of Trade credit and Accommodation

transferable right to use accommodation advances services in travel

(does not amount to

asset)

169

to the recording of a membership system time-

sharing arrangement discussed above. However,

if the right is resold, the difference between the

selling price and the amount remaining in trade

credit and advances (reflecting the value of the

remaining prepaid accommodation services)

should be recorded as a transaction in a nonpro-

duced nonfinancial asset, in the capital account.

e. Construction

10.101 Construction covers the creation, renovation,

repair, or extension of fixed assets in the form of build-

ings, land improvements of an engineering nature, and

other such engineering constructions as roads, bridges,

dams, and so forth. It also includes related installation

and assembly work. It includes site preparation and gen-

eral construction as well as specialized services such as

painting, plumbing, and demolition. It also includes

management of construction projects.

10.102 Acquisition of goods and services by the

enterprises undertaking that construction work from

the economy of location of the construction work is

also recorded under construction. Goods and services

provided from the home economy are resident-to-

resident transactions, and so should be excluded (see

also paragraph 10.22). Goods and services acquired

from third economies (i.e., neither the residence of

the enterprise, nor the location of the construction

work) are recorded under the appropriate general

merchandise or service item for the economy of the

enterprise.

10.103 If the external operations of a construc-

tion enterprise are substantial enough, they constitute

a branch resident in the economy of operations (see

paragraphs 4.27–4.29). Therefore, a large-scale con-

struction project contracted by a nonresident enterprise

that takes a year or more to complete will usually give

rise to a resident branch. Accordingly, there would be

a direct investment relationship between the parent and

the branch; there may also be goods and services sup-

plied between the branch and the parent, such as for

materials. As a result of this treatment, the construction

contracts covered in international trade in services are

generally of a short-term nature.

10.104 Construction can be disaggregated into con-

struction abroad and construction in the compiling

economy. This disaggregation allows for the recording

on a gross basis of both the construction work under-

taken and the goods and services acquired from the

economy in which the construction activity is being

undertaken by the nonresident enterprise that under-

takes the construction.

Construction abroad

10.105 Construction abroad consists of:

(a) construction work for nonresidents by enterprises

resident in the compiling economy (credit), and

(b) the goods and services acquired from the econ-

omy in which the construction activity is being

undertaken by these enterprises (debit).

Construction in the compiling economy

10.106 Construction in the compiling economy con-

sists of

(a) construction work for residents of the compiling

economy by nonresident construction enterprises

(debit), and

(b) the goods and services acquired in the compiling

economy from resident enterprises by these non-

resident construction enterprises (credit).

Valuation

10.107 Construction is valued on a gross basis—that

is, inclusive of all goods and services provided by the

construction contractor as inputs to the work, and also

inclusive of other costs of production and the operating

surplus that accrues to the construction contractor. The

transfer of ownership of construction under a contract

may be deemed to occur in stages as value is put in place.

In such cases, stage payments made by the owner can

often be used to approximate the value of the gross fixed

capital formation although stage payments may some-

times be made in advance or in arrears of the comple-

tion of the stage, in which case advances or trade credit

are also extended. Construction can be undertaken in a

similar way to manufacturing services on physical inputs

owned by others. That is, a customer may provide goods

and services as inputs to a construction project but the

goods and services do not change ownership to the con-

struction contractor. In such cases, the treatment, as with

manufacturing services, is to record actual changes of

ownership, not physical movements of goods. Repairs on

embassies, bases, and so forth owned by the government

that occupies them are included in government goods

and services n.i.e. (see paragraph 10.177).

Existing buildings

10.108 As noted in paragraph 4.34, because of the

imputation of notional units for ownership of land, most

Chapter 10 g Goods and Services Account

170

transactions involving acquisitions of existing build-

ings and land are treated as being between two resi-

dent units. International transactions of construction

can arise when a building for an embassy, consulate,

military base, or international organization changes

hands with a resident of the economy in which the

building is physically located. The ownership could

change because of a sale or gift. Transactions in con-

struction may also occur for buildings in an area that

is exchanged between economies (see paragraph 4.9).

The change in ownership of the land component is

shown in the capital account (see paragraph 13.10);

separate estimates should be made for the structure

and land components. Transactions in existing build-

ings are included in construction in the same way as

new buildings, to avoid having to distinguish new and

existing buildings, and this treatment is analogous to

the treatment in merchandise trade where both new and

second-hand equipment are combined.

f. Insurance and pension services

10.109 Insurance and pension services include ser-

vices of providing life insurance and annuities, non-

life insurance, reinsurance, freight insurance, pensions,

standardized guarantees, and auxiliary services to

insurance, pension schemes, and standardized guaran-

tee schemes. More information on insurance and pen-

sions is provided in Appendix 6c.

10.110 The processes undertaken by insurers and

pension funds include charging premiums, paying

claims, and investing funds. To analyze the underlying

economic nature of these operations, it is necessary to

rearrange these processes to identify separately the ser-

vice element. Appendix 6c provides some background

to the way insurance and pension schemes operate and

the value of their services is calculated. The usual start-

ing point for deriving the exported and imported com-

ponents is the value of premiums and claims, which are

observable, rather than derived.

10.111 In overview, the total value of insurance and

pension services is derived as the margin between the

amounts accruing to the companies (namely, premi-

ums, contributions, and supplements) and the amounts

accruing to the policyholders (namely, claims and ben-

efits). That is, for nonlife insurance, the value of output

of nonlife insurance services can be expressed with the

following formula:

Gross premiums earned;

+ Premium supplements;

– Claims payable plus adjustment for claims vola-

tility, if necessary.

More elaboration is provided in Appendix 6c: nonlife

insurance (paragraphs A6c.16–A6c.22), reinsurance

(paragraph A6c.23), life insurance (paragraph A6c.31),

and pension schemes (paragraph A6c.40).

10.112 The supplementary breakdown of insurance

and pension services is between direct insurance, rein-

surance, auxiliary insurance services, and pension and

standardized guarantee services. In addition, data on

gross premiums earned (see paragraph A6c.17) and

unadjusted claims (claims payable before adjustments

for claims volatility; see paragraphs A6c.21–A6c.22)

may be provided as supplementary items, with separate

details on nonlife, life, pension, and standardized guar-

antee components, as considered appropriate.

10.113 For exports of nonlife insurance services,

the service charge can be estimated from total non-

life insurance output by multiplying the gross premi-

ums earned from nonresidents by the ratio of service

charge to gross premiums earned for all nonlife insur-

ance operations. (This calculation is illustrated in Box

10.4, Example 2.) The same prorating technique can

be used for life insurance, annuities, pension funds,

and standardized guarantees. To the extent that these

ratios vary for different lines of business (reinsur-

ance, marine, term life, etc.), the calculations should

be made separately. Similarly, if it is known that there

are different margins between resident and nonresident

customers, data from the operations most relevant to

nonresident policyholders should be used. The ratios

should be calculated according to the formula for out-

put in paragraph 10.111, so they take into account pre-

mium supplements and claims volatility. (See Box 10.4

for an example of calculations.)

10.114 For imports of nonlife insurance services,

the available information is less complete than that

for exports. For reinsurance, the only customers are

insurance companies, so data on premiums payable

and claims receivable may be readily available from

them. However, premium supplements are not observ-

able. For direct insurance, there is a wider range of

customers and, so, available data may be more lim-

ited, such as premiums paid and actual claims only.

To derive a service charge from these values, ratios

need to be obtained using the most suitable available

indicator:

(a) Ratios from other economies or from published

accounts of large international insurance com-

panies may be used. International trade in some

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

171

types of nonlife insurance is dominated by rela-

tively large, specialized companies;

(b) Ratios from the resident insurance industry may

be considered. In some economies, there may be

equivalent lines of business; or

claims receivable from abroad over a medium- to

long-term period. International insurance trade

includes direct insurance of large items (like

ships and aircraft) and reinsurance, so claims

receivable for a particular economy may be

highly volatile. An adjustment for premium sup-

plements would also be needed, or there could be

an understatement of the value of services.

Such ratios should be calculated as consistently as pos-

sible with those for total services and exports outlined

above, so they would also take into account premium

supplements and claim volatility. Although premium

supplements are not readily observable for imports,

some adjustment is needed, or there would be an under-

statement of the value of services and asymmetry with

exports. Premium supplements to premiums ratios

observed from other cases could be used to avoid this

understatement. The same prorating techniques can be

used for life insurance, annuities, pension funds, and

standardized guarantee.

10.115 Data on reinsurance imports can be collected

from the policyholders, because they are all insurance

companies. The value of direct insurance service pro-

duced relates to the whole of the risk that is insured,

including any reinsured component. Thus, direct pre-

miums and claims are recorded gross of reinsurance.

10.116 Freight insurance is a form of nonlife insur-

ance that raises particular issues. Freight insurance pre-

miums payable on international traded goods before they

Chapter 10 g Goods and Services Account

(This example is applicable to types of insurance not subject to fluctuations in claims; for

an example with an adjustment for claims volatility, see Appendix 6c.)

Example 1. For resident insurers with separate data on policyholders abroad:

Premiums earned from abroad 100 (premiums received 105)

Claims payable abroad 95 (claims paid 85)

Technical reserves relating to insurance with nonresidents 200 (beginning of period)

Income attributable to policyholders 20 (premium supplements)

The resulting entries are:

Services Insurance service charge = 25 (derived as 100 + 20 – 95)

Primary Income Income attributable to policyholders = 20

Current transfers Net premiums receivable = 95

(premiums plus supplements less service = 100 + 20 – 25)

Claims payable = 95 (actual; equal to net premiums receivable

if no adjustment of claims for volatility)

Financial account Increase in insurance technical reserves = 15

(for prepaid premiums 105-100; for unpaid claims 95 – 85)

International investment Insurance technical reserves 215 (end of period)

position

Example 2. For resident insurers with separate data on policyholders abroad for premi-

ums only:

Total insurance services (to residents and nonresidents) 50

combined

Total premiums 200

Of which: Premiums from residents 120

Premiums from nonresidents 80

Estimated insurance services provided to nonresidents 20

(= 80 / (200) * 50)

Example 3. For nonresident insurers with resident policyholders:

Premiums from residents 40

Ratio of service charge to premiums (average from data on insurers abroad) = 25 percent

Estimated insurance services from nonresidents 10 (= 40 * 0.25)

Box 10.4. Numerical Examples of the Calculation of

Nonlife Insurance Services

172

reach the customs frontier of the economy of the exporter

are included in the FOB price of the good. Freight insur-

ance premiums payable subsequent to the goods leav-

ing the customs frontier of the exporter’s economy are

treated as payable by the importer. When the parties

have not arranged the payment of insurance premiums

in the same way as this methodology, partitioning and

rerouting are needed (see paragraphs 3.16–3.17). These

adjustments are of the same nature as those discussed for

freight services. The service elements for freight insur-

ance can be derived in the same way as other insurance.

10.117 Auxiliary insurance services consist of the

provision of services that are closely related to insur-

ance and pension fund operations. Included are agents’

commissions, insurance brokering and agency services,

insurance and pension consultancy services, evaluation

and loss adjustment services, actuarial services, salvage

administration services, and regulatory and monitoring

services on indemnities and recovery services. These

services are charged through explicit charges.

g. Financial services

10.118 Financial services cover financial interme-

diary and auxiliary services, except insurance and

pension fund services. These services include those

usually provided by banks and other financial corpora-

tions. They include deposit taking and lending, letters

of credit, credit card services, commissions and charges

related to financial leasing, factoring, underwriting,

and clearing of payments. Also included are financial

advisory services, custody of financial assets or bul-

lion, financial asset management, monitoring services,

liquidity provision services, risk assumption services

other than insurance, merger and acquisition services,

credit rating services, stock exchange services, and

trust services.

10.119 Financial services may be charged for by:

(a) explicit charges;

(b) margins on buying and selling transactions;

income receivable in the case of asset-holding

entities; or

(d) margins between interest payable and the refer-

ence rate on loans and deposits (called financial

intermediation service charges indirectly mea-

sured, abbreviated as FISIM).

For financial intermediaries, the balance between explicit

and implicit charges may vary over time and from insti-

tution to institution, so data on both are needed to get a

complete picture of their supply of services.

Explicit charges

10.120 Services are charged for by explicit charges

in the case of many financial services and require no

special calculation. Some explicit charges associated

with deposit and lending services include application

and commitment fees, fees for one-off guarantees,

early or late repayment fees or penalties, and account

charges. (However, an increase in interest rates as a

result of late payment would not be classified as an

explicit fee, but would be included with other interest

and, so, taken into account as FISIM.)

10.121 Explicit charges also include commissions

and other fees related to letters of credit, bankers’

acceptances, lines of credit, financial leasing, money

transfer, and foreign exchange transactions. Also

included are commissions and other charges related

to transactions in securities: brokerage, placements of

issues, underwritings, and redemptions; commissions

and fees paid for the arrangement of financial deriva-

tive contracts; commissions of commodity futures trad-

ers; and asset management services, financial market

operational and regulatory services, security custody

services, and so forth.

Service charges on purchases

of IMF resources are included among an economy’s

financial service payments, as are charges (similar to

commitment fees) associated with undrawn balances

under stand-by or extended arrangements with the IMF.

Charges payable to a financial institution for arranging

the provision of financial resources, which are services,

should be distinguished from amounts payable to the

suppliers of financial resources for the use of these

resources (which are income; see paragraph 11.3(b)).

Margins on buying and selling transactions

10.122 Dealers or market-makers in financial instru-

ments may charge, in full or part, for their services by

having a spread between their buying and selling prices.

Dealers, market-makers, foreign exchange bureaus, and

other intermediaries producing this kind of service are

distinguished from other traders by the existence of a

buy-sell spread, which shows that they serve the market

Financial derivative transactions may take place directly

between two parties or through intermediaries. In the latter case,

there may be implicit or explicit service charges. It is not usually

possible to distinguish implicit service charges. Therefore, it is rec-

ommended that net settlement payments of derivative contracts be

recorded as financial transactions. However, when possible, service

charge components should be recorded separately.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

173

in a somewhat similar way to a wholesaler, by provid-

ing liquidity and inventory. Foreign exchange, shares,

bonds, notes, financial derivatives, and other financial

instruments are often bought and sold in this way.

10.123 The dealers’ service charges are included

indistinguishably in the financial transactions to which

they relate. In such cases, the difference between the

reference price and the dealer’s buying price at the time

of purchase represents the service charge to the seller.

Similarly, the difference between the reference price

and the dealer’s selling price at the time of sale rep-

resents the value of the service provided to the buyer.

The reference price is usually a mid-price between the

buying and selling prices; some dealers may have their

own internal price for determining their buying and

selling prices. In contrast to the reference price, the

prices actually paid or received include the financial

service component. By using the reference price at the

time of purchase or sale, any holding gains or losses on

the dealer’s trading activity are excluded from services.

The service can also be measured by applying the deal-

ers’ average margin as a percentage to the value of

transactions through dealers.

Asset management costs taken out of income

10.124 Some institutional units have the sole or pre-

dominant function of holding financial assets on behalf

of their owners. For example, some mutual funds,

holding companies, trusts, and special purpose entities

serve this purpose. In the process of managing those

assets, these enterprises incur administrative expenses,

such as payments to fund managers, custodians, banks,

accountants, lawyers, or their own staff. The expenses

can be charged for explicitly as a fee, or implicitly by

being paid out of investment income received or out

of the assets of the enterprise. The expenses implic-

itly paid for should be recognized as a service to the

owners. For example, a hedge fund may distribute a

proportion of the net income of the fund to the entity

that manages the fund, which should be recorded as a

charge for services. Similarly, a custodian may charge

lower fees in exchange for the right to on-lend securities

(the income from on-lending securities is discussed in

paragraphs 11.67–11.68).

10.125 Implicit asset management service charges

can be measured at cost. The corresponding entry is

to increase the net value of investment income payable

to the investor to the gross value before deduction of

the expenses. Without the recognition of the output of

such services, the costs incurred would lead to negative

operating surplus for the asset management enterprises.

With this treatment, these enterprises have a net operat-

ing surplus of zero.

FISIM

10.126 Actual interest can be seen as including both

an income element and a charge for a service. Lenders

and deposit-takers operate by offering rates of interest

to their depositors that are lower than the rates that they

charge to their borrowers. The resulting interest mar-

gins are used by the financial corporations to defray

their expenses and to provide an operating surplus.

Interest margins are an alternative to charging cus-

tomers explicitly for financial services. In addition to

financial intermediation, where funds are taken in as

deposits and loaned, lending of own funds can give rise

to FISIM in the cases of money lenders and loans made

from banks’ own funds.

10.127 By convention, these indirect charges in

respect of interest apply only to loans and deposits and

only when those loans and deposits are provided by,

or deposited with, financial corporations (as defined

in paragraph 4.63). While loans by holding compa-

nies, special purpose entities, and other captive finan-

cial institutions to their affiliates are not normally

expected to generate FISIM, they may do so if they

charge a margin. Financial corporations may generate

FISIM even if they have only loans or only deposits;

for instance, a credit card issuer that raises all of its

funds by debt securities can earn FISIM on its loans

to credit card customers.

10.128 The rate of FISIM may vary owing to a range

of factors, such as the accessibility of funds, services

included such as arrangements for check-writing facili-

ties (for deposits), perceptions of the credit risk of the

borrower, and the collateral provided (for loans). Addi-

tionally, large-scale (“wholesale”) loans and deposits

tend to have lower rates of FISIM than small-scale

(“retail”) loans and deposits.

10.129 FISIM payable by each of the depositors and

borrowers are calculated by using the concept of a “ref-

erence” rate of interest. The reference rate should con-

tain no service element and reflect the risk and maturity

structure of deposits and loans. The rate prevailing for

interbank borrowing and lending may be a suitable

choice as a reference rate. A single rate should be used

for transactions in the domestic currency, whereas dif-

ferent rates should be applied for loans and deposits in

other currencies. The reference rate will change over

time with market conditions.

Chapter 10 g Goods and Services Account

174

10.130 For cross-border deposits and loans, different

currencies may be involved, so separate reference rates

should be applied for each currency that is a significant

proportion of loans or deposits. To be closest to the defini-

tion of the reference rate and for international symmetry of

recording, the rate should be taken from the financial mar-

kets of the home market of the currency, and preferably be

the same as used by statistical compilers in that economy.

(The data compiled for the currency composition in Tables

I-III of Appendix 9 can provide relevant information on

calculation of FISIM for each major currency.)

10.131 FISIM is calculated as follows:

(a) for loans from financial corporations—the dif-

ference between the interest actually payable on

loans and the amount that would be payable if

the reference rate were used, and

(b) for deposits with financial corporations—the

difference between the interest that would be

earned if a reference rate were used and the

interest actually earned.

(See Box 10.5 for a numerical example.)

10.132 Because a repo with supply of cash is treated

as involving a loan or deposit, as stated in paragraphs

5.52–5.53, it may give rise to FISIM. Similarly, a finan-

cial lease is treated as giving rise to a loan (see para-

graphs 5.56–5.58) so it may also give rise to FISIM if

provided by a financial corporation. Interbank loans

and deposits generally occur at or close to the reference

rate, in which case there is no FISIM. However, where

there are significant international interbank transac-

tions at interest rates above the reference rate (e.g., if

the debtor bank has a lower credit rating), it would be

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

The data requirements for the calculation of FISIM are:

(1) values of loans and deposits (available from the IIP);

(2) the corresponding interest payable/receivable (available from the primary income

account); and

(3) the applicable reference rate (usually available from central bank bulletins and other

publications).

In this example, all loans and deposits are denominated in domestic currency and are issued

by financial corporations. The interbank interest rate is 5 percent per annum.

Average value of loans during the year = 1000

Actual interest receivable by financial corporations on loans = 70

partitioned into:

50 pure interest receivable (derived as 1000 at 5 percent)

20 FISIM receivable (derived as 70 – 50)

Average value of deposits during the year = 500

Actual interest payable by financial corporations on deposits =10

partitioned into:

25 pure interest payable (derived as 500 at 5 percent)

15 FISIM receivable (derived as 25 – 10)

Total FISIM receivable by financial corporations = 35 (20+15)

—————

Notes:

The difference between interest receivable and payable is not the same as FISIM. In this example, the

difference is 25, which differs from the correct figure because the loan assets do not match the deposit

liabilities. (For example, an economy which had external loan assets funded entirely from domestic

sources, there would be zero interest payable, so the difference between international interest payable

and receivable is an unsuitable estimate of FISIM.) Unlike the reference rate concept, the method fails

to separate the services provided to depositors from those to borrowers, so it does not provide a basis to

identify the partner economy.

The average value of loans or deposits should be used in the calculation, as it corresponds to the amount

on which interest accrues. If values change significantly during the period, the use of an end-of-period

value as a proxy for the average may give an unsatisfactory result.

A more detailed calculation may take into account different currencies and maturities.

Box 10.5. Numerical Example of Calculation of FISIM

175

suitable for FISIM to be identified. See also paragraphs

11.74–11.75 on the effects of FISIM on interest.

10.133 Estimates of cross-border FISIM can be

calculated from data on the international investment

position or banking data on deposits and loans from

financial corporations in conjunction with the amounts

of actual interest payable and receivable and reference

interest rates. For economies where cross-border FISIM

is small, it can be measured with relatively simplified

methods based on aggregated data.

10.134 Negative FISIM may occur in reality (e.g.,

when loans are at fixed interest rates and market rates

rise). Negative FISIM can also occur owing to mea-

surement error. For example, some large international

transactions between banks may be at or near the refer-

ence rate, so a small error in measuring the reference

rate could cause negative FISIM.

10.135 The identification of FISIM as the finan-

cial service implicitly included in interest requires

corresponding adjustments to interest as recorded in

the primary income account. Actual interest payable

by borrowers is partitioned between a pure interest

charge at the reference rate (in primary income) and

FISIM (a service). Similarly, pure interest receivable

by depositors is calculated by applying the reference

rate to depositors, and depositors are shown as con-

suming a service equivalent to the difference between

the actual interest and interest at the reference rate.

The interest shown in the primary income accounts

is shown after adjusting for FISIM—“pure interest”;

also, there is a memorandum item for interest before

adjusting for FISIM—“actual interest” (see para-

graphs 11.74–11.75).

10.136 Financial services exclude pure interest, div-

idends, life insurance and pension services, other insur-

ance services, nonfinancial advisory services provided

by banks (included under other business services), and

holding gains and losses on purchases and sales of

financial instruments.

h. Charges for the use of intellectual property n.i.e.

10.137 Charges for the use of intellectual property

n.i.e. include:

(a) Charges for the use of proprietary rights (such

as patents, trademarks, copyrights, industrial

processes and designs including trade secrets,

franchises). These rights can arise from

research and development, as well as from mar-

keting; and

(b) Charges for licenses to reproduce or distribute

(or both) intellectual property embodied in pro-

duced originals or prototypes (such as copyrights

on books and manuscripts, computer software,

cinematographic works, and sound recordings)

and related rights (such as for live performances

and television, cable, or satellite broadcast).

(As shown in Table 10.4, some other kinds of intellec-

tual property are included in other categories.)

10.138 The production of books, recordings, films,

software, disks, and so forth is a two-stage process of

which the first stage is the production of the original

and the second stage the production and use of cop-

ies of the original. The output of the first stage is the

original itself over which legal or de facto ownership

can be established by copyright, patent, or secrecy.

The owner of the asset may use it directly to pro-

duce copies that give the purchaser a license to use.

Alternatively, the owner may issue a license to other

producers to reproduce and distribute the content.

The payments made by the licensee to the owner may

be described in various ways, such as fees, commis-

sions, or royalties. The treatment of flows relating

to intellectual property is summarized in Table 10.4.

In contrast to temporary rights to use, outright sales

of patents, copyrights, and industrial processes and

designs are included under research and development

services (discussed in paragraph 10.147). Similarly,

temporary rights for computer software and audio-

visual originals are treated differently from outright

sales (as shown in Table 10.4).

10.139 The time of recording of charges for the

use of intellectual property follows the substance of

the license agreement. If the rights to use intellectual

property are sold for a fixed fee, under a noncancel-

lable contract, and where the licensor has no remaining

obligations to perform, then the whole sum is a sale.

Otherwise charges are allocated over the life of the

agreement. In practice, it may be feasible to record the

payments only when they are made.

10.140 Franchise fees, trademark revenue, payments

for use of brand names, and so forth include aspects

of property income (i.e., putting a nonfinancial non-

produced asset at the disposal of another unit) as well

as aspects of services (such as the active processes

of technical support, product research, marketing, and

quality control). In principle, it would be desirable to

separate the income and service elements. However,

it may not generally be feasible to do so in practice;

in which case, a convention is adopted that the entire

Chapter 10 g Goods and Services Account

176

values are to be classified as charges for the use of intel-

lectual property. Such a convention would be taken as a

starting point, but if additional information to make a

split is available, the compiler should do so.

i. Telecommunications, computer, and

information services

10.141 Computer and telecommunication services

are defined in terms of the nature of the service, not the

method of delivery.

To illustrate, provision of busi-

ness services, such as accounting services, is included

under the appropriate heading under other business

services, even if these services are entirely delivered

by telephone, computer, or the Internet. Only amounts

payable for transmission should be included under tele-

communications services; downloaded content should

be included in the appropriate item (computer, informa-

tion, audiovisual, etc., services).

However, the mode of delivery is taken into account in some

cases in the distinguishing between goods and services, as shown

in Table 10.4.

Telecommunications services

10.142 Telecommunications services encompass the

broadcast or transmission of sound, images, data, or

other information by telephone, telex, telegram, radio

and television cable transmission, radio and televi-

sion satellite, electronic mail, facsimile, and so forth,

including business network services, teleconferencing,

and support services. They do not include the value of

the information transported. Also included are mobile

telecommunications services, Internet backbone ser-

vices, and online access services, including provision

of access to the Internet. Excluded are installation ser-

vices for telephone network equipment (included in

construction) and database services (included in infor-

mation services).

Computer services

10.143 Computer services consist of hardware- and

software-related services and data-processing services.

Table 10.4 shows the classification of various arrange-

ments for software and other types of intellectual prop-

erty products. Computer services include:

Table 10.4. Treatment of Intellectual Property

Sale/purchase of

Use of intellectual property ownership rights

_______________________________________________ ______________________

charges for the use of intellectual capital account

Franchises and trademarks property n.i.e. entry

charges for the use of intellectual research and

Outcomes of research and development property n.i.e. development services

License to use

Computer services; excluding reproduction License to reproduce

Audiovisual and related services: and distribution

and/or distribute

_________________________________________________

(a) Customized all types relevant service item

(b) Noncustomized—downloaded or relevant service item

otherwise electronically delivered charges for the use of

intellectual property relevant service item

media with periodic license fee n.i.e.

(d) Noncustomized—provided on physical goods

media with right to perpetual use

Covers the case where a specific product is supplied with the right to use the intellectual property embodied in it, but not to copy it for further distribution.

The transactions should be classified under the appropriate goods and services items.

Covers the case where authority to reproduce and/or distribute the intellectual property is delegated by its owner.

Covers the case where there is a change of economic ownership of the whole of the intellectual property right in question.The seller no longer has any rights

or obligations associated with the intellectual property.This case also includes second or subsequent outright sales of intellectual property rights.

The relevant service item is either computer services (see paragraph 10.143), or audiovisual and related services (see paragraphs 10.162–10.166), depending

on the nature of the content provided.

For example, the sale/purchase of a copy of a software package that is mass-produced, and is obtained by an individual to load onto a single computer is covered

by a license to use that excludes reproduction and distribution; this situation would be recorded in goods or services depending on the examples (see examples

(b), (c), and (d) under software in Table 10.4). If a manufacturer pays for the right to include the software on computers that it produces, then the payment would

be a license to reproduce and/or distribute (charges for the use of intellectual property provided by the owner of the original).

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

177

(a) sales of customized software (however deliv-

ered) and related licenses to use;

(b) the development, production, supply, and doc-

umentation of customized software, including

operating systems, made to order for specific

users;

loaded or otherwise electronically delivered,

whether with a periodic license fee or a single

payment;

(d) licenses to use noncustomized (mass-produced)

software provided on a storage device such as

a disk or CD-ROM with a periodic license fee

(noncustomized software on storage devices with

licenses that convey perpetual use is included in

goods; see paragraph 10.17(c) and Table 10.4);

(e) sales and purchases of originals and ownership

rights for software systems and applications;

(f) hardware and software consultancy and imple-

mentation services, including the management of

subcontracted computer services;

(g) hardware and software installation, including

installation of mainframes and central comput-

ing units;

(h) maintenance and repairs of computers and

peripheral equipment;

(i) data recovery services; provision of advice and

assistance on matters related to the management

of computer resources;

(j) analysis, design, and programming of systems

ready to use (including web page development

and design), and technical consultancy related

to software;

(k) systems maintenance and other support services,

such as training provided as part of consultancy;

(l) data-processing and hosting services, such as

data entry, tabulation, and processing on a time-

sharing basis;

(m) web page hosting services (i.e., the provision of

server space on the Internet to host clients’ web

pages); and

(n) provision of applications, hosting clients’ appli-

cations, and computer facilities management.

10.144 Software includes general business produc-

tivity software, computer game software, and other

applications. However, as shown in Table 10.4 and para-

graph 10.17(d), some forms of software are classified

under goods. It may be analytically useful to be able to

identify all software, whether in goods or services. The

time of recording software services follows the same

principles as for other intellectual property, identified

in paragraph 10.139.

10.145 Excluded from computer services are com-

puter training courses not designed for a specific user

(included in other personal, cultural, and recreational

services). Charges for licenses to reproduce or distrib-

ute software (or both) which are included in charges

for the use of intellectual property, are also excluded.

Leasing of computers without an operator is included in

operational leasing.

Information services

10.146 Information services include news agency

services, such as the provision of news, photographs,

and feature articles to the media. Other information

provision services include database services—database

conception, data storage, and the dissemination of data

and databases (including directories and mailing lists),

both online and through magnetic, optical, or printed

media; and web search portals (search engine services

that find Internet addresses for clients who input key-

word queries). Also included are direct nonbulk sub-

scriptions to newspapers and periodicals, whether by

mail, electronic transmission, or other means; other

online content provision services; and library and

archive services. (Bulk newspapers and periodicals are

included under general merchandise.) Downloaded con-

tent that is not software (included in computer services)

or audio and video (included in audiovisual and related

services) is included in information services.

j. Other business services

Research and development services

10.147 Research and development services consist

of services that are associated with basic research,

applied research, and experimental development of new

products and processes. In principle, such activities in

the physical sciences, social sciences, and humanities

are covered, including the development of operating

systems that represent technological advances. Also

included is commercial research related to electronics,

pharmaceuticals, and biotechnology.

10.148 The definition of research and development

services used here and in the CPC is wider than the

Frascati definition (which is used to define the scope

Chapter 10 g Goods and Services Account

178

of capital formation in the 2008 SNA); it includes other

product development that may give rise to patents.

Outright sales of the results of research and devel-

opment (such as represented in patents, copyrights,

and sale of information about industrial processes)

are included in research and development. However,

amounts payable for use of proprietary rights arising

from research and development are included under

charges for the use of intellectual property n.i.e.; see

paragraphs 10.137–10.140.

Professional and management consulting services

10.149 Professional and management consulting

services include:

(a) legal services, accounting, management consult-

ing, managerial services, and public relations

services; and

(b) advertising, market research, and public opinion

polling services.

10.150 Services for the general management of a

branch, subsidiary, or associate provided by a parent

enterprise or other affiliated enterprise are included

in other business services, often under professional

and management consulting services. However, reim-

bursements of ancillary services supplied by affili-

ated enterprises, such as transport, purchasing, sales

and marketing, or computing, should be shown under

the relevant specific heading. Management fees are

included in other business services. However, dispro-

portionately large values of services between affiliated

enterprises should be examined for signs that they are

disguised dividends, such as large fluctuations that do

not reflect actual changes in the services provided.

Technical, trade-related, and other business services

10.151 Technical, trade-related, and other business

services include:

(a) architectural, engineering, and other technical

services;

(b) waste treatment and depollution, agricultural,

and mining services (discussed further in para-

graph 10.152);

paragraphs 10.153–10.157);

(d) trade-related services (discussed further in para-

graph 10.158); and

(e) other business services (discussed further in

paragraph 10.159).

Waste treatment and depollution, agricultural,

and mining services

10.152 Waste treatment and depollution services

include waste collection and disposal, remediation,

sanitation, and other environmental protection services.

They also include environmental services, such as pro-

duction of carbon offsets or carbon sequestration, that

are not classified under any more specific category.

Other technical services include agricultural, mining,

and veterinary services.

Operating leasing

10.153 Operating leasing is the activity of renting

out produced assets under arrangements that provide

use of a tangible asset to the lessee, but do not involve

the transfer of the bulk of risks and rewards of own-

ership to the lessee. Operating leasing may also be

called leasing or rental services of specified produced

assets, such as buildings or equipment, as specified in

the CPC. Rental is also used as a term for the amounts

payable under operating leases for produced assets, and

is a service.

10.154 Operating leasing can be identified by the

following characteristics:

(a) The lessor, or owner of the equipment, normally

maintains a stock of assets in good working

order that can be hired on demand, or at short

notice, by users;

(b) The assets may be rented out for varying periods

of time. The lessee may renew the rental when

the period expires; and

nance and repair of the asset as part of the service

that is provided to the lessee. The lessor must nor-

mally be a specialist in the operation of the asset

and may also undertake to replace the equipment

in the event of a serious or prolonged breakdown.

Thus, in addition to the provision of an asset, the ser-

vice provided under operating leasing by the lessor

includes other elements, such as convenience and secu-

rity, servicing, and back-up facilities.

10.155 An operating lease is distinguished from:

(a) a financial lease, where the risks and rewards

of ownership of the asset are transferred to the

In contrast, rent is used to describe amounts payable under a

resource lease covering natural resources, such as land, water, or

mineral rights. Rent arising from such resource leases is included

in the primary income account, as discussed in paragraphs 11.85–

11.90.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

179

lessee; with an operating lease, the lessor has the

risks and benefits (see paragraphs 5.56–5.60 for

definition and elaboration on financial leases);

(b) a resource lease, where the asset provided is a

natural resource, rather than a produced asset

(see paragraphs 11.85–11.90 for a definition and

elaboration on resource leases and rent); and

licenses, where the lease itself—rather than the

underlying asset—becomes an economic asset of

the lessee. (See paragraph 13.12 for elaboration

on these leases.)

10.156 Operating leasing services cover leasing

(rental) and charters, without crew, of ships, aircraft,

and transport equipment, such as railway cars, contain-

ers, and rigs, without crew. Also included are operating

lease payments relating to other types of equipment

without an operator, including computers and telecom-

munications equipment. License payments for the right

to use intangible assets, such as software, intellectual

property, and so forth are included under specific head-

ings (computer services, charges for the use of intellec-

tual property n.i.e., etc.) rather than operating leasing.

Excluded from operating leasing services are leasing

of telecommunications lines or capacity (included in

telecommunications services) and rental of ships and

aircraft with crew (included in transport services).

10.157 Operating leases of dwellings and other

buildings are included in this item, if not included in

travel. If there is no objective basis on which to split

the payment between rent on land and rental on the

buildings, it is recommended to treat the whole amount

as rental when the building component is believed to

exceed the land component, and as a rent otherwise.

However, rent of land alone and rent of other natural

resources are classified as primary income (such leases

are called resource leases; see paragraph 11.85). Rental

of buildings by international organizations, embassies,

and so forth, is included under government goods and

services n.i.e. Rental of accommodation and vehicles

to nonresidents during visits to other economies is

included in travel (see paragraphs 10.86–10.88).

Trade-related services

10.158 Trade-related services cover commissions on

goods and service transactions payable to merchants,

commodity brokers, dealers, auctioneers, and commis-

sion agents. For example, these services include the auc-

tioneer’s fee or agent’s commission on sales of ships,

aircraft, and other goods. If the trader owns the goods

being sold, the trader’s margin is generally included indis-

tinguishably in general merchandise FOB (if the goods

pass through the economy of the trader) or under goods

under merchanting (otherwise). However, any margins

not included in the FOB price of the goods are included

in trade-related services. Brokerage on financial instru-

ments is excluded from trade-related services (included in

financial services) as are transport-related charges, such

as agency commissions (included in transport services).

Other business services

10.159 Other business services include distribution

services related to water, steam, gas, and other petro-

leum products and air-conditioning supply, where these

are identified separately from transmission services;

placement of personnel, security, and investigative ser-

vices; translation and interpretation; photographic ser-

vices; publishing; building cleaning; and real estate

services. Also included are forfeited down payments

not able to be specified to any other service.

10.160 Business and other services, such as trans-

port, construction, and computing, may be sub-

contracted. This arrangement may also be called

“outsourcing.” For example, a specialist service

arranger may be paid to provide back-office functions

for a customer, which the service arranger subcontracts

to another contractor. Thus, subcontracting is similar

in some ways to merchanting of goods, because the

services are purchased and resold. However, for ser-

vices, the degree of transformation involved may be

harder to assess than for goods, such as in the case

of bundling and managing the services of different

contractors. “Service merchanting” of this kind is an

important activity in some economies. The value of

services exported and imported in the economy of the

service arranger is recorded on a gross basis. (This

treatment is applicable because the arranger buys and

sells the services; if the arranger acted as an agent on

a commission basis, then only the commission would

be recorded as the service provided by the arranger.)

These services are classified to the appropriate spe-

cific service classification, such as transport, con-

struction, computing, or other business services. (See

also paragraph 10.75 for transport.) However, if the

activity is significant for an economy, net data could

be provided on a supplementary basis.

k. Personal, cultural, and recreational services

10.161 Personal, cultural, and recreational services

consist of (a) audiovisual and related services and (b)

other personal, cultural, and recreational services.

Chapter 10 g Goods and Services Account

180

Audiovisual and related services

10.162 Audiovisual and related services consist of

services and fees related to the production of motion

pictures (on film, videotape, disk, or transmitted elec-

tronically, etc.), radio and television programs (live or

on tape), and musical recordings. Table 10.4 summa-

rizes the treatment of intellectual property associated

with audiovisual and related services, as well as other

types of intellectual property.

10.163 Included are amounts receivable or payable for

rentals of audiovisual and related products, and charges

for access to encrypted television channels (such as cable

and satellite services). Fees to actors, directors, and pro-

ducers involved with theatrical and musical productions,

sporting events, circuses, and other similar events are

included in this item (unless they are employees of the

entity making payments, in which case the transactions

are classified as compensation of employees).

10.164 Mass-produced recordings and manuscripts

that are purchased or sold outright or for perpetual

use are included under audiovisual and related services

if downloaded (i.e., delivered electronically). How-

ever, those on CD-ROM, disk, paper, and so forth,

are included in general merchandise. Similar products

obtained through a license to use (other than when

conveying perpetual use) are included in audiovisual

and related services, as is the use of other online con-

tent related to audio and visual media. (See paragraph

10.166 for the treatment of originals.) The principles for

the timing for related audiovisual and related services,

such as for music and film copyrights and for master

recordings, are the same as those for other types of

intellectual property, as discussed in paragraph 10.139.

10.165 Charges or licenses to reproduce or dis-

tribute (or both) radio, television, film, music, and

so forth are excluded from audiovisual and related

services and included in charges for the use of intel-

lectual property n.i.e.

10.166 Purchases and sales of original manuscripts,

sound recordings, films, and so forth are included in

audiovisual and related services.

Other personal, cultural, and recreational services

10.167 Other personal, cultural, and recreational

services include health services, education services,

and others, as discussed in the following paragraphs.

10.168 Health services consist of services provided

by hospitals, doctors, nurses, and paramedical and simi-

lar personnel, as well as laboratory and similar services,

whether rendered remotely or on-site. However, health

services provided to nonresidents who are present in the

territory of the service provider are included in travel (see

also paragraph 10.94). Veterinary services are included

in other technical services (see paragraph 10.152).

10.169 Education services consist of services relating to

education, such as correspondence courses and education

via television or the Internet, as well as by teachers and

so forth who supply services directly in host economies.

However, education services provided to nonresidents

who are present in the territory of the service provider are

included in travel (see also paragraph 10.94).

10.170 Other personal, cultural, and recreational

services include those associated with museums and

other cultural, sporting, gambling, and recreational

activities, except those included in travel. The fees and

prizes of athletes are included.

10.171 The amounts paid for lottery tickets or placed

in bets consist of two elements:

(a) a service charge receivable by the unit organiz-

ing the lottery or gambling (this charge may also

have to cover taxes on gambling); and

(b) transfers to cover the amounts payable to the

winners and, in some cases, amounts payable to

charities.

The value of the lottery and other gambling services

supplied by or to nonresidents is estimated as the amount

wagered by nonresidents multiplied by the overall ratio

of services to the total amount wagered for that gambling

operator or type of gambling. This method for sepa-

rately identifying the service component is similar to the

method used for insurance services. For current transfers

associated with gambling, see paragraphs 12.25–12.26.

10.172 Acquisition of other personal, cultural, and

recreational services (such as education, health, muse-

ums, and gambling) by persons while outside their ter-

ritory of residence is included in travel (see paragraph

10.88) and excluded from this item.

l. Government goods and services n.i.e.

10.173 Government goods and services n.i.e. cover:

(a) goods and services supplied by and to enclaves,

such as embassies, military bases, and interna-

tional organizations;

(b) goods and services acquired from the host economy

by diplomats, consular staff, and military person-

nel located abroad and their dependents; and

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

181

included in other categories of services.

Transactions of public corporations (defined in para-

graph 4.108) are not included, unless the other party is

one of the specified types of institutions.

Goods and services supplied by and to government

and international organization enclaves

10.174 As government and international organiza-

tion enclaves are not residents of the territory in which

they are physically located (as discussed further in

paragraph 4.5(e)), their transactions with residents of

the territory of location are international transactions.

For the same reason, transactions of embassies, mili-

tary bases, and so forth with their home economies are

resident-to-resident and outside the scope of interna-

tional accounts.

10.175 Government goods and services n.i.e. credits

include the supply of goods and services to embassies,

consulates, military units or bases, defense agencies, and

other official entities (such as aid missions; government

tourism, information, and trade promotion offices) of

foreign governments located in the compiling economy.

10.176 Government goods and services n.i.e. debits

include acquisition of goods and services by embassies,

and so forth of the government of the compiling econ-

omy in other territories. Charges for visas and other

services provided by embassies and consulates are also

included in government goods and services n.i.e. The

supply and purchase of goods and services by interna-

tional organizations are also included in government

goods and services n.i.e. The acquisition of goods and

services for joint military arrangements, peacekeeping

forces, and other services, such as those provided by the

United Nations, are also included in government goods

and services n.i.e.

10.177 All types of goods and services, such as

office supplies, vehicles, repairs, electricity, and rental

of premises, for embassies, military bases, international

organizations, and so forth purchased from the host

economy or economies other than the home economy

are included under government goods and services n.i.e.

However, construction of new and existing structures is

included under construction (see paragraph 10.108).

Goods and services acquired by staff employed in

enclaves and their dependents

10.178 All expenditure on goods and services by dip-

lomats, consular staff, and military personnel located

abroad in the economies in which they are located is also

included in government goods and services n.i.e. (These

staff are classed as nonresidents of the territory of their

location, as discussed in paragraph 4.123.) The expendi-

ture of dependent members of the same household is also

included. However, the expenditure of locally engaged

staff of embassies, military bases, and so forth and inter-

national organization staff is not included in government

goods and services n.i.e. (and is usually a resident-to-resi-

dent transaction). (These staff are classed as residents of

the territory of their location, as discussed in paragraphs

4.123–4.124.) The supply of goods and services to foreign

diplomats and so forth located in the compiling economy

is shown as credits, while the expenditure of the compil-

ing economy’s diplomats and so forth in the economy of

their posting is shown as debits. (Goods disposed of by

diplomats, and so forth are similarly recorded with the

signs reversed; for example, a car sold at the end of a post-

ing is shown as a debit to the local economy.)

Otherservicessuppliedbyandtogovernments

10.179 Services supplied by and to governments

should be classified to specific services (business ser-

vices, health, etc.), if possible. For instance, acquisition

of new and existing buildings for an embassy, consul-

ate, and so forth is classified as construction, rather

than government goods and services n.i.e. (see para-

graph 10.108). However, some services are related to

government functions that are not able to be classified

to another specific service category, so are classified

as government services n.i.e. For example, techni-

cal assistance on public administration is included in

government services. Also, payments for police-type

services (such as keeping order), such as those sup-

plied with mutual agreement by a foreign government

or international organization, are included in govern-

ment services n.i.e. Additionally, government supply of

licenses and permits that are classified as services (as

discussed in paragraphs 10.180-10.181) are also govern-

ment services n.i.e. Box 10.6 covers issues associated

with technical assistance.

Government licenses, permits, and so forth

10.180 One of the regulatory functions of govern-

ments is to forbid the ownership or use of certain goods

or the pursuit of certain activities, unless specific per-

mission is granted by issuing a license or other cer-

tificate for a fee. If the issue of such licenses involves

little or no work on the part of government, the licenses

being granted automatically on payment, it is likely that

they are simply a device to raise taxes, even though the

Chapter 10 g Goods and Services Account

182

government may provide some kind of certificate, or

authorization, in return. However, if the government

uses the issue of licenses to exercise some proper regu-

latory function, such as checking the competence or

qualifications of the person concerned, checking the

efficient and safe functioning of equipment, or carry-

ing out some other form of control that it would other-

wise not be obliged to do, the payments made should

be treated as purchases of services from government

rather than payments of taxes, unless the payments are

clearly out of all proportion to the costs of providing

the services.

10.181 The borderline between taxes and payments

of charges for services rendered is not always clear-

cut in practice.

By convention, amounts payable by

households for licenses to own or use vehicles, boats,

or aircraft and also licenses for recreational hunt-

ing, shooting, or fishing are treated as taxes, whereas

amounts payable by households for all other kinds of

licenses, permits, certificates, passports, and so forth,

are treated as purchases of services. (For more details

on taxes, see paragraph 12.30.)

In the case of permits issued by the private sector, treatment as

a tax is not an option, so the fee can only be a service or contract,

lease, or license asset. In the case of licenses (government or pri-

vate) that may be resold by the holder, the resale is recorded in the

capital account under contracts, leases, and licenses (see paragraphs

13.11–13.16).

Who provides technical assistance?

Technical assistance is provided by the entity that

employs the personnel delivering the services (technical

assistance personnel), which could include a non-govern-

ment entity. The provider is not necessarily the same as

the party that provides the funding.

What is the residence of the technical assistance

provider?

Technical assistance provided by an entity resident in

the donor economy should be recorded as an export of a

service by the donor economy to the recipient economy.

How is technical assistance classified?

Technical assistance covers a wide variety of different

services, including computing and business services, and

should be classified by the nature of the service provided

to specific services, if possible. Technical assistance pro-

vided by government, or an international organization, is

classified as government services only when not classified

to a specific service, and where the technical assistance

personnel are employed by the donor government or an

international organization.

How is technical assistance funded?

Technical assistance may be subject to payment by the

recipient, or funded by a current or capital transfer from

the donor.

When cross-border technical assistance is provided

without a fee being charged to the recipient, a current

or capital transfer for the value of the services provided

is recorded. If a third party funds the costs of technical

assistance, then the funds provided are routed through the

recipient economy to the service (or technical assistance)

providing economy.

In principle the value of the services provided is estimated

by the costs incurred by the donor government (including

any costs in the donor economy, recipient economy, or a third

economy) in providing technical assistance. In the absence

of detailed information the value could be estimated by the

salary paid to the technical assistance personnel plus any

other identifiable costs (such as travel costs).

How are payments to technical assistance person-

nel classified?

If the technical assistance personnel are resident in the

donor economy and employed by the donor government,

payments to these technical assistance personnel are only

recorded in the domestic accounts of the donor economy.

If the technical assistance personnel are resident in the

recipient economy (or any economy other than the donor

economy) but employed by the donor government, com-

pensation of employees payable by the donor economy is

recorded in the international accounts (paragraph 11.15).

If the technical assistance personnel are resident in the

recipient economy, considered employed by the recipient

government, but their salaries are paid by the donor gov-

ernment, a current transfer from the donor to the recipient

economy (paragraph 12.47) is recorded in the interna-

tional accounts, with the recipient government imputed as

paying compensation to the resident technical assistance

personnel in the domestic accounts of the recipient econ-

omy. In this case, the output of the technical assistance is

attributed to the recipient economy.

If the technical assistance personnel are resident in

the recipient economy but are not considered to be in

an employer-employee relationship with the donor or the

recipient entity (see paragraphs 11.11–11.12) then pay-

ments to them are classified as payments for services, not

the compensation of employees.

If the technical assistance activities in the recipient

economy are such that a branch is recognized (paragraphs

4.26–4.28) and the technical assistance personnel are

employed by the branch, payment of compensation by the

donor economy is rerouted through the branch as equity.

Box 10.6. Technical Assistance

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

183

CHAPTER

Primary Income Account

A. Overview of the Primary Income

Account

Reference:

2008 SNA, Chapter 7, The Distribution of Income

Accounts.

11.1 The primary income account shows primary

income flows between resident and nonresident institu-

tional units. In the SNA, primary distribution of income

is recorded in two accounts, namely, the generation of

income account (which records primary income gen-

erated in the production process) and the allocation

of primary income account (which records primary

income allocated to institutional units for the provision

of labor, financial assets, and natural resources). In the

international accounts, all primary income flows relate

to the allocation of primary income account.

11.2 The main components and structure of the

account are shown in Table 11.1. Credit entries reflect

primary income receivable by the compiling economy

and debit entries reflect primary income payable by the

compiling economy. The balance on primary income

shows net primary income receivable by the compiling

economy, which is defined as the total value of primary

income receivable by the compiling economy less the

total value of primary income payable.

11.3 Primary income represents the return that

accrues to institutional units for their contribution to the

production process or for the provision of financial assets

and renting natural resources to other institutional units.

Two types of primary income are distinguished:

(a) Income associated with the production process.

Compensation of employees is income for the

contribution of labor inputs to the production

process. Taxes and subsidies on products and

production are also income related to produc-

tion; and

(b) Income associated with the ownership of financial

and other nonproduced assets. Property income is

the return for providing financial assets and rent-

ing natural resources. Investment income is the

return for providing financial assets; it consists of

dividends and withdrawals from income of quasi-

corporations, reinvested earnings, and interest.

However, ownership of financial derivatives and

employee stock options does not give rise to invest-

ment income. The relationship between financial

assets and the type of investment income they

generate is shown in Table 5.2.

11.4 Cross-border primary income flows provide

a link between the concept of gross domestic prod-

uct (GDP) and gross national income (GNI). GDP is

linked to the concept of production, in which value

added is generated. Contributors to the value added

(such as labor, finance, and entrepreneurship) receive

returns for their contributions. The economic process

of income generation from production together with

primary income distributions result in the GNI for an

economy. The difference between the GNI and GDP

is equal to the difference of primary income receiv-

able from nonresidents and primary income payable

to nonresidents, often described as “net income from

abroad.” When labor, financial resources, and natu-

ral resources owned by residents are put at the use of

nonresidents, primary income is earned. When labor,

financial resources, and natural resources are owned by

nonresidents and are put at the use of residents, primary

income is payable. GNI is larger (smaller) than GDP if

more (less) income is generated from the provision of

labor, financial resources, and natural resources owned

by residents to nonresidents than the similar income

payable to nonresidents.

11.5 Primary income should be distinguished

from secondary income. Primary income captures

returns for the provision of labor and financial assets

and renting of natural resources. Secondary income

184

captures further redistribution of income through

current transfers, such as by governments or chari-

table organizations. Secondary income is described

in Chapter 12.

11.6 The structure of the primary income account

is consistent with that of the corresponding financial

flows and positions, thus facilitating the analysis of

rates of return. (See Table 5.2 for classification of

financial assets and liabilities and the corresponding

type of income they generate.) For example, rent is

shown separately so that it is not mixed with returns

on financial assets. Investment income attributable to

policyholders in insurance, standardized guarantees,

and pension funds is also to be shown as a separate

item, if relevant. Specific further groupings of primary

income are discussed in the subsequent sections.

11.7 Section B of this chapter discusses the cov-

erage, timing, and valuation issues for each type of

primary income (compensation of employees, divi-

dends, reinvested earnings, interest, investment income

attributable to policyholders in insurance, standardized

guarantees, and pension funds, rent, and taxes and sub-

sidies on products and production). Section C explains

specific issues and possible classification of invest-

ment income by functional category of financial assets

and liabilities (direct investment, portfolio investment,

other investment, and reserve assets).

B. Types of Primary Income

11.8 The international accounts distinguish the fol-

lowing types of primary income:

(a) compensation of employees;

(b) dividends;

(d) interest;

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 11.1. Overview of the Primary Income Account

Credits Debits

Balance of goods and services

Compensation of employees

Investment income

Direct investment

Income on equity and investment fund shares

Dividends and withdrawals from income of quasi-corporations

Reinvested earnings

Interest

Portfolio investment

Income on equity and investment fund shares

Dividends on equity other than investment fund shares

Investment income attributable to investment fund shareholders

Dividends on investment fund shares

Reinvested earnings on investment fund shares

Interest

Other investment

Income on equity and investment fund shares

Interest

Investment income attributable to policyholders in insurance,

standardized guarantees, and pension funds

Reserve assets

Income on equity and investment fund shares

Interest

Other primary income

Rent

Taxes on production and imports

Subsidies

Total primary income credits and debits

Balance on primary income

Balance on goods, services, and primary income

Note: This table is expository; for Standard Components, see Appendix 9.

185

(e) investment income attributable to policyholders

in insurance, standardized guarantees, and pen-

sion funds;

(f) rent; and

(g) taxes and subsidies on products and production.

These income categories are described in paragraphs

11.10–11.94.

11.9 Table 11.1 presents investment income using

both functional and instrument classifications of finan-

cial assets. Investment income is generally linked to a

particular type of financial instrument. For example,

dividends are returns on equity and investment fund

shares. Sometimes, a group of financial instruments

has the same type of investment income. For example,

deposits, loans, and debt securities all give rise to inter-

est. This section describes various types of investment

income and other types of primary income. The next

section includes a description of specific issues on

investment income related to the functional categories

of financial assets and liabilities.

1. Compensation of employees

11.10 Compensation of employees presents remu-

neration in return for the labor input to the production

process contributed by an individual in an employer-

employee relationship with the enterprise. In the

international accounts, compensation of employees is

recorded when the employer (the producing unit) and

the employee are resident in different economies. For

the economy where the producing units are resident,

compensation of employees is the total remuneration, in

cash or in kind, payable by resident enterprises to non-

resident employees in return for work done by the latter

during the accounting period. For the economy where

the individuals are resident, it is the total remuneration,

in cash or in kind, receivable by them from nonresident

enterprises in return for work done during the account-

ing period. Residence of enterprises and individuals is

described in Section E of Chapter 4, Economic Terri-

tory, Units, Institutional Sectors, and Residence.

11.11 Cross-border compensation of employees

arises only when a resident individual is employed by

a nonresident or when a resident employs a nonresident

individual. Therefore, it is important to establish whether

an employer-employee relationship exists between a res-

ident individual and a nonresident employer or between

a nonresident individual and a resident employer. An

employer-employee relationship exists when there is an

agreement, which may be formal or informal, between

an entity and an individual, normally entered into vol-

untarily by both parties, whereby the individual works

for the entity in return for remuneration in cash or in

kind. The remuneration is normally based on either the

time spent at work or some other objective indicator

of the amount of work undertaken. If an individual is

contracted to produce a given result, it suggests a ser-

vice contract relationship between the entity and a self-

employed. Self-employed individuals are deemed to

operate their own unincorporated enterprises, and thus

sell output they produce. Self-employed individuals

may also employ others. Self-employed individuals are

generally responsible for decisions on markets, scale of

operations, and finance, and are also likely to own or

rent machinery or equipment on which they work.

11.12 When an individual performs work for an entity,

it may not always be clear whether an employer-employee

relationship exists between the individual and the entity.

Provision of several types of services may pose such prob-

lems because entities may choose either to purchase a ser-

vice from a self-employed worker or to hire an employee

to perform the job. The status of the worker has important

implications for the international accounts. If an employer-

employee relationship exists between the worker and the

producing entity, the payment constitutes compensation

of employees. If an employer-employee relationship does

not exist, the payment constitutes a purchase of services.

(See Chapter 10, Goods and Services Account for specific

categories of services.)

11.13 Several factors may have to be considered in

determining whether an employer-employee relation-

ship exists. An important test of whether an employer-

employee relationship exists is that of control. The right

to control or to direct, both as to what shall be done

and how it shall be done, is a strong indication of an

employer-employee relationship. The method of mea-

suring or arranging for the payment is not important as

long as the employer has the effective control on both

the method and the result of the work undertaken by the

individual. However, certain control on the work being

undertaken may also exist for the purchase of a service.

Therefore, other criteria should also be used to define

more clearly the employer-employee relationship. If the

individual is solely responsible for social contributions,

that would suggest that the individual is a self-employed

service provider. Payment of social contributions by the

employer is an indication of employer-employee rela-

tionship. If the individual is entitled to the same kind

of benefits (e.g., allowances, holidays, sick leave) that

the enterprise generally provides to its employees, this

indicates an employer-employee relationship. Payment

Chapter 11 g Primary Income Account

186

of taxes on the provision of services (such as sales tax

or value-added tax) by the individual is an indication

that the individual is a self-employed service provider.

11.14 Cross-border employees include seasonal or

other short-term workers (less than one year) and bor-

der workers who are residents of one economy and work

in another economy. Nonresidents who are employed as

domestic helpers or housekeepers (for less than one

year) by resident households are also treated as nonresi-

dent employees. Because embassies, consulates, mili-

tary bases, and so forth are considered extraterritorial

to the economies in which they are located (see Chapter

4, Economic Territory, Units, Institutional Sectors, and

Residence; Section E, Residence, for the definition of

residence), the compensation receivable by local (host

country) staff of these institutional entities is classified

as payable to resident entities by nonresident entities.

Compensation receivable by employees from interna-

tional organizations, which are extraterritorial entities,

represents receipts from nonresident entities.

11.15 According to the residence principles for house-

holds as explained in paragraphs 4.116–4.130, technical

assistance personnel employed by international organiza-

tions or governments on long-term assignments (for one

year or more) are residents of the economy in which they

reside (unless they are government employees with diplo-

matic status). Similarly, employees of parent enterprises

working in an affiliated enterprise in another economy

for one year or more are residents of the economy in

which they reside. Although such employees continue

to be legally employed and paid by the parent enterprise

(which may be international organizations, foreign gov-

ernments, or commercial enterprises), their employer-

employee relationship may not always be clear. They

should be considered employees of the institutional unit

for which they work if this unit effectively manages and

controls their work. The contractual arrangement for

hiring or paying salaries may simply be a matter of con-

venience. In some cases it may be difficult to determine

who is managing and controlling the work. In such cases,

the workers should be considered to be employed by the

entity that pays them.

11.16 Compensation of employees is recorded on an

accrual basis. It is measured by the value of the remu-

neration in cash or in kind that an employee becomes

entitled to receive from an employer with respect to

work undertaken during the relevant period, whether

paid in advance, simultaneously, or in arrears of the

work itself. To the extent that payment has not been

made for work performed, the economy of the employer

must record an entry in the accounts payable and the

economy of the employee must record an entry in the

accounts receivable.

11.17 Compensation of employees has three main

components:

(a) wages and salaries in cash,

(b) wages and salaries in kind, and

a. Wages and salaries in cash

11.18 Wages and salaries in cash consist of amounts

payable in cash (or any other financial instruments used

as means of payments) to employees in return for labor

input rendered, before deducting withholding taxes and

employees’ contributions to social insurance schemes

(which are shown in the secondary income account;

see paragraph 12.35). Included are basic wages and

salaries; extra pay for overtime, night work, and week-

end work; cost of living allowances, local allowances,

and expatriation allowances; bonuses; annual supple-

mentary pay, such as “thirteenth month” pay; allow-

ances for transportation to and from work; holiday pay

for official holidays or annual holidays; and housing

allowances. Wages and salaries in cash do not include

the reimbursement by employers of expenditures made

by employees in order to enable them to take up new

or relocated jobs (e.g., reimbursement for travel and

related expenses) or expenditures on items needed to

carry out their work (e.g., tools or special clothing).

These are shown as acquisition by the employer of

goods and services.

b. Wages and salaries in kind

11.19 Wages and salaries in kind consist of amounts

payable in the form of goods, services, interest forgone,

and shares to employees in return for labor input ren-

dered. Examples are meals; accommodation; sports,

recreation, or holiday facilities for employees and their

families; transportation to and from work; goods and

services from the employer’s own processes of produc-

tion; bonus shares distributed to employees; and so

forth. Benefits in kind should be valued at the market-

equivalent price. The goods or services may be provided

free or at a reduced cost. For example, when employees

receive loans at reduced or zero rates of interest, the

interest forgone is the difference between the interest

charged and a market-equivalent interest charge. To

provide a consistent and economically meaningful way

of recording benefits in kind, some “rerouting” may be

involved (see paragraph 3.16 for an example of rerout-

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

187

ing). That is, although the benefits are purchased by

the employer, the benefits are treated as if the employer

paid the amount of the benefit to the employee who, in

turn, acquired the item. The rerouting may affect the

resident-to-nonresident nature of the transaction.

11.20 Employee stock options (ESOs) are a way of

paying wages and salaries in kind. ESOs are valued

by reference to the fair value of the equity underly-

ing the ESO awarded. The value of ESOs at the time

of granting provides the measure of compensation of

employees that should be recorded as accruing over the

period to which the option relates, generally the period

between the granting and vesting dates. Sometimes, the

options may cover the period before the granting date,

which should also be taken into account in allocating

the compensation of employees. The value of the ESO

accumulates as compensation of employees is recorded,

so that at vesting date, it has accumulated to the value

of the ESO at granting. Changes in the value of ESOs

at or after the vesting date are not compensation of

employees, but are holding gains and losses (see para-

graph 9.30). Transactions and positions in ESOs are

recorded within financial derivatives and ESOs, with

a supplementary item for economies in which cross-

border transactions in ESOs are significant.

11.21 In cross-border situations, a multinational par-

ent company may directly provide ESOs to employees

of its foreign subsidiaries. The value of ESOs should

be recorded as compensation of employees payable

by the subsidiary, the actual employer, and hence this

transaction is domestic. The liabilities of the parent

companies and acquisition of assets by the employees

of the subsidiary in the form of ESOs are recorded in

the respective economies’ international accounts. If the

ESO is supplied free or below cost to the subsidiary,

a transaction between the parent and actual employer

should be imputed for the value of the ESO similar

to the treatment of transfer pricing (see paragraphs

11.101–11.102).

c. Employers’ social contributions

11.22 Employers’ social contributions are social

contributions payable by employers to social security

funds or other employment-related social insurance

schemes to secure social benefits for their employ-

ees. Social security schemes are operated by general

government; other employer-related social insurance

schemes may be operated by the employers themselves

or by an insurance corporation or may be an auton-

omous pension scheme. Examples of social benefits

include employers’ contributions or subsidies for pen-

sions, life insurance, and health insurance; allowances

for children, spouse, family, education, or other pay-

ments with respect to dependents; payments made to

workers absent from work because of illness, accidental

injury, maternity leave, and so forth; and severance pay-

ments. Both actual and imputed social contributions are

included. For defined contribution employer pension

schemes, the actual amounts payable by employers are

included in the compensation of employees. For defined

benefit pension schemes, including unfunded pension

schemes, the amount of employers’ social contributions

should be determined on the basis of actuarial calcula-

tions that yield contributions required to secure the de

facto entitlements to the social benefits. (See paragraph

5.66 for the definition of pension entitlements.)

11.23 Employees who are employed outside their

economy of residence may incur travel expenses (see

paragraphs 10.91–10.93) and may be subject to the pay-

ment of income taxes (see paragraph 12.28). These flows

should be recorded on a gross basis respectively as travel

expenses and taxes on income; that is, they should not be

deducted from compensation of employees.

2. Dividends and withdrawals from income of

quasi-corporations

11.24 Dividends are the distributed earnings allo-

cated to the owners of equity for placing funds at the

disposal of corporations. Raising equity through the

issue of shares is an alternative way of raising funds

compared to borrowing. In contrast to debt financing,

however, equity finance does not give rise to a liability

that is fixed in monetary terms and does not entitle the

holders of shares of a corporation to a fixed or predeter-

mined income. Owners of equity receive their share of

distributed earnings, the timing and amounts of which

are decided by corporations.

11.25 The concept of dividends is linked to the

instrument classification; namely, they are the return

payable by corporations to their shareholders or own-

ers.

Dividends are most often quoted in terms of the

amount of money declared payable per share. They may

also be quoted in terms of a percentage of the market

value of shares, referred to as dividend yield. Income on

nonparticipating preference shares is treated as inter-

est income, rather than dividend income, because such

shares are classified as debt instruments.

Manufactured dividends are discussed in paragraph 11.69.

Chapter 11 g Primary Income Account

188

11.26 In addition to dividends from corporations,

distributed income from quasi-corporations (such as

distributed branch profits) should be included under

this heading. In legal terms, quasi-corporations can-

not distribute income in the form of dividends. Nev-

ertheless, the owner, or owners, of a quasi-corporation

may choose to withdraw some or all of the income of

the enterprise, and some quasi-corporations formally

organized as trusts, partnerships, or other institutions

may formally distribute some or only a portion of their

earnings. From an economic point of view, the with-

drawal of such income is equivalent to the distribution

of corporate income through dividends and is treated

the same way. Withdrawals from income of quasi-cor-

porations do not include withdrawals of funds realized

by the sale or disposal of the quasi-corporation’s assets

(e.g., the sale of inventories, fixed assets, or land or

other natural resources). Transmittal of funds resulting

from such disposals of assets is recorded as a with-

drawal from the equity of quasi-corporations in the

financial account. Income from rent earned on land

and buildings directly held by nonresidents is also clas-

sified under dividends and distributed incomes from a

notional direct investment enterprise.

11.27 Exceptional payments by corporations

(including quasi-corporations such as branches) to their

shareholders that are made out of accumulated reserves

or sales of assets should not be treated as dividends.

Such exceptional payments, sometimes called super-

dividends, are treated as withdrawals of equity, and

therefore recorded in the financial account (as noted

in paragraph 8.23). The exceptional nature of the pay-

ments is normally determined as being disproportion-

ately large relative to the recent level of dividends and

earnings. Although dividends are notionally paid out

of the current period’s operating surplus, corporations

often smooth the payments of dividends, sometimes

paying out rather less than operating surplus but other

times paying out a little more, especially when the oper-

ating surplus itself is very low. For practical reasons, no

attempt is made to align dividend payments with earn-

ings except when the dividends are disproportionately

large. If the level of dividends declared is greatly in

excess of previous dividends and trends in earnings, the

excess should be excluded from dividends and shown as

a withdrawal of equity (see paragraph 8.23).

11.28 Stock dividends arise where stockholders elect

to receive payments of dividends in the form of issue of

new shares. The stock dividends are essentially a capi-

talization of earnings and an alternative to distributing

cash dividends. Therefore, stock dividends are treated

as income (in the primary income account), which is

then immediately reinvested (in the financial account).

11.29 Bonus shares refer to issues of new shares

to all stockholders in proportion to existing owner-

ship. These arrangements are not treated as transac-

tions because no new resources have been provided.

The claim of the shareholders on the entity is the same

before and after the issuance of bonus shares. (See also

paragraph 8.33.)

11.30 Liquidating dividends, whether partial or

total, arise mainly at the time of the termination of a

company. These are treated as a withdrawal of equity,

shown in the financial account, as a convention based

on the assumption that liquidating dividends are more

likely to involve previously existing equity finance

rather than current income.

11.31 Dividends are recorded at the time the

shares go ex-dividend (see paragraph 3.48 for record-

ing of dividends). Withdrawals of income from quasi-

corporations, that is, distributed profits, are recorded

when they are withdrawn by their owners. Dividends

and withdrawals from income of quasi-corporations

are recorded gross of any withholding taxes. These

taxes are deemed to be payable by recipients of such

income.

11.32 Dividends and withdrawals by owners of

quasi-corporations are also identified for equity in

investment funds. Investment funds are usually portfo-

lio investment, but they may also occur in other func-

tional categories. For equity in investment funds and

direct investment, the owners’ earnings include both

the distributed income and reinvested earnings.

3. Reinvested earnings

11.33 This section describes the treatment in the

international accounts of reinvested earnings from

equity participation. Reinvested earnings is associated

with the concept of attributing retained earnings to

their owners.

11.34 Retained earnings of an enterprise shows the

net earnings from production and primary and second-

ary income transactions before attributing reinvested

earnings. It is equal to net operating surplus plus pri-

mary income, current transfers receivable, and change

in pension entitlements, and minus primary income

(excluding reinvested earnings payable to the enter-

prise’s direct investors and owners of investment funds)

and current transfers payable. Retained earnings of

investment funds and the part of the retained earnings

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

189

of direct investment enterprises that belongs to direct

investors are treated as being distributed to the owners

who then are deemed to reinvest back. The imputation

of income to the owners of investment funds and direct

investors is shown in the primary income account as

“reinvested earnings” and the corresponding flow is

recorded in the financial account as “reinvestment of

earnings” (see paragraphs 8.15–8.16 for the recording

of financial account entries). Reinvestment of earnings

is an imputed financial transaction. In the position data,

reinvestment of earnings is not shown separately but

included implicitly in the total value of equity.

11.35 In macroeconomic statistics, corporations

are defined as entities separate from their owners

and able to take economic decisions (see paragraphs

4.13–4.15 for the definition of corporations as institu-

tional units). Owners receive dividends and face other

financial gains and losses arising from the activity

of the corporations they own.

For corporations, the

notion that the institutional units are decision-making

entities implies that retained earnings are treated as

the income and saving of that entity rather than those

of its owners. So the undistributed income arising

from the net operating surplus, net property income,

and net current transfers is recorded as retained earn-

ings or net saving of corporations. Losses are negative

net saving. Quasi-corporations, such as branches and

notional units, are treated in the same way as incor-

porated entities.

11.36 However, when retaining earnings is a deliber-

ate decision of owners to reinvest, treating them as if

they were retained by corporations would not reflect

economic reality. Although most economic relationships

between a corporation and its owners may be considered

to take place in an arm’s length situation, the distribu-

tion of its net earnings to its owners, in some cases,

may be subject to the control and influence the owners

have on corporate decisions. Attribution of cross-border

income is particularly important for deriving consistent

and comparable measures of national disposable income

and national saving. Retained earnings of investment

funds and the part of the retained earnings of direct

investment enterprises belonging to direct investors are

treated as being distributed to the owners and reinvested

back by the owners in their enterprises.

The amount of dividends payable in any given accounting period

depends on a range of factors, including the corporation’s judgment

of its own investment opportunities relative to those available in the

market, differences in the tax treatment of distributed and undistrib-

uted income, and the degree of influence and control of the owners

in management decisions.

a. Investment income attributable to investment

fund shareholders

11.37 Investment income attributable to the owners

of investment fund shares (or units) includes dividends

payable to them as well as retained earnings. Investment

funds provide a convenient, accessible, and affordable

vehicle for financial investment. Typically, investment

funds sell shares or units to the public and invest in a

diversified portfolio of securities, although they may

also invest in other assets, including real estate, or they

may be limited to a small number of investors (see

paragraphs 4.73–4.75 on investment funds as an institu-

tional subsector). Each share represents a proportional

equity in the investment portfolio managed by invest-

ment funds.

11.38 Earnings from investment funds can be

viewed as being passed on to their shareholders (or uni-

tholders) as they are earned in the form of investment

income on their equity. Investment funds earn income

by investing the money received from shareholders.

Shareholders’ income from investment funds is defined

as the investment income earned on the fund’s invest-

ment portfolio after deducting operating expenses. The

net earnings of investment funds after deducting the

operating expenses belong to shareholders. When only

a part of the net earnings is distributed to shareholders

as dividends, the retained earnings should be treated

as if they were distributed to the shareholders and then

deemed reinvested. The consequence of the treatment

of the retained earnings of investment funds is that the

saving of investment funds is always zero.

11.39 Investment income attributable to owners of

investment funds excludes holding gains and losses

arising from investment by the funds. Holding gains

and losses are recorded in the other changes in finan-

cial assets and liabilities account. (If dividends from

an investment fund include distribution of amounts

derived from holding gains, reinvested earnings may

be negative.)

b. Reinvested earnings on direct investment

11.40 Investment income attributable to direct

investors on their equity includes dividends, withdraw-

als from income of quasi-corporations, and reinvested

earnings. The reinvested earnings are the direct inves-

tors’ share of the retained earnings of the direct invest-

ment enterprise. Reinvested earnings are attributed to

direct investors who are in an immediate direct invest-

ment relationship with the direct investment enterprises

(i.e., when equity participation by direct investors meets

Chapter 11 g Primary Income Account

190

the 10 percent threshold). However, reinvested earnings

are not attributed to direct investors when the equity

participation provides less than 10 percent of the vot-

ing power. (For example, a direct investor may directly

hold a stake of 1 percent of an indirectly held subsid-

iary; although it is a direct investor by virtue of the

chain of ownership, it is not shown as a direct recipi-

ent of reinvested earnings on its 1 percent holding.)

Paragraphs 6.8–6.24 define direct investment relation-

ships. In the case of a government-owned nonresident

entity used solely for fiscal purposes, transactions are

imputed between the government and the government-

owned nonresident entity to reflect the fiscal activities

of the government (see paragraphs 8.24–8.26). There-

fore, such government-owned entities do not give rise to

reinvested earnings.

11.41 The rationale behind the treatment of rein-

vested earnings on direct investment is that, because

a direct investment enterprise is, by definition, subject

to control, or influence, by a direct investor or inves-

tors, the decision to retain and reinvest some of its

earnings within the enterprise represents an invest-

ment decision on the part of the direct investor(s).

Many factors may influence the decisions of direct

investors on the proportions of net earnings of direct

investment enterprises to be distributed or retained,

including taxation systems, transfer costs, investment

opportunities in the ongoing business and elsewhere,

relative costs of moving financial resources, and need

to expand the ongoing business. Therefore, attributing

the retained earnings of direct investment enterprises

to their direct investors is needed for consistent and

comparable measures of national income and national

saving. However, because reinvested earnings are

recorded only for equity in direct investment and

investment funds, but not for other types of equity,

it may be useful for some analysis to have measures

of income and the current account with and without

reinvested earnings.

11.42 Reinvested earnings represent the direct inves-

tors’ proportion, in terms of equity held, of the earnings

that foreign subsidiaries and associates do not distribute

as dividends. The undistributed earnings of branches

are also considered to be reinvested earnings.

11.43 Reinvested earnings of a direct investment

enterprise are, therefore, the direct investor’s share of

the direct investment enterprise’s retained earnings

or net saving (before reinvested earnings payable are

deemed distributed). Retained earnings or net saving

(before reinvested earnings payable are deemed distrib-

uted) of an enterprise may be formally stated as:

Net operating surplus (operating revenue minus

operating expenses)

+ Dividends receivable;

+ Interest receivable;

+ Rent receivable;

+ Enterprise’s share of reinvested earnings of any

direct investment enterprises;

+ Current transfers receivable;

–Dividends payable;

–Interest payable;

–Rent payable;

– Taxes and other current transfers payable.

(These items correspond exactly to SNA items; addi-

tional information on the treatment of particular items

of revenue and expense can be found in the 2008 SNA.)

Reinvested earnings are recorded in the period in which

the retained earnings accrue. See also Box 11.5 for an

example of the calculation of reinvested earnings.

11.44 Reinvested earnings are measured on the basis

of net saving before reinvested earnings are deemed dis-

tributed, and thus linked to the concept of operational

earnings generated from production, lending and bor-

rowing financial assets, and renting natural resources,

and current transfers. Reinvested earnings do not include

any realized or unrealized holding gains or losses. Hold-

ing gains and losses may arise from valuation changes,

including exchange-rate-related gains and losses, revalu-

ation of fixed assets, and changes in market prices of

financial assets and liabilities. Reinvested earnings also

do not include gains or losses due to other changes in

volume of assets, such as write-offs of nonproduced,

nonfinancial assets, write-offs of bad debts, and uncom-

pensated seizures of assets. Because business accounting

measures of profits often include holding gains or losses,

adjustments to business accounting records may be nec-

essary. Holding gains and losses and other changes in

volume of financial assets and liabilities are described in

Chapter 9, Other Changes in Financial Assets and Lia-

bilities Account. Provisions for various types of losses,

such as for bad debts, are internal bookkeeping entries

that should not be taken into account in determining the

net saving and reinvested earnings.

11.45 Retained earnings of a direct investment

enterprise are measured after deducting corporate

taxes charged on the income of the enterprise. Such

taxes are payable by the enterprise and not by its

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

191

owners. Furthermore, retained earnings should be cal-

culated after any provision for consumption of fixed

capital. Consumption of fixed capital is measured by

the value, at current replacement cost, of the fixed

assets used up (as a result of physical deterioration,

normal obsolescence, or normal accidental damage)

during an accounting period. In the calculation of con-

sumption of fixed capital, the expected economic life

of an individual asset should be taken into account.

(Expected life and normal obsolescence or damage do

not include losses due to wars or major natural disas-

ters.) Depreciation used in the business accounts is not

necessarily the same as consumption of fixed capital

as the depreciation is usually based on historic cost

or book values. If data based on historic cost or book

values are used, they should be adjusted to current

replacement cost basis for the purpose of calculating

consumption of fixed capital.

11.46 Reinvested earnings can be negative when a

direct investment enterprise has a loss on its operations

or the dividends declared in a period are larger than net

income in that period. If direct investment abroad gen-

erates negative earnings, the entry should be shown as a

negative income receivable by the direct investor. Simi-

larly, the economy of the direct investment enterprise

should record the losses as negative income payable.

11.47 In a chain of direct investment relationships,

reinvested earnings need only be recorded between the

direct investor and directly owned direct investment enter-

prises. The passing of retained earnings from indirect

holdings should be taken into account through the chain

of direct investment relationships. Retained earnings of

an enterprise in the chain would include reinvested earn-

ings derived from its immediate direct investment enter-

prise (see paragraphs 6.8–6.24 for a definition of direct

investment relationships), which as a direct investor would

receive reinvested earnings from its immediate direct

investment enterprise, and so on. Therefore, reinvested

earnings are passed on to the indirect direct investors

through the chain indirectly, as illustrated in Box 11.1.

4. Interest

Reference:

IMF and others, External Debt Statistics: Guide

for Compilers and Users, Chapter 2, Appendix,

Accrual of Interest Costs—How Should This Be

Implemented? and paragraphs 6.15–6.17.

Chapter 11 g Primary Income Account

Enterprise A has a 100 percent subsidiary Enterprise B, which in turn has a 100 percent

subsidiary Enterprise C.

Enterprise A is owned 95 percent by portfolio investors, while Enterprise C owns 5 percent

(reverse investment).

In the following example, earnings are as stated and none of the enterprises pays dividends

during the period—all earnings are retained; so the following results are obtained for rein-

vested earnings:

Earnings from

Reinvested Earnings:

_____________________________

Own Operations Payable Receivable

Enterprise A 100 0 120

Enterprise B 40 120 80

Enterprise C 80 80 0

Notes:

• The reinvested earnings receivable for Enterprise A consist of the reinvested earnings receivable

from its immediate direct investment enterprise, Enterprise B. However, the reinvested earnings

of Enterprise C are indirectly taken into account through reinvested earnings of Enterprise B. (See

paragraph 11.47.)

• No reinvested earnings are payable on the reverse investment equity of Enterprise C in Enterprise A.

(See paragraph 11.99.)

Box 11.1. Reinvested Earnings with Chain of Ownership

192

11.48 Interest is a form of investment income that

is receivable by the owners of certain kinds of finan-

cial assets, namely deposits, debt securities, loans, and

other accounts receivable, for putting the financial

assets at the disposal of another institutional unit.

Income on SDR holdings and SDR allocations is also

included in interest. Not all current account flows asso-

ciated with debt instruments are interest; some may be

commissions or fees, which are charges for financial

services (see paragraphs 10.118–10.136 for a discussion

of financial services).

11.49 Interest is recorded on an accrual basis; that is,

interest is recorded as accruing continuously over time

to the creditor on the amount outstanding. Depending

on the contractual arrangements, the rate at which inter-

est accrues can be a percentage of the amount outstand-

ing, a predetermined sum of money, a variable sum of

money dependent on a defined indicator, or some com-

bination of these methods. Under the accrual basis, as

interest accrues, the amount outstanding increases; that

is, accrued interest not yet paid is a part of the amount

outstanding. What are commonly referred to as interest

payments, therefore, are financial account transactions

that reduce the debtor’s existing liability. The amount

initially advanced or borrowed is also known as initial

principal. Periodic coupon payments may cover part or

whole of the interest accrual during that period as well

as payments that reduce the initial principal.

a. Currency of denomination and

fixed-rate vs. index-linked instruments

11.50 For the purpose of defining and measuring

interest, it is useful to distinguish between the follow-

ing three types of arrangements:

(a) Domestic-currency-denominated fixed-rate

instruments. At inception, the contracting par-

ties determine all future cash flows that the

debtor must make in domestic currency. Interest

for these instruments is the difference between

the sum of all debtor’s payments and the funds

the creditor makes available to the debtor. The

information on the amount outstanding and

interest rates needed to calculate interest accru-

als is known at inception.

(b) Foreign-currency-denominated fixed-rate

instruments. At inception, future cash flows are

determined in the relevant foreign currency. The

recording of interest on foreign currency fixed-

rate instruments is also straightforward. Interest

is defined according to the formula described

in (a) above, with the only difference being

that, in the first instance, a foreign currency is

used as the currency of denomination. Interest

expressed in foreign currency is to be converted

into the domestic currency at the mid-point mar-

ket exchange rate for the periods in which the

interest accrues. The information on amount

outstanding and interest rates needed to calcu-

late interest accruals in the currency of denomi-

nation is known at inception. Debt instruments

with both the amount to be paid at maturity and

all periodic payments (such as coupons) linked

to a foreign currency are treated as though they

are denominated in that foreign currency.

anism links the amount to be paid at maturity or

periodic payments (such as coupons) (or both) to

indicators agreed by the parties, and the values

of the indicators are not known in advance. As

a result, the amount of interest cannot be known

at the time of issue. For some instruments, it can

be determined only at the time of redemption.

Indexed instruments include those indexed to the

consumer price index, a stock exchange index,

a commodity price, and so forth. Index-linked

debt instruments are those on which payments are

linked to a reference item that normally changes

over time in response to market pressures. All other

debt instruments should be classified as fixed-rate.

As noted in paragraph 11.50(b), debt instruments

with both the amount to be paid at maturity and

periodic payments linked to a foreign currency are

classified and treated as though they are denomi-

nated in that foreign currency. All other types of

index-linked instruments, including those that are

partially linked to exchange rates (e.g., those for

which either only the amount to be paid at matu-

rity or only periodic payments are linked to an

exchange rate), are treated as being denominated

in domestic currency for the recording of inter-

est and other economic flows. The calculation of

interest accrual for index-linked instruments is

described in paragraphs 11.59–11.65.

b. Interest on loans, deposits, and accounts

receivable/payable

11.51 The nature of financial assets and liabilities in

the form of deposits, loans, and accounts receivable/pay-

able is explained in Chapter 5, Classification of Financial

Assets and Liabilities. In general, the interest accrual

on these financial assets and liabilities is determined by

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

193

applying the relevant interest rate as specified in the con-

tractual arrangements between parties to the amount out-

standing at each point of time throughout the accounting

period. Some instruments have a fixed interest rate for

the entire life of the instrument. Some instruments may

have terms for changes in interest rates, once or several

times, during the life of the instrument. For each period,

the relevant interest rate should be used to calculate inter-

est accrued in that period. Some loans and deposits may

also have indexation of the amount to be paid at maturity

or periodic payments (or both). Interest accruals arising

from indexation as described in paragraphs 11.59–11.65

also apply to indexed loans and deposits.

c. Interest on debt securities—traded debt

instruments and concept of interest

11.52 Defining and measuring interest for traded

debt securities is not straightforward. While debtors

have obligations to settle according to the terms and

conditions set at the inception of the debt instruments,

holders of securities acquired in the secondary markets

may not know or even care about the interest rate at the

time of issue. There are three approaches for defining

and measuring interest for traded debt instruments:

(a) Interest is equal to the amounts the debtors will

have to pay to their creditors over and above

the repayment of the amounts advanced by the

creditors. Interest accrual on a debt instrument

is determined for the entire life by the condi-

tions set at inception of the instrument. Interest

accrual is determined using the original yield-to-

maturity. A single effective yield, established at

the time of security issuance, is used to calculate

the amount of accrued interest in each period

to maturity. This approach is also known as the

debtor approach.

(b) Interest is the income that follows from applying,

at any point in time, the discount rate of future

receivables implicit in the instrument’s market

value. The accrual of interest under this approach

reflects current market conditions and expecta-

tions. Interest accrual at any given time is deter-

mined using the current yield-to-maturity. The

effective interest rate for calculating the accrued

interest varies with period-to-period changes in

the market price of the securities. This approach

is also known as the creditor approach.

the discount rate implicit in the cost at which the

instrument was acquired. The accrual of inter-

est under this approach reflects market condi-

tions and expectations at the time of acquisition.

Interest is determined using the remaining yield-

to-maturity at the time the debt instrument is

acquired. The effective interest rate will change

only if the security is resold in the secondary

market. This approach is also known as the

acquisition approach.

11.53 In the international accounts, interest is

recorded following the first approach described above

in paragraph 11.52(a). The same approach is followed

in other macroeconomic statistical systems. Interest

calculated according to the market rates as described

in paragraph 11.52(b) may be reported as a supple-

mentary item, which is important particularly for ana-

lyzing rates of return. It should be noted that for debt

securities the valuation and recording of transactions

in the financial account and positions in the balance

sheets do not depend on the method used for the cal-

culation and recording of interest accrual. Acquisi-

tions and disposals of debt securities are recorded at

transaction prices and the positions are recorded at

market prices or fair values.

Debt securities with known cash flows

11.54 For debt securities for which the issue and

redemption prices are the same (i.e., issued at par), total

interest accruals over the whole life of the securities

are given by the periodic coupon payments. If coupon

payments are fixed, accrued interest can be calculated

by allocating the coupon payment to the relevant period

using a daily compound formula.

11.55 Certain debt securities, such as short-term

bills of exchange and zero-coupon bonds, are such

that the debtor is under no obligation to make any

payments to the creditor until the liability matures. In

effect, the debtor’s liability is discharged by a single

payment covering both the amount of the funds origi-

nally borrowed and the interest accrued and accumu-

lated over the entire life of the liability. Instruments

of this type are said to be discounted because the

amount initially borrowed is less than the amount to

be repaid. The difference between the amount to be

repaid at the end of the contract and the amount origi-

nally borrowed is interest that must be allocated over

the accounting periods between the beginning and end

of the contract. The interest accruing in each period

is recorded in the primary income account with the

same amount increasing the debtor’s liability for the

same instrument in the financial account. An example

is shown as Box 11.2.

Chapter 11 g Primary Income Account

194

11.56 A slightly more complicated case is a deep-

discount bond, which is a discounted instrument that

also requires periodic coupon payments. In such

cases, the interest accrual is the amount of the cou-

pon payable periodically plus the amount of interest

accruing in each period attributable to the difference

between the redemption price and the issue price.

Interest accrual from the periodic coupon payments

is derived as explained in paragraph 11.54. Inter-

est accrual from the amortization of the discount

(the difference between the issue and redemption

prices) can be calculated by summing daily amorti-

zations for the reporting period. Although amortiza-

tion rates could be calculated on monthly or quarterly

bases, amortization at a daily rate facilitates the allo-

cation of the amortized discount to the individual

reporting periods.

11.57 In some cases, debt securities are issued at

a premium rather than at a discount. The method of

determining the interest accrual is identical to the case

of a discounted instrument except that when issued at

a premium, the difference between the redemption and

issue price is amortized over the life of the instrument

and reduces (rather than increases as in the case of the

discounted instrument) the amount of interest accruing

in each period.

11.58 Stripped securities raise special issues for

accrual of interest. Unofficial strips are issued by a third

party without the authorization of the original issuer and,

hence, the stripped securities are new instruments—a

liability of the strip issuer. The original debt securi-

ties continue to accrue interest according to the term

specified in the contract. Interest on stripped securities

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

A bond is issued on January 1, Year 1, with 100 repayable in five years, with no coupons.

If the market rate of interest at the time of issue is 10 percent for that maturity and credit

rating, then the bond will be issued at a price of 62.09 (that is, 100/1.1

The annual interest calculations and associated values of the principal are as follows:

IIP IIP

_____________ _____________

Value of Debt

Income

Value of Debt_____________

Securities Interest Securities

January 1 Accrued December 31

Year 1 62.09 6.21 68.30

Year 2 68.30 6.83 75.13

Year 3 75.13 7.51 82.64

Year 4 82.64 8.26 90.91

Year 5 90.91 9.09 100.00

Notes:

• According to the debtor approach (see paragraph 11.52(a)), the interest in each period is

fixed at inception.

• The sum of interest over the five years is 37.91, equal to the difference between 62.09

(price at issue) and 100 (price at redemption).

• Interest accrued each year increases in line with the growing accumulated value of accrued

interest.

• The corresponding entry to the interest accrued is an increase in debt securities in the

financial account. The values of the bond during the period are unknown, because of hold-

ing gains and losses. While fluctuations in market interest rates will cause changes in the

value, the calculation of interest is unaffected.

(For further details, see External Debt Statistics: Guide for Compilers and Users, para-

graph 2.66 and Table 2.3.)

Box 11.2. Numerical Example of Calculation of Interest Accrual on a

Zero-Coupon Bond

195

accrues at the rate determined at the time of issuance of

strips. Official strips (issued with the authorization of the

original issuer through a strip dealer it appoints) simply

change the arrangements for holding the original instru-

ment, and thus the strips remain the direct obligation of

the original issuer. Interest on official strips therefore

accrues at the rate on the underlying security, but not at

the rate prevailing at the time of stripping.

Index-linked debt securities

11.59 As explained in paragraph 11.50, an indexation

mechanism links the amount to be paid at maturity or

coupon payments (or both) to indicators agreed by the

parties. The values of the indicators are not known

in advance. For debt securities with indexation of the

amount to be paid at maturity, they may be known only

at the time of redemption. As a result, interest flows

before redemption are uncertain and cannot be deter-

mined with certainty. For estimating interest accru-

als before the values of the reference indicators are

known, some proxy measures will have to be used.

In this regard, it is useful to distinguish the following

three arrangements:

(a) indexation of coupon payments only with no

indexation of amount to be paid at maturity,

(b) indexation of the amount to be paid at maturity

with no indexation of coupon payments, and

rity and coupon payments.

The principles described in paragraphs 11.60–11.66 for

index-linked debt securities apply to all index-linked

debt instruments.

11.60 When only coupon payments are index-linked,

the full amount resulting from indexation is treated as

interest accruing during the period covered by the cou-

pon. It is most likely that by the time data are compiled

for a reporting period, the date for the coupon payment

would have been passed and hence the value of index

is known. When the date for the coupon payment has

not been passed, the movement in the index during that

part of the reporting period covered by the coupon can

be used to calculate the interest accrual.

11.61 When the amount to be paid at maturity

is index-linked, the calculation of interest accruals

becomes uncertain because the redemption value is

unknown; in some cases the maturity time may be

several years in the future. Two approaches can be fol-

lowed to determine the interest accrual in each account-

ing period:

(a) Interest accruing in an accounting period due to

the indexation of the amount to be paid at matu-

rity may be calculated as the change in the value

of this amount outstanding between the end and

beginning of the accounting period due to the

movement in the relevant index. (See Box 11.3

for an example.)

(b) Interest accruals may be determined by fixing the

rate of accrual at the time of issue. Accordingly,

interest is the difference between the issue price

and the market expectation, at inception, of all

payments that the debtor will have to make, which

is recorded as accruing over the life of the instru-

ment. This approach records as income the yield-

to-maturity at issuance, which incorporates the

results of the indexation that are foreseen at the

moment the instrument was created. Any devia-

tion of the underlying index from the originally

expected path leads to holding gains or losses that

will not normally cancel out over the life of the

instrument. (See Box 11.4 for an example.)

11.62 Although the first approach (using the move-

ment in the index) has the advantage of simplicity, inter-

est includes all changes and fluctuations in the value of

the amount to be paid at maturity in each accounting

period due to the movement in the relevant index. If

there is a large fluctuation in the index, this approach

may yield negative interest in some periods even though

market interest rates at the time of issue and current

period may be positive. Also, fluctuations behave like

holding gains and losses. The second approach (fixing

the rate at the time of issue) avoids such problems, but

the actual future cash flows may differ from the ini-

tially expected cash flows unless ex ante market expec-

tations are exactly met. This means that interest for the

life of the instrument may not be equal to the difference

between the issue price and redemption value.

11.63 The first approach works well when a broad-

based indexation of the amount to be paid at maturity

is used (e.g., a consumer price index or nominal GDP)

because such indexation is expected to change rela-

tively smoothly over time. However, the first approach

may give counter-intuitive results when the indexation

of the amount to be paid at maturity combines motives

for both interest income and holding gains (e.g., a nar-

row price index such as a commodity price, stock price,

or gold price). Therefore, when indexation includes a

holding gain motive, typically indexation based on a

single, narrowly defined item, the second approach is

preferred; otherwise the first approach should be used

for the measurement of interest accrual.

Chapter 11 g Primary Income Account

196

11.64 Because debt instruments with both the amount

to be paid at maturity and coupon payments indexed to

foreign currency are treated as though they are denomi-

nated in that foreign currency, interest, other economic

flows, and positions for these instruments should be

calculated using the same principles that apply to for-

eign-currency-denominated instruments. Interest should

accrue throughout the period using the foreign currency

as the currency of denomination and converted into the

domestic currency using mid-point market exchange

rates. Similarly, the amount outstanding should be val-

ued using the foreign currency as the unit of account

with the end of period exchange rate used to determine

the domestic currency value of the entire debt instru-

ment (including any accrued interest) in the international

investment position. Changes in market values of debt

securities due to exchange rate movements and interest

rate changes are treated as revaluations.

11.65 When both the amount to be paid at maturity

and coupon payments are indexed to a broad-based

reference item, interest accruals during an accounting

period can be calculated by summing two elements:

the amount resulting from the indexation of the cou-

pon payment (as described in paragraph 11.60) that is

attributable to the accounting period, and the change

in the value of the amount outstanding between the

end and beginning of the accounting period arising

from the movement in the relevant index (as described

in paragraph 11.61(a)). When both the amount to be

paid at maturity and coupon payments are indexed to

a narrow index that includes a holding gain motive,

interest accruals for any accounting period can be

determined by fixing the yield-to-maturity at issuance

as explained in paragraph 11.61(b).

Debt securities with embedded derivatives

11.66 For debt securities with embedded deriva-

tives, such as call, put, or equity conversion options,

the accounting for accrued interest is the same as for

securities that do not have such features. For all peri-

ods leading up to the exercise of the option, the inter-

est accrual is unaffected by the presence of the option.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

A bond is issued on Jan 1, Year 1 at a price 1000 for five years, with no coupons, indexed to

a broad price index. The index value at the beginning of the period is 100.

The index and bond values, with the derived interest and revaluations are as follows:

Broad Price Index Bond

_______________ ________

End of Period Interest Revaluation Dec. 31

Year 1 107.0 70 –12 1,058

Year 2 113.0 60 –17 1,101

Year 3 129.0 160 58 1,319

Year 4 148.0 190 10 1,519

Year 5 140.3 –77 –39 1,403

__________________________________________________________________________________

Years 1–5 403 0

Notes:

• Total interest over the five years (i.e., 403) is determined by the movement of the index

(i.e., 40.3 percent increase).

• Since this is a bond, revaluations also arise because of changes in market conditions,

such as changes in market interest rates, credit ratings, and expectations about the future

path of the index. However, they are zero over the life of the bond when it is repaid at its

indexed value.

• Negative values of interest can arise in the periods when the index declines.

• The corresponding entry to the interest accrued is an increase in debt securities in the

financial account.

• Fluctuations in market interest rates cause changes in the value of the bond, but the calcu-

lation of interest is unaffected.

Box 11.3. Numerical Example of Calculation of Interest Accrual on an

Index-Linked Bond—Broad-Based Index

197

When the embedded option is exercised, the securities

are redeemed and accrual of interest ceases.

d. Fees on securities lending and gold loans

11.67 Securities lending without cash collateral con-

sists of the delivery of securities for a given time period.

(This is discussed further in paragraphs 7.58–7.61.)

Usually the borrowers (e.g., brokers) subsequently on-

sell the securities outright to other clients. The ability

of the borrower to on-sell the securities reflects that

legal ownership is transferred to the borrower, while

the economic risks and rewards of ownership remain

with the original owner. In return, the “lender” receives

a fee from the “borrower” for the use of the security.

Gold loans consist of the delivery of gold for a given

time period. They may be associated with physical gold

or (less frequently) unallocated gold accounts. As with

securities lending, legal ownership of the gold is trans-

ferred (the temporary borrower may on-sell the gold to

a third party), but the risks and benefits of changes in

the gold price remain with the lender. Gold borrowers

(usually market dealers or brokers, but also gold pro-

ducers and industrial gold users) often use these trans-

actions to cover their sales to third parties in periods of

(temporary) gold shortage. A comparable fee is paid to

the original owner for the use of the gold. The amount

of the fee is determined by the value of the underlying

asset and the duration of the reverse transaction. War-

rants may also sometimes be lent.

11.68 Securities and monetary gold are financial

instruments and thus the fees for securities lending

without cash collateral and gold loans are payments

Chapter 11 g Primary Income Account

A bond is issued on Jan 1, Year 1 at a price 1000 for five years, with no coupons, indexed

to a narrow price index. The index value at the beginning of the period is 100. (The numbers

are the same as the example in Box 11.3, but the treatment differs because the narrow index

treatment is applied in Box 11.4.) Market interest rates are 8 percent per annum at the time

of issue.

The index and bond values, with the derived interest and revaluations are as follows:

Narrow Price Index Bond

_________________ ________

End of Period Interest Revaluation Dec. 31

Year 1 107.0 80 –22 1,058

Year 2 113.0 86 –43 1,101

Year 3 129.0 93 124 1,318

Year 4 148.0 101 100 1,519

Year 5 140.3 109 –225 1,403

__________________________________________________________________________________

Years 1-5 469 –66

Notes:

• The total increase in value over the five years (i.e., 469 – 66 = 403) is determined by the

movement of the index (i.e., 40.3 percent increase).

• According to the debtor approach (see paragraph 11.52(a)), the interest in each period

is fixed according to the interest rate at inception. The interest for Year 1 is 80 (8 per-

cent of 1000), for Year 2 it is 86 (8 percent of 1000 + 80), for Year 3 it is 93 (8 percent of

1000 + 80 + 86), and so on.

• The revaluation for the whole life of the bond is due to the difference between the increase

in the index and the compound increase that would have occurred at the market rate of

interest. (Revaluations also arise for individual periods during the life of the bond because

of changes in market conditions, such as changes in market interest rates, credit ratings,

and expectations about the future path of the index.)

• Fluctuations in market interest rates cause changes in the value of the bond, but the calcu-

lation of interest is unaffected.

Box 11.4. Numerical Example of Calculation of Interest Accrual on an

Index-Linked Bond—Narrowly Based Index

198

for putting a financial instrument at the disposal of

another institutional unit. Accordingly, fees on securi-

ties lending (equity securities as well as debt securi-

ties) and gold loans accrue to the security owner and

are treated as interest (with the corresponding entry in

other accounts receivable/payable; see paragraph 5.73).

As a simplifying convention, fees paid on loans of non-

monetary gold are also treated as interest. For securi-

ties lending, although, in some circumstances, the fee

is payable to the custodian in the first instance (and

used to defray custodial charges, in whole or in part),

in principle, all of the fee is payable to the owner of the

security who, in turn, is deemed to pay part or all of

it to the custodian in a separate transaction. (Amounts

accruing to custodians are included under custodial ser-

vices, discussed under financial services in paragraphs

10.121 and 10.124.)

e. Investment income accrued while securities

are under reverse transactions

11.69 The economic owner of securities continues

to record dividends and the accrual of interest on the

securities even when the legal ownership changes under

a reverse transaction (see paragraph 7.58) or a cus-

todian has on-sold the securities to a third party (see

paragraph 10.124). If the reverse transaction covers

the period when dividends or coupons are payable, the

security taker is typically obliged to compensate the

security lender. (The payments to the security lender to

compensate for the dividends are called “manufactured

dividends.”) The treatment of the reverse positions is on

the research agenda.

f. Accrual of interest on nonperforming debt

11.70 Amount outstanding of nonperforming debt

remains a legal liability of the debtor, so interest should

continue to accrue unless the liability has been extin-

guished (e.g., by repayment or as a result of a bilateral

arrangement between debtor and creditor). However, for

some analysis, it may be more useful to exclude, from

primary income measures, interest that is not realisti-

cally expected to be paid. It would, therefore, be useful

for the creditor to provide supplementary information

on accrued interest on nonperforming debt when it is

significant and quantifiable. It is important that meta-

data should provide information on the method adopted

for defining nonperforming debt. Nonperforming loans

are described in paragraphs 7.50–7.53.

11.71 Following the accrual principle, arrears on debt

repayments (both periodic payments and amount to be

paid at maturity) that are not paid on due dates should

continue to be shown in the same instrument until the

liability is extinguished (see also paragraph 3.56). For

arrears arising from a debt contract, interest should

accrue at the same interest rate as on the original debt,

unless a different interest rate for arrears was stipulated

in the original debt contract, in which case this stipu-

lated interest rate should be used. The stipulated rate

may include a penalty rate in addition to the interest rate

on the original debt. If the terms and characteristics of

the financial instrument automatically change when it

goes into arrears, and if the classification of the loan is

changed, the change should be recorded as a reclassifica-

tion in the other changes in financial assets and liabilities

account (see paragraph 3.56 for treatment of arrears). If

the contract is renegotiated, transactions are recorded as

a new instrument is created. If an item is purchased on

credit and the debtor fails to pay within the period stated

at the time the purchase was made, any extra charges

incurred should be regarded as interest and accrue until

the debt is extinguished.

11.72 When a one-off guarantee covering a debt

that becomes nonperforming is activated, the guaran-

tor assumes the liability for that debt. From the time

of activation of the debt guarantee, the interest accrual

becomes the liability of the guarantor. A guarantor may

make payments for interest that are due on loans or

other interest-bearing liabilities of other units for which

it acts as the guarantor. Any interest accruing before the

guarantor assumes the debt is a liability of the original

debtor and payments by the guarantor should be classi-

fied on the basis of contractual arrangements between

the guarantor and the original debtor. In most cases,

such payments establish a claim by the guarantor on the

original debtor, who is obliged to service the debt. In

other cases, the claim on the debtor may be an increase

in the existing equity participation (e.g., the activation

of a guarantee made by a parent company for debt of

its subsidiary will improve the balance sheet of the

subsidiary and hence the parent company’s equity in it).

If the guarantor does not obtain a claim on the origi-

nal debtor, a capital transfer from the guarantor to the

debtor is recorded, particularly when the guarantor is a

government unit. The treatment of one-off guarantees

is described in paragraphs 8.42–8.45.

g. Interest on financial leases

11.73 Financial leases are defined and distinguished

from operating leases in paragraphs 5.56–5.58. The

implication of treating financial leases as a loan is that

interest accrues on the loan. The lessor is treated as

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

199

making a loan to the lessee equal to the market value

of the asset, this loan being gradually paid off over the

period of the lease. The rate of interest on the imputed

loan is implicitly determined by the total amount pay-

able in rentals over the life of the lease in relationship to

the market value of the asset at the time of lease initia-

tion. The initial loan to the lessee, together with the les-

see’s subsequent repayments of the loan, are recorded

in the financial account of the lessor and lessee. The

interest payable on the loan is recorded in the primary

income account. (A numerical example of calculation

of items for financial leases is shown in Box A6b.1.)

h. Pure interest (excluding FISIM)

11.74 Typically, financial intermediaries offer lower

rates of interest to their depositors than the rates that

they charge to their borrowers. The resulting inter-

est margins are used by the financial intermediaries

to defray their expenses and to provide an operating

surplus. This method of operation is an alternative to

charging customers directly for services. The treatment

of this margin (FISIM—financial intermediation ser-

vices indirectly measured) and its measurement are

described in paragraphs 10.126–10.136.

11.75 The primary income account records “pure

interest” by eliminating the FISIM component from

“actual interest.” “Actual interest” payable to a finan-

cial intermediary includes the service charge, which

should be subtracted to give the interest recorded as

investment income in the international accounts. Simi-

larly, “actual interest” receivable from a financial inter-

mediary is seen as having had a service charge already

deducted, so the actual interest receivable from the

financial intermediary will be increased by the value

of the service received to provide interest recorded as

investment income in the international accounts. The

“pure interest” is calculated using the reference inter-

est rate. The concept of “reference” interest rate and its

application are described in paragraphs 10.129–10.130.

Actual interest charged or received by banks is needed

for certain analytical purposes (for instance, for debt

sustainability analysis and analysis of rates of return)

and should be disseminated as a memorandum item.

i. Interest under high inflation

11.76 High inflation gives rise to specific issues in

measuring and interpreting interest. An obvious example

is that interest rates for domestic-currency-denominated

instruments could be significantly higher than those for

foreign-currency-denominated instruments. Thus, nomi-

nal interest for domestic-currency-denominated instru-

ments includes compensation for the loss of purchasing

power on the monetary value of the funds advanced. The

topic of accounting under high inflation is important and

more pervasive in the accounts than simply the ques-

tion of how to measure interest in these circumstances.

Indeed, the whole issue of the measurement of transac-

tions on a current price basis is called into question when

prices at the end of the period are several times those at

the start of the period. Chapter 29, Satellite Accounts

and Other Extensions, of the 2008 SNA provides guid-

ance on compiling and presenting data in conditions of

inflation, covering the whole range of issues from the

goods and services account, through income and finan-

cial accounts, to balance sheets.

5. Investment income attributable to

policyholders in insurance, standardized

guarantees, and pension funds

11.77 Investment income attributable to policy-

holders in insurance, standardized guarantees, and

pension funds represents returns to policyholders on

their claims in insurance and standardized guarantee

schemes in the form of technical reserves and income

payable on pension entitlements.

11.78 The operations of insurance corporations,

standardized guarantee schemes, and pension funds

include charging premiums, paying claims, and manag-

ing and investing funds. However, the observed trans-

actions do not always reflect the underlying economic

relationships between the insurance corporations or

pension funds and policyholders, and it is necessary to

rearrange these operations so that the underlying eco-

nomic behavior is reflected in the economic accounts.

One such rearrangement is the imputation of invest-

ment income attributable to policyholders in insurance

corporations, standardized guarantee schemes, and

pension funds. The measurement of these services is

described in paragraphs 10.109–10.117.

11.79 Insurance corporations, standardized guaran-

tees schemes, and pension funds hold technical reserves

to meet obligations arising from claims and entitle-

ments. The definition and classification of these tech-

nical reserves are described in paragraphs 5.62–5.63

and 7.63–7.68. The technical reserves and entitlements

represent a liability of the insurer, issuer of standard-

ized guarantees, and defined benefit pension fund, and a

corresponding asset of the policyholders and beneficia-

ries. To meet their technical reserve liabilities, the insur-

ers, guarantors, and pension funds make investments in

Chapter 11 g Primary Income Account

200

various assets, such as financial assets, land, or build-

ings. However, the investments by insurers, guarantors,

and pension funds are not necessarily equal to the tech-

nical reserves and entitlements.

11.80 For nonlife insurance policies, the technical

reserves represent prepayment of premiums and reserves

against outstanding claims. Guarantors have technical

provisions for calls under standardized guarantees. The

investment income on these technical reserves is treated

as income attributable to the policyholders.

11.81 For life insurance, the insurers’ liability equals

the present value of expected claims from existing poli-

cyholders. Set against these liabilities, the insurance

corporations hold assets, and the income earned by

insurance corporations from these assets is attributed to

the policyholders as investment income on their claims

on life insurance corporations. (See paragraph A6c.33

for further information.)

11.82 For defined contribution pension schemes, the

investment income payable on pension entitlements is

measured in the same way as for the investment income

attributable to insurance policyholders (i.e., equal to the

investment income on funds plus any income earned

by renting land and buildings owned by the fund). For

the defined benefit pension schemes, because the value

of entitlements is the present value of future payments,

the investment income payable on pension entitlements

is measured as the increase in benefits payable because

the date when the entitlements become payable is closer.

The amount of the increase is not affected by whether

the pension scheme actually has sufficient funds to meet

all the obligations nor by how it is funded (whether from

investment income or holding gains, for example). (In

contrast, changes in model assumptions are recorded

under other changes in volume—see paragraph 9.24.)

11.83 Investment income attributable to policyhold-

ers is retained by the insurance corporations, guar-

antors, and pension funds in practice. It is therefore

treated as being paid back by the policyholders to the

insurance corporations, guarantors, and pension funds

in the form of premium supplements that are additional

to actual premiums payable under the terms of the insur-

ance and pension policies. The corresponding entries to

the investment income attributable to insurance policy-

holders for casualty insurance, including standardized

guarantees, are called premium supplements and taken

into account in deriving service charges and net premi-

ums. (See paragraphs 12.41–12.42 and Appendix 6c,

Topical Summary—Insurance, Pension Schemes, and

Standardized Guarantees.)

11.84 The total amount of investment income attribut-

able to policyholders is allocated among policyholders.

The allocation to policyholders could be made in propor-

tion to actual premiums payable by them. Investment

income payable by resident insurers, guarantors, and pen-

sion funds to nonresident policyholders can be estimated

by multiplying the gross premiums earned from non-

residents by the ratio of investment income attributable

to policyholders to gross premiums earned for all opera-

tions. To the extent that these ratios vary for different

lines of business (reinsurance, marine, life, pension funds,

standardized guarantees, etc.), the calculations should be

made separately. Such investment income receivable by

resident policyholders from nonresident insurers, guaran-

tors, and pension funds is not readily observable. Ratios

of investment income attributable to policyholders to pre-

miums that are observed in other similar cases could be

used to calculate investment income receivable.

6. Rent

Reference:

2008 SNA, Chapter 7, The Distribution of Income

Accounts.

11.85 Rent covers income receivable for putting nat-

ural resources at the disposal of another institutional

unit. The party providing the natural resource is called

the lessor or landlord, while the user is called the lessee

or tenant. The terms under which rent is payable are

expressed in a resource lease. A resource lease is an

agreement whereby the legal owner of a natural resource

that has an infinite life makes it available to a lessee in

return for a regular payment recorded as rent.

11.86 Examples of rent include amounts payable for

the use of land extracting mineral deposits and other

subsoil assets, and for fishing, forestry, and grazing

rights. The regular payments made by the lessees of nat-

ural resources such as subsoil assets are often described

as royalties, but they are classified as rents. Payments or

receipts by government of rent on land without build-

ings (e.g., for military bases) should be shown as rent,

not as government goods and services n.i.e. If a single

payment covers both the return on land and structures

on it and there is no objective basis on which to split the

payment for the use of land and structures, the whole

amount should be treated as rent when the value of land

is believed to exceed the value of structures, and as

purchase of services (rental) otherwise.

11.87 Usually, the entity using land or natural

resources is a resident institutional unit. However, if the

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

201

user is a nonresident then a cross-border transaction on

rent arises. For example, a forestry or fishing operation

that pays for temporary access to naturally growing

fish or timber in another economic territory gives rise

to rent in the international accounts. It is also possible

that other natural resources adjoining a border could be

extracted from a base on the other side of the border,

thus giving rise to rent. Payments for overflight rights

are also rent, unless they relate primarily to air traffic

control, in which case they would be other transport

services. Rent arrangements can be contrasted with:

(a) outright ownership of the resources concerned,

which would be recorded as an international

transaction in a natural resource (see paragraph

13.9) or, more likely, give rise to a notional direct

investment enterprise that owns the resource

(paragraphs 4.34–4.40); or

(b) when the right to use an asset amounts to an

economic asset but not outright ownership of

the underlying asset, the purchase and sale are

classified under contracts, leases, and licenses

(e.g., a right to use a natural resource for 10

years, such as a spectrum license; see paragraph

13.11); or

fixed assets, such as houses and machinery (see

paragraphs 10.153–10.157 on rentals arising from

operating leases).

11.88 Notional direct investment enterprises created

for holding land and leases on land for long periods will

normally generate rent (or travel or operational leasing

services if there is a building on the land). Notional units

are described in paragraphs 4.34–4.40. When the land or

buildings are used by the owners (who are nonresidents)

of the notional unit, an imputation for rent (in the case

of use of land) or travel services (e.g., in territories that

had a large number of vacation homes owned by nonresi-

dents) or operational leasing (if nonresident enterprises

own premises for their own use) would be necessary.

These imputations are recorded under relevant catego-

ries of the current account. The income arising from the

notional direct investment enterprise is recorded under

direct investment income. For example, if the vacation

home is rented, the notional unit receives the payment for

accommodation and generates net earnings that are con-

sidered withdrawals from income of quasi-corporations,

generated by the provision of accommodation services.

11.89 Rent is recorded on an accrual basis; that is,

rent is treated as accruing continuously to the owner

throughout the period of the contract agreed between

the owner and the user. The rent recorded for a particu-

lar accounting period is, therefore, equal to the value of

the accumulated rent payable over that period of time,

as distinct from the amount of rent due to be paid dur-

ing that period or the rent actually paid. An up-front

rent payment covering several periods gives rise to a

financial asset of the lessee and liability of the lessor,

classified under accounts receivable/payable. Similarly,

a payment after the rent period(s) gives rise to other

accounts receivable/payable.

11.90 If a lessee subleases a natural resource, the

income from the subleasing should be classified as rent,

as should the income payable to the owner of the natu-

ral resource by the owner of the lease.

7. Taxes and subsidies on products and

production

11.91 Taxes and subsidies on products and produc-

tion are included in the primary income account. (See

paragraphs 10.180–10.181 for distinction between taxes

and services.) Taxes on income and wealth are included

in the secondary income account (see paragraphs 12.28–

12.31 for taxes on income and wealth). Cross-border

taxes and subsidies on products and production are nor-

mally not significant except perhaps in economic unions.

They arise if an international or regional organization

levies its own taxes or pays subsidies (which may also

be done through national governments). They may also

arise when economic activity by nonresidents (such as

short-term construction or installation projects) is insuf-

ficient to constitute a branch. Although taxes on products

may be levied at various stages (production, distribution,

or use), they are included in the prices of goods and ser-

vices. Therefore, for purchasers, the prices paid include

relevant taxes on products, while for governments such

taxes are considered primary income.

11.92 Taxes and subsidies on products and produc-

tion should be recorded in the primary income account

to maintain the conceptual consistency with SNA. The

2008 SNA distinguishes between

(a) Taxes on products, which are payable per unit of

a good or service. Examples include value-added

tax, import duties, export taxes, and excise; and

(b) Other taxes on production. Examples include

payroll taxes, recurrent taxes on buildings and

land, and business licenses.

This item corresponds to the 2008 SNA’s “Taxes on production

and on imports” and “Subsidies.”

Chapter 11 g Primary Income Account

202

The same distinction is made for subsidies. As men-

tioned in paragraph 11.4, the balance on the primary

income account makes up the difference between GDP

and GNI. Subsidies are shown separately from taxes,

rather than being deducted from taxes.

11.93 In some cases, an exporter of a good con-

tractually agrees to pay import duties. In such cases,

the duties are outside the scope of the primary distri-

bution of income in the international accounts. This

treatment is adopted because the duties arise from the

process of importation, and so they are an obligation

of the importer. They are, therefore, treated as pay-

able by the importer, and so are resident-to-resident

transactions. The amount of import duties paid by the

exporter, therefore, is not included in the FOB value of

the goods. (Because the tax is imputed as being paid

by the importer, it is a resident-to-resident transaction.)

Similarly, if an importer agrees to pay export taxes, the

tax is still an obligation of the exporter. The amount

of the export tax paid by the importer, therefore, is

included in the FOB value of the goods and rerouted

through the exporter. (See also paragraph 10.34.) (This

treatment is the same as applies to arrangements to pay

freight and insurance services.)

11.94 In some circumstances, a duty or other tax

may be imposed by the customs authorities without

ownership being acquired by a resident of that terri-

tory. Examples may include goods to be processed,

repaired, or stored, or for use by visitors. In such cases,

when customs duties are payable by nonresidents, the

duties are recorded as taxes on products payable by

nonresidents.

C. Investment Income and Functional

Categories

11.95 This section deals with investment income

that is included under each functional category of

financial assets and liabilities. It also discusses specific

issues related to investment income for a functional

asset category. A functional asset category includes

different types of financial instruments that serve the

same function, and hence a functional category can

include different types of investment income. Financial

derivatives and employee stock options do not give rise

to investment income.

1. Direct investment income

11.96 Direct investment income includes all

investment income arising from direct investment

positions between resident and nonresident insti-

tutional units. As noted in paragraph 6.28, debt

between selected affiliated financial intermediaries

is not included in direct investment, so the corre-

sponding income on those instruments is also clas-

sified as portfolio or other investment income. Rare

cases of other primary income, such as compensation

of employees and rent between direct investors and

direct investment enterprises, are not included under

direct investment income.

11.97 Direct investment relationships are defined in

paragraphs 6.8–6.24. Three types of direct investment

relationships and associated investment income flows

can be distinguished:

(a) Direct investors’ investment in direct investment

enterprises. This category includes investment

income flows (distributed earnings, reinvested

earnings, and interest) between the direct inves-

tor and its direct investment enterprises (whether

in an immediate relationship or not).

(b) Reverse investment (defined in paragraph 6.40).

This type of relationship covers investment income

flows on liabilities of direct investors to their direct

investment enterprises and on claims of direct

investment enterprises on their direct investors.

ment income flows between all fellow enter-

prises that belong to the same direct investment

group.

Dividends, withdrawals from income of quasi-

corporations, and interest can apply for any of these

types of direct investment relationships. Reinvested

earnings are attributed to direct investors only when

equity participation by the direct investor meets the 10

percent threshold. A numerical example of the calcula-

tion of reinvested earnings is given in Box 11.5.

11.98 Investment income associated with various

types of financial instruments is discussed in Section

B above. Table 11.2 shows various types of investment

income by three types of direct investment relation-

ship.

Interest can be broken down further by type of

financial instruments. The possibility of a detailed

presentation of direct investment income as shown in

Table 11.2 not only allows explicit links to financial

instruments but also expands the analytical value of the

Note that the titles in Table 11.2 refer to the position to which the

income flows relate, so the heading “direct investors in direct invest-

ment enterprises” refers to investment income payable to direct

investors by their direct investment enterprises.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

203

data for detailed analysis of direct investment relation-

ships. However, the second and third categories may be

insignificant or confidential in some cases, allowing

for dissemination of only aggregate data for all three

types combined.

Income on reverse investment

11.99 Reverse investment is defined in paragraph

6.40. Investment income on reverse investment is

shown on a gross basis. That is, both the income receiv-

able from claims on direct investors and income pay-

able on liabilities to direct investment enterprises are

shown separately. However, income data may also be

presented according to the directional principle on a

supplementary basis. There are no reinvested earnings

on reverse equity because the 10 percent threshold has

not been met.

Income on investment between fellow

enterprises

11.100 There are no reinvested earnings on equity

between fellow enterprises because the 10 percent

threshold has not been met. The treatment of fellow

enterprises in income data presented according to the

directional principle is discussed in paragraph 6.43 and

Box 6.4.

Transfer pricing

11.101 Transfer pricing at values that differ signifi-

cantly from arm’s length prices is usually associated

with shifting resources between related enterprises,

so it relates to direct investment income measures.

Transfer pricing may be motivated by income distri-

bution or equity buildups or withdrawals. Examples

may be the provision of goods and services without

Profit and Loss Statement of Enterprise A

Nonresident direct investors own 50 percent of the equity

of Enterprise A.

Revenue:

1. Sales of finished goods 20,000

+ increase in inventories of finished goods 500

2.Transport services provided 3,000

3.Repair services 6,000

4.Dividends 3,000

5. Interest on bonds 1,000

6.Profit on sale of property 1,000

7. Total revenue (1 through 6) 34,500

Expenses:

8. Raw materials purchased 12,000

– increase in inventories of materials 2,000

9. Salaries and wages 5,000

10. Office rental 500

11. Travel of employees 2,000

12. Fuel, electricity, other costs 500

13. Depreciation 1,000

14. Interest on loans 1,000

15. Bad debt provisions 2,000

16. Total expenses (8 through 15) 22,000

17. Net income (before taxes) 12,500

18. Taxes on income 4,000

19. Net income (after taxes) 8,500

20. Dividends payable 5,000

Reinvested earnings can be derived by:

(a) Adjusting net income after taxes:

Net income after taxes (line 19 = 8,500)

– dividends (line 20 = 5,000)

– revenue not part of output, primary income or second-

ary income (namely, holding gains, line 6 = 1,000)

+ expenses not being a transaction (namely, bad debt

provisions, line 15 = 2,000)

= 4,500, multiplied by 0.5

= 2,250.

(b) From the national accounting relationships

output of goods and services (line 1 + line 2 + line 3;

which gives 29,500);

– intermediate consumption of goods and services;

(line 8 + line 10 + line 11 + line 12; which gives

13,000)

– consumption of fixed capital (line 13, which gives

1,000) (Assumes depreciation is an acceptable approx-

imation to consumption of fixed capital. Aggregate

adjustments may be possible if it is not.)

+ primary and secondary income receivable (line 4 +

line 5, which gives 4,000);

– primary and secondary income payable (line 9 + line

14 + line 18 + line 20; which gives 15,000)

* all multiplied by the direct investor’s share in the

equity of the enterprise

= 4,500 multiplied by 0.5

= 2,250

In practice, data for these calculations may not always

be available monthly or quarterly, or may not be available

for the most recent period(s). As a result, it may be neces-

sary to derive some items from partial data or by methods,

such as extrapolation, ratios, and models.

Box 11.5. Numerical Example of Calculation of Reinvested Earnings of a

Direct Investment Enterprise

Chapter 11 g Primary Income Account

204

explicitly charging, or at understated or overstated

values. Where transfer pricing is identified and quan-

tified with a high degree of certainty, the relevant

entry should be adjusted to an arm’s length value (see

also paragraphs 3.77–3.78). Compilers in each of the

economies involved are encouraged to cooperate and

exchange information in order to avoid asymmetrical

recordings of bilateral data. In addition to the adjust-

ment to the flow itself, there should be a correspond-

ing entry, as stated below:

(a) if a direct investment enterprise is overinvoiced

on a good or service provided by the direct inves-

tor or

(b) if a direct investor is underinvoiced on a good

or service provided by the direct investment

enterprise,

then the transfer pricing acts as a hidden dividend from

the direct investment enterprise, so dividends should

be increased by the difference between the market

value of the goods and services and the prices actually

charged:

(a) if a direct investment enterprise is underinvoiced

on a good or service provided by the direct inves-

tor or

(b) if a direct investor is overinvoiced on a good

or service provided by the direct investment

enterprise,

then the transfer pricing acts as a hidden investment

in the direct investment enterprise, so direct invest-

ment equity flows should be increased by the difference

between the market value of the goods and services and

the prices actually charged.

Table 11.2. Detailed Breakdown of Direct Investment Income

Credits Debits

Direct investment income

Income on equity and investment fund shares

Dividends and withdrawals from income of quasi-corporations

Reinvested earnings

Interest

1. Direct investors in direct investment enterprises

Income on equity and investment fund shares

Income on equity other than investment fund shares

Dividends and withdrawals from income of quasi-corporations

Reinvested earnings

Income on investment fund shares

Dividends

Reinvested earnings

Interest

By type of financial instruments

2. Direct investment enterprises in direct investors (reverse investment)

Income on equity and investment fund shares

Income on equity other than investment fund shares

Dividends and withdrawals from income of quasi-corporations

Income on investment fund shares

Dividends

Reinvested earnings

Interest

By type of financial instruments

3. Between fellow enterprises

Income on equity and investment fund shares

Income on equity other than investment fund shares

Dividends and withdrawals from income of quasi-corporations

Income on investment fund shares

Dividends

Reinvested earnings

Interest

By type of financial instruments

Note: This table is expository; for Standard Components, see Appendix 9.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

205

11.102 The adjustments for transfer pricing have

implications for reinvested earnings and for data of

the counterpart economy. It is, therefore, useful to

exchange information to the extent possible with

counterpart economies in order to avoid asymmetrical

recordings.

2. Portfolio investment income

11.103 Portfolio investment income includes income

flows between residents and nonresidents arising from

positions in equity and debt securities other than those

classified under direct investment or reserve assets.

Financial instruments covered in portfolio investment

are described in paragraphs 6.54–6.57.

11.104 Two types of portfolio investment income

are distinguished at the first level, namely, income

on equity securities and investment fund shares, and

income on debt securities. The income on investment

fund shares includes both dividends and reinvested

earnings. Income on equity securities other than invest-

ment fund shares includes only distributed earnings

(dividends). Interest is further classified by types of

debt security and by maturity. Such a detailed classifica-

tion of portfolio investment income ensures consistency

with both instrument and functional classifications of

financial assets and liabilities.

11.105 Portfolio investment income can be further

classified by domestic institutional sectors (see Chapter

4, Economic Territory, Units, Institutional Sectors, and

Residence; Section D, Institutional Sectors) for owners

of securities as well as issuers of securities. A variety of

other supplementary disaggregations by foreign sector,

currency of denomination, and so forth may be desir-

able for specific analytical purposes.

3. Other investment income

11.106 Other investment income covers flows

between resident and nonresident institutional units

in regard to interest on deposits, loans, trade credit

and advances, and other accounts receivable/payable;

income on equity and investment fund shares that are

not classified in any other functional categories; and

investment income attributable to policyholders in

insurance, standardized guarantees, and pension funds.

Interest payable on SDR allocations is also recorded

under other investment income. Fees for nonmonetary

gold loans should also be included in interest under

other investment income (see paragraph 11.68). Table

11.3 shows various types of other investment income

and associated financial instruments.

11.107 Other investment income on equity excludes

income on direct investment equity and portfolio

investment in equity securities. Equity participation in

some incorporated or unincorporated enterprises (such

as partnership or joint ventures) does not qualify either

as direct investment (because the equity participation is

below the 10 percent threshold) or as portfolio invest-

ment (because they are not equity securities). Such

Table 11.3. Detailed Breakdown of Other Investment Income

Credits Debits

Other investment income

Income on equity and investment fund shares

Income on equity other than investment fund shares

Dividends and withdrawals from income of quasi-corporations

Income on investment fund shares

Dividends

Reinvested earnings

Interest

Deposits

Loans

Trade credit and advances

Other accounts receivable and payable

SDR allocations n.a.

Nonmonetary gold loans

Investment income attributable to policyholders in insurance,

pension funds, and standardized guarantee schemes

Note: This table is expository; for Standard Components, see Appendix 9.

Chapter 11 g Primary Income Account

206

equity participation is classified under other investment

(see also paragraphs 5.26 and 6.62) and any income

distributed to the owners should be classified in other

investment income. Similarly, some investment funds

may be organized by and limited to a small number

of members, but may not meet the definition of direct

investment or portfolio investment. Both distributed

and reinvested earnings on such investment fund shares

are classified under other investment income.

11.108 Other investment income should be further

classified by type of financial instruments. It can also

be classified by the domestic institutional sectors (for

both income receivable on holdings of external assets

and income payable on external liability positions).

4. Income on reserve assets

11.109 Data on income on reserve assets is useful for

studying rates of return on reserves, and for ensuring

that rates of return on other categories exclude reserves.

Investment income on reserve assets includes income

on equity and investment fund shares, and interest. Fees

on security lending and monetary gold loans (as dis-

cussed in paragraph 11.67) and interest on unallocated

gold accounts (as discussed in paragraph 6.80) are also

included under interest on reserve assets. Income on

equity and investment fund shares can be further clas-

sified into dividends on equity securities and income

attributable to investment fund shareholders. The lat-

ter includes both distributed and reinvested earnings.

Interest receivable can also be further classified by type

of financial instruments. If not available for publica-

tion, income from reserve assets should be included in

other investment–interest.

11.110 Interest on SDR holdings is shown on a gross

basis under income on reserve assets. That is, the value

of interest payable on SDR allocations is not deducted.

(Interest payable on SDR allocations is shown as

income under other investment liabilities, as stated in

paragraph 11.106.)

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

207

CHAPTER

Secondary Income Account

A. Overview of the Secondary

Income Account

Reference:

2008 SNA, Chapter 8, The Redistribution of Income

Accounts.

12.1 The secondary income account shows current

transfers between residents and nonresidents. Various

types of current transfers are recorded in this account

to show their role in the process of income distribution

between the economies. Transfers may be made in cash

or in kind. Capital transfers are shown in the capital

account (see paragraphs 13.19–13.34).

12.2 Whereas primary income affects national

income (see paragraph 11.4 for the definition of gross

national income), secondary income, together with pri-

mary income, affects gross national disposable income.

Capital transfers do not affect disposable income and,

hence, are recorded in the capital account.

12.3 The balance on the secondary income account

presents total credits less total debits, and is called

balance on secondary income. In addition, the balance

of the sum of all current account transactions can also

be shown at the end of this account because it is the

last account in the sequence of current accounts. The

balance on all current accounts is called the current

account balance, an important economic aggregate in

analyzing external imbalance. The current account bal-

ance also links to the national accounts as it is equal

to the saving-investment balance for the economy (see

paragraphs 14.4–14.5).

12.4 The components and structure of the second-

ary income account are shown in Table 12.1. Current

transfers can be further classified by institutional

sectors receiving or providing the transfers. In some

cases, compilers may be interested in compiling data

classified by sector of provider for credits and sec-

tor of recipient for debits. For economies that are

major recipients of assistance, it would be desirable

to show current and capital transfers with consistent

classifications to allow them to be compared and

aggregated.

B. Concepts and Coverage

12.5 In describing the content of the secondary

income account, two important distinctions are made:

(a) transfers are distinguished from other types of

transactions (see paragraphs 12.6–12.11) and (b) cur-

rent transfers are distinguished from capital transfers

(see paragraphs 12.12–12.15).

1. Transactions: exchanges and transfers

12.6 As explained in paragraph 3.13, every transac-

tion is either an exchange or a transfer. An exchange

involves a provision of something of economic value in

return for a corresponding item of economic value.

12.7 A transfer is an entry that corresponds to the

provision of a good, service, financial asset, or other

nonproduced asset by an institutional unit to another

institutional unit when there is no corresponding return

of an item of economic value. Transfers can also arise

where the value provided in return for an item is not

economically significant or is much below its value.

The accounting system in the international accounts

requires that each party to a transaction record two

entries (see paragraphs 3.26–3.31 for the description of

the accounting system). When something of economic

value (e.g., goods, services, or a financial asset) is pro-

vided without a corresponding return of an item of

economic value, the corresponding entry is made as a

transfer. A cash transfer consists of the payment of cur-

rency or transferable deposit by one institutional unit to

another without anything supplied in return. A transfer

in kind consists of either the transfer of ownership of a

208

good or asset, other than cash, or the provision of a ser-

vice, again without any corresponding return of an item

of economic value. A transfer is classified as a current

or capital transfer (see paragraphs 12.12–12.15).

12.8 A unit making a transfer receives no specific

quantifiable benefit in return that can be recorded as

part of the same transaction. Nevertheless, certain

transfers (e.g., net nonlife insurance premiums) may

entitle the unit making the payment to some contingent

future benefits. Taxes are usually used to provide cer-

tain collective services that the taxpayers may be able

to consume. Even in the context of taxes payable by

residents, such benefits are generally uncertain or not

quantifiable, and hence items such as net nonlife insur-

ance premiums and taxes other than those on products

and production are treated as transfers. Taxes on prod-

ucts and production are, however, treated as primary

income. (See paragraphs 11.91–11.94.)

12.9 The borderline between transfers and exchanges

may, in some cases, be unclear. The distinction between

taxes and charges for government services is one such

case. Paragraphs 12.30 and 10.180–10.181 provide the

guidelines for distinguishing taxes from services. Another

case is the distinction between personal transfers and

compensation of employees when individuals go abroad

for employment. The distinction between the recording

of one or the other of these transactions is based on the

nature of the transaction and how long the individuals

stay in the economic territories where they are work-

ing, that is, whether they are considered residents of the

economies where they are working. Similarly, a case of

distinction between financial transactions and personal

transfers is described in paragraph 12.24.

12.10 A nonprofit institution serving households

(NPISH, as defined in paragraph 4.100) may be a direct

investor in a corporation. However, flows between two

NPISHs are generally transfers, rather than investment,

because it is considered that flows in these cases are

seldom driven by commercial considerations.

12.11 Transfers do not generally arise between com-

mercial entities. For example, provision of goods and

services without an explicit charge or at understated

value between institutional units in a direct invest-

ment relationship does not represent a transfer. In this

instance, the corresponding entry is in direct invest-

ment equity (see paragraphs 11.101–11.102). However,

net nonlife insurance premiums and nonlife insurance

claims are transfers that may occur between commer-

cial entities. Likewise, a commercial entity may be

involved in the provision of current or capital transfer to

another commercial entity as a compensation for dam-

ages to properties or other losses.

2. Distinction between current and

capital transfers

12.12 Transfers may be either current or capital.

To avoid duplication, the distinction between current

and capital transfers is discussed primarily in this

chapter rather than in Chapter 13, Capital Account. To

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 12.1. Overview of the Secondary Income Account

Credits Debits

Balance on goods, services, and primary income

Personal transfers

Current taxes on income, wealth, etc.

Social contributions

Social benefits

Net premiums on nonlife insurance and standardized guarantees

Nonlife insurance claims and calls under standardized guarantees

Current international cooperation

Miscellaneous current transfers

Total current transfers credits and debits

Balance on secondary income

Adjustment for change in pension entitlements

Current account balance

Current account balance (excluding reinvested earnings)

Note: This table is expository; for Standard Components, see Appendix 9.

209

distinguish current transfers from capital transfers, it

is preferable to focus on the special characteristics of

capital transfers.

12.13 Capital transfers are transfers in which the

ownership of an asset (other than cash or inventories)

changes from one party to another; or that oblige

one or both parties to acquire or dispose of an asset

(other than cash or inventories); or where a liability

is forgiven by the creditor. Cash transfers involving

disposals of noncash assets (other than inventories)

or acquisition of noncash assets (other than inven-

tories) are also capital transfers. A capital trans-

fer results in a commensurate change in the stocks

of assets of one or both parties to the transaction

without affecting the saving of either party. Capital

transfers are typically large and infrequent, but capital

transfers cannot be defined in terms of size or fre-

quency. A transfer in kind without a charge is a capital

transfer when it consists of (a) the transfer of owner-

ship of a nonfinancial asset (other than inventories,

i.e., fixed assets, valuables, or nonproduced assets) or

(b) the forgiveness of a liability by a creditor when no

corresponding value is received in return. However,

capital equipment provided by a direct investor to its

direct investment enterprise is not a capital transfer,

but involves a transaction in direct investment equity.

A transfer of cash is a capital transfer when it is linked

to, or conditional on, the acquisition or disposal of a

fixed asset by one or both parties to the transaction

(e.g., an investment grant).

12.14 Current transfers consist of all transfers that

are not capital transfers. Current transfers directly

affect the level of disposable income and influence

the consumption of goods or services. That is, current

transfers reduce the income and consumption possibili-

ties of the donor and increase the income and consump-

tion possibilities of the recipient. For example, social

benefits and food aid are current transfers.

12.15 It is possible that some cash transfers may be

regarded as capital by one party to the transaction and

as current by the other party. A large economy that

regularly makes investment grants in cash to a number

of smaller economies may regard the outlays as cur-

rent, even though they may be specifically intended to

finance the acquisition of assets. So that a donor and a

recipient do not treat the same transaction differently, a

transfer should be classified as capital for both parties

even if it involves the acquisition or disposal of an asset,

or assets, by only one of the parties. When there is

doubt about whether a transfer should be treated as cur-

rent or capital, it should be treated as a current transfer.

The treatment of nonlife insurance claims as current or

capital is discussed in paragraphs 12.44–12.45.

3. Recording and valuation of transfers

12.16 Although no good, service, or asset is received

in return from the counterpart, the recording of a trans-

fer nevertheless must give rise to two entries for each

party to the transaction. For a transfer in cash, the

donor records a decrease in currency or deposits and

a transfer payable; the recipient records an increase in

currency or deposits and a transfer receivable. For a

provision of goods or services in kind without a charge,

the donor records an export of goods or services and

a transfer payable; the recipient records an import of

goods or services and a transfer receivable. When a

liability is forgiven, the creditor and debtor extinguish

the financial asset and liability, respectively, with the

corresponding entries recorded as transfers.

12.17 In general, the time of recording of transfers is

determined by the time of the change of economic own-

ership of the resources (such as goods, services, finan-

cial assets) that are corresponding entries to transfers.

Determining the time of recording for grants and other

voluntary transfers can be complex because there is a

wide variety of eligibility conditions that have various

legal powers. In some cases, a potential transfer recipi-

ent has a legal claim when certain conditions have been

satisfied, such as the prior incurrence of expenses for

a specific purpose or the passage of legislation. These

transfers are recorded when all requirements and con-

ditions are satisfied. In cases where the transfer recipi-

ent never has a claim on the donor, the transfer should

be attributed to the time at which the cash payment is

made, the asset conveyed, or liability forgiven.

12.18 Taxes and other compulsory transfers should

be recorded when the activities, transactions, or other

events occur that create the government’s claim to the

taxes or other payments. The time of recording of taxes

is the time at which tax liability arises. Accordingly,

the amount of taxes is determined by the amount due

for payment as evidenced by tax assessments, decla-

rations, or other instruments, such as sales invoices

or customs declarations, that create liabilities in the

form of obligations to pay on the part of taxpayers.

Some compulsory transfers, such as fines, penalties,

and property forfeitures, are determined at a specific

time. These transfers are recorded when a legal claim

to the funds is established, which may be when a court

renders judgment or an administrative ruling is pub-

lished. If data on taxes are on a cash basis, adjustments

Chapter 12 g Secondary Income Account

210

should be made for large differences to approximate the

accrual basis of recording.

12.19 Because a transfer is the corresponding entry

to an actual resource flow or a forgiven liability, the

value of the transfer equals the value of the corre-

sponding flow. Generally, transfers in kind give rise to

valuation difficulties for the actual resource flow and,

accordingly, also the corresponding transfer entries.

The principles for the valuation of in-kind transactions

are described in paragraph 3.72.

C. Types of Current Transfers

12.20 The international accounts classify the fol-

lowing types of current transfers:

Personal transfers

Other current transfers

(a) current taxes on income, wealth, etc.,

(b) social contributions,

(d) net nonlife insurance premiums,

(e) nonlife insurance claims,

(f) current international cooperation, and

(g) miscellaneous current transfers.

These categories of current transfers are described in

paragraphs 12.21–12.58 in the context of international

accounts.

1. Personal transfers

Reference:

IMF, 2009, International Transactions in Remittances:

Guide for Compilers and Users.

12.21 Personal transfers consist of all current trans-

fers in cash or in kind made or received by resident

households to or from nonresident households. Personal

transfers thus include all current transfers between resi-

dent and nonresident individuals, independent of:

(a) the source of income of the sender (irrespec-

tive of whether the sender receives income from

labor, entrepreneurial or property income, social

benefits, and any other types of transfers; or dis-

poses assets); and

(b) the relationship between the households (irre-

spective of whether they are related or unrelated

individuals).

By convention, current transfers between house-

holds with regard to lotteries and other gambling are

included under personal transfers (discussed in para-

graph 12.26).

12.22 Workers’ remittances are current transfers

made by employees to residents of another economy.

They are included as a supplementary item.

12.23 The connection to the residence status of the

person concerned is important in determining whether

a personal transfer is involved. For example, in the

case of workers, personal transfers include only those

transfers abroad made by workers who are residents of

the economy in which they are employed. Resources

may be sent abroad by residents of an economy for

the purpose of financing other residents of the same

economy who are staying abroad (such as those sent

by parents to children who are studying in other ter-

ritories). These transactions should not be recorded as

current transfers in the balance of payments because

the parties are residents of the same economy. The

expenses abroad constitute a purchase of education

services in the case of students. Expenditures incurred

abroad by residents staying for less than one year in

foreign economic territories are generally recorded as

travel (see paragraphs 10.86–10.100).

12.24 Funds sent abroad by individuals who are

resident in the economy in which they are employed,

self-employed, or operating a business, for the purpose

of making a deposit in his or her own account with

a bank located abroad, represent a financial invest-

ment, which is recorded in the financial account,

rather than as a personal transfer. But any withdraw-

als to provide resources to a relative or another per-

son (without a quid pro quo) should be recorded as a

personal transfer. The situation of joint accounts can

arise with workers resident abroad who have joint

bank accounts with relatives in their home countries.

The treatment of such joint accounts is discussed in

paragraph 4.145. If the joint account emigrant work-

ers hold in their home country is freely usable by its

holders in the home country, the account may be con-

sidered to be held by residents in the home economy

(liability to residents). In such a case, the depos-

its made to the account by the nonresident should

be shown as funded by a transfer from abroad and

withdrawals by residents from the account would be

domestic transactions.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

211

Lotteries and other gambling

12.25 The amounts paid for lottery tickets or placed

in bets consist of:

(a) a service charge to the unit organizing the lottery

or gambling (discussed in paragraph 10.171);

and

(b) current transfers that are payable from the gamblers

to the winners and, in some cases, to charities.

The transfers are regarded as taking place directly from

those participating in the lottery or gambling to the

winners and charities. That is, they are not recorded

as transfers to or by the unit operating the gambling.

Some of the service charge at purchasers’ prices may

include gambling taxes, which are shown as payable by

the operator, not the customers.

12.26 When nonresident households take part in

gambling there may be net transfers between residents

and nonresidents. In some cases the winner of a lottery

does not receive a lump sum immediately but a stream

of payments over future periods. This arrangement

should be recorded as the receipt of the lump sum as a

current transfer equal to the present value of the pay-

ment stream and the immediate purchase of an annuity.

The recording of annuities is described in paragraphs

A6c.29–A6c.35.

Remittances

12.27 Appendix 5 describes the concept of remit-

tances for measuring and analyzing international remit-

tances and resource flows to households and NPISHs.

Three categories of remittances are defined, which may

be included as supplementary items, as follows:

(a) Personal remittances. From the perspective of

the recipient economy, personal remittances are

defined as:

Personal transfers receivable;

+ Compensation of employees receivable;

– Taxes and social contributions payable (related to

compensation of employees);

– Transport and travel expenditures payable by resi-

dents employed by nonresidents (as defined under

business travel in paragraphs 10.91–10.93);

+ Capital transfers receivable from households.

(b) Total remittances. From the perspective of the

recipient economy, total remittances are defined as

Personal remittances receivable;

+ Social benefits receivable.

Although conceptually, total remittances include nonlife

insurance transactions (net nonlife insurance premiums

and nonlife insurance claims), these transactions are

excluded on practical grounds.

the perspective of the recipient economy, this

category is defined as:

Total remittances receivable;

+ Current transfers receivable by NPISHs;

+ Capital transfers receivable by NPISHs.

Current and capital transfers to NPISHS are generally

recorded under miscellaneous current transfers or other

capital transfers (discussed in paragraphs 12.53 and

13.31).

2. Other current transfers

a. Current taxes on income, wealth, etc.

Reference:

2008 SNA, Chapter 8, The Redistribution of Income

Accounts; Section C, Current Taxes on Income,

Wealth, etc.

12.28 Current taxes on income, wealth, etc., in the

international accounts consist mainly of taxes levied on

the income earned by nonresidents from the provision of

their labor or financial assets. Taxes on capital gains aris-

ing from assets of nonresidents are also included. Taxes

on wages and salaries earned by nonresident employees

are recorded as payable by the nonresident employees.

Taxes on income and capital gains from financial assets

can be payable by individuals, corporations, nonprofit

institutions, governments, and international organiza-

tions. Taxes on interest and dividends are recorded as

payable by the recipients of the interest or dividends.

Taxes on financial transactions (such as taxes on issue,

purchase, and sale of securities) payable by nonresidents

are also current transfers. (However, if such taxes have

been classified as other taxes on products and produc-

tion in the national accounts, by convention, they may

be treated in the same way in the international accounts

for consistency.) Taxes on income and wealth may be

imposed by and payable directly to international orga-

nizations, such as the agencies of an economic union.

Taxes on rent and ownership of land are treated as

payable by the resident producers or resident notional

Chapter 12 g Secondary Income Account

212

institutional units; hence, they generally should not be

recorded in the balance of payments. Inheritance taxes

are treated as capital transfers (see paragraph 13.28 for

the treatment of inheritance taxes). Refunds of taxes

to taxpayers are treated as negative taxes; that is, the

amount of taxes is reduced by tax refunds.

12.29 Any other current taxes (other than taxes on

income and wealth, as explained in the preceding para-

graph, and taxes on products and production that are

recorded in the primary income account as explained

in paragraph 11.91) are also included in the secondary

income account.

12.30 Specific permission is granted by govern-

ments through issuing a license or other certificate for

which a fee is demanded. A “fee” that is a tax should be

distinguished from a “fee” that is a payment in return

for services provided by governments (see also para-

graphs 10.180–10.181 for distinction between taxes and

services). If the issue of such licenses involves little or

no work on the part of government or the fee charged is

clearly out of all proportion to the costs associated with

the issuance of licenses, it is likely that the licenses

being granted automatically on payment of the amounts

due are simply a device to raise taxes, even though the

government may provide some kind of certificate, or

authorization, in return. However, if the government

uses the issue of licenses to exercise some proper regula-

tory function—for example, checking the competence,

or qualifications, of the person concerned, checking the

efficient and safe functioning of the equipment in ques-

tion, or carrying out some other form of control that it

would otherwise not be obliged to do—the payments

made should be treated as purchases of services from

government rather than payments of taxes, unless the

payments are not broadly proportional to the costs of

providing the services.

12.31 Any fines or penalties on the late payment of

taxes are included in the amount of associated taxes.

b. Social contributions

Reference:

2008 SNA, Chapter 8, The Redistribution of Income

Accounts; Section D, Social Insurance Schemes

and Section E, Net Social Contributions.

12.32 Social contributions are the actual or imputed

contributions made by households to social insurance

schemes to make provision for social benefits to be paid.

Social insurance schemes include social security schemes

(which cover the entire community or large sections of

it and are imposed, controlled, and financed by gov-

ernment) and employment-related schemes (including

funded and unfunded pension schemes). Social contribu-

tions in the international accounts are recorded when a

resident makes contributions to social security and pen-

sion schemes in another economy for his or her employ-

ment in that economy, or an employer makes actual or

imputed contributions on behalf of the employee. (Social

contributions by an employer on behalf of its employees

are included in compensation of employees; see para-

graphs 11.22–11.23.) Similarly, social contributions are

recorded when a nonresident makes social contributions

to the resident social security and pension schemes.

12.33 The calculation of the amount of social contri-

butions varies for social security and pension schemes.

For social contributions to social security schemes, the

amount of social contributions recorded in the second-

ary income account includes the actual contributions

payable by the employers and employees. Because the

amount payable by employers is included in the com-

pensation of employees, the total of social contributions

payable to social security schemes is recorded as a

transfer payable by the employees.

12.34 The calculation of social contributions to pen-

sion schemes involves contribution supplements and ser-

vice charges. Contribution supplements, which represent

investment income payable on pension entitlements, are

described in paragraph A6c.41 and charges for pension

fund services are explained in paragraph 10.118. Further-

more, the treatment of social contributions is designed

to treat social insurance transactions simultaneously as

income distribution and financial transactions.

12.35 Social contributions to pension schemes are

determined as follows:

Employers’ actual contributions;

+ Employers’ imputed contributions;

+ Employees’ actual contributions;

+ Contribution supplements corresponding to invest-

ment income payable by pension schemes on pen-

sion entitlements;

– Service charges payable to pension schemes.

12.36 Employers’ actual and imputed contribu-

tions are rerouted through employees (for explanation

of rerouting, see paragraph 3.16). Contribution supple-

ments represent investment income payable by pen-

sion schemes on pension entitlements. All the service

charges are treated as charges payable by the employ-

ees, because the beneficiaries are the ultimate users.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

213

For determining the contribution supplements and ser-

vice charges for a group or groups of policyholders,

ratios of these items to actual contributions payable

from various similar sources may have to be used.

12.37 Pension entitlements represent claims of ben-

eficiaries on the funds. The payments of social con-

tributions into the pension schemes and the receipts

of pensions by beneficiaries therefore constitute the

acquisition and disposal of financial assets. In addition,

they are recorded as current transfers in the second-

ary income account as social contributions and social

benefits, respectively, so that disposable incomes of

households reflect these flows. Negotiated changes

in pension entitlements are current transfers (if they

relate to current periods) or capital transfers (other-

wise). In contrast, changes arising from revision to

model assumptions are other changes in volume (see

paragraph 9.24).

12.38 In order to reconcile the treatment of pen-

sions as current transfers with the treatment of pen-

sion entitlements as financial assets, it is necessary to

introduce an adjustment item. This adjustment item

adds back social contributions to, and subtracts pension

receipts from, the balance on secondary income. After

the adjustment, the current account balance is the same

as what it would have been if social contributions and

pension receipts were not recorded as current transfers.

This item is called “adjustment for change in pension

entitlements” and is equal to:

the total value of the actual social contributions pay-

able into pension schemes;

+ the total value of contribution supplements pay-

able out of the property income attributed to pen-

sion fund beneficiaries;

– the value of the associated service charges;

– the total value of the pensions paid out as social ben-

efits by pension schemes (see paragraph 12.40).

(Changes in pension entitlements arising from capital

transfers are not included in this item.)

12.39 When cross-border flows of pension contribu-

tions and pension receipts are significant, the adjust-

ment item must be recorded in order to reconcile the

current and financial accounts. For the economy of

the employees, the adjustment item is added to the bal-

ance on secondary income (a credit entry) and for the

economy of the pension schemes, opposite adjustment

is needed; that is, the adjustment item is deducted from

the balance on secondary distribution of income (a

debit entry). When cross-border flows are minor, the

adjustment item may be omitted.

c. Social benefits

Reference:

2008 SNA, Chapter 8, The Redistribution of Income

Accounts; Section F, Social Benefits Other Than

Social Transfers in Kind.

12.40 Social benefits include benefits payable under

social security and pension schemes. They include pen-

sions and nonpension benefits regarding events or cir-

cumstances such as sickness, unemployment, housing,

and education, and may be in cash or in kind. Also

included are social benefits payable to households by

government units or NPISHs to meet the same needs as

those under social insurance schemes but that are not

made under a social insurance scheme. Cross-border

social benefits may be insignificant but can be impor-

tant in economies where a significant number of resi-

dents have or had employment in other economies.

d. Net premiums on nonlife insurance and

standardized guarantees

12.41 Net nonlife insurance premiums and net pre-

miums on standardized guarantees are described in

paragraphs 12.42 and 12.43, respectively. Net nonlife

insurance premiums are derived from total nonlife insur-

ance premiums and premium supplements after deduct-

ing the service charges. Only the net nonlife insurance

premiums constitute current transfers and are recorded

in the secondary income account. The service charges

constitute purchases of services by the policyholders and

are recorded as insurance services. Net nonlife reinsur-

ance premiums are calculated and recorded in the same

way as for the direct nonlife insurance.

12.42 Nonlife insurance premiums consist of both

the gross premiums payable by policyholders to obtain

insurance during the accounting period (premiums

earned) and the premium supplements payable out

of the investment income attributable to insurance

policyholders. The total of the nonlife insurance pre-

miums payable in this way has to cover payments

of service charges to the insurance enterprises for

arranging the insurance and payments for the insur-

ance itself. The way in which the service charges are

calculated is explained in paragraph 10.111. After

the service charges are deducted from total non-

life insurance premiums and premium supplements,

the remainder is described as net nonlife insurance

Chapter 12 g Secondary Income Account

214

premiums. These are the amounts available to provide

cover against various events or accidents resulting in

damage to goods or property or harm to persons as

a result of natural or human causes—fires, floods,

crashes, collisions, sinkings, theft, violence, acci-

dents, sickness, and so forth—or against financial

losses resulting from events such as sickness, unem-

ployment, and accidents.

12.43 Some units, especially government units,

may provide guarantees against creditors defaulting

in conditions that have the same characteristics as

nonlife insurance. This happens when many guar-

antees of the same sort are issued and it is possible

to make a realistic estimate of the overall level of

claims under current guarantees. In this case, the

fees payable (and the investment income earned on

the technical provisions for calls) are treated in the

same way as nonlife insurance premiums and the

calls under the guarantees are treated in the same

way as nonlife insurance claims. Therefore, net

premiums on standardized guarantees are derived

from total premiums and premium supplements after

deducting the service charges.

e. Nonlife insurance claims and calls under

standardized guarantees

12.44 Nonlife insurance claims are the amounts

payable in settlement of claims that become due during

the current accounting period. Claims become due at

the moment when the eventuality occurs that gives rise

to a valid claim. They are equal to claims paid within

the accounting period plus changes in the technical

reserves against outstanding claims. Nonlife reinsur-

ance claims are calculated and recorded in the same

way as for the direct nonlife insurance.

12.45 The nonlife insurance claim is treated as a

transfer to the claimant that accrues at the time that the

insured event occurs. Insurance claims have a mix of

current and capital elements. As a convention, cross-bor-

der nonlife insurance claims are treated as current trans-

fers, except in the cases covered in paragraph 13.24.

12.46 Claims payable under standardized guar-

antees are recorded under this item in the secondary

income account (see also paragraph 12.43).

f. Current international cooperation

12.47 Current international cooperation consists of

current transfers in cash or in kind between the govern-

ments of different countries or between governments

and international organizations. This includes:

(a) transfers between governments that are used by

the recipients to finance current expenditures,

including emergency aid after natural disasters;

they include transfers in kind in the form of food,

clothing, blankets, medicines, and so forth;

(b) annual or other regular contributions paid by

member governments to international organiza-

tions (excluding taxes payable to supranational

organizations) and regular transfers made as mat-

ter of policy by the international organizations to

governments (for the treatment of capital contri-

butions, see paragraph 13.32); and

nizations to cover the salaries of those technical

assistance staff who are deemed to be resident in

the economy in which they are working and who

are in an employer-employee relationship with

the host government. Also included is technical

assistance supplied in kind.

Current international cooperation does not cover trans-

fers intended for purposes of capital formation; such

transfers are recorded as capital transfers. Contribu-

tions that give rise to equity are acquisitions of shares

or other equity (as in paragraph 5.26).

12.48 External aid provided by governments

through a nonresident entity created to undertake fis-

cal functions is also considered to be current interna-

tional cooperation. These transfers are described in

paragraphs 8.24–8.26.

12.49 When goods and services acquired from mar-

ket producers are provided to governments or other enti-

ties by international organizations, other governments,

or NPISHs, without charge to the recipient, they should

be valued at market prices, that is, the prices paid by the

purchasers. When a transfer in kind involves goods and

services produced by international organizations, other

governments, or NPISHs, the valuation should be based

on cost of production, consistent with the general prin-

ciples for the valuation of services produced by general

government and NPISHs.

12.50 Generally, funding of technical assistance

has characteristics of current transfers. However, tech-

nical assistance that is tied to or part of capital projects

is classified as capital transfers because investment

grants are capital transfers. (See also paragraphs

13.25–13.26 concerning investment grants, which are

capital transfers.)

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

215

12.51 Loans with concessional interest rates could

be seen as providing a current transfer equal to the

difference between the actual interest and the market-

equivalent interest. If such a transfer were recognized,

it would usually be recorded as current international

cooperation, and the interest recorded would be

adjusted by the same amount. However, the means of

incorporating the impact within the SNA and inter-

national accounts have not fully evolved, although

various alternatives have been advanced. Accordingly,

until the appropriate treatment of concessional debt

is agreed, information on concessional debt could be

provided through supplementary information. The

supplementary information should show the benefits

arising from concessional debt as one-off transfers at

the point of loan origination equal to the difference

between the nominal value of the debt and its pres-

ent value using a relevant market discount rate. (See

paragraphs A2.67–A2.69 for a more detailed descrip-

tion of the calculation.) This option has the advantage

of considering all the possible sources of transfers in

debt concessionality—maturity period, grace period,

and frequency of payments, as well as the interest

rate—and is consistent with nominal valuation of

loans. Such an approach should be used for official

lending involving an intention to convey a benefit

and occurrence in a noncommercial setting (usually

government-to-government). Commercial situations

are different in that concessional interest rates may be

used to encourage the purchase of the goods and ser-

vices, and so should not be treated in the same way.

g. Miscellaneous current transfers

12.52 Miscellaneous current transfers, in cash or

in kind, include all current transfers other than those

described in the previous sections of this chapter. The

categories of miscellaneous current transfers between

residents and nonresidents are described in paragraphs

12.53–12.58.

Current transfers to NPISHs

12.53 Current transfers to NPISHs are transfers

received by resident NPISHs from nonresident insti-

tutional units in the form of membership dues, sub-

scriptions, donations, and so forth whether made on

a regular or occasional basis. Grants and donations

between NPISHs are generally classified as current

transfers (e.g., donations for relief works).

Other miscellaneous current transfers

Fines and penalties

12.54 Fines and penalties imposed on institutional

units by courts of law or other government bodies are

treated as miscellaneous current transfers. However,

early or late repayment penalties agreed as part of the

original contract are not included in current transfers;

they should be treated along with the associated good,

or service, or income, as appropriate.

Payments of compensation

12.55 Payments of compensation consist of current

transfers paid by institutional units to other institutional

units in compensation for injury to persons or damage

to property caused by the former that are not settled as

payments of nonlife insurance claims. Payments of com-

pensation could be either compulsory payments awarded

by courts of law or settlements agreed out of court. Com-

pensation may cover nonfulfillment of contracts, injuries

to persons, damages to property, or other losses that are

not covered by insurance policies. This heading covers

compensation for injuries or damage caused by other

institutional units. It also includes ex gratia payments

made by government units or NPISHs in compensation

for injuries or damages caused by natural disasters.

12.56 Major compensation payments for extensive

damages (e.g., oil spillages or side effects of pharma-

ceutical products) are treated as capital rather than cur-

rent transfers (see also paragraph 13.29).

Other

12.57 Gifts and donations of a current nature not

included elsewhere are regarded as current trans-

fers. However, payments of membership dues or sub-

scriptions to market nonprofit organizations serving

businesses, such as chambers of commerce or trade

associations, are treated as payments for services ren-

dered and are therefore not transfers. (See also para-

graphs 13.29–13.34 on other capital transfers.)

12.58 Payments to international or supranational

authorities that are regarded as being compulsory, and

for which nothing is provided in return, but which are

not taxes, are classified as miscellaneous transfers.

Chapter 12 g Secondary Income Account

216

CHAPTER

Capital Account

A. Concepts and Coverage

Reference:

2008 SNA, Chapter 10, The Capital Account.

13.1 The capital account in the international

accounts shows (a) capital transfers receivable and

payable between residents and nonresidents and (b)

the acquisition and disposal of nonproduced, nonfi-

nancial assets between residents and nonresidents.

13.2 An overview of the capital account is shown in

Table 13.1. The balance on the capital account shows

the total credits less debits for capital transfers and

nonproduced, nonfinancial assets. In addition, the sum

of the current and capital account balances can also

be shown as a balancing item. The balancing item is

labeled as net lending (+)/net borrowing (–) from the

capital and current accounts. That sum is also concep-

tually equal to net lending (+)/net borrowing (–) from

the financial account, as discussed in paragraph 8.4.

Although conceptually equal, they may differ in prac-

tice. The current and capital accounts show nonfinan-

cial transactions, with the balance requiring net lending

or net borrowing, while the financial account shows

how net lending or borrowing is allocated or financed.

13.3 In economic literature, “capital account”

is often used to refer to what is called the financial

account in this Manual and in the SNA. The term “capi-

tal account” was also used in the Balance of Payments

Manual prior to the fifth edition. The use of the term

“capital account” in this Manual is designed to be con-

sistent with the SNA, which distinguishes between capi-

tal transactions and financial transactions.

13.4 The SNA capital account shows capital forma-

tion for the full range of produced and nonproduced

assets (shown in Table 5.1). The corresponding parts of

the international accounts show only transactions in non-

produced, nonfinancial assets. Transactions in produced

assets are included in the goods and services account,

which does not distinguish whether those goods or ser-

vices are destined for capital or current purposes.

13.5 The value of net lending/net borrowing in the

international accounts is conceptually the same as the

aggregate of net lending/net borrowing of the domestic

sectors in the SNA. This is because all the resident-to-

resident flows cancel out. It is also equal to the opposite

of net lending/net borrowing of the rest of the world

sector in the SNA. The relationship between saving

and net lending/net borrowing is shown in the capital

account of the SNA as:

Net lending (+)/net borrowing (–)

=Saving;

– Acquisition of nonproduced, nonfinancial assets;

+ Disposal of nonproduced, nonfinancial assets;

+ Capital transfers receivable;

– Capital transfers payable.

13.6 Acquisition and disposal of nonproduced, non-

financial assets are recorded at the time of change of

ownership, in line with the general principles in para-

graphs 3.41–3.59. Capital transfers are recorded when

all requirements and conditions for receiving them are

satisfied and the receiving unit has an unconditional

claim. Determining this time can be complex if there

is a wide variety of eligibility conditions that have vari-

ous legal powers. In some cases, a potential transfer

recipient has a legal claim when certain conditions are

satisfied, such as the prior incurrence of expenses for a

specific purpose, or the passage of legislation. In other

cases, the transfer recipient never has a claim on the

donor and it should be attributed to the time at which

the cash payment is made, the asset is conveyed, or

liability is canceled.

13.7 Acquisition and disposals of nonproduced,

nonfinancial assets and capital transfers receivable and

payable are recorded separately on a gross basis, rather

217

than netted. Gross data are important in the context

of cross-border analysis and allow the derivation of

net flows, if needed. Principles for the recording and

valuation of current and capital transfers are stated in

paragraphs 12.16–12.19.

B. Acquisitions and Disposals of

Nonproduced, Nonfinancial Assets

Reference:

2008 SNA, Chapter 10, The Capital Account, and Chap-

ter 13, The Balance Sheet.

13.8 Nonproduced, nonfinancial assets consist of:

(a) natural resources;

(b) contracts, leases, and licenses; and

1. Natural resources

13.9 Natural resources include land, mineral rights,

forestry rights, water, fishing rights, air space, and

electromagnetic spectrum. International transactions

in land and other natural resources do not usually arise

because notional resident units are generally identi-

fied as the owners of these immovable assets. (The

identification of notional units is discussed in para-

graphs 4.34–4.40.) As a result, purchases and sales of

these assets are generally resident-to-resident trans-

actions. In contrast to a change of ownership of the

resource, the right to use a natural resource on a tem-

porary basis is classified as rent (as discussed in para-

graphs 11.85–11.90) or a contract, lease, or license, if

it amounts to an economic asset in its own right (as

discussed in paragraph 13.11).

13.10 International transactions in land arise

when there are acquisitions and disposals of land for

enclaves of international organizations and foreign

governments. (International organizations are defined

in paragraphs 4.103–4.107.) International transactions

also occur when there are voluntary changes of sover-

eignty over a particular area, whether for payment or

as a transfer. The value of any associated buildings and

equipment would be shown separately in the goods and

services account, if practical.

2. Contracts, leases, and licenses

13.11 Contracts, leases, and licenses covers those

contracts, leases, and licenses that are recognized as

economic assets. These assets are creations of society

and its legal system, and are sometimes called intan-

gible assets. Examples include marketable operating

leases, permissions to use natural resources that are

not recorded as outright ownership of those resources,

permissions to undertake certain activities (including

some government permits), and entitlements to pur-

chase a good or service on an exclusive basis. Transac-

tions in these assets are recorded in the capital account,

but holdings of these assets are not recorded in the IIP

because there is no counterpart liability. (These assets

are recorded in the national balance sheet.)

13.12 A marketable operating lease can be trans-

ferred or subleased. It may be treated as an asset only

when the lease specifies a predetermined price for the

use of an asset that differs from the price the asset

could be leased for at the current time. They could

Table 13.1. Overview of the Capital Account

Credits Debits

Current account balance

Acquisitions (DR.)/disposals (CR.) of nonproduced, nonfinancial assets

Natural resources

Contracts, leases, and licenses

Marketing assets

Capital transfers

Debt forgiveness

Other

Capital account balance

Net lending (+)/net borrowing (–) (from current and capital accounts)

Note: This table is expository; for Standard Components, see Appendix 9.

Chapter 13 g Capital Account

218

cover property, time-share accommodation, equip-

ment, and other produced assets. Marketable operating

lease asset flows are recorded in the capital account

when the lessee sells the right and thus realizes the

price difference.

13.13 Some leases and licenses are not nonproduced,

nonfinancial assets and, therefore, are not covered in

the capital account. Examples include the following:

• If the right to use land or another natural resource

is provided on a short-term, nontransferable basis,

then amounts payable are classified as rent (dis-

cussed in paragraphs 11.85–11.90).

• If a government provides permission to undertake

an activity, unrelated to its ownership of an under-

lying asset or a service, and the permit does not

meet the definition of an economic asset, then a

tax is recorded (discussed in paragraphs 10.180–

10.181 and 12.30). An example could arise when

a government issues a restricted number of gam-

bling licenses.

• If ownership of intellectual property products,

such as research and development, computer soft-

ware and databases, and entertainment, literary,

and artistic originals, is provided, then a service

is recorded. Similarly, the provision of temporary

right to use or reproduce intellectual property

products is shown as a service. In contrast, the

sale of franchises or trademarks is included under

marketing assets. (The treatment of these items is

elaborated in Table 10.4.)

• A financial lease gives rise to a loan and a change

of economic ownership of the leased asset to the

lessee (discussed in paragraphs 5.56–5.60). An

operating lease for use of a produced asset gives

rise to a service (discussed in paragraphs 10.153–

10.157).

13.14 According to general principles, various

arrangements involving emissions permits can be clas-

sified in the balance of payments in different ways,

including the following:

• If a nonresident enterprise purchases an emission

permit from a resident government, the payment

is classified as a cross-border tax on production

in most circumstances. However, if the payment is

part of the cost of establishing a direct investment

enterprise in the resident economy, it is rerouted as

a resident-to-resident transaction, with the payment

by the nonresident enterprise recorded as an equity

investment in its direct investment enterprise (see

paragraph 4.47). Also, if the issuing government

provides extensive services for the purchaser, the

payment is instead classified in services (see para-

graphs 10.180–10.181).

• If the permit is tradable (as most are), then it is an

economic asset. A resale of this asset by a resident

to a nonresident enterprise is recorded under con-

tracts, leases, and licenses in the capital account (if

it does not involve direct investment, as described

in the previous bullet).

International expenditures associated with cleaning up

or improving the environment are recorded consistent

with general balance of payments classification prin-

ciples, usually as services (see paragraph 10.152). (See

2008 SNA, Chapter 17, for further information.)

13.15 Entitlements to future goods and services on

an exclusive basis may be an asset under contracts,

leases, and licenses. Examples include the transfer fees

paid by one sporting club to another for the transfer of

a player, and a transferable contract to acquire a good or

service at a fixed price, which may be called an option.

Very rarely, such an asset may have a negative value

(e.g., where the contract has an obligation to purchase

at one price, and the market price has fallen below that,

so the purchaser under the contract may have to pay

another party to take up the obligation).

13.16 Another example of contracts, leases, and

licenses can arise with time-share arrangements (see

paragraph 10.100(c)).

3. Marketing assets (and goodwill)

13.17 Marketing assets consist of items such as

brand names, mastheads, trademarks, logos, and

domain names. When sold separately from the entity

that owns them, they are recorded as acquisitions and

disposals of nonproduced, nonfinancial assets. (Mar-

keting assets is included with goodwill in the 2008 SNA

asset categories. However, goodwill arises separately

only in domestic accounts.)

13.18 Internet domain names are recognized as a

marketing asset in some cases. However, normal regis-

tration fees payable to a domain authority represent a

service, because the fees are in return for work done. In

contrast, where the domain name has a premium value

(i.e., in excess of the basic registration fee) because of its

scarcity, it is a kind of license included under marketing

assets. Similarly, the fee for designing a new logo is a

business service, whereas an amount to acquire an exist-

ing logo would be included under marketing assets.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

219

C. Capital Transfers

Reference:

2008 SNA, Chapter 10, The Capital Account.

13.19 Capital transfers are transfers in which the

ownership of an asset (other than cash or inventories)

changes from one party to another; or which obliges

one or both parties to acquire or dispose of an asset

(other than cash or inventories); or where a liability is

forgiven by the creditor. The definition of transfers and

the distinction between current and capital transfers are

given in paragraphs 12.12–12.15. Governments, house-

holds, and nonprofit institutions undertake transfers to

convey a benefit to another party.

13.20 Transfers from enterprises consist of compul-

sory transfers to governments or other units under court

orders, or voluntary transfers to nonprofit institutions

and other entities. Unlike governments, households, or

nonprofit institutions, commercial entities do not gener-

ally have the motivation to transfer resources to other

entities for no return, so there are only limited cases

where a commercial entity provides a capital transfer

to another commercial entity, and some cases of debt

assumption and activation of one-off guarantees (as

discussed further in paragraphs 8.42–8.45).

13.21 There may be imputed capital transfers as a

result of government use for fiscal purposes of enti-

ties resident in other economies, as discussed in para-

graphs 8.24–8.26.

1. Debt forgiveness

Reference:

IMF and others, External Debt Statistics: Guide for Com-

pilers and Users, Chapter 8, Debt Reorganization.

13.22 Debt forgiveness is the voluntary cancella-

tion of all or part of a debt obligation within a contrac-

tual agreement between a creditor and a debtor.

With

debt forgiveness, the contractual arrangement cancels

or forgives all or part of the principal amount outstand-

ing, including interest arrears (interest payments that

fell due in the past) and any other interest costs that

have accrued. Debt forgiveness does not arise from the

This includes forgiveness of some or all of the principal amount

of a credit-linked note arising from an event affecting the entity on

which the embedded credit derivative was written, and forgiveness

of principal that arises when a type of event contractually specified

in the debt contract occurs—for example, forgiveness in the event of

a type of catastrophe.

cancellation of future interest payments that have not

yet fallen due and have not yet accrued.

13.23 Debt forgiveness is distinguished from debt

write-off and is treated as a capital transfer transaction.

In contrast to debt write-offs, debt forgiveness arises

from an agreement between the parties to the debt and it

has the intention to convey a benefit, rather than unilat-

eral recognition by the creditor that the amount can no

longer be collected. Debt forgiveness is unlikely to arise

between commercial entities; more commonly there are

debt write-offs (as discussed in paragraphs 9.8–9.11).

(Appendix 1 on exceptional financing and Appendix 2

on debt reorganization provide additional information.)

2. Nonlife insurance claims

13.24 Nonlife insurance claims are normally clas-

sified as current transfers. For exceptionally large

claims, such as those following a catastrophe, some

part of the claims may be recorded as capital trans-

fers rather than as normal current transfers. It may

be difficult for the parties to identify these events

consistently, so, as a simplifying convention, all

cross-border nonlife insurance claims are classified

as current transfers, unless it is necessary to record

a capital transfer to be consistent with the national

accounts. To allow comparability with partner data,

a supplementary item should be provided for insur-

ance claims included in capital transfers. For current

transfers relating to insurance premiums and claims,

see paragraphs 12.41–12.46.

3. Investment grants

13.25 Investment grants consist of capital transfers

in cash or in kind made by governments or international

organizations to other institutional units to finance all

or part of the costs of their acquiring fixed assets. The

recipients may be other governments or other entities.

The recipients are obliged to use investment grants

received in cash for purposes of gross fixed capital for-

mation, and the grants are often tied to specific invest-

ment projects, such as large construction projects. Grants

for investment made by organizations other than general

government and international organizations are other

capital transfers (see paragraph 13.29). In contrast to

investment grants, a foreign government may also fund

an investment project as a direct investor (see paragraph

6.22), in which case the amount invested is classified as

equity in a direct investment enterprise. A direct invest-

ment stake is distinguished from a project funded by a

capital transfer in that the direct investor owns voting

Chapter 13 g Capital Account

220

power in the enterprise and has a right to future benefits,

such as dividends or the right to sell the asset.

13.26 If the investment project continues over a long

period of time, an investment grant in cash may be paid

in installments. Payments of installments continue to

be classified as capital transfers even though they may

be recorded in a succession of different accounting

periods. Investment grants in kind consist of transfers

of transport equipment, machinery, and other equip-

ment by governments to nonresident units and also the

direct provision of buildings or other structures for

nonresident units. Investment grants include transfers

of military equipment in the form of weapons or equip-

ment that are classified as fixed assets.

4. One-off guarantees and other

debt assumption

13.27 Capital transfers occur when a one-off guar-

antee is activated and the guarantor acquires no claim

on the debtor or a claim worth less than the value of the

guarantee. The treatment is the same for other cases of

debt assumption where the assumer is not a guarantor.

• If the original debtor still exists, the capital transfer

is from the debt assumer to the debtor.

• If the original debtor no longer exists, the capital

transfer is from the debt assumer to the creditor.

The value of any claim the debt assumer receives from

the debtor (e.g., a promise of reimbursement) is regarded

as a financial account transaction between the guaran-

tor and the debtor. The treatment of one-off guarantees

and other cases of debt assumption is described in more

detail in paragraphs 8.42–8.45, including the circum-

stance when the guarantor is in a direct investment rela-

tionship with the debtor. Different types of guarantees

are distinguished in paragraph 5.68.

5. Taxes

Reference:

IMF, Government Finance Statistics Manual 2001,

Chapter 5, Revenue.

13.28 Capital taxes consist of taxes levied at irregu-

lar and infrequent intervals on the values of the assets

or net worth owned by institutional units or on the val-

ues of assets transferred between institutional units as

a result of legacies, gifts inter vivos, or other transfers.

They include:

(a) Capital levies. Capital levies consist of taxes on

the values of the assets or net worth owned by

institutional units levied at irregular, and very

infrequent, intervals of time; and

(b) Taxes on capital transfers. These consist of taxes

on the values of assets transferred between insti-

tutional units. They consist mainly of inheritance

taxes (death duties) and gift taxes, including

those on gifts made between living members of

the same family to avoid, or minimize, the pay-

ment of inheritance taxes. They do not include

taxes on sales of assets.

Recurrent taxes on income and wealth as well as taxes

on financial and capital transactions are classified as

current transfers (see paragraphs 12.28–12.31). Detail

on the classification of taxes can be found in Govern-

ment Finance Statistics Manual 2001.

6. Other capital transfers

13.29 Major nonrecurrent payments in compensation

for extensive damages or serious injuries not covered by

insurance policies are included in capital transfers. The

payments may be awarded by courts of law or by arbi-

tration, or settled out of court. They include payments

of compensation for damages caused by major explo-

sions, oil spillages, the side effects of pharmaceutical

products, and so forth. However, if an amount payable

under a court order or settlement is identifiable to a

specific unpaid debt, it should be recorded under the

relevant financial account item. See also paragraphs

12.55–12.56 for payments of compensation included in

current transfers.

13.30 Assets of persons changing their economic

territory of residence are other changes in volumes,

and not imputed as being a transfer, as discussed in

paragraphs 9.21–9.22.

13.31 Capital transfers include large gifts and

inheritances (legacies), including those to nonprofit

institutions. These capital transfers could be made

under wills or when the donor is still living. Capital

transfers include exceptionally large donations by

households or enterprises to nonprofit institutions

to finance gross fixed capital formation, such as

gifts to universities to cover the costs of building

new residential colleges, libraries, and laboratories.

Capital transfers also include cash grants from donor

governments or multilateral financial institutions to

the debtor economy to be used to repay debt (see

paragraph A1.7).

13.32 A capital contribution to an international

organization or nonprofit institution is a capital transfer

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

221

if it does not give rise to equity for the provider of the

contribution.

13.33 As discussed in paragraphs 3.79, 12.51, and

A2.67–A2.68, there is a transfer element with respect to

concessional lending. The transfer element of conces-

sional loans can be shown as supplementary data.

13.34 A bailout is a loosely defined term meaning

a rescue from financial distress. One action that may

occur as part of a bailout is that a government may

buy assets for more than their market value. The sale

and purchase of the asset should be recorded at the

market value and a capital transfer from the govern-

ment to the seller of the claim should be recorded for

the difference between the market price and the total

amount paid.

13.35 Household-to-household capital transfers may

be identified separately when they are significant. They

are included in the supplementary item personal remit-

tances, as discussed in Appendix 5.

Chapter 13 g Capital Account

222

CHAPTER

Selected Issues in Balance of

Payments and International

Investment Position Analysis

A. Introduction

14.1 This chapter provides an introduction to the use

of balance of payments and international investment

position data in economic analysis. Preceding chapters

of this Manual present the concepts underlying the

components used in the international accounts. The

importance of this accounting and statistical report-

ing framework describing an economy’s international

transactions and positions derives primarily from their

impact on the domestic economy. Although the interna-

tional accounts are sometimes called the “external sec-

tor” or “rest of the world sector,” they do not constitute

a sector, in the sense of a group of institutional units

with similar motivations. Rather, international accounts

show the relationship between domestic sectors and the

rest of the world. This chapter discusses some of these

major links.

14.2 This discussion directs particular emphasis

to the factors influencing international transactions

and positions and the extent to which such factors are

sustainable. Finally, some of the implications of bal-

ance of payments adjustments for economic policy

are considered. In this chapter, it is assumed, by and

large, that international and domestic transactions

are not constrained by formal or informal admin-

istrative controls and that market participants are

free to respond to price signals and macroeconomic

policies. It also assumed that the economy does not

affect global interest rates.

14.3 Owing to the introductory nature of this chap-

ter, the discussion of balance of payments financing

and adjustment in Sections D and E is not exhaustive,

and focuses on an illustrative case that demonstrates

fundamental mechanisms and macroeconomic inter-

actions. More complex cases with volatile and highly

mobile financial and balance sheet effects bring addi-

tional concerns and limitations. These issues are briefly

discussed in Section G, but more complete analysis

goes beyond the scope of the Manual, and the reader

is encouraged to refer to additional literature, for which

some references are provided in Section H. The chapter

does not discuss the special issues associated with a

currency union.

B. General Framework

14.4 The relationships among the economic

accounts in the SNA are described in Chapter 2,

Overview of the Framework. The major accounts can

be expressed as accounting identities. Because these

are identities, no causation should be inferred. The

SNA goods and services account shows the balance

between supply and use:

Supply = Output + M (1)

=Use = C + G + I + X + IC,

where

M = imports of goods and services

C = household consumption

G = government consumption

I = gross capital formation

X = exports of goods and services

IC = intermediate consumption

Because GDP is equal to gross output less intermediate

consumption, identity (1) can be rearranged as:

GDP = C + G + I + X – M,(2)

Often called investment in economic analysis. The SNA uses the

term “capital formation” to mean investment in nonfinancial assets

so as to make a clear distinction from investment in financial assets.

Investment is used subsequently in this chapter to mean capital for-

mation in the SNA sense. Capital formation includes fixed capital,

inventories, and valuables.

223

that is, the expenditure approach to GDP, where

GDP = gross domestic product.

The definition of gross national disposable income

(GNDY) is GDP plus net primary and secondary

income from abroad, so

GNDY = C + G + I + X – M + BPI + BSI,(3)

where

BPI = balance on primary income

BSI = balance on secondary income (net current

transfers)

The current account balance is:

CAB = X – M + BPI + BSI (4)

where

CAB = current account balance

From equations (3) and (4), the current account bal-

ance can also be seen equivalently as the gap between

disposable income and expenditure:

CAB = GNDY – C – G – I.(5)

Or equivalently:

GNDY = C + G + I + CAB.(6)

As defined in the SNA use of income account:

S = GNDY – C – G,(7)

where

S = gross saving.

Substituting identity (3) in (7),

S = I + CAB,(8)

which can be rearranged as:

S – I = CAB.(9)

That is, the current account balance is the gap between

saving and investment.

14.5 Thus, the current account balance mirrors the

saving and investment behavior of the economy. In

These relationships have been shown for the gross values of

production, income, capital formation, and saving, before deduc-

tion of consumption of fixed capital. The relationships also hold if

production, income, capital formation, and saving are expressed net

of consumption of fixed capital.

analyzing changes in the current account balance of

an economy, it is therefore important to understand

the manner in which these changes reflect movements

in saving and investment. For example, an increase

in investment relative to saving will have the same

impact on the current account—at least in the short

run—as a decline in saving relative to investment.

However, the longer-run implications for the exter-

nal position of the economy may be quite different.

More generally, identity (9) shows that any change in

an economy’s current account balance (e.g., a larger

surplus or smaller deficit) is necessarily equivalent to

an increase in saving relative to investment. This rela-

tionship highlights the importance of ascertaining the

extent to which any policy measures designed to alter

the current account balance directly (e.g., changes in

tariffs, quotas, and exchange rates) will affect saving

and investment behavior.

14.6 This link between domestic transactions and

transactions with the rest of the world is shown in iden-

tity (5). The implication of this relationship for balance

of payments analysis is that improvement in an econo-

my’s current account requires a reduction in expendi-

ture relative to income. Alternatively, it may be possible

to achieve an improvement in the current account bal-

ance by means of an increase in national income that

is not matched by a commensurate rise in consumption

or domestic investment. Implementation of structural

measures that increase the efficiency of the economy

would be one way to achieve this objective.

14.7 This last point highlights an important aspect

of the identities shown previously; these are identities

that define relationships among variables rather than

describe the behavior of economic agents. By them-

selves, the identities cannot provide a full analysis of

the factors determining developments in the current

account. For example, total expenditure on goods and

services by domestic residents (C + G + I) is likely to

be influenced in part by their income (GNDY). Thus

it would be inappropriate to use identity (5) to ana-

lyze the impact of a change in GNDY on the current

account balance without taking full account of the

induced response in consumption and capital forma-

tion of such a change. This example illustrates the

necessity for understanding the spending propensities

of residents of the economy when analyzing the bal-

ance of payments.

14.8 The interrelationship of the current account

balance with saving and investment can be seen in

greater detail by distinguishing between the private

and government sectors. Private saving and investment

Chapter 14 g Selected Issues

224

and I

) and government saving and investment

and I

)

are identified as:

S – I = S

+ S

– I

(10)

Use of the saving-investment gap identity for the cur-

rent account in identity (9) then gives:

CAB = (S

– I

) + (S

– I

). (11)

This identity shows that, if government sector dissav-

ing is not offset by net saving on the part of the private

sector, the current account will be in deficit. More spe-

cifically, the identity shows that the budgetary balance

of the government (S

– I

) may be an important factor

influencing the current account balance. In particular, a

sustained current account deficit may reflect persistent

government spending in excess of receipts, and such

excess spending suggests that fiscal tightening is the

appropriate policy action.

14.9 To reiterate an important point, however, iden-

tity (11) cannot be used by itself to analyze develop-

ments in the balance of payments in terms of investment

and saving on the part of the private and government

sectors because there are links between the variables

on the right-hand side of identity (11). For example, an

increase in taxes could be considered the appropriate

policy measure both to raise government saving (or

reduce dissaving) and to contribute to an improvement

in an economy’s current account balance. In analyz-

ing the impact of higher taxes, it is necessary to take

account of the behavioral response of private saving and

private investment. Private investment could be posi-

tively or negatively affected by higher taxes. The effect

would depend, in part, on whether the taxes were levied

on consumption, an action that would release domes-

tic resources and thereby tend to “crowd in” domestic

investment, or on returns to investment. In addition,

private saving would tend to fall because of the decline

in disposable income caused by taxes on consumption.

Similarly, an increase in interest rates could tend to

reduce private consumption and investment, but also

tend to put upward pressure on the exchange rate with

consequent effects on exports, imports, and differing

effects on debt service for domestic currency and for-

eign currency liabilities.

14.10 Thus, identity (11) provides only a starting

point for an analysis of the interaction between saving

The scope of the “government sector” could be defined as gen-

eral government or the public sector (definitions of both are given in

Chapter 4), according to analytical needs; the private sector would

be defined in a complementary way.

and investment decisions and the balance of payments;

the identity must be supplemented by specific infor-

mation about the factors that determine the behavior

of both the private sector and the government before

the effect of policy measures on an economy’s current

account can be ascertained.

14.11 As noted in Box 2.1, the basic principle of

double-entry bookkeeping used in constructing the bal-

ance of payments implies that the sum of all interna-

tional transactions—current, capital, and financial—is

in principle equal to zero.

Accordingly, the financial

account shows how the sum of the current account

and capital account balances is financed. For example,

imports of goods may be financed by nonresident sup-

pliers so that an increase in imports can be matched by

a financial inflow. At the expiration of the financing

period, the payment to the nonresident supplier will

involve either a drawdown of foreign assets (e.g., for-

eign deposits held by domestic banks) or the replace-

ment of the liability to the nonresident supplier by

another liability to nonresidents. There are also close

connections between many financial account transac-

tions. For example, the proceeds from the sale of bonds

in foreign financial markets (a financial inflow) may

be invested temporarily in short-term assets abroad (a

financial outflow).

14.12 This balance between financial and other

entries can be expressed as:

NLB = CAB + KAB = NFA,(12)

where

NLB = net lending/net borrowing

KAB = the capital account balance

NFA = net financial account entries

In words, this identity shows that net lending/net bor-

rowing (from the sum of the current account balance

and capital account balance) is conceptually equal to

net lending/net borrowing from the financial account.

Alternatively, it could be said that the current account

balance is equal to the sum of balances on the capital

and financial accounts (with signs reversed, if neces-

sary, depending on the presentation used)

including

reserve assets.

In practice, they may not balance owing to errors or omissions.

Net financial account transactions could be presented as in net

lending (+)/net borrowing (–) in Tables 2.1 and 8.1 and following

from the heading-based presentation in paragraph 3.31. Alterna-

tively, they could be presented with a sign-based presentation (nega-

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

225

CAB = NKF + RT,(13)

where

NKF = net capital and financial account transactions

excluding reserve assets

RT = net reserve asset transactions

14.13 Thus the net provision of resources to or from

the rest of the world, as measured by the current and

capital account balances, must—by definition—be

matched by a change in net claims on the rest of the

world. For example, a surplus on the current and capital

accounts is reflected in an increase in net claims, which

may be in the form of acquisition of reserve assets on

the part of the monetary authorities or other official or

private claims on nonresidents. Alternatively, a deficit

on the current and capital accounts implies that the

net acquisition of resources from the rest of the world

must be paid for by either liquidating foreign assets or

increasing liabilities to nonresidents.

C. Alternative Presentations of

Balance of Payments Data

14.14 The different presentations discussed below

can be used to highlight different aspects of balance

of payments financing and its effect on the economy.

These presentations involve reorganization of the items

to emphasize particular aspects.

1. Standard presentation

14.15 The tables presented in Chapters 2 and 7–13

use a standard presentation that groups economic pro-

cesses and phenomena, consistent with the SNA and

other macroeconomic statistics. It features two major

lines for balances:

(a) between current account entries and accumula-

tion entries—the balancing item is the current

account balance, and

(b) between financial and nonfinancial entries—the

balancing item is net lending/net borrowing.

In addition, there are a range of other balancing items

shown in Table 2.1 and Chapters 7–13 that highlight

different components.

tive signs for increases in assets, etc.), in which case the signs would

need to be reversed.

2. “Analytic” presentation

14.16 The analytic presentation is a reorganization

of the standard presentation of balance of payments

statistics to facilitate a basic distinction between (a)

reserves and closely related items and (b) other trans-

actions. The analytic presentation is an example of a

satellite account and is designed to focus on manage-

ment of reserves and closely related items, but the

term “analytic” should not be taken to suggest that

this presentation is suitable for all analytical purposes

or that other presentations are not useful for other

kinds of analysis. Table 14.1 illustrates this presenta-

tion. It draws the line between the ways monetary

authorities finance transactions (below the line) and

other items (above the line).

14.17 This presentation shows how reserves, along

with the related items of IMF credit and loans, and

exceptional financing (such as accumulation of arrears,

debt forgiveness, intergovernmental grants, and debt

restructuring) are used to finance other “autonomous”

international transactions. Exceptional financing is dis-

cussed in detail in Appendix 1. The presentation is

useful for monetary authorities that use intervention,

including managed exchange rate regimes, with vari-

ous degrees of flexibility. Arrears related to exceptional

financing are recorded below the line as transactions

in the analytical presentation with the corresponding

entry in the relevant instrument. (This treatment is

because, although the accumulation of arrears is not a

transaction, it results from the actions of the monetary

authorities.) Categories of the balance of the payments

above-the-line from which transactions could be taken

to below-the-line are marked as “(n.i.e.).”

3. Sectoral analysis

14.18 Another analytical presentation groups

items in the financial account by the type of resi-

dent recipient of external financing—for example,

central bank, deposit-taking corporations except the

central bank, general government. To support this

approach, sectoral splits are required for most finan-

cial account items.

14.19 Sectoral presentations provide a convenient

way to analyze the net foreign lending or borrowing of

each domestic sector. These data help identify issues

of sustainability and vulnerability. Sectoral analysis

is developed in conjunction with the balance sheets

(see paragraphs 14.57–14.66) and in the presentation

of external debt statistics (see External Debt Statistics:

Guide for Compilers and Users).

Chapter 14 g Selected Issues

226

4. Monetary presentation

Reference:

Louis Bê Duc, Frank Mayerlen, and Pierre Sola, The

Monetary Presentation of the Euro Area Balance

of Payments, European Central Bank Occasional

Paper No. 96 (September 2008).

14.20 The monetary presentation explicitly shows the

link between the balance of payments and monetary and

financial statistics (as mentioned in paragraph 2.8). It

identifies the transactions of the deposit-taking corpora-

tions (plus money market funds, if their liabilities are

included in the definition of broad money), which are

equal to the foreign assets and liabilities of the same enti-

ties, as recorded in monetary and financial statistics.

14.21 This presentation highlights the effects of

international transactions on monetary developments.

This may be summarized by the following equations:

(a) The transactions derived from the balance sheet

of deposit-taking corporations (and money mar-

ket funds, where relevant) can be expressed as

follows:

Available at http://www.ecb.europa.eu/pub/scpops/ecbocp96.pdf.

NFA + $DC – $M + OTR = 0, (14)

where

NFA = transactions in foreign assets and liabilities

of the deposit-taking corporations

DC =domestic credit

M = broad money (liabilities)

OTR = other (net) transactions vis-à-vis residents

$ = transactions derived from corresponding

positions (i.e., excluding any changes due to

revaluation or other changes in volume)

(b) The identification of transactions by deposit-by deposit-

taking corporations in the balance of paymentsin the balance of payments

leads to the following equation:

NFA + ETN = 0, (15)

where

ETN = nonfinancial balance of payments transac-

tions and transactions in foreign assets and

liabilities by sectors other than deposit-

taking corporations

Under this type of analysis, if deposit-taking corporations trans-

act in foreign assets with other resident sectors, for the identities to

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table 14.1. “Analytic” Presentation of the Balance of Payments

Credits Debits

Current account n.i.e.

Goods

Services

Primary income

Secondary income n.i.e.

Balance on current account n.i.e.

Capital account n.i.e.

Balance on capital account n.i.e.

Financial account n.i.e.

Direct investment n.i.e.

Portfolio investment n.i.e.

Financial derivatives and ESOs n.i.e.

Other investment n.i.e.

Balance on financial account n.i.e.

Balance on current, capital, and financial accounts n.i.e.

Reserves and related items

Reserve assets

IMF credit and loans

Exceptional financing

Total reserves and related items

Exceptional financing items are moved from the current, capital, and financial accounts to the reserves and related items heading. For this reason, other items are

stated as being n.i.e. (Exceptional financing is discussed in Appendix 1.)

227

link between developments in broad money and

the balance of payments transactions of the sec-

tors other than deposit-taking corporations:

$M = –ETN + $DC + OTR.(16)

14.22 This presentation highlights the effect of

international transactions on domestic liquidity. It

emphasizes the links between balance of payments and

monetary statistics.

5. Partner analysis

14.23 Data by partner economy can assist in the

conduct of international trade negotiations. They are

also useful in identifying potential vulnerability from

excessive reliance on another economy, and in fore-

casting and analyzing contagion effects. They can

be used to monitor data quality, through the study of

comparison of bilateral data as reported by each of the

partner economies (see, for example, Eurostat’s study

of asymmetries in EU current account data, cited at

the end of this chapter). Such analysis reflects devel-

opments such as the need to monitor large payments

imbalances between and among certain individual

economies and groups of economies, and the analyti-

cal interest in the source of balance of payments flows

and positions for economies.

14.24 For analysis of IIP by partner, assets are

shown according to the residence of the debtor

(or issuers of nondebt instruments), and liabilities

according to the residence of the creditor (or hold-

ers of nondebt instruments). For analysis of balance

of payments transactions by partner, data both on

a debtor-creditor and a transactor basis may be of

interest.

The debtor-creditor basis facilitates anal-

yses concerned with such issues as whose securi-

ties are being purchased and sold. The transactor

basis allows for analysis of where residents engage

in financial asset transactions with nonresidents,

changes in relative importance and growth of inter-

national financial centers, and so forth.

hold, transactions in both NFA and ETN need to be recorded, even

those that are resident-to-resident, and therefore not balance of pay-

ments, transactions. As noted in paragraph 3.8, in practice balance

of payments transactions in financial assets may be derived from

data that do not distinguish whether the counterparty is a resident

or a nonresident.

The debtor/creditor and the transactor bases differ in the case

of secondary market transactions and are discussed in paragraph

4.154.

D. Financing a Current Account Deficit

14.25 This section examines the financing of a cur-

rent account deficit by means of net financial inflows

and changes in reserve assets, and some of the eco-

nomic policy issues involved. For such an analysis, it

would be helpful to use identity (12), and to assume that

initially S = I (i.e., that the current account is in balance

and that net capital and financial account and reserve

asset transactions are also zero). From this initial situa-

tion, it is instructive to trace the effects, on the current

account and the financial account, of an autonomous

increase in investment (capital formation), which is

generated by a rise in the productivity of capital. If this

additional investment is not matched by a correspond-

ing rise in saving, interest rates will tend to rise as long

as the monetary authorities do not “control” the rates.

The excess of investment over saving will be reflected

in a current account deficit, which may be financed by

a net financial inflow.

14.26 Whether there is spontaneous financing of

a current account deficit—that is, whether the gap

between saving and investment is met from autono-

mous flows—depends on a number of considerations.

The functional categories of the international accounts,

as well as additional breakdowns (e.g., domestic sec-

tor, partner economy, currency of denomination), can

be crucial to assess the determinants of such financ-

ing, and therefore the appropriate policy measures to

foster the most appropriate and sustainable financing

sources. In particular, direct investment is frequently

characterized by stable and long-lasting economic

links, as well as the provision of technology and man-

agement. The financial inflow may be directly related

to increased capital formation as a result of direct

investment, loans obtained from foreign banks, or

bonds issued in international financial markets. The

foreign financing can be for the purchase of imported

goods and services required for an investment project

and for the purchase of domestic inputs. Alternatively,

additional investment may be financed domestically

by means of bank loans or issues of equities and

bonds. In this case, there is no direct link between

increased domestic expenditures and foreign financ-

ing. However, the tendency for domestic interest rates

to rise (in comparison with rates abroad) because of

the increased investment will provide an incentive

for funds to flow into the economy. Whether or not

funds do so depends largely on how investors view the

economic prospects of the economy. The prevalence

of stable economic and political conditions—particu-

larly if it is not likely that the higher interest rate will

Chapter 14 g Selected Issues

228

be offset by a continuing depreciation of the exchange

rate of the economy—will increase the spontaneous

movement of funds into the economy.

14.27 The financial inflow associated with the

excess of investment over saving involves a reduction

in the net foreign asset position of the economy and

the reduction, in turn, will change the net investment

income flow of the economy. The key analytical issue is

whether the economy will be able to service the change

in the net foreign investment position without undertak-

ing significant modifications in economic policies or

without incurring undesirable changes in interest rates

or exchange rates. Servicing is likely to occur without

changes if the investment makes a significant contribu-

tion to the productivity of the economy. Such a contri-

bution can be manifested in two ways: first, the firm

or government enterprise undertaking the investment

must be sufficiently profitable to pay the rate of return

that will attract the funds to finance the investment;

second, the additional investment must enhance the debt-

servicing capacity of the economy. As long as funds

from abroad are invested productively, external financ-

ing for a current account deficit is likely to be forthcom-

ing for a considerable period of time. In this situation,

the finance-receiving economy’s current account deficit

manifests an efficient allocation of resources.

14.28 Alternatively, it is useful to consider a case in

which investment is unchanged but saving declines—

for example, because of an increase in government

spending not matched by a rise in tax and other rev-

enue or because of an increase in private consumption

not matched by an offsetting change in government

saving. In this situation, domestic interest rates would

also tend to rise. However, unlike the previous case, the

shift to a current account deficit is not paralleled by an

increase in productivity in the economy. Under these

conditions, there may not be a spontaneous inflow of

funds if investors view the deterioration in the current

account as reflecting inappropriate and unsustainable

government policies. For example, the decline in saving

may reflect an enlarged public sector deficit that is not

associated with increased investment. Alternatively, the

rise in absorption may be due to higher private spending

generated by an expansionary monetary policy. Under

these circumstances, investors may not wish to increase

their net claims on the economy.

14.29 In the absence of a spontaneous financial

inflow, some combination of the following will be

necessary: policy actions to attract private funds, the

use of reserve assets for balance of payments financ-

ing, and the implementation of balance of payments

adjustment measures. From identity (12), it can be

seen that, if the current account shifts into deficit,

financing must take place either by drawing down the

economy’s reserve assets or by increasing incentives

for attracting private funds. The latter can be achieved

by enhancing the domestic economic environment for

long-term investment. The adoption of monetary and

fiscal policies that support stable economic conditions

and encourage direct and other investment would tend

to induce financial inflows on a sustained basis. Funds

may also be induced to flow in from abroad—and to

provide balance of payments financing—by the rais-

ing of domestic interest rates. Such a policy may well

be appropriate if the current account deficit is caused

by aggregate demand pressures; a restrictive monetary

policy would have the effect of dampening excess

demand and providing short-term financing. However,

such financing may not be dependable from a long-

term perspective as, for example, changes in foreign

monetary conditions may make investment of liquid

assets in the domestic economy appear unattractive.

Therefore, it is necessary to look at the underlying

causes of a current account deficit.

14.30 The appropriateness of using reserve assets to

finance a gap between domestic expenditure and income,

rather than undertaking adjustment measures to reduce

or eliminate this gap, depends on the extent to which

the gap is temporary or reversible. As an economy’s

stock of reserve assets (as well as the resources it can

borrow to supplement its reserve assets) is limited, the

use of reserve assets to finance a current account deficit

is confined within these limits. However, by mitigat-

ing the necessity for balance of payments adjustment,

official financing can perform a useful buffer function.

For example, temporary shocks, such as poor harvests

or other temporary supply disruptions, to domestic out-

put do not necessarily require comparable changes in

the domestic absorption of goods and services. Thus

the financing, through the use of reserve assets, of a

temporary excess of consumption and investment over

national income can provide a desirable smoothing

of the path of expenditures by residents. The reserve

assets can also be used to finance seasonal swings in

foreign payments and receipts. While the financing of

temporary shocks is appropriate, recourse—although

it can make the adjustment path smoother and more

gradual—to owned or borrowed reserve assets does not

obviate the necessity for adjustment if deterioration in

the current account persists.

14.31 There are limits to the extent to which pri-

vate funds and official resources can finance a current

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

229

account deficit. The willingness of the private sector

to invest in the economy may be directly influenced

by ongoing changes in reserve assets. If the existing

stock of reserve assets is relatively low in compari-

son with the current account deficit and the monetary

authorities are expected to exhaust the economy’s

reserve assets within the investment horizon of the

investors, then the probability of a depreciation of the

exchange rate or the introduction of other policy mea-

sures adversely affecting the rate of return expected by

investors would tend to increase significantly. Under

these circumstances, any private funds from abroad

that are financing all or part of a current account

deficit could quickly switch from a net inflow to a

net outflow. As can be seen from identity (12), unless

adjustment measures are implemented to reverse both

the current account deficit and the financial account

outflow, reserve assets would be required to finance

both an excess of domestic investment over saving

and a net increase in liabilities to nonresidents. Such a

situation would probably result in a loss of confidence

in the currency, exacerbation of the financial outflow,

and a rapid exhaustion of reserve assets.

14.32 More generally, in a world of high financial

mobility, external and domestic private sector willing-

ness to provide financing are influenced by a complex

set of expectations about future economic, political,

and other developments in the recipient economy and

in the rest of the world. Changes in these expecta-

tions may result in rapid rebalancing of the composition

of balance sheets and cause high volatility in finan-

cial flows with significant current account and other

macroeconomic implications. Section F provides more

extended discussion.

14.33 The previously described framework for

analysis of the balance of payments is applicable, irre-

spective of the exchange rate regime adopted by an

economy. For example, if the exchange rate is pegged,

then transactions in reserve assets will be determined

by the net demand or supply of foreign exchange at

that exchange rate (i.e., from identity (13), RT = CAB

– NKF). At the other extreme, if the exchange rate

arrangement involves a pure float so that no exchange

market intervention takes place, then CAB = NKF. In

the intermediate case of a managed float, purchases

and sales of reserve assets are typically undertaken to

achieve a desired exchange rate path for the domestic

currency in terms of one or more foreign currencies.

14.34 Financial account transactions, as included in

the NKF term in identity (13), can be analyzed in terms

of their composition. Direct investment, portfolio invest-

ment, financial derivatives, and other investment can

have different implications for the economy, in terms

of factors such as volatility, future returns, and effect

on capital formation. More detailed data on instruments

and maturity are also relevant to understanding the

nature of the financing and its future effects.

14.35 There is another connection between the

financial account and the current account. Finan-

cial flows generate changes in foreign claims and

liabilities. In nearly all cases, these financial stocks

earn returns (interest, dividends, or reinvested earn-

ings) that appear in the current account as investment

income. The rate of these returns can differ between

assets and liabilities and between different types of

investment. This link between the accounts is partic-

ularly relevant in the case of an economy running a

current account deficit because there is an important

dynamic relationship between an existing deficit and

the future current account balance. A deficit in the

current account must be financed by some combina-

tion of an increase in liabilities to nonresidents and

a reduction in claims on nonresidents so that the net

result is a decline in net foreign assets. As a conse-

quence, there will be a reduction in net investment

income (unless rates of return adjust in an offsetting

manner), and this reduction will increase the current

account deficit. This interaction between the cur-

rent account and the financial account can lead to a

destabilizing situation in which the current account

balance progressively worsens unless changes

in economic policies or adjustments in certain vari-

ables (e.g., exchange rates) are made to arrest the

deterioration.

14.36 In analyzing the balance of payments and,

in particular, the sustainability of any specific current

account situation, it is important to consider the deter-

minants of financial flows. These relate mainly to fac-

tors affecting the rate of return and risk on foreign and

domestic assets. Such factors include interest rates, the

profitability of direct and other investments, expected

changes in exchange rates, and tax considerations.

These factors are embodied in the expected real (i.e.,

adjusted for exchange rates and inflation) after-tax rate

of return on the stock of foreign assets held by residents

and on the stock of claims held by nonresidents. Resi-

dents and nonresidents are subject to different legal and

tax considerations, which affect the rates of return on

asset holdings. However, both are similarly affected by

economic conditions external to the countries in which

they are resident. Moreover, these external conditions

are exogenous to an individual economy.

Chapter 14 g Selected Issues

230

14.37 Indeed, whereas in circumstances of low

financial mobility and mostly official financing it

could be reasonable to focus mostly on domestic

conditions, in a world of high financial mobility,

external conditions—such as changing world interest

rates—are important factors in influencing financial

flows.

14.38 Balance of payments statistics use the accrual

principle, which reflects underlying resource flows.

However, a payments crisis is usually driven by cash

flows. It may therefore be useful to consider cash flow

dimensions when there are significant timing dif-

ferences between payments and resource flows, for

example, in the cases of accrual of interest, reinvested

earnings, and nonperforming loans.

E. Balance of Payments Adjustment in

Response to a Current Account Deficit

14.39 There are many situations in which it may

not be feasible to rely on private and official resources

to finance a current account deficit on a sustained

basis. If a deficit is unsustainable, the adjustment

will necessarily happen through change in the will-

ingness of market participants to provide financing

or depletion of reserves and other financial assets,

or a combination of both. Such adjustments may be

abrupt and painful (up to the possibility of a bal-

ance of payments crisis). Therefore, policy measures

aimed at mitigating the adjustment path may need to

be considered.

14.40 For balance of payments analysis, it is there-

fore important to consider the possible introduction of

adjustment measures to achieve a viable external pay-

ments position (i.e., conditions under which a deficit

on goods, services, and income can be financed by

private and official transfers, private financial inflows,

and some recourse to reserve and other financial

assets). The subsequent discussion illustrates some

possible measures, but it is not exhaustive. It exam-

ines briefly the roles of exchange rate changes, fiscal

measures, and monetary policy in achieving balance

of payments adjustment.

14.41 In this analysis, it may be useful to rewrite

identity (9) as:

S – I = CAB

= BTG + BTS + BPI + BSI

= NKF + RT (17)

where

BTG = balance on trade in goods

BTS = balance on trade in services

BPI = balance on primary income

BSI = balance on secondary income

The magnitude of the necessary adjustment in the

balance of payments depends, to some extent, on the

nature of the components of the current account bal-

ance. For example, an economy may have been run-

ning a persistent deficit on trade in goods that was

financed, in part, by borrowing from private and offi-

cial sources. In this situation, the economy is also

likely to be running a deficit on the balance of pri-

mary income that reflects the servicing of this debt. A

deficit for goods, services, and primary income may,

however, be offset by a surplus on secondary income,

which could reflect both official and private current

transfers. If such inward transfers are expected to be

of a long-term nature and can confidently be relied

upon to finance all or part of the deficit in other com-

ponents of the current account, then the extent of the

necessary balance of payments adjustment may be

rather small.

14.42 However, even in the case of a small adjust-

ment, it is nonetheless important to be fully cognizant

of the fact that foreign debt must be repaid. Thus the

amortization schedule of the economy is an important

factor for judging the sustainability of a particular

balance of payments situation. If large amortization

payments are due in the near future and expected

financial inflows are not sufficient to cover payments

falling due, it may be necessary to undertake adjust-

ment measures beforehand to avoid more drastic mea-

sures required for dealing with a subsequent balance

of payments crisis.

14.43 In the face of an unsustainable current account

deficit in an economy with a fixed or managed exchange

rate, one adjustment measure that could be considered is

a depreciation of the exchange rate of the domestic cur-

rency.

Such a depreciation may be necessary to offset a

domestic price rise (relative to prices abroad) that—by

penalizing exports and encouraging imports—worsens

the balance on trade in goods. To the extent that the

depreciation raises the prices of traded goods and ser-

vices (i.e., exports and imports) in comparison with the

The application of such a depreciation may be complicated by

significant currency balance sheet mismatches, which need to be

taken into account. These mismatches are discussed in Section G.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

231

prices of nontraded goods and services, depreciation

will promote the substitution of domestic for imported

products and stimulate foreign demand for domestic

products. However, because the depreciation will be

accompanied by a rise in domestic prices in response to

the increase in the cost of imported goods and services

and the rise in demand for exports and domestically

produced import substitutes, the improvement in inter-

national competitiveness generated by the exchange rate

change will be partially or fully eroded. Such a devel-

opment underscores the importance of supplementing

the exchange rate adjustment with restrictive monetary

and fiscal policies to facilitate the shift in resources

signaled by the change (caused by the depreciation) in

relative prices. Thus, an expenditure-switching policy

in the form of exchange rate depreciation must gener-

ally be supported by expenditure-reducing measures;

indeed, such measures are essential if there is no excess

capacity in the economy.

14.44 The effects of such action can be seen from

identity (9), which shows that any improvement in the

current account must be matched by a corresponding

positive change in the difference between saving and

investment. An exchange rate depreciation by itself

may generate such a change in the desired direction.

In particular, if there is no change in the stance of

monetary policy, the increase in demand generated

by the depreciation will raise the demand for money.

With an unchanged money supply, the greater demand

for money will tend to increase nominal and real

domestic interest rates. As a result, interest-sensitive

expenditures will be dampened, and there could be

a positive impact on saving. However, it is unlikely

that this induced effect on the gap between saving

and investment will itself be sufficient, particularly

if the economy is at full employment, to achieve

the desired improvement in the current account.

Therefore, in all likelihood, it will be necessary to

accompany the adjustment in the exchange rate with

measures to reduce the level of domestic expendi-

ture through tighter monetary and fiscal policies that

release resources to expand output in the exporting

and import-substitution industries.

14.45 The discussion of identity (11) pointed to

fiscal deficits as one potential cause of external imbal-

ances. Changes in government spending and taxation

may therefore be necessary to achieve the required

reduction in the saving-investment gap—to the extent

that an exchange rate depreciation does not induce a

sufficient response in the difference between total sav-

ing and investment. However, it is important that fis-

cal policy measures be designed to achieve the desired

objective and not exacerbate the adjustment problem.

For example, cuts in infrastructure investment may

have the desired short-run balance of payments effect,

but such cuts could have, particularly if the spending

reductions are in such areas as transport or electricity,

a long-run adverse impact on the supply potential of

the economy and the generation and supply of energy

designed to relieve bottlenecks. Moreover, tax mea-

sures that result in very high marginal tax rates or

that are aimed particularly at investment income could

have the undesired side effect of inducing offsetting

reductions in private saving and reducing incentives

to invest in the economy. Such disincentive effects

can be avoided by implementing fiscal action aimed at

reducing or eliminating subsidies and by cutting back

on government activity that can be performed better

by the private sector.

14.46 The stance of monetary policy plays an

important role in balance of payments adjustment.

The existing external imbalance may reflect an

excess of domestic investment over saving (or what is

the same thing—an excess of domestic spending over

income) that results from an excessively expansion-

ary monetary policy. It is, first of all, important to

adjust the stance of monetary policy so that interest

rates are generally positive in real terms and provide

an incentive to savers and so that domestic economic

conditions are sufficiently stable to encourage invest-

ment. From the perspective of aggregate supply and

demand, it can be seen from identity (5) that mon-

etary policy should ensure that the level of domestic

expenditure is in line with the productive capacity

of the economy. Thus, from the point of view of bal-

ance of payments analysis, the objective of monetary

and fiscal policies is to limit domestic spending to

what is available from domestic resources and for-

eign financing.

14.47 One important aspect of monetary policy in

balance of payments adjustment is the link between

reserve asset transactions and domestic monetary con-

ditions. A decline in reserve assets may be associated

with a current account deficit or a net financial outflow

caused by an expansionary monetary policy or both.

The reserve asset decline can lead to a reduction in

the monetary base and therefore to a tightening in the

stance of monetary policy. A more restrictive mon-

etary policy tends to correct the payments imbalance

through higher interest rates that dampen domestic

demand and make domestic assets more attractive to

investors. However, this built-in adjustment mechanism

Chapter 14 g Selected Issues

232

can be short-circuited if the monetary authorities offset

the effect of the loss of reserve assets on the monetary

base by increasing the domestic component of the base

(e.g., through open-market purchases of securities held

by the banking system). Such offsetting action tends to

prevent domestic interest rates from rising and thereby

contributes to the persistence of the balance of pay-

ments deficit.

F. Implications of a Current Account

Surplus

14.48 The foregoing discussion focuses entirely on

an economy that faces an actual or incipient balance

of payments problem in the form of a persistent cur-

rent account deficit.

Of course, for the world as a

whole, the current account deficits of economies in

deficit are exactly offset by the surpluses of other

economies. Although surpluses typically do not lead

to crises in the countries that run them, an analysis of

some aspects of a surplus balance of payments situa-

tion is useful as surpluses may raise important issues

associated with domestic monetary management and

vulnerabilities and the speed of adjustment toward

more balanced external accounts. As can be seen

from identity (13), a surplus in the current account is

reflected in an increase in net claims held by the pri-

vate sector or government (NKF) on nonresidents or

an increase in official reserve assets (NRT), or both.

The change in the net foreign asset position may be

due to a reduction in liabilities to nonresidents rather

than to an increase in gross claims. Such a reduction

may well be a desirable development if a previous

large buildup of liabilities has imposed a severe debt

service burden on the economy. In this case, a current

account surplus can be an appropriate step toward

achieving a viable balance of payments.

14.49 The case of an economy with no recent cur-

rent account deficits and an increase in its gross pri-

vate claims on the rest of the world reflects an excess

of aggregate saving over domestic investment. If the

government’s fiscal balance is in deficit, private sector

saving will exceed domestic investment. The allocation

In practice, owing to measurement problems, the sum of the

balances of all economies was negative in many years because of

measurement problems. For discussion of this issue, see IMF, Report

on the World Current Account Discrepancy, September 1987, and

Jean Godeaux, Report on the Measurement of International Capital

Flows, September 1992. More recent data are available in most

issues of the Annual Report of the IMF Committee on Balance of

Payments Statistics.

of part of saving to foreign assets presumably reflects

the fact that investors find the rate of return on these

assets more attractive, at the margin, than investment

opportunities in the domestic economy. The provision

of resources to the rest of the world in the form of

a buildup of net claims on nonresidents will, by and

large, result in an efficient allocation of the domestic

economy’s saving as long as the buildup of net claims

reflects the operation of market forces rather than

government policies designed directly or indirectly to

increase such claims.

14.50 Thus, for analyzing the balance of payments

of an economy in persistent surplus, one key consid-

eration is whether government policies distort saving

and investment decisions and thereby bias an economy

toward a current account surplus. Such distortions

can take many forms. First, there are measures that

directly influence the current account. Examples are

tariffs and quotas that limit imports, restrictions on

payments abroad, and export subsidies and govern-

ment procurement policies that give preference to

domestic producers. Moreover, an exchange market

intervention policy may bias the value of the currency

downward. Finally, there may be measures that limit

foreign acquisition of domestic assets—a limitation

that would tend to bias the financial account toward

a net outflow and thereby shift the current account in

the direction of a surplus.

14.51 These measures may, in fact, not lead to a larger

current account surplus. Policy actions aimed at particu-

lar components of the balance of payments will, over

time, lead to offsetting movements in other components

in the absence of changes in the underlying determinants

of saving and investment. In any event, if a large and per-

sistent current account surplus appears to arise from such

distortionary measures, the appropriate policy action is

the reduction and eventual removal of these distortions.

If a persistent surplus remains after such measures are

eliminated, then the accumulation of net claims on the

rest of the world would appear to manifest the saving

and investment propensities of the economy. If, in this

case, one were to identify the surplus as a problem, it

would generally be necessary to establish that private

saving or government saving was excessively high or that

domestic investment was too low. It is considerably more

difficult to arrive at such a conclusion than to identify the

previously enumerated distortions that relate directly to

international transactions.

14.52 A current account surplus, while reflecting

entirely a response to market forces, may cause eco-

nomic difficulties for an economy. For example, an

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

233

economy with a “resource curse” experiences either a

natural resource discovery or a substantial improve-

ment in the terms of trade for the natural resources

sector. The expanding sector or terms of trade gains

lead to an improvement in the current account and

an appreciation of the exchange rate. This develop-

ment tends to make other sectors of the economy

contract and be less competitive internationally. If

the newly discovered resources are expected to be

depleted fairly rapidly and the gains in terms of trade

to be transitory, it may be appropriate to protect the

sectors adversely affected. One way to achieve this

objective is through exchange market intervention to

prevent or moderate the exchange rate appreciation.

The accumulation of reserve assets or special funds

tends to insulate the real economy from having to

adjust to the short-run disturbance.

14.53 Current account surpluses may also create

other difficulties in the domestic economy, such as

difficulties in monetary management and increases in

vulnerabilities associated with large and rapid mon-

etary expansions. When a current account surplus

causes an increase in reserve assets, the economy’s

monetary aggregates expand and a credit expansion

will tend to take place. If this credit expansion is

too large and rapid, the economy may overheat (lead-

ing to inflationary pressures) or vulnerabilities in the

financial sector may emerge, particularly if there are

weaknesses in financial sector supervision. Steriliza-

tion of the buildup in reserves—that is, offsetting its

monetary impact through, typically, sales of domestic

securities—can help mitigate this effect, but not for-

ever, and often at significant cost. These costs typi-

cally arise because the domestic securities will carry a

higher interest rate than the (usually low) rate received

by the monetary authorities for their reserves. More-

over, if the currency were to appreciate in the future,

the monetary authority would experience a decline in

net worth, because the value of the reserves would fall

relative to the value of the domestic securities used for

the sterilization operations.

14.54 A conclusion of the preceding analysis is

that, when a current account surplus is not the result

of government policy actions, it may be difficult to

establish that an economy is investing too much of its

saving abroad and whether, therefore, specific policy

changes are needed when a country is facing a cur-

rent account surplus. Some guidance may be obtained,

however, from the behavior of reserve assets. When

a current account surplus is reflected in a buildup of

foreign reserve assets rather than in a rise in net foreign

assets held by the private sector, the buildup represents

specific government policy action in the form of for-

eign exchange market intervention. Intervention, which

involves the sale of domestic currency in exchange for

foreign currency, has the tendency to keep the foreign

exchange value of the domestic currency lower than

it otherwise would be. The accumulation of reserve

assets may therefore limit the extent to which the cur-

rency appreciates and—particularly when accompanied

by sterilization—prevent the operation of the self-

correcting mechanism that would tend to reduce the

current account surplus.

14.55 Thus, one aspect of balance of payments anal-

ysis for an economy with a persistent current account

surplus involves an appraisal of the level of reserve

assets held by monetary authorities. The accumula-

tion of such assets is excessive if the assets exceed, by

a wide margin, the amount required to finance pos-

sible future short-run deficits. In such a situation, the

economy’s resources may well be more efficiently used

if devoted to domestic consumption or capital forma-

tion rather than exports. If the private and government

sectors are unlikely to increase domestic capital forma-

tion, cessation of reserve asset accumulation would lead

to an increase in domestic absorption or to a rise in net

foreign investment by residents or both.

In either case,

allocation of the economy’s resources would tend to be

more efficient as the allocation would be responding to

market forces.

14.56 As in the case of an economy exhibiting a cur-

rent account deficit, monetary, fiscal, and exchange rate

policies have an important role in the adjustment of an

economy with a current account surplus. In principle, the

surplus could be reduced through expenditure-expand-

ing policies (e.g., expansionary fiscal and monetary

policies) or through expenditure-switching policies that

would drive consumption toward foreign goods and away

from domestic goods (e.g., a currency appreciation).

Nevertheless, expansionary fiscal and monetary poli-

cies could have the unwanted implication of fueling the

credit boom, which would cause increased inflationary

pressures and possibly heighten credit-related vulner-

abilities. A currency appreciation would, on the contrary,

moderate the credit expansion by increasing consumers’

Economies that are large exporters of nonrenewable resources,

such as oil, may have limited domestic investment opportunities. In

such cases, the buildup of foreign assets can be viewed not so much

as an accumulation of reserve assets for balance of payments financ-

ing purposes but rather as a diversification of the economy’s stock

of wealth. Also, there may be a case for the accumulation of reserve

assets in the instance of an economy subject to resource curse if the

effects are expected to be transitory.

Chapter 14 g Selected Issues

234

purchasing power in terms of foreign goods (which would

drive demand toward the consumption of foreign goods),

and by limiting the creation of new base money (because

the monetary authority would be limiting its intervention

in the foreign exchange market). Given that the cur-

rency appreciation would also make domestic goods less

attractive abroad, a gradual appreciation process may be

needed in order to achieve a smooth adjustment of the

external accounts.

G. The Balance Sheet Approach

References:

M. Allen, C. Rosenberg, C. Keller, B. Setser, and N.

Roubini, A Balance Sheet Approach to Financial

Crisis, IMF Working Paper (WP/02/210).

J. Mathisen and A. Pellechio, Using the Balance Sheet

Approach in Surveillance: Framework, Data

Sources, and Data Availability, IMF Working

Paper (WP/06/100).

IMF and others, External Debt Statistics: Guide for

Compilers and Users; Part III, Use of External

Debt Statistics.

14.57 As financial markets in many economies

have become increasingly integrated with global mar-

kets, foreign borrowing has helped finance higher lev-

els of investment than would be possible with saving

by residents alone and contributed to sustained peri-

ods of growth. But the opening of financial markets

has revealed that private financial flows are sensitive

to market conditions, perceived policy weaknesses,

and negative shocks. Flows of private finance have

been volatile with some economies experiencing

financial crises.

14.58 The financial structure of economies—the

composition and size of the liabilities and assets on

the economy’s financial balance sheet—has been an

important source of vulnerability to crises. Financial

weaknesses, such as a high level of short-term debt,

can be a trigger for domestic and external investors

to reassess their willingness to finance an economy.

The composition of the IIP also helps indicate the

vulnerability of the economy to changes in external

market conditions. The implications for vulnerabil-

ity differ among different functional categories and

instruments. In the case of direct investment liabili-

ties and portfolio investment equity, the return to the

creditor depends on the performance of the issuer.

In contrast, in the case of debt liabilities other than

for direct investment, the return to the creditor is not

dependent on the performance of the debtor, so the

economy of the debtor has a greater risk exposure,

in that payments are required to be made even if the

debtor faces difficult circumstances.

14.59 The balance sheet approach provides a sys-

tematic analytical framework for exploring how bal-

ance sheet weaknesses contribute to macrofinancial

vulnerabilities, including the origin and propaga-

tion of modern-day financial crises. It draws on the

growing body of academic work that emphasizes

the importance of balance sheets. It pays particular

attention to the balance sheets of key sectors of the

economy and explores how weaknesses in one sector

can cascade and ultimately generate a broader crisis.

It is built on the use of harmonized classifications

and definitions in different types of economic statis-

tics, so that data can be aggregated and compared.

For international accounts compilation, the balance

sheet approach requires that institutional sector

classifications and the level of detail should match

those used for monetary, financial, and government

finance statistics.

14.60 Unlike traditional analysis, which is based

on the examination of flow variables (such as cur-

rent account and fiscal balance), the balance sheet

approach focuses on the examination of stock variables

in an economy’s sectoral balance sheets. The econo-

my’s aggregate balance sheet—the external assets and

liabilities of all sectors of the economy—is vital. The

net IIP at the end of a specific period reflects not only

financial flows but also valuation changes and other

adjustments during the period, all of which affect the

current value of a country’s total claims on nonresi-

dents and total liabilities to nonresidents.

14.61 Indeed, as the financial assets and liabilities

of domestic sectors cancel each other out, a country’s

balance sheet consists of its stock of domestic nonfi-

nancial assets plus its net IIP. But the balance sheet

approach emphasizes that it is often equally important

to look inside an economy and to examine the balance

sheet of an economy’s key sectors, such as general

government, the financial sector, and the nonfinancial

corporations sector.

14.62 The sources of financial vulnerability are var-

ied: creditors may lose confidence in an economy’s

ability to earn foreign exchange to service the external

debt; in the government’s ability to service its debt; in

the banking system’s ability to meet deposit outflows;

or in corporations’ ability to repay bank loans and other

debt. An entire sector may be unable to attract new

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

235

financing or roll over existing short-term liabilities. It

must then either find the resources to pay off its debts

or seek a restructuring.

14.63 To support this analysis, the framework for

assessing balance sheet risks focuses on five types of

balance sheet mismatches, all of which help to deter-

mine an economy’s ability to service debt in the face

of shocks:

(a) Maturity mismatches, where a gap between lia-

bilities due in the short term and liquid assets

leaves an institutional sector unable to honor its

contractual commitments if creditors decline to

roll over debt. They also expose the sector to the

risk that interest rates will rise;

(b) Currency mismatches, where, if unhedged, a

change in the exchange rate leads to a holding

loss;

ance on debt rather than equity financing leaves

a firm or bank less able to weather revenue

shocks;

(d) Solvency problems, where assets—including the

present value of future revenue streams—are

insufficient to cover liabilities, including contin-

gent liabilities;

and

(e) Dependency problems. IIP by partner economy

(and also balance of payments by partner) can

help identify overreliance on another economy,

and hence potential vulnerability and contagion

concerns.

Additional items on the currency composition and

residual maturity of debt liabilities are designed to

support analysis of these issues. Analysis should also

take into account hedging strategy; for example, cur-

rency or interest rate exposure may be hedged, or

unhedged financial derivatives exposure may imply

much greater vulnerability to changes than the value

of the derivatives suggests. Maturity mismatches, cur-

rency mismatches, and a poor financial structure all

can contribute to solvency risk, but solvency risk can

also arise from simply borrowing too much or from

investing in low-yielding assets.

14.64 Composition of the IIP sheds light on the

dynamics. For example, if assets are largely denomi-

The interpretation of loan asset values is enhanced by taking

into account additional information on fair values and nonperform-

ing loans.

nated in foreign currency and liabilities are largely

denominated in domestic currency, a depreciation (an

appreciation) of the domestic currency will have posi-

tive (negative) wealth effects. Currency depreciations

(appreciations) usually have expansionary (contrac-

tionary) impact on production via the improvement

of net exports and a contractionary (expansionary)

impact on domestic consumption. The wealth effect

associated with the currency composition of foreign

assets and liabilities may dampen the impact of a

depreciation (appreciation) on domestic consumption.

On the contrary, when assets are denominated in the

domestic currency and liabilities in a foreign currency

the wealth effect associated with a currency change

will reinforce the impact of a depreciation (apprecia-

tion) on domestic consumption.

14.65 Further, debts among residents that create

internal balance sheet mismatches also generate vul-

nerability to an external balance of payments crisis.

The transmission mechanism often works through the

domestic banking system. For instance, broad con-

cerns about the government’s ability to service its

debt, whether denominated in domestic or foreign cur-

rency, will quickly destabilize confidence in the banks

holding this debt and may lead to a deposit run. Alter-

natively, a change in the exchange rate coupled with

unhedged foreign exchange exposure in the nonfinan-

cial corporations sector can undermine confidence in

the banks that have lent to that sector. The run on the

banking system can take the form of a withdrawal of

cross-border lending by nonresident creditors, or the

withdrawal of deposits by domestic residents. Indeed,

if the latter results in an increased demand for foreign

currency or other foreign assets by domestic residents,

this could lead to financial outflows, loss of reserves,

or a combination of both.

14.66 Many of the characteristics of a financial

account crisis derive from the adjustment in portfolios

that follows from an initial shock. Underlying weak-

nesses in balance sheets can linger for years without

triggering a crisis. For example, a currency mismatch

can be masked so long as continued financial inflows

support the exchange rate. Consequently, the exact tim-

ing of a crisis is difficult to predict. However, should

a shock undermine confidence, it can trigger a large

and disorderly adjustment, as the initial shock reveals

additional weaknesses and a broad range of investors,

including local residents, seek to reduce their exposure

to the economy. If these flows cannot be financed out of

reserves, the relative price of foreign and domestic assets

has to adjust.

Chapter 14 g Selected Issues

236

H. Further Information

Al-Hamidy, Abdulrahman, Use of Balance of Pay-

ments Statistics: Case of Saudi Arabia (BOP-

COM-02/50).

Allen, Mark, Christoph Rosenberg, Christian Keller,

Brad Setser, and Nouriel Roubini, A Balance Sheet

Approach to Financial Crisis, IMF Working Paper

(WP/02/210).

Bank of Uganda, Policy Applications of Balance of

Payments and IIP Statistics (BOPCOM-03/37).

Bê Duc, Louis, Frank Mayerlen, and Pierre Sola, The

Monetary Presentation of the Euro Area Balance

of Payments, European Central Bank Occasional

Paper No. 96 (September 2008).

Brunner, Allan D., and Kanda Naknoi, Trade Costs,

Market Integration, and Macroeconomic Volatil-

ity, IMF Working Paper (WP/03/54).

European Central Bank, Use of Balance of Payments

Statistics (unnumbered paper presented at the 2001

meeting of BOPCOM).

Eurostat, Asymmetries in EU Current Account Data (2006

Edition), Working Papers and Studies, prepared by

Maria-Helena Figueira and Mushtaq Hussain.

IMF, Policy Development and Review Department,

Debt- and Reserve-Related Indicators of External

Vulnerability, March 23, 2000.

IMF, Statistics Department, Training in the Use of Bal-

ance of Payments Statistics—Staff Notes (BOP-

COM-00/12).

Jahjah, Samir, and Peter Montiel, Exchange Rate Pol-

icy and Debt Crises in Emerging Economies,IMF

Working Paper (WP/03/60).

Lambert, Frederic, and Laurent Paul, The International

Investment Position: Measurement Aspects and

Usefulness for Monetary Policy and Financial

Stability Issues (BOPCOM-02/74).

Lane, Philip R., and Gian Maria Milesi-Ferretti, Long-

Term Capital Movements, IMF Working Paper

(WP/01/107).

Lehmann, Alexander, Foreign Direct Investment in Emerg-

ing Markets: Income, Repatriations and Financial

Vulnerabilities, IMF Working Paper (WP/02/47).

Mathisen, Johan, and Anthony J. Pellechio, Using

the Balance Sheet Approach in Surveillance:

Framework, Data Sources, and Data Availability,

IMF Working Paper (WP/06/100).

OECD, OECD Handbook on Economic Globalisation

Indicators.

Polak, Jacques J., The Two Monetary Approaches to the

Balance of Payments: Keynesian and Johnsonian,

IMF Working Paper (WP/01/100).

Scherbakov, S., Use of Balance of Payments Statistics

in Foreign Exchange Policy Formulation: Russia’s

Experience BOPCOM-02/49).

Shcherbakov, S.G., Foreign Reserve Adequacy: Case of

Russia (BOPCOM-02/53).

Sighvatsson, Arnór, The Current Account Deficit

in an International and Historical Context,

Central Bank of Iceland, Monetary Bulletin,

2001/1.

South African Reserve Bank, The Use of Balance of

Payments Statistics in the Determination of Mon-

etary and Fiscal Policy (BOPCOM-02/51).

U.K. Office for National Statistics, Use of Balance of

Payments Statistics in the United Kingdom (BOP-

COM-01/36).

U.K. Office for National Statistics, Use of International

Investment Position Statistics in UK (BOPCOM-

02/52).

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

237

APPENDIX

Exceptional Financing Transactions

A. Introduction

Reference:

IMF and others, External Debt Statistics: Guide for Com-

pilers and Users, Chapter 8, Debt Reorganization.

A1.1 The identification of exceptional financing

transactions is linked to an analytic construct rather

than based on precise criteria. Exceptional financ-

ing brings together financial arrangements made

by the authorities (or by other sectors fostered by

authorities) of an economy to meet balance of pay-

ments needs. These transactions can be viewed as an

alternative to the use of reserve assets, IMF credit,

and loans to deal with payments imbalances, or in

conjunction with such use. Exceptional financing is

important for IMF operations, statistics, and member

countries, as the use of IMF resources is subject to

an analytical requirement of need, which—according

to the Articles of Agreement of the IMF—is linked

to a member’s balance of payments, reserve position,

or developments concerning reserves. Exceptional

financing is presented in the “analytic” presentation

of the balance of payments, such as published in the

IMF’s Balance of Payments Statistics Yearbook, with

the relevant transactions reclassified from that shown

in the standard components. The analytic presentation

is discussed further in paragraphs 14.16–14.17.

A1.2 Determining the need helps to distinguish:

(a) the above-the-line items (i.e., those that are

deemed to be autonomous in the current, capital,

and financial accounts and are undertaken for

the sake of the transactions) and thus contrib-

ute to or result in an overall payments deficit or

surplus, and

(b) the below-the-line items (i.e., those considered

to be accommodating or financing the deficit or

surplus).

In essence, from the viewpoint of the authorities of

the reporting economy, the below-the-line transactions

reflect (a) the transactions undertaken for balance of

payments needs that finance payments required to be

made in the current recording period such as prede-

termined debt service payments by the authorities as

well as (b) other financial transactions undertaken by

the authorities that are related to balance of payments

needs (beyond those required) and impact on reserve

assets in the current recording period, such as prepay-

ments of debt, drawings on new loans, and receipt of

cash transfers. Given that transactions in reserve assets

and in IMF credit and loans are always considered

as being undertaken to meet a balance of payments

need, it is the other below-the-line transactions that

are recorded under exceptional financing. There are

no below-the-line entries under exceptional financing

arising from the provision of financing nor for transac-

tions other than those undertaken to meet balance of

payments needs.

A1.3 This appendix provides guidance on distin-

guishing transactions in the standard presentation

that are exceptional financing transactions. Such a

distinction involves a degree of judgment. Examples

include government-to-government grants provided for

debt payment linked to balance of payments needs,

and rescheduling or forgiveness of debt falling due in

the current period. Also, in cases of arrears, “transac-

tions” are recorded in exceptional financing but are

not recorded in the standard presentation. Exceptional

financing transactions are usually recorded in the

appropriate accounts of the analytic presentation as

credit entries below-the-line, with corresponding debit

entries shown above-the-line. However, for transactions

in arrears past due from previous periods, swaps of such

debts (such as described in paragraph A1.9), or where

debt is repaid or cancelled through transfers (such as

described in paragraph A1.5), the two entries of these

transactions are recorded below-the-line.

238

A1.4 The transactions identified as exceptional

financing are presented below under the following

sections:

• B. Transfers—such as debt forgiveness and other

intergovernmental transfers, including transfers

from international organizations;

• C. Direct or other equity investment—such as debt

or equity swaps involving debt reduction;

• D. Borrowing (including bond issues) for balance

of payments support by the government or cen-

tral bank, or by other sectors of the economy and

induced by the authorities, usually through some

form of exchange rate or interest subsidy;

• E. Debt rescheduling or refinancing;

• F. Debt prepayment and buybacks; and

• G. Accumulation and repayment of arrears.

Some of these cases involve debt reorganization that

is covered in detail in Appendix 2, Debt Reorganiza-

tion and Related Transactions. Table A1.1 presents

selected exceptional financing transactions in the

analytic and standard presentation of the balance of

payments.

B. Transfers

1. Debt forgiveness

A1.5 Debt forgiveness is defined as the voluntary

cancellation of all or part of a debt obligation within

a contractual arrangement between a creditor and a

debtor (External Debt Statistics: Guide for Compilers

and Users). Debt forgiveness is recorded as a capital

transfer (see paragraph 13.23) from the creditor econ-

omy to the debtor economy, offset by a reduction in

the liability of the debtor (reduction in the asset of the

creditor) under the appropriate debt instrument in the

financial account, with any interest accruing in current

period recorded in the income account.

A1.6 In the analytic presentation, for the debtor

economy, the recording of debt forgiveness depends

on whether the debt being forgiven is due for payment

in the current reporting period, in arrears, or not yet

due (Table A1.1, rows 1–6). Forgiveness of obligations

due in the current period is recorded as transfers,

debt forgiveness (credit item) below-the-line, whereas

the reduction of the obligations (debit item) is shown

above-the-line. For forgiveness on obligations past

due from previous periods, that is, on arrears, the

two entries are recorded below-the-line in exceptional

financing,

that is, credit (under debt forgiveness) and

debit items (under cancellation of arrears). If the obli-

gations not yet due are forgiven, there is no entry

under exceptional financing, because these payments

were not required to be made in the current period,

and the two entries are made above the line.

2. Other intergovernmental transfers

A1.7 Other transfers included within exceptional

financing are grants in the form of cash from govern-

ments and international organizations (including the

IMF and the World Bank) to the recipient economy.

To the extent that the cash is provided for the purpose

of financing a balance of payments need in the recipi-

ent country, the grant received (credit item) will be

recorded in the analytic presentation as exceptional

financing,

with a corresponding debit entry under

reserve assets (Table A1.1, row 7). An example of other

intergovernmental transfers is cash grants from donor

governments or multilateral financial institutions to the

debtor economy to be used to repay debt and grants to

finance a current account need.

A1.8 Only the initial transaction associated with the

grant is relevant for exceptional financing. If the pro-

ceeds of the grant are used for scheduled debt service

payments, no exceptional financing transactions for the

debt transactions are recorded. The same applies if

the grant is directly used to make advance repayments

of debt for balance of payments needs, such as a debt

buyback. However, it should be noted that if an advance

repayment is made out of reserve assets, an exceptional

financing will be recorded for the debt transaction (see

Section C).

C. Debt-for-Equity Swap

A1.9 Exceptional financing transactions related to

equity investment involve the exchange, usually at a

discount, of debt instruments of an economy for non-

resident investors’ equity investments in the econ-

omy (see paragraphs A2.29–A2.37). Generally, such

arrangements result in the extinction (debit item) of a

These entries for arrears arise for two reasons: First, if arrears

are repaid from reserves, a credit entry under reserves is recorded

below-the-line (see Section D); not recording the “repayment of

arrears” through debt forgiveness would create an asymmetry of

approach. Second, the accumulation of arrears resulting from bal-

ance of payments difficulties is recorded as a credit item in the

period in which they arise. The repayment recorded as a debit item

ensures intertemporal consistency.

Any interest accruing from the proceeds of the grant should be

recorded by the debtor economy as a credit in the income account.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

239

fixed-payment liability, a debt security, or loan (usually

denominated in foreign currency), to be recorded under

the appropriate instrument, and the creation (credit

item) of an equity liability (denominated in domestic

currency) to a nonresident, to be recorded under direct

or portfolio investment as relevant. These cases include

exchanges of a bank loan, or a liability of an enterprise,

for equity, or the resident central bank redeeming the

outstanding debt owed to a nonresident, at a discount

and in local currency (credit item), with the nonresident

reinvesting the proceeds as equity in the enterprise.

A1.10 For debt exchanged directly for equity invest-

ment in the debtor economy, credit entries should be

made under direct investment–equity, if the investor

(equity holder) directly holds equity that entitles it to

10 percent or more of the voting power in the direct

investment enterprise; otherwise, the equity claim

should be recorded under portfolio investment–equity.

These transactions should be recorded at the value of

the equity acquired, with offsetting debit entries made

under the appropriate debt instrument for the reduction

in liabilities.

A1.11 For indirect debt-for-equity swaps whereby

debt is exchanged, first for a local currency claim

(deposit) that is in turn exchanged for equity liability of

the debtor, transactions in the balance of payments are

recorded for both the initial exchange—debt for deposit

at the value of the deposit—and the exchange of depos-

its for equity. In the IIP, equity liabilities (either direct

or portfolio) increase and debt liabilities decrease by

the value of the instrument extinguished.

A1.12 In the analytic presentation, only the initial

transaction associated with the debt-for-equity swap

is relevant. As with debt forgiveness, the recording of

the exchange of claims (either debt for equity, or debt

for a local currency claim) depends on whether the

debt being exchanged is due for payment in the cur-

rent reporting period, in arrears, or not yet due (Table

A1.1, rows 8–16). Swaps of obligations that fall due in

the current recording period are recorded under equity

(credit item) below-the-line under exceptional financ-

ing, with debt repayment (debit item) recorded above-

the-line. For arrears swapped, equity (credit item) and

repayment of arrears (debit item) are both recorded

below-the-line. For debt exchanged that is not yet due,

there is no recording under exceptional financing, the

two entries being made above-the-line.

A1.13 All transactions should be valued at the mar-

ket price of the new claim received. If there is a differ-

ence in the value between the old and new claims, this

is recorded as a valuation adjustment in the revaluation

account rather than as a transaction, except when non-

marketable debt owed to official creditors is involved,

in which instance any reduction in the value of the old

debt is recorded as debt forgiveness (capital transfer).

D. Borrowing for Balance of Payments

Support

A1.14 In the analytic presentation, borrowing

(including bond issues) by or on behalf of the authori-

ties to meet balance of payments needs is recorded

(credit item) below-the-line under exceptional financ-

ing. Subsequent debt payments as scheduled are

recorded above-the-line (Table A1.1, rows 17–18).

However, advance repayments for balance of payments

needs financed from reserve assets are recorded as

exceptional financing (debit item), so both the reserve

and debt transactions are recorded below-the-line (see

also Section E).

A1.15 Regarding short-term borrowing for balance

of payments support, only the initial drawing of a loan

and any subsequent increases in the amount borrowed

need be recorded below-the-line. In other words, a new

borrowing is not recorded each time the same amount

borrowed under a short-term loan is “rolled-over” and

not repaid at the maturity (the debit and credit entries for

the loan in such circumstances will cancel each other;

see paragraph 3.115). If there is repayment of the bor-

rowing (even partial repayment) this amount is recorded

above-the-line (unless it is an advance repayment under

the conditions described above). If the loan is rolled over

for a number of periods, a judgment should be made as to

whether the continual renewal of the amount borrowed

represents exceptional financing in that the balance

of payments circumstances are such that the debtor is

unable to repay the loan (see paragraph A1.2, point (a)).

E. Debt Rescheduling or Refinancing

A1.16 Debt rescheduling or refinancing involves a

change in an existing debt contract and replacement by a

new debt contract, generally with extended debt service

payments. Thus, payments are recorded as paid on the

old debt and a new debt is recorded. Debt rescheduling

refers to the formal deferment of debt service payments

and the application of new and generally extended

maturities to the deferred amounts. Debt refinancing

refers to the replacement of an existing debt instrument

or instruments including any arrears, with a new debt

Appendix 1 g Exceptional Financing Transactions

240

instrument or instruments. If, under a rescheduling, the

government assumes the debt of banks or other sectors

of the economy, the sector classification of the debtor

will change (as described in paragraph 8.45).

A1.17 In the analytic presentation, the recording of

debt rescheduling and refinancing, as with debt for-

giveness, depends on whether the debt being resched-

uled or refinanced is due for payment in the current

reporting period, in arrears, or not yet due (Table A1.1,

rows 19–30). Rescheduling or refinancing of debt fall-

ing due in the current recording period is recorded

below-the-line as a debt transaction (credit item) under

exceptional financing, and the offsetting debit entry

is recorded above-the-line. For arrears rescheduled

or refinanced, both the arrears on the old debt (debit

item) and the rescheduling of arrears (credit item) are

recorded below-the-line. For rescheduling or refinanc-

ing of obligations not yet due, there is no recording

under exceptional financing, both entries being above-

the-line under the relevant debt instruments.

A1.18 All transactions should be valued at the mar-

ket price of the new claim received.

If there is a differ-

ence in the value between the old and new claim, this

is recorded as a valuation adjustment in the revaluation

account rather than as a transaction (e.g., a capital trans-

fer), except when nonmarketable debt owed to official

creditors is involved, in which instance any reduction in

the nominal value of debt is recorded as debt forgive-

ness. Where there is no established market price for the

new claim, an appropriate proxy is used (see Appendix

2, Debt Reorganization and Related Transactions).

F. Debt Prepayment and Debt Buyback

A1.19 Debt prepayments consist of a repurchase,

or early payment, of debt at conditions that are agreed

between the debtor and the creditor; that is, debt is

extinguished in return for a cash payment agreed

between the debtor and the creditor. When a discount

is involved relative to the nominal value of the debt,

prepayments are referred to as “buybacks.”

A1.20 In the analytic presentation, debt prepayment

transactions are recorded as exceptional financing only if

they are financed from reserve assets to meet balance of

payment needs of the debtor economy (Table A1.1, rows

For analytical purposes, supplementary data could be provided

on the nominal value of the debt being extinguished.

31–33). In this case, debit entries

are recorded below-the-

line in the appropriate instrument in exceptional financing

with offsetting credit entries in reserve assets also below-

the-line. If the prepayment was financed from external

donor funds that are placed in the debtor’s reserve assets,

the debtor economy records all transactions below-the-

line in the analytic presentation (Table A1.1, row 31). In

the IIP of the debtor economy, reserve assets increase

when donor funds are received and decline, along with

debt liabilities, when the prepayment takes place. Pre-

payments of debt using the debtor’s own financial assets

other than reserve assets are recorded above-the-line in

the appropriate accounts (Table A1.1, row 33).

G. Accumulation and Repayment of

Debt Arrears

1. Accumulation of arrears—current period

A1.21 Debt arrears arise when amounts are past due

for payment and are unpaid. If the contract remains

unchanged, in the standard presentation, no transactions

will be recorded. Debt arrears (both interest accrued

and principal) remain in the outstanding amount of the

debt instrument for which payments have been missed

until the liability is extinguished (see paragraph 3.56).

Nonetheless, debt arrears are an arrangement recorded

in exceptional financing.

A1.22 In the analytic presentation, arrears are included

because this presentation is focused on the actions of

the monetary authorities to meet balance of payments

needs, and accumulating arrears is an action the mon-

etary authorities can take for this purpose. Arrears in the

current period resulting from balance of payments diffi-

culties—that is, arrears resulting from the inability of the

authorities to provide foreign exchange (and not from the

inability of the original debtor to provide national cur-

rency)—are recorded below-the-line as accumulation of

arrears (credit) within exceptional financing, as de facto

the creditor is financing the payments the debtor was

required to make. The contra debit entries to the arrears

are recorded in the reporting period above-the-line under

the appropriate accounts, that is, accrued interest under

the appropriate debt instrument in income in the current

The debit entry is recorded below-the-line because the repay-

ment of the debt instrument affects the level of reserve assets in the

reporting period.

If the original contract provided for a change in the characteris-

tics of a financial instrument when it goes into arrears, this change

should be recorded as a reclassification in the other change in vol-

ume of assets account.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

241

Table A1.1. Balance of Payments Accounting for Selected Exceptional Financing Transactions

Analytic Standard

___________________________________ ___________________________________

Type of Transaction

Credit Debit Credit Debit

A.1. Transfers—debt forgiveness

Payments falling due in the current

recording period

1 Interest Exceptional financing Investment income, Capital transfers, debt Investment income,

other investment forgiveness other investment

2 Interest accrued previous period Exceptional financing Other investment, Capital transfers, debt Other investment,

liabilities, loans forgiveness liabilities, loans

3 Principal Exceptional financing Other investment, Capital transfers, debt Other investment,

liabilities, loans forgiveness liabilities, loans

Payments in arrears

4 Interest Exceptional financing Exceptional financing Capital transfers, debt Other investment,

forgiveness liabilities, loans

5 Principal Exceptional financing Exceptional financing Capital transfers, debt Other investment,

forgiveness liabilities, loans

Payments not yet due in the current

recording period

6 Principal Capital transfers, debt Other investment, Capital transfers, debt Other investment,

forgiveness liabilities, loans forgiveness liabilities, loans

A.2. Transfers—other

intergovernmental grants

7 Exceptional financing Reserve assets Current/Capital Reserve assets

transfers

B. Debt/equity swaps

B.1. Direct swaps

Payments falling due in the current

recording period

8 Principal Exceptional financing Other investment, Direct investment-equity Other investment,

liabilities, loans liabilities, loans

Payments in arrears

9 Interest Exceptional financing Exceptional financing Direct investment-equity Other investment,

liabilities, loans

10 Principal Exceptional financing Exceptional financing Direct investment-equity Other investment,

liabilities, loans

Payments not yet due

11 Principal Direct investment- Other investment, Direct investment-equity Other investment,

equity liabilities, loans liabilities, loans

B.2. Indirect swaps

Exchange of a fixed-payment

liability denominated in foreign

currency for a deposit liability

denominated in domestic

currency

Payments falling due in the current

recording period

12 Principal Exceptional financing Other investment, Other investment, Other investment,

liabilities, loans liabilities, currency and liabilities, loans

deposits

Payments in arrears

13 Interest Exceptional financing Exceptional financing Other investment, Other investment,

liabilities, currency and liabilities, loans

deposits

14 Principal Exceptional financing Exceptional financing Other investment, Other investment,

liabilities, currency and liabilities, loans

deposits

Appendix 1 g Exceptional Financing Transactions

242

Table A1.1 (continued)

Analytic Standard

___________________________________ ___________________________________

Type of Transaction

Credit Debit Credit Debit

Payments not yet due

15 Principal Other investment Other investment, Other investment, Other investment,

liabilities, currency liabilities, loans liabilities, currency and liabilities, loans

and deposits deposits

Subsequent exchange of a deposit

liability denominated in domestic

currency for equity investment

16 Principal Direct investment- Other investment, Direct investment- Other investment,

equity liabilities, currency equity liabilities, currency

and deposits and deposits

C. Borrowing for balance of payments

support

17 Drawing on new loans Exceptional financing Reserve assets Other investment, Reserve assets

liabilities loans

18 Bond issues Exceptional financing Reserve assets Portfolio investment, Reserve assets

liabilities, debt securities

D. Debt rescheduling/refinancing

D.1 Debt rescheduling

Payments falling due in the current

recording period

19 Interest Exceptional financing Investment income, Other investment, Investment income,

other investment liabilities, loans other investment

20 Interest accrued previous period Exceptional financing Other investment, Other investment, Other investment,

liabilities, loans liabilities, loans liabilities, loans

21 Principal Exceptional financing Other investment, Other investment, Other investment,

liabilities loans liabilities, loans liabilities, loans

22 Capitalization of moratorium Exceptional financing Investment income, Other investment, Investment income,

interest (interest as it falls due)

other investment liabilities, loans other investment

Payments in arrears

23 Interest Exceptional financing Exceptional financing Other investment, Other investment,

liabilities, loans liabilities, loans

24 Principal Exceptional financing Exceptional financing Other investment, Other investment,

liabilities, loans liabilities, loans

Payments not yet due in the

current recording period

25 Principal Other investment, Other investment, Other investment, Other investment,

liabilities, loans liabilities, loans liabilities, loans liabilities, loans

D.2. Debt refinancing—loan/bond swap

Payments falling due in the current

recording period

26 Interest Exceptional financing Other investment, Portfolio investment, Other investment,

liabilities, loans liabilities, debt securities liabilities, loans

27 Principal Exceptional financing Other investment, Portfolio investment, Other investment,

liabilities, loans liabilities, debt securities liabilities, loans

Payments in arrears

28 Interest Exceptional financing Exceptional financing Portfolio investment, Other investment,

liabilities, debt securities liabilities, loans

29 Principal Exceptional financing Exceptional financing Portfolio investment, Other investment,

liabilities, debt securities liabilities, loans

Payments not yet due

30 Principal Portfolio investment, Other investment, Portfolio investment, Other investment,

liabilities, debt liabilities, loans liabilities, debt liabilities, loans

securities securities

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

243

Table A1.1 (concluded)

Analytic Standard

___________________________________ ___________________________________

Type of Transaction

Credit Debit Credit Debit

E. Debt prepayment and buyback

Payments not yet due in the current

recording period

31 Receipt of donor funds Exceptional financing Reserve assets Capital transfers Reserve assets

32 Principal Reserve assets Exceptional financing Reserve assets Other investment,

liabilities, loans

33 Principal (using debtor financial Other investment, Other investment, Other investment, Other investment,

assets other than reserve assets) assets, currency and liabilities, loans assets, currency and liabilities, loans

deposits deposits

F. Accumulation/repayment of arrears

F.1. Accumulation of arrears

34 Interest accrued in the current Exceptional financing Investment income, Other investment, Investment income,

period other investment liabilities, loans other investment

35 Interest accrued previous period Exceptional financing Other investment, No transaction No transaction

liabilities, loans

36 Principal due and not paid Exceptional financing Other investment, No transaction No transaction

liabilities, loans

F.2. Repayment of arrears

37 Interest Reserve assets Exceptional financing Reserve assets Other investment,

liabilities, loans

38 Principal Reserve assets Exceptional financing Reserve assets Other investment,

liabilities, loans

G. Debt-for-development swaps

Payments falling due in the current

recording period

39 Interest Exceptional financing Investment income, Other investment, Investment income,

other investment liabilities, currency and other investment

deposits

40 Principal Exceptional financing Other investment, Other investment, Other investment,

liabilities, loans liabilities, currency and liabilities, loans

deposits

Payments in arrears

41 Principal Exceptional financing Exceptional financing Other investment, Other investment,

liabilities, currency and liabilities, loans

deposits

Payments not yet due in the current

recording period

42 Principal Other investment, Other investment, Other investment, Other investment,

liabilities, currency liabilities, loans liabilities, currency and liabilities, loans

and deposits deposits

43 Subsequent use of debt/development Capital transfers Other investment, Capital transfers Other investment,

swap funds in the debtor economy liabilities, currency liabilities, currency

and deposits and deposits

For debt rescheduled or refinanced, swapped into equity or bonds, or canceled before maturity, the reduction in the liability should be attributed to the

appropriate instrument in the financial account. In this table, it has been assumed that loans are the instrument.

This presentation, for illustrative purposes, shows separate debit and credit entries for financial account items. In practice, because net recording is recommended

for financial account items, entries affecting the same item will be offsetting and thus will not appear as separate entries in a balance of payments statement.

Only intergovernmental grants received to finance balance of payments need. (Grants received from IMF subsidy accounts are included since such grants

are considered exceptional financing transactions.)

These payments are recorded by using the price at which the new claim on the debtor was acquired by the nonresident investor.

Initially the debtor country exchanges the liability denominated in a foreign currency for a liability denominated in domestic currency. The appropriate

credit entry depends on the type of liability for which the liability that is denominated in foreign currency is exchanged for; in this table the liability is assumed

to be a deposit.

Borrowing (including bond issues) by authorities or other sectors on the authorities’ behalf to finance balance of payments need.

Only moratorium interest linked to balance of payments difficulties. Capitalization of moratorium interest when past due is treated as rescheduling of

payment arrears.

These payments are recorded at the value of the new claim received.

Cash settlement only.

Debt-for-development swaps are described in paragraphs A2.38–A2.40.

Appendix 1 g Exceptional Financing Transactions

244

account, and other arrears (principal arrears, and inter-

est arrears arising in the current period that accrued in

earlier periods) under the appropriate debt instrument in

the financial account (Table A1.1, rows 34–36).

2. Repayment of arrears

A1.23 In the standard presentation, the repayment

of debt arrears to meet a balance of payments need is

recorded as a debit entry under the appropriate debt

instrument in the financial account and a correspond-

ing credit entry under reserve assets. In the analytic

presentation, repayment of arrears (through currency

and deposits) is recorded below-the-line as a debit entry

under repayment of arrears within exceptional financ-

ing, and a credit entry under reserve assets (Table A1.1,

rows 37 and 38).

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

245

APPENDIX

Debt Reorganization and

Related Transactions

A. Debt Reorganization

Reference:

IMF and others, External Debt Statistics: Guide for Com-

pilers and Users, Chapter 8, Debt Reorganization.

A2.1 This appendix discusses various forms of

debt reorganization and related transactions, and how

they are recorded in the balance of payments and the

international investment position. References are made,

where applicable, to exceptional financing when reor-

ganization may arise to finance balance of payments

needs, and to debt concessionality when reorganization

may involve transfers to account for such concessional-

ity. Table A1.1 in Appendix 1, Exceptional Financing

Transactions, provides a summary presentation of the

recording of debt reorganization in the standard and

analytic presentations of the balance of payments.

A2.2 Debt reorganization (also referred to as debt

restructuring) is defined as arrangements involving

both the creditor and the debtor (and sometimes third

parties) that alter the terms established for servicing an

existing debt. Governments are often involved in debt

reorganization, as a debtor, creditor or guarantor, but

debt reorganization can also involve the private sector,

such as through debt exchanges.

A2.3 Debt reorganization usually involves relief for

the debtor from the original terms and conditions of debt

obligations it has entered into. This may be in response to

liquidity issues, where the debtor does not have the cash

to meet looming debt service payments, or sustainability

issues, where the debtor is unlikely to be able to meet its

debt obligations in the medium term.

A2.4 A failure by a debtor economy to honor its

debt obligations (default, unilateral moratorium, etc.)

is not debt reorganization because it does not involve

an arrangement between the creditor and the debtor.

Such failure gives rise to arrears, which are also cov-

ered in this appendix. Similarly, a creditor can reduce

the value of its debt claims on the debtor in its own

books through debt write-offs—unilateral actions that

arise, for instance, when the creditor regards a claim

as unrecoverable, perhaps because of bankruptcy of

the debtor, and so no longer carries it on its books.

Again, this is not debt reorganization as defined in

the Manual.

A2.5 The four main types of debt reorganization

are:

(a) A reduction in the amount of, or the extinguish-

ing of, a debt obligation by the creditor via a

contractual arrangement with the debtor. This is

debt forgiveness.

(b) A change in the terms and conditions of the amount

owed, which may result, or not, in a reduction

in burden in present value terms.

Depending

on the nature of the transaction undertaken, the

reorganization is described as debt rescheduling

or refinancing (or debt exchange).

thing of economic value, other than another

debt claim, on the same debtor. This includes

debt conversion, such as debt-for-equity swaps,

debt-for-real-estate swaps, debt-for-development

swaps, and debt-for-nature swaps,

and debt pre-

payment (or debt buybacks for cash).

(d) Debt assumption and debt payments on behalf of

others when a third party is also involved.

Also called “time value of money” or “discounted cash flow,”

present value is the value today of a future payment or stream of pay-

ments discounted at some appropriate compounded interest rate.

Some agreements described as debt swaps are equivalent to debt

forgiveness from the creditor and the debtor viewpoint. At the same

time, there is a commitment from the debtor country to undertake a

number of development, environment, etc., expenses. These transac-

tions should be considered under debt forgiveness, because no value

is provided to the creditor.

246

A2.6 A debt reorganization package may involve

more than one of the types mentioned above; for exam-

ple, most debt reorganization packages involving debt

forgiveness also result in a rescheduling of the part of

the debt that is not forgiven or cancelled.

1. Debt forgiveness

a. Definitions

A2.7 “Debt forgiveness” is defined as the voluntary

cancellation of all or part of a debt obligation within

a contractual arrangement between a creditor and a

debtor.

Debt forgiveness is distinguished from debt write-

off by the agreement between the parties and the intention

to convey a benefit, rather than unilateral recognition by

the creditor that the amount is unlikely to be collected.

Debt forgiveness is unlikely to arise between commercial

entities. Debt forgiven may include all or part of the prin-

cipal outstanding, inclusive of any accrued interest arrears

(interest that fell due in the past) and any other interest

costs that have accrued. Debt forgiveness does not arise

from the cancellation of future interest payments that have

not yet fallen due and have not yet accrued.

b. Accounting for debt forgiveness

A2.8 In the balance of payments, debt forgiveness,

as noted in paragraphs A1.5–A1.6, is recorded (at the

time specified in the agreement that the debt forgive-

ness takes effect) in the standard presentation as a

capital transfer receipt of the debtor economy (transfer

payment of the creditor economy), with a repayment of

the debtor’s liability in the financial account (a receipt

in the creditor’s asset). (See Table A1.1, rows 6–11.) In

the IIP, the debtor’s liability and creditor’s asset are

reduced by the amount of debt that is forgiven. As to

the value of the debt forgiveness, market prices are the

basis of valuation for flows and stocks, except for loans

where the nominal value is used.

A2.9 In the analytic presentation, the recording,

or not, of debt forgiveness in exceptional financing

(below-the-line) depends on whether the debt is due

for payment in the current period, in arrears, or not yet

due (Table A1.1, rows 1–6). Forgiveness of obligations

due in the current period is recorded below-the-line

as a credit item under debt forgiveness, whereas the

This includes forgiveness of some or all of the principal amount

of a credit-linked note arising from an event affecting the entity on

which the embedded credit derivative was written, and forgiveness

of principal that arises when a type of event contractually specified

in the debt contract occurs, such as forgiveness in the event of a type

of catastrophe.

reduction of the obligations is shown above-the-line

as a debit item. For forgiveness in arrears from previ-

ous periods, a credit entry under debt forgiveness and

a debit entry under cancellation of arrears are both

recorded below-the-line under exceptional financing.

If the obligations not yet due are forgiven, there are

no entries under exceptional financing; all entries are

above-the-line.

2. Debt rescheduling and refinancing

A2.10 Debt rescheduling and refinancing involve a

change in an existing debt contract and replacement by

a new debt contract, generally with extended debt ser-

vice payments. Debt rescheduling involves rearrange-

ments on the same type of instrument, with the same

principal value and the same creditor as with the old

debt. Refinancing entails a different debt instrument,

generally at different value, and may be with a creditor

different than that from the old debt.

For instance, a

creditor may choose to apply the terms of a Paris Club

agreement either through a debt rescheduling option

(that is, changing the terms and conditions of its exist-

ing claims on the debtor) or through refinancing (mak-

ing a new loan to the debtor that is used to repay the

existing debt).

a. Debt rescheduling

Definition

A2.11 Debt rescheduling is a bilateral arrangement

between the debtor and the creditor that constitutes

a formal deferment of debt service payments and the

application of new and generally extended maturities.

The new terms normally include one or more of the fol-

lowing elements: extending repayment periods, reduc-

tions in the contracted interest rate, adding or extending

grace periods for the repayment of principal, fixing the

exchange rate at favorable levels for foreign currency

debt, and rescheduling the payment of arrears, if any. In

the specific instance of zero coupon securities, a reduc-

tion in the principal amount to be paid at redemption to

an amount that still exceeds the principal amount out-

standing at the time the arrangement becomes effective

could be classified as either an effective change in the

From the debtor perspective, debt refinancing may involve bor-

rowing from a third party to repay a creditor. The definition of

debt refinancing in the Manual is a narrower concept reflecting

transactions between the debtor and same creditor only. The trans-

actions associated with borrowing from a third party for balance

of payments support are set out in Section D, Borrowing for Bal-

ance of Payments Support, of Appendix 1, Exceptional Financing

Transactions.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

247

contractual rate of interest or a reduction in principal

with the contractual rate unchanged. Such a reduction

in the principal payment to be made at maturity should

be recorded as debt forgiveness, or debt rescheduling

if the bilateral agreement explicitly acknowledges a

change in the contractual rate of interest. Under Paris

Club arrangements, rescheduling can be characterized

as “flow” or “stock” rescheduling. A flow reschedul-

ing refers to a rescheduling of specified debt service

falling due during a certain period and, in some cases,

specified arrears outstanding at the beginning of that

period.

A stock rescheduling refers to rescheduling the

outstanding stock of debt at a particular point in time.

Accounting for debt rescheduling

A2.12 The balance of payments treatment for debt

rescheduling is that the existing contract is extin-

guished and a new contract created. The applicable

existing debt is recorded as being repaid and a new debt

instrument (or instruments) created with the new terms

and conditions. In the standard presentation for the

debtor, a debit entry is recorded under the appropriate

instrument representing the repayment of the old debt

with a credit entry under the appropriate instrument

representing the creation of a new debt (Table A1.1,

rows 19–25). This treatment does not apply, however,

to interest arrears that are being rescheduled when the

conditions in the existing debt contract remain intact.

In such a case, the existing debt contract is not consid-

ered to be rescheduled, only the interest arrears. The

IIP reflects the transactions extinguishing the old debt

instrument and creating the new instrument.

A2.13 The transaction is recorded at the time both

parties record the change in terms in their books, and

is valued at the value of the new debt (which, under

a debt rescheduling, is the same value as that of the

old debt). If no precise time is determined, the time at

which the creditor records the change in terms in its

books is decisive. If the rescheduling of obligations due

beyond the current period is linked to the fulfillment of

certain conditions by the time the obligations fall due

(such as multiyear Paris Club rescheduling), entries are

recorded in the balance of payments only in the period

when the specified conditions are met.

A2.14 In the analytic presentation, as noted in

Appendix 1, Exceptional Financing Transactions, the

recording of debt rescheduling transactions in excep-

In the balance of payments, if the debt falling due during the

period is rescheduled, the transaction is treated the same as the

rescheduling of a debt stock.

tional financing depends on whether the debt being

rescheduled is due for payment in the current period,

in arrears, or not yet due. Obligations falling due in the

reporting period are recorded under exceptional financ-

ing (below-the-line as credit entries under the appropri-

ate instruments), with debit entries made above-the-line

under the appropriate debt instruments in the financial

account and the income account (for accrued interest)

(Table A1.1, rows 19–22). For arrears, the two entries

are under exceptional financing, that is, below-the-line,

with credit items (under the relevant instrument) and

debit items (under rescheduling of arrears) (Table A1.1,

rows 23–24). For obligations not yet due, both debit

and credit entries are recorded above-the-line under the

appropriate instruments in the financial account (Table

A1.1, row 25).

b. Debt refinancing

Definition

A2.15 Debt refinancing involves the replacement of

an existing debt instrument or instruments, including

any arrears, with a new debt instrument or instru-

ments. It can involve the exchange of the same type of

debt instrument (loan for a loan) or different types of

debt instruments (loan for a bond). For instance, the

public sector may convert various export credit debts

into a single loan. Also, debt refinancing can be said

to have taken place when a debtor exchanges existing

bonds for new bonds through exchange offers given by

its creditor (rather than a change in terms and condi-

tions). So debt refinancing can occur irrespective of

whether the debtor is experiencing balance of payments

difficulties or not.

Accounting for debt refinancing

A2.16 The balance of payments treatment of debt refi-

nancing transactions is similar to debt rescheduling to the

extent that the debt being refinanced is extinguished and

replaced with a new financial instrument or instruments.

However, unlike in rescheduling, the old debt is extin-

guished at the value of the new debt instrument except for

nonmarketable debt owed to official creditors.

A2.17 If the refinancing involves direct debt

exchange, such as a loan-for-bond swap, in the standard

presentation, debit entries are recorded by the debtor

under the appropriate debt instrument in the financial

account and the income account (for accrued interest)

and a credit entry under portfolio investment liabilities

to show the creation of the new obligation (Table A1.1,

rows 26–30). The transaction is valued at the value of

Appendix 2 g Debt Reorganization and Related Transactions

248

the new debt with the difference between the value of

the old debt and that of the new instrument recorded in

the revaluation account. However, if the debt is owed

to official creditors and is nonmarketable (loan), the

old debt is extinguished at its original value with the

difference in value with the new instrument recorded

as debt forgiveness.

A2.18 Where there is no established market price

for the new bond, an appropriate proxy is used. For

example, if the bond is similar to other bonds being

traded, the market price of a traded bond would be an

appropriate proxy for the value of the new bond. If the

debt being swapped was recently acquired by the credi-

tor, the acquisition price would be an appropriate proxy.

Alternatively, if the interest rate on the new bond is

below the prevailing interest rate, the discounted value

of the bond, using the prevailing interest rate, could

serve as a proxy. If such information is not available,

the face value of the bond being issued may be used as

a proxy. See also debt-for-equity conversion below.

A2.19 The IIP reflects the transactions extinguish-

ing the old debt instrument and creating the new debt

instrument along with any valuation change recorded in

the revaluation account. For instance, a loan-for-bond

exchange undertaken will generally result in a reduc-

tion in the liabilities of the debtor (reduction in the

claim of the creditor on the debtor economy) because

the loan is recorded at nominal value versus the market

value of the bond.

A2.20 In the analytic presentation, debt-for-bond

exchange of obligations falling due in the reporting

period are recorded below-the-line as credit entries

under the appropriate instruments in exceptional financ-

ing, with debit entries made above-the-line under the

appropriate debt instruments in the financial account and

the income account (for accrued interest) (Table A1.1,

rows 26–27). For arrears refinanced, there are offsetting

credit (under the relevant instrument) and debit items

(under rescheduling of arrears) under exceptional financ-

ing. For obligations not yet due, both debit and credit

entries are recorded above-the-line under the appropriate

instruments in the financial account (Table A1.1, row

30). When arrears are cancelled as a result of a debt-for-

debt exchange, the two entries are below-the-line: a debit

entry under cancellation of arrears (under the relevant

debt instrument in the standard presentation) and a credit

item under debt forgiveness (Table A1.1, rows 28–29).

A2.21 If the proceeds of the new debt are used to

partially pay off existing debt, any remaining debt is

recorded as the extinguishment of the old debt and

creation of a new debt, unless it is paid off through a

separate transaction.

A2.22 If the terms of any new borrowings are con-

cessional, the creditor could be seen as providing a

transfer to the debtor. Debt concessionality is discussed

below.

3. Debt conversion and debt prepayment

a. Definitions

A2.23 Debt conversion (swap) is an exchange of

debt—typically at a discount—for a nondebt claim

such as equity, or for counterpart funds that can be

used to finance a particular project or policy. Typically

debt conversion involves an exchange of external debt

in foreign currency for a nondebt obligation in domestic

currency, at a discount. Debt for equity, debt for exports,

debt for nature, and debt for development swaps are all

examples of debt conversion. In essence, external debt

is extinguished and a nondebt liability created.

A2.24 A debt-for-equity swap results in reduced debt

liability and an increase in equity liability of the debtor

economy. A third party, usually a nongovernmental

organization (NGO) or a corporation, is often involved

in a debt-for-equity swap, buying the claims from the

foreign creditor and receiving shares in a corporation or

local currency (to be used for equity investment) from

the debtor economy.

A2.25 Other types of debt swaps, such as exter-

nal debt obligations for exports (debt for exports) or

external debt obligations for counterpart assets that are

provided by the debtor to the creditor for a specified

purpose, such as wildlife protection, health, education,

and environmental conservation (debt for sustainable

development) are also debt conversions.

A2.26 It is important to distinguish direct and indi-

rect debt conversion, that is, whether the swap leads

directly to the acquisition of a nondebt claim on the

debtor, or indirectly via another claim on the economy,

such as a deposit that is subsequently used to purchase

equity.

b. Accounting for debt conversion

A2.27 Where debt is exchanged for another item

(e.g., equity or counterpart funds for development pur-

poses), the transaction is recorded at the time both

parties record the exchange of value in their books.

The general principle is for the old debt to be valued

at the value of the item acquired (converted at the pre-

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

249

vailing market exchange rate if the item is in foreign

currency). Any difference between the value of the

debt being extinguished and the corresponding claim

or funds provided is recorded as a valuation adjustment

in the revaluation account. An exception arises when

official creditors are owed nonmarketable debt, and

the counterpart claim (assets) has a lower value than

the debt, in which case the transaction in the old debt

is recorded at its full value and any difference in value

between the debt and counterpart item (or assets) is

recorded as debt forgiveness, a capital transfer. With

debt-for-development swaps, the transactions recorded

should be based on the type of debt obligation forgiven

rather than the subsequent use of the funds.

A2.28 Debt-for-equity and debt-for-development

swaps are the most commonly used debt conversion

arrangements.

c. Debt-for-equity swaps

Direct debt conversion

A2.29 For debt exchanged directly for equity invest-

ment in the debtor economy, credit entries should

be made under direct investment–equity, or portfo-

lio investment–equity. These transactions should be

recorded at the value of the equity acquired, with off-

setting debit entries made under the appropriate debt

instrument for the reduction in liabilities. The treatment

of transactions recorded depends on whether the debt

being swapped is due for payment in the current period,

is in arrears, or is not yet due (Table A1.1, rows 8–11).

Debt due for payment in the current period

A2.30 In the standard presentation, for a debt-for-

equity swap there are debit entries under the relevant

instrument, such as other investment liabilities, and

the income account (for accrued interest) for all pay-

ments falling due in the current period. The value of the

repayment of the old debt is equal to the market value

of the equity liability being swapped, with the contra-

entry credit recorded in direct investment–equity, or

portfolio investment–equity. If the market value of the

new liability is lower than the value of the old debt,

a valuation adjustment is recorded under the relevant

instrument, such as loan liabilities in the revaluation

account (see also paragraph A1.13).

A2.31 In the analytic presentation, the debit entries

are recorded above-the-line and the contra-entry credit

is recorded below-the-line under direct investment or

portfolio investment-equity.

Debt in arrears

A2.32 In the standard presentation, debt-for-equity

swaps for arrears are recorded as a debit entry under

the relevant instrument in the financial account, at

the value of the equity liabilities being provided, with

the contra-entry credit in direct investment–equity or

portfolio investment–equity. In the analytic presenta-

tion, a debit entry is recorded in exceptional financ-

ing under cancellation of arrears, with the offsetting

credit entry also recorded in exceptional financing

under direct investment-equity or portfolio investment-

equity.

Debt due for payment in the future

A2.33 In the standard presentation, debit entries

arising from debt-for-equity swap operations for debt

due for payment in the future and exchanged at a price

below nominal value are recorded as a debit entry in the

respective accounts at the value of the equity liabilities

being provided with the contra-entry credit in direct

investment-equity, if the direct investor (equity holder)

directly holds equity that entitles it to 10 percent or

more of the voting power in the direct investment enter-

prise; otherwise, the equity claim should be recorded

under portfolio investment-equity. If the market value

of the new liability is lower than the value of the old

debt, a valuation adjustment is recorded under the rel-

evant instrument, such as loan liabilities in the revalua-

tion account (see also paragraph A1.13). In the analytic

presentation, all entries are made above-the-line as in

the standard presentation.

A2.34 In all cases, in the IIP, equity liabilities

(either direct or portfolio) increase and debt liabilities

decrease by the value of the instrument extinguished.

Indirect debt conversion

A2.35 A debt-for-equity swap may also involve

indirect conversion. An example is when a fixed-pay-

ment foreign currency liability (e.g., a debt security or

loan) is exchanged at a discount for a domestic financial

instrument, such as a domestic currency deposit. The

proceeds are then reinvested by the nonresident into the

equity of the debtor. These swaps are valued at market

prices in the balance of payments.

A2.36 In the standard presentation, this transaction

is recorded by the debtor as an increase in liabilities

(credit) under the financial instrument provided, with

corresponding debit entries under the instrument (lia-

bility) being extinguished (Table A1.1, rows 12–16).

Subsequently, the nonresident creditor exchanges the

Appendix 2 g Debt Reorganization and Related Transactions

250

financial instrument received for equity investment

in an enterprise of the debtor economy. At this point,

a credit entry is recorded under direct investment–

equity, if the direct investor (equity holder) directly

holds equity that entitles it to 10 percent or more of

the voting power in the direct investment enterprise;

otherwise, the equity claim should be recorded under

portfolio investment–equity. The offsetting debit

entry is made under the relevant instrument being

exchanged for the equity, such as currency and depos-

its. In the IIP, equity liabilities (either direct or portfo-

lio) increase and debt liabilities decrease by the value

of the instrument extinguished.

A2.37 In the analytic presentation, the treatment is

the same as described for direct debt conversion except

that only the initial transaction is relevant, so the credit

entry is recorded under the relevant financial instru-

ment provided, rather than equity.

d. Debt-for-development swaps

A2.38 A debt-for-development swap involves the

exchange at a discount of an existing liability (e.g., a

debt security or loan) for a claim (such as a domestic

deposit) earmarked for a specific development purpose

in the debtor economy. For example, an NGO purchases

debt from the original creditor at a substantial dis-

count using its own foreign currency resources, and

then resells it to the debtor country government for

local currency equivalent. The NGO in turn spends the

money on a development project, previously agreed on

with the debtor country government.

A2.39 In the standard presentation, the debtor

economy records the transaction only with the

creditor (such as an NGO). The debtor records an

increase in liabilities (credit) under the appropriate

debt instrument provided to the creditor, with an

offsetting debit entry recorded under the appropriate

debt instrument being extinguished (Table A1.1, rows

39–43). In the IIP, liabilities decline by the value of

the debt extinguished and increase by the value of

the other claim provided that it is still outstanding at

the end of the period.

A2.40 If a debt-for-development swap is under-

taken to meet a balance of payments need, only the

initial transaction with the creditor is relevant for the

analytic presentation. Subsequent use by the creditor

of the assets acquired for development in the debtor

economy is not exceptional financing—the credit

items are recorded as capital transfers (Table A1.1,

row 43).

e. Debt prepayment

Definitions

A2.41 Debt prepayments consist of a repurchase,

or early payment, of debt at conditions that are agreed

between the debtor and the creditor; that is, debt is

extinguished in return for a cash payment agreed

between the debtor and the creditor. When a discount

is involved relative to the nominal value of the debt,

prepayments are referred to as “buybacks.” Debt pre-

payment could be driven by the debtor’s need to reduce

the cost of its debt portfolio by taking advantage of

favorable economic performance or market conditions

to repurchase debt, or for balance of payments purposes,

such as a looming balance of payments constraint.

Accounting for debt prepayment

A2.42 In the standard presentation, debit entries

relating to debt prepayment are recorded by the debtor

in the appropriate instrument in the financial account

when the transactions take place at the value of the

debt prepaid. Credit entries are recorded in reserve

assets or in currency and deposits in other invest-

ment–assets depending on the source of financing. In

the IIP, the debtor’s liability declines by the amount

of debt prepaid. As noted in Appendix 1, Exceptional

Financing Transactions, if prepayment of debt is

linked to balance of payments needs and is financed

from reserve assets, both credit and debit items are

recorded below-the-line in exceptional financing and

reserve assets, respectively (Table A1.1, rows 31–32).

Prepayments of debt using debtor’s own financial

assets other than reserve assets is recorded above-the-

line as in standard presentation (Table A1.1, row 33).

If the debt is owed to official creditors and is non-

marketable (loan), some element of debt forgiveness

could arise—that is, if the prepayment occurs within

an agreement between the parties with an intention to

convey a benefit (see paragraph A2.7).

A2.43 In the analytic presentation, debt prepayment

transactions are recorded as exceptional financing only

if they are financed from reserve assets for the balance

of payments purposes of the debtor economy. In this

case, debit entries are recorded below-the-line in the

appropriate instrument in exceptional financing with

offsetting credit entries in reserves recorded below-

the-line.

A2.44 If the prepayment was financed from exter-

nal donor funds, transactions could result in a two-stage

analysis if cash is provided to the debtor economy that

subsequently uses the proceeds to prepay the debt.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

251

Stage 1

A2.45 The debtor economy records in the standard

presentation a credit entry under capital transfers in the

capital account equal to the donor funds provided. An

offsetting debit entry is recorded in reserves assets. In

the analytic presentation, the debtor economy records

a credit entry below-the-line under transfers in excep-

tional financing, with the offsetting debit entry recorded

in reserve assets.

Stage 2

A2.46 When the debt prepayment occurs, the

debtor economy records in the standard presentation

the repayment of the debt instrument as a debit entry

at the value paid, with an offsetting credit entry in

reserve assets. In the analytic presentation, the debit

entry is recorded under the relevant debt instrument

below-the-line

and the credit entry under reserve

assets. Savings arise in future years as a result of the

prepayment of the debt. The debit entry is recorded

below-the-line as the transaction affects reserve assets

in the reporting period.

A2.47 In the IIP of the debtor economy, assets

increase in the first stage and decline, along with debt

liabilities, when the prepayment takes place.

4. Debt assumption and debt payments on

behalf of others

a. Debt assumption

Definition

A2.48 Debt assumption is a trilateral agreement

between a creditor, a former debtor, and a new debtor

under which the new debtor assumes the former debt-

or’s outstanding liability to the creditor and is liable for

repayment of debt. Calling a guarantee is an example

of debt assumption. If the original debtor defaults on its

debt obligations, the creditor may invoke the contract

conditions permitting the guarantee from the guaran-

tor to be called. The guarantor unit then must either

repay the debt or assume responsibility for the debt

as the primary debtor and the liability of the original

debtor is extinguished. Governments can be the debtor

that is defaulting or the guarantor. Also, a government

through agreement can offer to provide funds to pay

off the debt obligation of another government owed to

a third party.

Advance payments for balance of payments need are recorded

below-the-line (see Appendix 1, Exceptional Financing Transactions).

Accounting for debt assumption

A2.49 The amount of the debt to be recorded is the

full amount of the outstanding debt unless there is an

agreement with the creditor to reduce the amount of debt

owed. The timing of the recording is at the time the debt

is removed from the original debtor’s balance sheet.

A2.50 In the standard presentation the transac-

tion recorded between the creditor and debtor is as

described in paragraphs 8.42–8.45 and Box 8.1. The

creditor records a new loan claim on the new debtor.

The extinguishing of the original debt is classified as a

transaction if the original debtor continues to exist, or

as other volume change (with a capital transfer recorded

from the new debtor to the creditor) if the original

debtor no longer exists.

A2.51 In many cases it is likely that the entity

assuming the debt and the original debtor are resident

in the same economy, such as the case of a government

assuming the debt of a resident entity. In such instances,

the sector classification of the debtor may change.

A2.52 However, if the assuming entity was in

a different economy from the original debtor was,

then the nature of the transactions recorded would

depend on whether the assuming economy obtained

a claim on the original debtor and, if not, the rela-

tionship between the two entities. The terms of the

debt assumption may include a legal obligation for the

defaulting entity to pay back to the guaranteeing unit

the amount of debt assumed. If so, in the standard pre-

sentation, the original debtor economy would record

both credit and debit entries under the relevant debt

instrument(s) in the financial account. If no claim was

established, then a capital transfer (debt forgiveness)

would be recorded from the assuming to the original

debtor economy. However, if the original debtor was

in a direct investment relationship with the entity in

the assuming economy, in which instance an increase

in the direct investor’s equity (or decrease if the parent

is the original debtor) would be recorded in the direct

investment enterprise. If the new debtor acquires a

claim that only partially covers the debt acquired, the

difference is classified as debt forgiveness by both the

original and new debtors. If the original debtor no

longer exists, an other volume change is recorded, as

described in paragraph A2.50.

A2.53 In the analytic presentation, if the new

debtor and original debtor are resident in differ-

ent economies, the recording of debt assumption is

the same as for debt rescheduling if the new debtor

acquires a claim on the original debtor. If not, then

Appendix 2 g Debt Reorganization and Related Transactions

252

the recording of the debt assumption is the same

as for debt forgiveness (except in the case of direct

investment as described in the previous paragraph).

When a partial claim is acquired, the recording as

between debt rescheduling and debt forgiveness is

prorated accordingly.

b. Debt payments on behalf of others

Definition

A2.54 Rather than assume the debt, a government

may decide to repay a specific borrowing or make a

specific payment on behalf of another institutional

unit, without the guarantee being called or the debt

being taken over. In this case, the debt stays recorded

solely in the balance sheet of the other institutional

unit, the only legal debtor. As the existing debt

remains extant, and the terms remain unaltered, this

is not considered debt reorganization. Such a situation

may occur where the debtor is experiencing temporary

financial difficulties rather than permanent financial

problems.

Accounting for debt payments on behalf of others

A2.55 As with debt assumption, the recording of

transactions depends on whether the two entities are

located in the same economy or not, and whether or

not the payer receives a financial claim on the debtor

in respect of the debt service payments it has made on

behalf of the debtor.

A2.56 If the paying entity and the original debtor are

resident in the same economy, then no balance of pay-

ments transactions are reported between them. If they

are in different economies, and a claim is established

on the original debtor, the paying economy records an

increase in financial assets and a decrease in reserve

assets or currency and deposits, depending on the

source of funding. Otherwise, as with debt assumption,

a capital transfer or direct investment–equity transac-

tion is recorded. The payment of the debt service is not

recorded as a payment of interest or principal by the

paying economy because the payments are not related

to a liability in its balance sheet.

A2.57 If a financial claim has not been established,

and the transactions arise from a balance of payments

need, in the analytic presentation the debtor country

records a credit entry below-the-line in transfers (other

intergovernmental grants) under exceptional financing

and a debit entry above-the-line reflecting any interest

and principal payments made.

5. Special cases

a. Debt service falling due between Paris

Club agreed minute date and specified

implementation date

A2.58 Under Paris Club debt rescheduling arrange-

ments, creditor countries as a group usually agree in

the nonbinding “Agreed Minute” that they sign, that

payment terms and conditions of applicable debt fall-

ing due before the specified effective (implementation)

date of the Paris Club bilateral agreement might not be

paid on schedule. However, interest continues to accrue

based on the existing loan terms, but payments are not

made, up until the point when there is a formal bilateral

agreement.

A2.59 When such payments fall due, they are consid-

ered technical arrears (External Debt Statistics: Guide

for Compilers and Users, paragraph 3.37). Given that

there is a mutually signed understanding between the

debtor and the creditor that the terms and conditions in

the mother agreement are temporarily suspended, tech-

nical arrears are treated in the standard presentation

of the debtor economy as rescheduled short-term debt

and classified under other investment, other accounts

receivable/payable, until the effective date of the bilat-

eral agreement when the new terms apply.

When the

new terms apply, there may be a need to reclassify

technical arrears to the appropriate instruments in the

financial account.

A2.60 In the analytic presentation, debit entries are

recorded above-the-line as in the standard presenta-

tion, while corresponding credit entries are recorded

below-the-line as accumulation of arrears, in excep-

tional financing.

b. Debt service moratorium extended by

creditors

A2.61 Debt service moratorium involves an indi-

vidual creditor permitting the debtor a formal suspen-

sion of debt service payments falling due within a given

period. Debt service moratorium may be granted in

the event of natural disasters, such as the moratorium

granted to tsunami-affected countries in 2005, and usu-

ally involves formal exchange of letters but not neces-

sarily a formal bilateral agreement.

The guidance in this section is based on the Paris Club arrange-

ments because the issue described most commonly arises in that

forum. But the guidance is equally applicable to other fora in which

the same issue arises.

This approach is applicable to other debt rescheduling arrange-

ments with similar terms.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

253

A2.62 As the intention of the action is to provide the

debtor with short-term debt relief, debt service morato-

rium extended by creditors should be classified as debt

rescheduling, provided there is some formal process that

demonstrates agreement on behalf of both the debtor

and creditor, such as the exchange of letters, to delay

payment. In such instances, arrears are not created. In

the standard presentation for the debtor, a debit entry is

recorded under the appropriate instrument represent-

ing the repayment of obligations as they fall due with

a credit entry under the same instrument representing

the creation of a new debt. In the analytic presentation

of the debtor economy, debit entries of obligations fall-

ing due in the current period are recorded above-the-

line, and contra-entries are recorded as rescheduling

of existing debt under other investment liabilities in

exceptional financing.

B. Transactions Related to Debt

Reorganization

1. New money facilities

A2.63 In some debt reorganization arrangements

to assist the debtor to overcome temporary balance of

payments difficulties, new money facilities are agreed

with the creditor to be used to repay maturing debt

obligations. In the standard presentation, drawings on

the new money facilities are recorded by the debtor as

a credit, and offsetting debit entries are made under

the appropriate instrument, such as reserve assets. As

the maturing debt obligations are paid, debit entries

are recorded under the debt instrument for principal

amounts falling due and under income for interest

accrued in the current period. In the IIP the liabilities

(assets) of the debtor (creditor) are increased by the

new borrowing.

A2.64 In the analytic presentation, a credit entry for

the full amount borrowed is recorded under drawings

on new loans within exceptional financing, with the

offsetting debit entry under reserve assets. Scheduled

debt payments out of the proceeds of the new borrow-

ings are not regarded as exceptional financing; that is,

debit entries are made above-the-line and offsetting

entries under reserve assets, but advance repayments

of debt for balance of payments purposes from reserve

assets are recorded as debit items under exceptional

financing under the relevant financial instrument. If

the terms of the new borrowings are concessional, the

creditor is providing a transfer to the debtor. Debt con-

cessionality is discussed below.

2. Defeasance

A2.65 Defeasance is a technique by which a debtor

exactly matches debt service outflows from a set of

its liabilities with financial assets with the same debt

service inflows, and removes both the asset and liabili-

ties from its balance sheet (see paragraphs 8.30–8.31).

Although a debtor may wish to regard the defeased debt

as being effectively extinguished, the Manual does not

recognize defeasance as affecting the debt of the debtor

as long as there has been no change in the legal obliga-

tions of the debtor. That is, the debt should continue to

be shown on the liabilities side and the financial assets

recorded on the asset side of the balance sheet, and the

transactions associated with those assets and liabilities

recorded in the balance of payments provided they are

with nonresidents. If a separate unit is created to hold

the assets and liabilities, the transactions by which the

assets and liabilities are moved to the second institu-

tional unit are recorded in the financial account, if the

second unit is resident of another economy. If the two

units are resident in the same economy but are clas-

sified in different sectors, a reclassification in other

changes in volume account is recorded.

3. Debt write-offs

A2.66 A creditor can unilaterally decide to write off

debt owed to it. No transactions are recorded but the

creditor economy records the reduction in its financial

assets through the other changes in the volume of assets

account. (The corresponding liability should also be

removed from the balance sheet of the debtor, through

the other changes in volume account.)

4. Debt concessionality

A2.67 Debt concessionality has gained increasing

importance in discussions relating to debt relief to the

heavily indebted poor countries. However, there is no

consistent definition or measure of debt concessionality

in economic accounts. In debt reorganization through

the Paris Club, such as the Heavily Indebted Poor

Countries Initiative and similar arrangements, debt

reduction in present value terms is calculated using a

market-based discount rate, usually the OECD’s Com-

mercial Interest Reference Rate (CIRR).

The differ-

ence between the nominal value of the applicable debt

These rates are determined on the fifteenth day of each month

for applicable currencies on the basis of secondary market yields on

government bonds with residual maturity of five years and, in addi-

tion, three and seven years for the Canadian dollar, the U.S. dollar,

and the euro.

Appendix 2 g Debt Reorganization and Related Transactions

254

and its present value is the amount of capital transfer

derived from the debt reorganization arrangements.

A2.68 Where such transfers are significant, countries

are encouraged to provide these data as a supplemen-

tary

item to the standard components. The recording

should be made as a one-off transaction at the point

of loan origination equal to the difference between the

nominal value of the debt and its present value (using a

relevant market discount rate such as the CIRR). For a

new loan, this approach would require information on

the market interest rate at inception and the contractual

interest rate—with the market interest rate as the dis-

count rate and the difference the value of the transfer.

This approach has the advantage of considering all the

possible sources of transfers in debt concessionality—

maturity period, grace period, frequency of payments,

interest rate, and other applicable costs—and is consis-

tent with nominal valuation of loans. In addition, this

approach is consistent with the economic equivalence

between a concessional loan of say, 100 units with an

embedded grant element of 35 percent, and a commer-

cial loan of 100 units combined with a direct grant of 35

The advantage of a supplementary item in the accounts as

opposed to the main body is that while it allows these transfers to

be measured and data disseminated, it would also allow compilers

to develop their approaches over time without affecting the main

accounts.

units. The transfer value is calculated at the time it hap-

pens, that is, at the inception of the debt, as the difference

between its nominal value and its present value using the

payment stream and the current market interest rate as

the discount factor.

A2.69 If the loan is retired before maturity and

replaced by a new loan, adjustment of the previously

recorded transfers is required. This means that the

value of any transfers not yet received on the original

loan that is replaced would need to be subtracted from

the original transfer value calculated; otherwise, the

amount of concessionality recorded over time would

be overstated.

A2.70 This can be done by recalculating the transfer

at inception using the actual payment schedule outturn,

including the retirement of the entire remaining loan

at the time of rescheduling.

This recalculated value

should replace the originally calculated value in the

historical supplementary series, so the historical data

reflect the actual transfers received and do not mix any

new concessional transfer with the value not received

on the original loan, when there may have been a dif-

ferent set of market-related interest rates.

This retirement value would include any amount that is forgiven

because such forgiveness is recorded as a capital transfer in the

period given.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

255

APPENDIX

Regional Arrangements: Currency

Unions, Economic Unions, and

Other Regional Statements

A. Introduction

A3.1 Since the previous edition of the Manual, a

growth in regional arrangements for monetary and eco-

nomic cooperation has been evident, with a particularly

notable development being the creation of the euro in

the broader framework of the European Union. Such

regional arrangements include customs unions, which

have common tariff and other trade policies with non-

member economies; economic unions, which harmonize

certain economic policies to foster greater economic

integration; and monetary and currency unions, which

provide for a single monetary policy across an area.

Concepts and recommendations noted in the chapters

of the Manual for compilation of balance of payments

and IIP statements also apply to these regional arrange-

ments, but beyond these, specific statistical issues arise

that are addressed in this appendix.

A3.2 This appendix begins by addressing issues

relating to currency unions (CUs), because such unions

raise most of the methodological issues and there is

the essential policy need for CU balance of payments

and IIP statistics.

Methodological guidance is pro-

vided for the compilation at both the CU and member-

economy levels. The appendix also covers economic

unions (EcUns) and customs unions. As indicated by

Table A3.1, which lists various methodological issues

that can arise from regional arrangements, those issues

relevant for EcUn and customs unions are largely a

subset of those relevant to a CU.

A3.3 Compiling balance of payments and inter-

national investment position statistics for regional

arrangements such CUs and EcUns involves the aggre-

gation of data for two or more economies.

In contrast,

References to specific statistical issues that apply to unilateral

adoption of a foreign currency (such as dollarization) are also

included in this section.

In this context, “regional” is not used to mean a region within

an economy.

“regional statements” are compiled by an economy

vis-à-vis a grouping of selected economies (geographi-

cal breakdown of statistics). Issues pertaining to this

category of statement are also addressed at the end of

this appendix.

A3.4 IIP data by partner are shown according to

the debtor-creditor approach. In addition, national con-

tributions for compiling financial flows data in CU

and EcUn balance of payments are allocated along the

debtor-creditor approach as a way to ensure bilateral

symmetry.

This convention means that cross-border

transactions in financial claims are allocated to the

economy of residence of the nonresident debtor, and

cross-border transactions in liabilities are allocated to

the economy of residence of the nonresident creditor.

B. Currency Unions

A3.5 In a CU, full balance of payments and IIP state-

ments are essential to support the policy analysis at the

CU level. The single monetary policy of the CU requires

the availability of information for the main variables

that affect monetary and foreign exchange conditions for

the union as a whole, among which balance of payments

statistics are of primary importance. In that sense, the

statistical requirements for a CU are the same as for an

economy that issues its own currency.

A3.6 As monetary policy is no longer conducted at

an economy level, the statistical requirements might

appear less necessary for economies that are members

of a CU. However, because economic and fiscal poli-

cies are often still largely defined at the national level,

As opposed to the transactor principle. Under the transactor

principle, cross-border transactions in claims are allocated to the

economy of residence of the nonresident party to the transaction

(the transactor). Information on the location of counterparties can

be of analytical interest, such as the markets in which or with which

residents transact.

256

experience has demonstrated the need for a continua-

tion of national balance of payments and IIP statement

for member economies in a CU.

A3.7 The specific statistical issues that need to be

addressed are of three types:

• Definitional issues that are central to any discussion

of CU balance of payments and IIP statement.

• Application of core balance of payments concepts

to the context of a CU.

• Methodological issues arising from the operational

and technical aspects of a CU.

1. Definitional issues

a. Definition of a currency union

A3.8 The adoption of a single monetary policy by

more than one economy can be facilitated through a

range of different types of monetary arrangements.

A situation in which there is the presence of a single

monetary policy among economies, established by an

intergovernmental legal agreement, is defined in the

Manual as a monetary union.

A monetary union that

replaces national currencies with a common currency

to form a currency union raises specific methodologi-

cal issues for the compilation of a balance of payments

and IIP. These issues include treatment of the central

monetary authority, the arrangements for reserves man-

agement, and the definition of a domestic currency.

In compiling data for a monetary union that is not a currency

union, account would need to be taken of the specific institutional

arrangements to determine which principles set out in this appendix

need to be applied.

A3.9 For statistical purposes, a currency union

is defined as a union to which two or more econo-

mies belong and that has a regional central decision-

making body, commonly a currency union central bank

(CUCB), endowed with the legal authority to conduct

a single monetary policy and issue the single currency

of the union. A CU is established by means of an inter-

governmental legal agreement (e.g., a treaty). To belong

to a CU, the economy must be a member of the central

decision-making body, participate in its regular mon-

etary policy decision-making process, and be subject

to its monetary policy decisions. Participation in the

monetary policy decision-making process includes rep-

resentation and voting rights, possibly on a rotating

basis, in the central decision-making body.

A3.10 Monetary arrangements reached by any CU

economy (on behalf of and in line with guidelines set

up by the CUCB) with an economy outside the CU,

such as overseas dependent territories, to regulate the

use of the common currency do not qualify the other

economies to CU membership under this definition.

Similarly, the unilateral adoption of another currency

by third-party economies (e.g., dollarization, euroiza-

tion) is not considered sufficient to regard the economy,

or economies, to be a member, or members, of a cur-

rency union for statistical purposes. Where different

economies establish a common monetary area (CMA)

that allows free movement of finance and a common

exchange control regime with the rest of the world,

but different national currencies remain legal tender in

their respective economies, even if one currency is a

reference currency against which the other currencies

are pegged, the arrangement does not meet the above

criteria to be classified as a CU. The same applies for a

CMA established among members by coordinating the

peg with a third economy.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table A3.1. Methodological Issues Relevant for Different Types of Regional Cooperation

Currency Union

Issue Customs Union Economic Union (CU)

1. Definition of a CU central bank n.a. n.a. X

2. Domestic/foreign status of the common currency* n.a. n.a. X

3. Allocation of intra-CU claims among CU’s central banks n.a. n.a. X

4. Reserve assets* n.a. n.a. X

5. Regional organizations X X X

6. Economic territory n.a. X X

7. Debtor/creditor versus transactor principle* X X X

8. Geographic allocation of goods X X X

*These three items also raise statistical issues in “dollarized economies.”

X = relevant issue.

n.a. = not applicable issue.

257

b. The Currency Union Central Bank

A3.11 The regional central decision-making body in

a CU referred to above is usually the CUCB. A CUCB is

a regional financial institution that acts as the common

central bank for the member economies of the CU. The

CUCB is an institutional unit in its own right, owning

assets and liabilities on own account, and is nonresident

of any CU member economy but resident in the CU.

c. Regional organizations

A3.12 More generally, regional organizations are

a type of international organization. They consist of

those institutions whose members are governments or

monetary authorities of economies that are located in

a specific region of the world. Regional organizations,

which include CUCBs, are created for many purposes

including supporting, guiding, and even governing

aspects of the economic relationships or integration

processes among the region’s economies. Regional

organizations are established by means of an inter-

governmental legal arrangement (e.g., a treaty). They

can be financial (e.g., regional development banks) or

nonfinancial (e.g., relating to the administration of an

economic union) organizations.

d. Centralized and decentralized CU

A3.13 At the time of drafting this Manual, two

kinds of CU are identified. In one model, the CU has

a CUCB owned by the governments of the member

economies with the common currency issued by the

CUCB and central bank operations in each economy

carried out by branches or agencies of the CUCB. This

model, referred to as a “centralized” model, is of the

type observed in Africa and the Caribbean and was in

existence at the time of the publication of the previous

edition of the Manual.

A3.14 In the other model, the CU comprises a

CUCB and CU national central banks (CUNCBs) of

the member economies with the CUCB being owned

by the CUNCBs. The monetary policy decisions are

taken by the decision-making body of the CUCB,

which also coordinates the implementation of the deci-

sions, a primary responsibility of the CUNCBs. This

model, referred to as a “decentralized” model, is the

type developed by the euro area in the 1990s.

A3.15 In some instances, as described ahead, the

specific guidance for reporting differs between the

two models because of the differing institutional

arrangements.

e. Definition of a domestic currency in a CU

A3.16 A domestic currency is defined in paragraph

3.95. The currency issued in a CU is the domestic

currency of the CU. It should always be considered a

domestic currency from the viewpoint of each member

economy, even though this currency can be issued by

a nonresident institution (either another CUNCB or

the CUCB). One consequence is that, in a CU, from a

national perspective, holdings of domestic currency can

be a claim on a nonresident.

f. Application of core balance of

payments concepts

Residence

Residence in a currency union

A3.17 The economic territory of a CU consists of

the economic territory of the CU economies that com-

prise the CU, plus the CUCB. Any other regional orga-

nizations that comprise the same or a subset of the same

economies are included in the CU. Within this territory,

the same principles of residence apply as described in

paragraphs 4.113–4.144.

A3.18 So, being a resident of an economy of a CU

necessarily implies being a resident of the CU, along

with the CUCB. Other regional organizations that are

within the CU territory are also resident, except those

whose membership of economies is not the same as, nor

a subset of, those in the CU. Such regional organiza-

tions should be regarded as nonresident of the CU.

Residence status of multiterritory enterprise

located in a CU (or EcUn)

A3.19 Union-wide incorporation for multiterritory

enterprises might create problems in determining the

residence of units and the allocation of activities across

member economies in which the company has opera-

tions, and so present difficulties for national statistics.

In some instances, the location of incorporation or reg-

istration may not be easily allocated to one specific

economy, if the jurisdiction that allows the creation

and regulates the entity is at the union level. However,

the attribution of residence of multiterritory enterprises

also arises in other circumstances, and so the treatment

described in paragraphs 4.41–4.44 should be applied to

multiterritory enterprises located in a CU (or EcUn).

In the case of a “dollarized economy,” the banknotes and coins

of legal tender should be considered foreign currency as stated in

paragraph 3.96.

Appendix 3 g Regional Arrangements

258

Institutional sector allocation

A3.20 The institutional sector (and, where relevant,

subsector) classification of regional organizations in

the CU or EcUn balance of payments and IIP that are

nonresident of member economies but resident of the

CU or EcUn should be decided on a case-by-case basis.

However, in the CU international accounts, the CUCB

should always be attributed to the central bank sector

and, for example, a regional investment bank could be

classified as a financial corporation.

Geographical allocation of stocks and flows

A3.21 The compilation of the balance of payments and

IIP statement of a CU or EcUn has implications for the

collection of data at the national level in that the issue of

geographical allocation of stocks and flows, not essential

for national data, becomes fundamental for the compila-

tion of a CU balance of payments and IIP. Compiling the

balance of payments and IIP of a CU from the simple

aggregation of national data would not be appropriate.

A3.22 Thereareseveralreasonsforthis.Thecom-here are several reasons for this. The com-

pilation of a CU balance of payments and IIP by the

simple addition of gross national data would unduly

inflate the gross flows and stocks of the CU because

these would also include transactions and positions

between CU members (“intra” transactions). The addi-

tion of only the net national transactions or positions of

the CU members would solve this problem, but would

provide only net aggregates, because only net balances

could be shown, without separating out debits from

credits in the current account and assets from liabilities

in the financial account. In addition,itisverylikely, it is very likely

that, in practice, intra transactions would not cancel out

entirely because of asymmetries in bilateral figures,

which would result in erroneous aggregate data.

A3.23 Therefore, the compilation of the balance of

payments and IIP of the CU is typically undertaken by

aggregating the national contributions for compiling the

transactions and positions of the CU with nonresidents

of the CU, the so-called extra-CU data. Given the aggre-

gation of data from different economies, it is essential

that the CU member economies consistently follow the

internationally agreed standards for the classification

of transactions and assets and liabilities, and provide

adequate metadata describing their methodology.

A3.24 Data on intra transactions and positions can

also be essential. An example is with portfolio invest-

ment, where liabilities vis-à-vis nonresidents of the CU

may need to be calculated as the difference between

total national securities liabilities to nonresidents and

the transactions and positions in these securities by res-

idents in the other CU economies. The reason for this

is that national balance of payments and IIP collection

systems may not be able to identify whether nonresi-

dent purchasers and owners of domestic securities are

resident of other economies of the CU, or not.

In such

instances, asymmetries in intra data would affect the

quality of balance of payments and IIP data of the CU.

A3.25 For direct investment, intra-CU transactions

between a parent company and a branch or subsidiary

located within different economies of the CU would

be classified as domestic transactions of the CU. Given

the different treatment of entities in a direct investment

relationship in the external and domestic accounts, close

cooperation among compilers may be required; for

example, reinvested earnings among entities in differ-

ent CU member economies are recorded as cross-border

transactions in national balance of payments, but are not

recorded as transactions in CU national accounts.

Geographic allocation of transactions in goods

(imports and exports)

A3.26 In balance of payments methodology, the

change of ownership is the principle determining the

coverage and time of recording of international trans-

actions. The consequence of applying the change-of-

ownership concept to merchandise trade is that goods

exports will be allocated to the region of residence of

the new owner and imports to the region of residence

of the former owner. However, international standards

for international merchandise trade statistics, as well as

customs returns in most economies, are based instead on

physical movements of goods across national or customs

frontiers, and the recording of these movements does not

necessarily coincide with changes in ownership.

A3.27 For the recording of goods in customs data,

three concepts are usually used: the economy of origin,

the economy of final destination, and the economy of

consignment (see paragraph 4.150). The concepts of

“economy of origin” (imports) and “economy of last

destination” (exports) are generally acceptable approxi-

mations to the change of ownership principle. However,

in the context of a CU or EcUn, where customs declara-

tions are in many cases completed in a third economy

For securities, the issuer may not know the identity or residence

of the creditor. Such information can be obtained only from the

intermediary or the creditor. Because of the importance of this infor-

mation, economies are increasingly developing reporting systems to

capture data on a debtor-creditor basis, often through cooperative

efforts, including the IMF’s Coordinated Portfolio Investment Sur-

vey and Coordinated Direct Investment Survey.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

259

(economy of consignment) that does not itself obtain

ownership of the goods, double recording of “extra”

trade flows is likely: first at the port of entry into the

CU or EcUn, second at the economy of final destina-

tion. In these circumstances, a combination of the three

concepts is necessary to arrive at a proper recording of

both extra- and intra-union trade. Box A3.1 provides a

numerical example.

A3.28 From a recording perspective, in CUs and

EcUns that still have internal customs border, reliance

on customs data, with economy of consignment data

as supplementary, is feasible. In CUs and EcUns with-

out national customs borders (the most likely situa-

tion), data on economy of origin, the economy of last

known destination, and the economy of consignment

are required from reporters.

Definition of reserve assets

A3.29 Reserve assets shown in the balance of pay-

ments and IIP of the CU should include only those

assets that (a) represent claims on nonresidents of the

CU and (b) meet the criteria described in Chapter 6.

Also, the definition of the reserve assets at the CU level

and at the member economy level should be the same;

in other words, with respect to national data, reserve

assets should include only those assets that qualify as

reserve assets at the CU level.

A3.30 Similarly, liabilities classified as reserve-

related liabilities in the national data should include

In the case of a dollarized economy, reserve assets shown in the

balance of payments and IIP should meet the criteria described in

Chapter 6, Functional Categories.

Appendix 3 g Regional Arrangements

To compile trade data, gross transactions of the

member economies with partner economies outside

the CU or EcUn area are aggregated. This approach

allows for a CU or EcUn’s balance of payments state-

ment to be compiled on a gross (credits and debits)

basis. This is evidenced in the example below, where

economy A is not a member of the union, and econo-

mies B and C are members of the union. Economy

A (economy of origin) exports goods to economy C

(economy of last known destination), and B is the

economy of consignment.

1. Use of economy of origin and economy of last known

destination:

Partner economy attribution

_________________________________

Reporting Extra-union

Intra-union

_____________________

economy Economy A Economy B Economy C

_____________________________________________________

Economy A records export: 10

Economy B records import: 10 export: 10

Economy C records import: 10

Union import: 20 export: 10

In this example, the compilation of trade data for

the union (economies B and C) leads to an overesti-

mation of imports (double counting of imports from

A) and also to an unbalanced intra-trade (export of

B to C, not recorded as an import by C). However, if

the union is without internal customs borders and the

goods are cleared on the external border of the union

and released into free circulation, then only the cus-

toms data of Economy B would record the transaction

(imports from A but not exports to C). Subsequent

dispatches and arrivals need to be collected through

enterprise surveys.

2. Use of economy of consignment:

Partner economy attribution

_________________________________

Reporting Extra-union

Intra-union

_____________________

economy Economy A Economy B Economy C

_____________________________________________________

Economy A records export: 10

Economy B records Import: 10 export: 10

Economy C records import: 10

Union Import: 10 import: 10 export: 10

If, instead, the concept of economy of consignment is

used, this results in an appropriate recording of extra-

union trade, but not a proper recording of intra-union

trade which is artificially inflated. In addition, in balance

of payments of member economies, the geographic allo-

cation of flows is inaccurate.

3. Combination of the two methods:

In this case, economies record goods transactions of

the economy of origin and the economy of last destina-

tion as imports/exports. Additionally, goods transactions

with intermediary economies are recorded as arrivals/

dispatches. Arrivals and dispatches can be disregarded

when compiling the extra-union transactions of the union.

Partner economy attribution

_________________________________

Reporting Extra-union

Intra-union

_____________________

economy Economy A Economy B Economy C

_____________________________________________________

Economy A records dispatch: 10 export: 10

Economy B records arrival: 10 dispatch:10

Economy C records import: 10 arrival: 10

Union import: 10

Therefore, only a combination of the two methods will

achieve a proper recording of trade flows.

Box A3.1. Recording of Trade Transactions in Currency and Economic Unions

260

only those liabilities that qualify as reserve-related

liabilities at the CU level.

2. Issues related to the operational aspects of

acurrencyunion

A3.31 Issues arise from the operational aspects of

the functioning of a CU that relate mostly to the attri-

bution of transactions and positions among member

economies and the CUCB, and do not affect the CU

balance of payments and IIP statements.

a. Treatment of national agencies in a

centralized currency union

A3.32 In a centralized CU, in each member econ-

omy the monetary authority functions are deemed to

be carried out by a national (resident) monetary author-

ity. Typically, the CUCB maintains national offices in

each member economy.

This institutional unit, called

“the national agency,” acts as the central bank for that

economy and must be treated for statistical purposes as

an institutional unit that is separate from the headquar-

ters of the CUCB.

A3.33 Transactions among resident units of the

same member economy settled through accounts at the

CUCB are not to be recorded in the national balance

of payments but attributed to the national agency as

domestic transactions and positions.

A3.34 Transactions with nonresidents settled

through the CUCB are to be recorded as transactions

of the national agency in the national balance of pay-

ments according to the nature of the transaction, with

the corresponding entry in the relevant financing item

attributed by the CUCB, such as reserve assets (to illus-

trate this, see numerical example at the end of this

appendix). As changes in reserve assets of a CUCB

in a centralized system for the most part reflect mem-

ber economies underlying external transactions, these

transactions and positions in reserve assets should con-

tinue to be shown in the balance of payments and IIP

of member economies.

A3.35 Transactions of residents with the CUCB,

where the CUCB is acting on its own account, should be

recorded in the national balance of payments according

to the nature of the transaction. For example, debt secu-

In rare occurrences where this is not the case, for statistical

purposes an institutional unit is to be created to record the central

bank transactions and positions with the residents of the economy

described in this section.

rities issued by the CUCB and subscribed by residents

of an economy of the CU are recorded as portfolio

investment in the national balance of payments.

A3.36 Transactions and positions of the CUCB with

nonresidents of the CU, where the CUCB is acting on

its own account, such as interest on the part of reserve

assets that are not allocated to any member economy

or bonds issued by the CUCB and subscribed by non-

residents of the CU, should not be recorded in any

national balance of payments of member economies but

are included in the balance of payments of the CU.

A3.37 Gross assets and liabilities of member

economies at the end of the period should reflect the

position at the beginning of the period together with

any transactions and other flows recorded during the

period between residents and nonresidents (including

the CUCB). Usually, the member economies will have

a net claim on the CUCB, which represents its share of

the reserve assets of the CUCB. However, if an econ-

omy has a net liability position, transactions in liabili-

ties, other investment, loans, central bank, short-term

(and in the memo item “reserve-related liabilities”),

rather than reserve assets, should be recorded because

the position has the nature of an overdraft.

A3.38 The above approach to recording these trans-

actions and positions reflects current practice in cen-

tralized CUs where a monetary survey is established in

each member economy. In compiling CU data, compil-

ers will need to ensure that assets and liabilities of the

CUCB are not double counted.

A3.39 Any assets held by the CUCB on behalf of

member economies, such as gold, reserve position at the

IMF and SDRs, and more generally foreign assets that

are assigned to member economies in the accounts of the

CUCB, are to be shown in the balance of payments and

IIP of the member economy. Any liabilities attributable to

the economy, such as use of IMF credit, are to be shown

in the balance of payments of the member economy.

b. Treatment of national agencies and reserve

assets in a decentralized currency union

A3.40 The methodology recommended for a cen-

tralized CU is de facto applied in the decentralized sys-

tem where, in each economy, monetary activities with

residents of the CU are carried out by national central

banks having their own assets and liabilities.

A3.41 Where reserve assets are held by the

CUNCBs (i.e., the assets are actually recorded on their

balance sheets), the institutional setting may in certain

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

261

circumstances result in some restrictions on the effec-

tive control over these assets by the CUNCBs. That is,

CUNCBs may be able to transact in some of the reserve

assets only with the agreement of the CUCB, such as

to ensure appropriate coordination of reserve activity

among CUNCBs. Provided there has been no trans-

fer of ownership to the CUCB and the foreign assets

owned by the CUNCBs can be mobilized by the CU

to meet balance of payments needs, that is, are reserve

assets of the CU, the CUNCB of the member economy

should classify them as reserve assets in their national

balance of payments and IIP, even though the CUNCB

may not have complete control of their use because of

operational constraint at the CU level.

c. Transactions and positions in banknotes

A3.42 For CU balance of payments and IIP statis-

tics, transactions and positions in banknotes should be

treated according to the same principles as for national

data, with nonresident purchases recorded as an increase

in external liabilities (credit) and the corresponding

entry, such as travel, recorded as appropriate. From

a national perspective, holdings of the CU banknotes

issued by a CUNCB in another member economy are

external assets at the same time, even though the cur-

rency is classified as a domestic currency.

A3.43 If the issuer of the banknotes can be identi-

fied, such as in the African and the Caribbean cur-

rency unions at the time of writing, the methodology

described in paragraph A3.42 above can be applied in

the national balance of payments and IIP data. However,

when the issuer of the banknotes cannot be identified,

such as presently in Europe where the banknotes are

collectively issued by the system without any indication

of the economy of origin, this methodology cannot be

strictly applied among the CU members, and approxi-

mations in national data are needed.

d. Other intra–currency union claims and

liabilities

Initial subscription of the CUCB’s capital

A3.44 Initial subscriptions to a CUCB’s capital are to

be recorded in the balance of payments and IIP of mem-

ber economies as assets, other investment, other equity.

All the member economies and the CUCB of a CU must

classify this transaction and position the same.

Initial transfer of reserve assets

A3.45 Claims arising from a transfer of reserve assets

to the CUCB are to be classified as assets, other invest-

ment, under either other equity or currency and deposits,

depending on the nature of the claim. If a CU member

does not fully meet its obligations to transfer reserve

assets to the CUCB, the CUCB reports a claim on the

member economy. Such claims on the member economy

should be classified in its balance of payments and IIP

as liabilities, other investment, other accounts payable–

other, central bank (or general government), short-term.

Intra-CUNCBs and CUCB balances

A3.46 Transactions and positions corresponding to

claims and liabilities among CUNCBs and the CUCB

(including those arising from settlement and clearing

arrangements) are to be recorded for the central bank

under other investment, currency and deposits or loans

(depending on the nature of the claim) in the balance of

payments and IIP of member economies. If changes in

these intra-CU claims and liabilities do not arise from

transactions, relevant entries are to be made under the

“other adjustment” column of the IIP. Remuneration of

these claims and liabilities is to be recorded in the balance

of payments of CU member economies as income on a

gross basis under investment income, other investment.

Allocation of seigniorage

A3.47 Seigniorage is monetary income accruing

from the issuance of currency. Reallocations of mone-

tary income among member economies and the CUCB

where no underlying asset and liability positions are

recognized are to be recorded as a current transfer.

Distribution of profits

A3.48 Distribution of profits of the CUCB should

be classified as income on the financial asset to which

member economies’ subscriptions are attributed.

C. Economic Unions

A3.49 For the purpose of macroeconomic coordina-

tion and cooperation, EcUns formulate specific data

requirements including for balance of payments sta-

tistics, which help assess aspects such as the degree of

integration of the EcUn internal market and share of

trade with economies outside the EcUn.

A3.50 At the EcUn level, the current account, the

capital account, and the direct investment account

are relevant for monitoring economic performance

of the EcUn. However, as different currencies con-

tinue to coexist, and the respective monetary authori-

ties set their monetary policy objectives in terms of

Appendix 3 g Regional Arrangements

262

developments of monetary variables, interest rates,

and exchange rates, the portfolio and other investment

categories are less meaningful at the EcUn level. For

instance, reserve assets of a union other than a CU are

the sum of the total of the national reserves (without

consolidation) and this total has no specific meaning

at the union level.

1. Definition issues

a. Definition of an economic union

A3.51 For statistical purposes, an EcUn is a union

to which two or more economies belong. EcUns are

established by means of an intergovernmental legal

agreement among sovereign countries or jurisdictions

with the intention of fostering greater economic inte-

gration. In an economic union some of the legal and

economic characteristics associated with a national

economic territory are shared among the different

countries or jurisdictions. These elements include (a)

the free movement of goods and services within the

EcUn and a common tax regime for imports from

non-EcUn economies (free trade zone); (b) the free

movement of finance within the EcUn; and (c) the free

movement of (individual and legal) persons within the

EcUn.

Also in an EcUn, specific regional organiza-

tions are created to support the functioning of the

EcUn under points (a) to (c). Some form of coopera-

tion and coordination in fiscal and monetary policy

usually exists within an EcUn.

b. Residence in an economic union

A3.52 The economic territory of an economic

union consists of the economic territory of the mem-

ber countries or jurisdictions, and the regional institu-

tions that comprise the same or a subset of the same

economies and are set up to manage the functioning

of the EcUn.

A3.53 So, being a resident of an economy of an

EcUn necessarily implies being a resident of the EcUn,

and regional organizations that are within the defini-

tion of the EcUn territory are also resident. However,

regional organizations whose membership of econo-

mies is not the same as, nor a subset of, those in the

EcUn should be regarded as nonresident of the EcUn.

As noted in Chapter 4, an economy, and by extension, an eco-

nomic union, can include physical or legal (special) zones to which,

to some extent, separate laws are applied.

2. Recording issues

A3.54 Because the compilation of EcUn balance

of payments statistics relies on national contributions,

as with the data for currency unions, it is essential

that the EcUn member economies consistently follow

internationally agreed standards for the classifica-

tion of transactions and assets and liabilities, and

provide adequate metadata describing their method-

ology. The discussion in paragraphs A3.27–A3.28 on

the geographic allocation of transactions in goods

also applies to EcUns.

D. Customs Arrangements

A3.55 Regional integration can take the form of

customs arrangements between several economies.

In general, these customs arrangements, based on a

common customs tariff vis-à-vis nonmember econ-

omies, do not raise specific balance of payments

issues. However, when customs unions generate

cross-border flows, such as through a revenue-shar-

ing formula, the recording of transactions and posi-

tions in the international accounts is affected by the

institutional and administrative arrangements of the

customs union.

A3.56 In customs unions such as the Southern Afri-

can Customs Union, there may be a cooperative approach

among members to levying, collecting, and distribut-

ing customs duties. How and when these functions are

undertaken is important for determining the appropriate

recording approach. One or all of these functions may be

assigned to one economy specifically, to all the member

economies collectively, or to a designated international

agency created by the members. Most important, econo-

mies in a customs union are encouraged to agree on

common, appropriate, statistical recording for the benefit

of regional consistency and comparability.

A3.57 The following paragraphs set out some of the

possible types of arrangments.

1. A designated agency levies, collects, and

distributes the proceeds from the duties

A3.58 In this scenario, the designated agency has

the right to levy and collect the customs duties, and

distribute the proceeds. If it is recognized as an insti-

tutional unit, in the international accounts the customs

duties are classified as its own tax revenue (primary

income), and recorded at the time the underlying

economic event occurs that gives rise to the customs

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

263

duties, along with an increase in financial assets (such

as cash received). The importing economy reports the

accrual of taxes (given that in the balance of payments

import taxes are payable by the importer) and a reduc-

tion in financial assets or increase in liabilities. If the

payment of customs duties occurs after the underly-

ing economic event, the designated agency records

an accounts receivable claim (debit) on the importer

in the importing economy, recorded in the financial

account. The importing economy records an accounts

payable liability (credit).

A3.59 If the designated agency is to distribute the

revenue pool to member economies on the basis of an

underlying economic event (import of goods), it records

a current transfer (debit) (member economies record a

current transfer (credit)) and accounts payable (credit)

(member economies, accounts receivable) at the time

the underlying economic event occurs, the size of which

depends on the nature of the revenue-sharing agreement.

However, if the distributions are made to an agreed

and negotiated formula, the current transfer should be

recorded at the time the member economy acquires an

unconditional claim on the designated agency.

At the

time of distribution, the designated agency extinguishes

the accounts payable (member economies extinguish the

accounts receivable), with a corresponding entry of a

reduction in foreign assets (member economies record

increase in foreign assets).

A3.60 The institutional unit could be an interna-

tional agency in which all the transactions described in

the previous paragraphs are between the international

agency and the member economies, or be a resident of

one member economy, in which case all the transac-

tions described in the previous paragraphs are between

that economy and all the other member economies.

2. A designated agency levies duties but

member economies collect duties

A3.61 In a variant, if member economies act as col-

lecting agents on behalf of the designated agency for the

customs duties from importers in their own economy, the

Sometimes, the revenue-sharing distributions are based on pre-

liminary estimates and require final adjustments to the distributed

revenue at a later stage. Such adjustments to the estimates of the dis-

tributed revenue should be recorded in the periods in which they are

made. So if the revenue to be received by an economy is increased,

a current transfer credit and accounts receivable debit (or cash if

paid when the adjustment is made) for the amount of the increase

is recorded in that period; if revenue to be received is reduced, a

current transfer debit and a negative accounts receivable (or cash if

repaid when the adjustment is made) are recorded in that period.

collecting member economy records an accounts payable

liability in the financial account (credit) to the designated

agency, which records an accounts receivable claim as the

customs duties accrue. The contra-entry will be reflected

as an increase in taxes (primary income) payable by the

importing economy and receivable by the designated

agency. When the member economy makes the payment

to the designated agency, the member economy will record

a reduction in cash, with a contra-entry in the financial

account to eliminate the accounts payable liability.

A3.62 If the collecting economy collects customs rev-

enue due from importers outside their own economy—

that is, it collects customs duties from importers in other

economies in the customs union—it records accounts

payable to the designated agency as well as an increase in

financial assets reflecting the cash received; the import-

ing economy records taxes payable to the designated

agency unit and a reduction in financial assets (increase

in foreign liabilities) to the collecting economy, reflect-

ing, say, the cash paid; and the designated agency records

taxes (primary income) from the importing economy

and account receivable from the collecting economy.

A3.63 Distributions of revenue by the designated

agency are treated as described in paragraph A3.59.

3. Member economies have collective rights to

levy and collect the duties

A3.64 If member economies have collective rights to

levy the customs duties under the agreement, the revenue

attributed to each member economy is either in propor-

tion to the respective underlying economic activity that

gives rise to the customs duties, or not. Each member

economy records customs duties due on their imports on

an accrual basis, regardless of how the revenue is to be

shared or where the customs duties are collected.

A3.65 Should the customs agreement provide for

any member economy to receive a larger share of the

customs pool than is evidenced by the underlying

economic activities, a current transfer element exists

between member economies. The current transfer

is recorded at the time unconditional claims are

established, with a corresponding entry in accounts

receivable/payable.

A3.66 It could be that the ports of entry for the

customs union are situated in one or a small group of

member economies. If so, there could be a discrepancy

between the revenue collected by a member state and that

member’s share of the customs pool. In these circum-

stances, an accounts receivable (importing economy) and

Appendix 3 g Regional Arrangements

264

accounts payable (collecting economy)

are recorded at

the time that such a claim can be established, with the

corresponding entry in a reduction in financial assets

of the importing economy and an increase in financial

assets for the economy that collects more customs rev-

enue than that member’s share of the customs pool. The

discrepancies between the customs revenue collected by

each of the customs union members and the total of each

member’s share of the customs pool share should sum to

zero across the customs union, as the customs revenue

collected by the customs union equals the revenue to be

shared out among member economies.

4. Member economies have collective rights

to levy the duty, but only one member

collects the duties

A3.67 If one of the member economies collects all

the customs revenue, the recording is as described in

the previous paragraphs. Only the collecting economy

will record accounts payable, as all other economies

will have claims on the collecting economy for their

share of the customs revenue.

A3.68 In all the above circumstances, where there

are economic arrangements involving a small group of

economies, to avoid bilateral asymmetries, it is recom-

mended that all the economies involved agree and fol-

low the same recording procedures.

E. Other Regional Statements

A3.69 Similar statements can be compiled on a

regional basis to show the CU’s or EcUn’s external

transactions with, or position vis-à-vis, another selected

group of economies or a particular economy. These are

known in the Manual as data by partner economy and

are covered in paragraphs 4.146–4.164.

1. Recording principles

a. General

A3.70 Concepts and recommendations noted in the

chapters of the Manual for compilation of balance of

payments and IIP statements also apply to regional

statements, but specific references to residents of the

relevant foreign economy or group of economies should

be substituted for the general references to nonresidents

Net recording of accounts payable or receivable might be appro-

priate when a member economy both is to receive more (less) of

the customs pool than is evidenced by the underlying economic

activities, and collects more (less) of the revenue than its share of

the revenue pool.

or the rest of the world. This substitution should be

made for all transactions and positions.

b. Current and capital accounts

A3.71 In the current account, as noted in previous

paragraphs, trade in goods—reflecting the change of

ownership principle associated with coverage of this

item—generally would show exports allocated to the

region of residence of the new owner and imports allo-

cated to the region of residence of the former owner.

For trade in services, allocation would be to the region

where the provider or acquirer of the service is resident

and, for income, the region on which the resident has

the associated financial claim or liability. For transfers

(current and capital), allocation would be to the region

of the donor or recipient, as appropriate.

c. Financial account and positions

A3.72 In the financial account and position data,

consistent with paragraph A3.4, allocation should be on

the basis of the debtor-creditor principle.

2. Specific recording issues

a. Multilateral settlements

A3.73 Although a balance of payments statement vis-

à-vis the rest of the world, whether for an economy or

for a CU or EcUn, should in concept balance, any state-

ment vis-à-vis a subset of nonresidents generally does

not. For instance, a resident in the compiling economy

may make payment to or accept payment from a non-

resident (resident of economy A) in the form of a claim

on another nonresident (resident of economy B). This

situation occurs when a currency is used in international

transactions by other economies for making settlements.

The discrepancies resulting from the allocation of trans-

actions in real resources to the region of the nonresident

owner or transactor and changes in financial items to the

region of the nonresident creditor or debtor, however, are

explicitly recognized by presenting a regional statement

compiled in that way. Thus, an entry is provided under

the item multilateral settlements to restore an accounting

balance by serving as an offset to the discrepancies in the

regional statement. That item may be seen to represent,

in concept, the settlement of an imbalance in the compil-

ing economy’s transactions with one region by a transfer

to or from that region of claims on, or liabilities to, some

other region or regions.

As noted above, information on the basis of the transactor prin-

ciple can also be of analytical interest.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

265

A3.74 The data needed to compile statistics on multi-

lateral settlements, however, are seldom available. In prac-

tice, therefore, the item is usually derived as a residual;

however, it can be calculated only in combination with the

item for net errors and omissions, which is also a residual

or balancing item. Inconsistencies or errors of this or any

other kind in classifying entries regionally should not have

any effect on a global statement, which represents the sum

total of all regional statements, because multilateral settle-

ments appearing in individual regional statements cancel

each other when all regions are combined.

b. Selection of regions

A3.75 Guidelines on residence in Chapter 4 are

applicable for determining the residence of the entity.

A region would then comprise an economic territory or

a group of economic territories, because the residence

of any entity is attributed to a specific economic terri-

tory. For transactions and positions vis-à-vis CUs and

EcUn, the territories are as defined above.

A3.76 Because most international organizations are

not included in the economic territory of a economy

or region and so are not considered resident in that

economy, a separate region for international organiza-

tions would be appropriate for allocation purposes. The

regional breakdown that will be relevant for a particu-

lar economy or group of economies depends primarily

on how the statement is to be used. The Manual does

not contain a standard list of economies or regions for

which the reporting economy or group should compile

separate statements.

Numerical Example: International

Transactions and Positions in the

National Data for a Member Economy

of a Centralized Currency Union

1. Opening period

Let us assume that A and B are the only members of

the CU and that the opening position is as follows:

The creation of a notional monetary authority

in each economy entails the attribution of domestic

assets (credit to governments and banks) and liabilities

(banknotes) to each economy as follows:

The CUCB has foreign assets of 500, which in this

instance are all reserve assets, the total reserves for

the union. In turn, the net claim

of the national mon-

etary authority on the CUCB represents the foreign

assets (again, all reserve assets in this instance) of the

economy: A and B have reserve assets of 300 and 200,

respectively.

In this example, it is assumed that the CUCB has no

assets and liabilities on “own account,” that is, no assets

or liabilities other than those that reflect positions with

the national economies.

During the periods 1, 2, and 3, the following opera-

tions take place:

Net is meant in terms of the difference between the assets and

liabilities.

CUCB Balance Sheet

Assets Liabilities

Foreign assets (reserve 500 Banknotes 1,600

assets)

Claims on CU residents 1,500 Deposits of CU banks 400

Total 2,000 Total 2,000

National Agency Balance Sheet

Economy A

Assets Liabilities

Net claim on CUCB 300 Banknotes 1,000

(reserve assets)

Domestic assets 950 Bank deposits 250

(residents of A) (residents of A)

Total 1,250 Total 1,250

National Agency Balance Sheet

Economy B

Assets Liabilities

Net claim on CUCB 200 Banknotes 600

(reserve assets)

Domestic assets 550 Bank deposits 150

(residents of B) (residents of B)

Total 750 Total 750

Appendix 3 g Regional Arrangements

266

2. Period 1

Economy A imports 100 of goods from Economy

Y (not a member of the CU), which are paid in

foreign exchange (U.S. dollars).

Typically, the resident of A will acquire the for-

eign currencies he needs from the CUCB, through his

domestic bank. The transactions are as follows:

• The bank account at the importer’s resident com-

mercial bank is debited (100) and the importer

acquires foreign currency (100).

• The commercial bank acquires foreign currency

from the CUCB (100) and the commercial bank’s

account at the CUCB is debited (from 250 to 150).

For statistical purposes, it will be assumed that the

national agency in economy A holds the account of

the commercial bank, and that in turn the national

agency acquires the foreign currency from the

CUCB.

• The CUCB draws down its reserve assets (from 500

to 400), and the account of the national agency is

debited in the books of the CUCB.

• Net claims of economy A on the CUCB decline

because of the debiting of the national agency’s

account. This decline in net claims reflects trans-

actions in reserve assets (from 300 to 200).

So under the proposed treatment, imports increase with

the corresponding entry in reserve assets. The balance

of payments transactions and the balance sheet of econ-

omy A would be as follows:

3. Period 2

Economy A exports the same goods to B for an

amount of 120 domestic currency.

The transaction is settled in domestic currency

through the banking system. The transactions are as

follows:

• The resident importer’s bank in B settles in domes-

tic currency with the exporter’s bank through its

accounts at the CUCB. So B’s commercial bank

account at the CUCB is debited (from 150 to 30),

while A’s commercial bank account is credited

(from 150 to 270). As in period 1, for statisti-

cal purposes, it is assumed that the accounts of

the commercial banks are held in their respective

national agencies.

• Net claims of economy A on the CUCB increase

(from 200 to 320) as a result of the crediting of

the national agency’s account and net claims of B

decline (from 200 to 80) as a result of the debiting

of the national agency’s account.

• The transaction is neutral for the CUCB as a

whole, but does affect the intra-CU composition

of net claims on the CUCB, which in this instance

is reflected in changes in reserve assets.

In the proposed treatment of the balance of payments of

A and B, the entries would be as follows:

Economy A Balance of Payments

Credit Debit

Current Account

Goods 100

Financial Account

Reserve assets 100

National Agency Balance Sheet

Economy A

Assets Liabilities

Net claim on CUCB 200 Banknotes 1,000

(reserve assets)

Domestic assets 950 Bank deposits 150

(residents of A) (residents of A)

Total 1,150 Total 1,150

Balance of Balance of

Payments Payments

Economy A Economy B

Credit Debit Credit Debit

Current Account

Goods 120 120

Financial Account

Reserve assets 120 120

National Agency Balance Sheet

Economy A

Assets Liabilities

Net claim on CUCB 320 Banknotes 1,000

(reserve assets)

Domestic assets 950 Bank deposits 270

(residents of A) (residents of A)

Total 1,270 Total 1,270

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

267

4. Period 3

Economy B exports the same goods to economy Z

(not a member of the CU) for the amount of 150.

The transaction is settled in foreign currency (U.S.

dollars).

• Then the resident of B sells the foreign exchange

receipts to his resident commercial bank in B and

his account is credited (150).

• The commercial bank sells foreign currency to the

CUCB (150) and the commercial bank’s account at

the CUCB is credited (from 30 to 180). As in peri-

ods 1 and 2, for statistical purposes, it is assumed

that the national agency holds the account of the

commercial bank.

• The CUCB increases its reserve assets (from 400

to 550), and the account of the national agency is

credited in the books of the CUCB.

• Net claims of economy B on the CUCB increase

as a result of the crediting of the national agency’s

account.

So, under the proposed treatment, exports increase with

the corresponding entry in reserve assets. The balance

of payments transactions and the balance sheet of econ-

omy B would be as follows:

5. Conclusion

At the end of period 3, the balance of payments of A

and B shows the following entries:

These transactions result in an increase of the reserve

assets of the CUCB of 50, and its balance sheet has

changed as follows:

As can be seen in this numeric example, the change

in reserve assets of the CUCB (+50) from the opening

period to the end of period 3 reflects only transac-

tions with nonresidents of the CU: import of goods of

100 from economy Y and export of goods of 150 to

economy Z.

Economy B Balance of Payments

Credit Debit

Current Account

Goods 150

Financial Account

Reserve assets 150

National Agency Balance Sheet

Economy B

Assets Liabilities

Net claim on CUCB 80 Banknotes 600

(reserve assets)

Domestic assets 550 Bank deposits 30

(residents of B) (residents of B)

Total 630 Total 630

National Agency Balance Sheet

Economy B

Assets Liabilities

Net claim on CUCB 230 Banknotes 600

(reserve assets)

Domestic assets 550 Bank deposits 180

(residents of B) (residents of B)

Total 780 Total 780

Economy A Economy B

Credit Debit Credit Debit

Current Account 120 100 150 120

Financial Account

Reserve assets 20 30

CUCB Balance Sheet

Assets Liabilities

Foreign assets 550 Banknotes 1,600

(reserve assets)

Claims on CU residents 1,500 Deposits of CU banks 450

Total 2,050 Total 2,050

Appendix 3 g Regional Arrangements

268

National Agency Balance Sheet National Agency Balance Sheet

Economy A Economy B

Assets Liabilities Assets Liabilities

Net claim on CUCB 320 Banknotes 1000 Net claim on CUCB 230 Banknotes 600

(reserve assets) (reserve assets)

Domestic assets 950 Bank deposits 270 Domestic assets 550 Bank deposits 180

(residents of A) (residents of A) (residents of B) (residents of B)

Total 1,270 Total 1,270 Total 780 Total 780

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

269

APPENDIX

Statistics on the Activities of

Multinational Enterprises

A. Introduction

References:

Eurostat, Recommendations Manual on the Production

of Foreign AffiliaTes Statistics.

Organization for Economic Cooperation and Develop-

ment (OECD), OECD Benchmark Definition of

Foreign Direct Investment (fourth edition), Chap-

ter 8, FDI and Globalisation.

OECD, OECD Handbook on Economic Globalisation

Indicators, Chapter 3, The Economic Activity of

Multinational Enterprises.

United Nations, Manual on Statistics of International

Trade in Services, Chapter IV, Foreign Affiliates

Statistics and the International Supply of Services.

A4.1 In addition to the statistics on direct investment

(DI) described in this Manual, information on foreign-

controlled enterprises is provided through statistics on

the Activities of Multinational Enterprises (AMNE sta-

tistics) and the closely related Foreign AffiliaTes Statis-

tics (FATS). AMNE statistics cover a range of variables

on these direct investment enterprises, described below.

This wider dataset is compiled separately from balance

of payments and international investment position sta-

tistics (although the data may be collected in the frame-

work of DI compilation), as the data relate to the overall

holdings and activities of direct investment enterprises

rather than just positions and transactions by them with

related enterprises. That is, the objective of AMNE

statistics is to provide an additional perspective on the

impact of direct investment that is complementary to

data on international flows and positions. This appen-

dix is designed to give an overview of the nature and

compilation of AMNE statistics for the information of

balance of payments compilers and users who may be

considering this extended range of information.

A4.2 AMNE statistics may be produced for both

foreign-controlled enterprises in the compiling econ-

omy (a subset of inward foreign direct investment; so

called “inward AMNE”) and foreign affiliates con-

trolled by the compiling economy (a subset of outward

foreign direct investment; so called “outward AMNE”).

In addition, outward AMNE also may cover the activi-

ties of resident direct investors.

A4.3 AMNE statistics can be important for the anal-

ysis of the performance of domestically and foreign-

controlled enterprises, both in absolute terms and rela-

tive to the larger domestic and foreign universes of enter-

prises. Direct investment enterprises may be involved in

activities such as research and development that benefit

the domestic economy but may not be recorded as bal-

ance of payments transactions. Also, data on transactions

in goods and services (with both residents and nonresi-

dents) can provide an additional perspective to balance

of payments data, as transactions by direct investment

enterprises with unrelated persons could be significant.

A4.4 When the General Agreement on Trade in Ser-

vices (GATS) was negotiated, four modes of supplying

services were identified.

One of these is mode 3, the

supply of services through commercial presence, i.e.,

direct investment. AMNE statistics for enterprises that

produce services provide information that allows for

the negotiation and monitoring of GATS agreements

and other trade agreements. However, AMNE statistics

are not limited to suppliers of services, and also cover

manufacturing, mining, and other activities.

A4.5 Detailed discussion and recommendations

for measuring AMNE and for FATS is found in the

Manual on Statistics of International Trade in Services

(Chapter IV, Foreign Affiliates Trade in Services Sta-

tistics),

in the OECD Handbook on Economic Glo-

For a discussion on GATS and modes of supply, refer to the

Manual on Statistics of International Trade in Services (Chapter V

Modes of Supply).

MSITS focuses on foreign affiliates producing services, but

notes that most of its recommendations (all other than those related

to industry/product groupings) for compiling these statistics are

equally applicable to goods and services.

270

balisation Indicators, and in the fourth edition of the

OECD Benchmark Definition of Foreign Direct Invest-

ment, Chapter 8, FDI and Globalization. A summary is

provided here.

B. Coverage

1. Universe or population

A4.6 AMNE statistics cover those direct invest-

ment enterprises in which the direct investor (or a

group of investors in combination) directly or indi-

rectly holds or controls a majority of the voting

power (i.e., subsidiaries). This differs from the scope

of direct investment enterprises due to the exclu-

sion of associates. These statistics follow the defini-

tion of direct investment discussed in this Manual

(paragraphs 6.8–6.24)

in that coverage is defined as

those enterprises with majority foreign ownership of

the voting power by a single investor or a group of

investors acting together; only those enterprises with

foreign control are covered.

A4.7 Countries that are able to do so may wish to

provide supplemental statistics covering cases in which

foreign control may be deemed to be present, even

though no single foreign direct investor holds a major-

ity stake.

2. Economic variables for AMNE statistics

A4.8 Basic variables of substantial interest may

include: sales (turnover) and/or output; employment;

value added; exports and imports of goods and ser-

vices; and number of enterprises.

A4.9 Other variables that might be collected to sup-

plement these data include: assets (both financial and

nonfinancial); compensation of employees; net worth;

net operating surplus; gross fixed capital formation;

taxes on income; research and development expendi-

tures; total purchases of goods and services; and intra-

group exports and imports.

A4.10 The definitions of these variables are given

in the 2008 SNA and in the documents referenced

above. It is also useful to have data for the total popu-

lation or for the domestically-controlled enterprises

on the same basis as AMNE statistics on inward DI,

so performance can be compared with foreign-con-

trolled enterprises.

And the OECD Benchmark Definition of Foreign Direct Invest-

ment (fourth edition) (BD4).

C. Statistical Units

A4.11 In principle, most AMNE statistics could be

collected at the enterprise group or enterprise level, or the

level of individual business locations or establishments.

Some indicators, such as total assets, are more naturally

collected from enterprise groups or enterprises than from

establishments. DI statistics are usually collected from

enterprise groups or enterprises, so collection of AMNE

statistics at this same level facilitates linkages between

the two types of data. However, because enterprise groups

and enterprises are more likely than establishments to

have activities in multiple industries, data that are classi-

fied on the basis of primary activity can be more difficult

to interpret for enterprise groups and enterprises than for

establishments. There are thus advantages and disadvan-

tages associated with every basis of collection, and no

recommendation is made as to the appropriate statistical

collection unit. AMNE statistics often will be developed

in the context of existing statistical systems, in which the

statistical units are already defined, and in these cases

there may be little choice in the units used.

D. Time of Recording and Valuation

A4.12 Time of recording and valuation are consis-

tent with the Manual. Flow variables, such as output

or value added, should cover the whole of the reference

period (usually a year), and should be measured on an

accruals basis. Stock variables, such as assets and net

worth, should be as at the end of the reference period.

All transactions and position variables in principle

should be measured at market value.

E. Attribution of AMNE Variables

1. Geographic

A4.13 For statistics on foreign-controlled enterprises

in the compiling economy (inward AMNE statistics), the

geographical attribution should be by the economy of the

ultimate controlling investor. However, to facilitate links

with DI data, compilers are encouraged also to provide

some data in which attribution is based on the economy

of the immediate investor (that is, the first foreign par-

ent). Statistics for foreign enterprises controlled by inves-

tors resident in the compiling economy (outward AMNE

statistics) should be attributed based on the location of

the enterprises whose activities are being described.

2. By activity and by product

A4.14 Ideally, all AMNE variables should be attrib-

uted on the basis of the industrial activities of the estab-

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

271

lishment or enterprise, according to the United Nations

International Standard Industrial Classification of All

Economic Activities (ISIC).

A4.15 In addition, particular variables such as sales

or output, exports, and imports may be attributed by the

types of products produced and sold. Data on a product

basis would identify the specific types of goods and

services delivered through foreign-controlled enter-

prises and could most readily be compared with data

on goods and services delivered through trade between

residents and nonresidents, and to domestic produc-

tion. However, some variables, such as value added

and employment, do not readily lend themselves to a

product classification.

A4.16 As a longer-term goal, compilers are encour-

aged to work toward disaggregating by product some

or all of the variables that lend themselves to this

basis of attribution (such as sales (turnover) or out-

put, exports, and imports). Product-based statistics are

free of problems of interpretation related to secondary

activities and are consistent with the basis of clas-

sification used for trade in goods and services in the

balance of payments.

F. Compilation Issues

A4.17 There are two basic approaches, not nec-

essarily mutually exclusive, to developing AMNE

statistics. The first is to conduct surveys that directly

request information on the operations of the covered

enterprises (appropriate for both inward and outward

AMNE statistics). The second identifies the subset

of existing domestic enterprise data that is accounted

for by foreign-owned firms (for inward AMNE sta-

tistics only). DI registers may be used in either case

to identify the units to be covered (as well as the

economy of attribution, in the case of inward AMNE

statistics).

A4.18 For both inward and outward AMNE statis-

tics, questions about key AMNE variables might be

added to existing surveys of direct investment transac-

tions and positions. However, because DI surveys may

be conducted more frequently than AMNE statistics

are required (for example, quarterly rather than annu-

ally) and require a quick turnaround, and also because

AMNE statistics are needed for only the controlled

portion of the DI universe, separate surveys may be a

more appropriate way to proceed.

A4.19 For inward AMNE statistics, it should be pos-

sible to link the DI statistics to the existing domestic eco-

nomic statistics (for example, as collected for national

accounts purposes) through the use of information on

ownership structure to identify those resident enterprises

that are foreign-controlled, as well as identifying the res-

idence of the owner. AMNE statistics would be obtained

as an aggregation of statistical variables across the for-

eign-controlled statistical population.

A4.20 Additional questions may have to be added

to DI surveys if information on the ultimate controlling

parent is to be obtained.

Appendix 4 g Statistics on the Activities of Multinational Enterprises

272

APPENDIX

Remittances

A. Economic Concept of Remittances

and Why They Are Important

A5.1 Remittances represent household income from

foreign economies arising mainly from the temporary

or permanent movement of people to those economies.

Remittances include cash and noncash items that flow

through formal channels, such as via electronic wire,

or through informal channels, such as money or goods

carried across borders. They largely consist of funds

and noncash items sent or given by individuals who

have migrated to a new economy and become residents

there, and the net compensation of border, seasonal,

or other short-term workers who are employed in an

economy in which they are not resident.

A5.2 For many economies, remittances represent

a sizable and stable source of funds that sometimes

exceed official aid or financial inflows from foreign

direct investment. Remittances may have a significant

impact on poverty reduction and can finance economic

growth in receiving economies.

A5.3 The Manual identifies standard components

and provides supplementary items to allow compilation

of remittance aggregates. No single data item in the bal-

ance of payments framework comprehensively captures

transactions in remittances. This appendix explains the

different items needed to calculate remittance aggregates

and the relationships between the different aggregates.

A5.4 Remittances are mainly derived from two

items in the balance of payments framework: income

earned by workers in economies where they are not

resident (or from nonresident employers) and transfers

from residents of one economy to residents of another.

The definitions of those items, as well as other relevant

The balance of payments accounts definitions of remittances are

somewhat broader than those resulting from movement of persons,

because they are not based on the concepts of migration, employ-

ment, or family relationships.

definitions and concepts, are set out below. The stan-

dard components related to remittances are discussed

in Section B, and supplementary items are covered in

Section C. Section D identifies related data series that

are often raised in the context of remittances but are not

included in the definitions as such. Section E discusses

the application of balance of payments concepts on

remittances, and Section F considers data by partner

economy. Table A5.1 shows components required for

compiling remittance items and their source. Table A5.2

shows the relationship between the different items.

B. Standard Components in the

Balance of Payments Framework

Related to Remittances

Reference:

IMF, 2009, International Transactions in Remittances:

Guide for Compilers and Users.

A5.5 The two items in the balance of payments

framework that substantially relate to remittances are

“compensation of employees” and “personal transfers.”

Both of these standard components are recorded in the

current account.

1. Compensation of employees

A5.6 Compensation of employees refers to the

income of border, seasonal, and other short-term work-

ers who are employed in an economy where they are

not resident and of residents employed by nonresident

entities.

Compensation of employees represents “remu-

neration in return for the labor input to the production

process contributed by an individual in an employer-

Nonresident employers include embassies and international insti-

tutions as well as nonresident companies (paragraphs 4.131–4.134).

In some economies, income obtained from nonresident employers

is significant.

273

employee relationship with the enterprise.” Compensa-

tion of employees is recorded gross, before taxes and

other expenses incurred in the economy where the work

is performed. Paragraphs 11.10–11.23 provide more

details. (However, in the derivation of personal remit-

tances, a net measure of compensation of employees is

derived, as discussed in paragraph A5.12.)

2. Personal transfers

A5.7 Personal transfers consist of all current

transfers in cash or in kind made or received by resi-

dent households to or from nonresident households.

Personal transfers thus include all current transfers

between resident and nonresident individuals (para-

graph 12.21). Therefore, personal transfers are a subset

of current transfers. They cover all current transfers

that are sent by individuals to individuals.

A5.8 “Personal transfers” replaces an item called

“workers’ remittances” in the standard presentation.

Families may provide financial support to relatives who are

located but not resident in another economy, such as families sup-

porting relatives who are students or medical patients abroad. Such

transactions involve residents of the same economy and are there-

fore not included in personal transfers. The spending of the relative

abroad will be included in travel.

According to BPM5, workers’ remittances are current

transfers by migrants who are employed in new econo-

mies and considered residents there. To ensure consis-

tency of time series, workers’ remittances are continued

as a supplementary item. Unlike this previous item, per-

sonal transfers are defined independently of the source

of income of the sending household, the relationship

between the households, and the purpose for which the

transfer is made. This simplifies the definition and brings

it in line with compilation practices applied in many

economies (which did not take account of factors such

as source of income and purpose). So, although it is rec-

ognized that personal transfers will often originate from

migrants sending resources to support their relatives in

their economy of origin, personal transfers as defined in

this Manual are not limited to such activity.

C. Supplementary Items Related to

Remittances

A5.9 There are several supplementary data items

in the international accounts including personal remit-

tances, total remittances, and total remittances and

transfers to nonprofit institutions serving households

(NPISHs). They are cumulative measures, as illustrated

Appendix 5 g Remittances

Table A5.1. Components Required for Compiling Remittance Items and Their Source

Item Source and description

1. Compensation of employees Primary income account, standard component

2. Personal transfers Secondary income account, standard component

3. Travel and transport related to employment of border, Goods and services account, supplementary item

seasonal, and other short-term workers

4. Taxes and social contributions related to employment of Secondary income account, supplementary item

border, seasonal, and other short-term workers

5. Compensation of employees less expenses related to Primary income account (for compensation of employees),

border, seasonal, and other short-term workers standard component

Goods and services account (for travel and transport expenses)

and secondary income account (for taxes and social contributions),

supplementary items

6. Capital transfers between households Capital account, supplementary item

7. Social benefits Secondary income account, supplementary item

8. Current transfers to NPISHs Secondary income account, supplementary item

9. Capital transfers to NPISHs Capital account, supplementary item

Important relationships are:

“Net” compensation of employees (#5): #1 minus the sum of #3 and #4

Personal remittances: #2 plus #5 plus #6

Total remittances: #2 plus #5 plus #6 plus #7

Total remittances plus transfers to NPISHs: #2 plus #5 plus #6 plus #7 plus #8 plus #9.

274

in Table A5.2. As supplementary items, their compi-

lation and dissemination is encouraged but voluntary,

depending on the data needs of the compiling economy.

1. Personal remittances

A5.10 Personal remittances are defined as current

and capital transfers in cash or in kind between resident

households and nonresident households, plus compen-

sation of employees, less taxes and social contributions

paid by nonresident workers in the economy of employ-

ment, less transport and travel expenditures related to

working abroad (paragraph 12.27). In short, this item

includes all household-to-household transfers and the

net earnings of nonresident workers.

A5.11 Household-to-household transfers are included

within current or capital transfers, as appropriate, in

the balance of payments accounts. Compilers in both

economies are required to be aware of the sector of the

transacting party on both sides. Personal transfers are

a standard item under current transfers, while capital

transfers between households are a supplementary item

in the capital account.

A5.12 The gross earnings of nonresident workers are

recorded under “compensation of employees,” a stan-

dard component. To derive the relevant component for

the calculation of personal remittances, compensation

is adjusted by deducting taxes, social contributions, and

transport and travel of border, seasonal, and other short-

term workers outside their economy of residence. The

three items that are deducted are all supplementary items

in the balance of payments framework. Social contribu-

tions are defined as “the actual or imputed contribu-

tions made by households to social insurance schemes to

make provision for social benefits to be paid” (paragraph

12.32). Compensation of employees is considered part of

personal remittances because it refers to the earnings of

geographically mobile workers and benefits households

in a territory other than that where the work is performed.

Data users are not always concerned with the length of

stay of a migrant worker (which defines residence), but

instead with all earnings of migrant workers that benefit

their economies of origin, regardless of their residence

status in the host economy.

A5.13 It should be noted that “personal remittances”

also include transfers originating from individuals who

are not migrant workers. On the other hand, the earn-

ings of individuals from the provision of services to

another economy are not included. Paragraph 11.13

provides the definition of an employer-employee rela-

tionship which clarifies the difference between “com-

pensation of employees” and payments for services.

2. Total remittances

A5.14 Total remittances are the sum of personal

remittances and social benefits. Social benefits include

“benefits payable under social security funds and pen-

sion funds. They may be in cash or in kind” (paragraph

12.40). Total remittances include income from individ-

uals working abroad for short periods, from individuals

residing abroad and sending transfers, and social ben-

efits from abroad. Social benefits is a supplementary

item in the balance of payments framework within sec-

ondary income. Total remittances are a supplementary

item in the balance of payments statement.

3. Total remittances and transfers to NPISHs

A5.15 This item includes total remittances and both

current and capital transfers to NPISHs from any sector

of the sending economy. It therefore includes donations,

in cash or kind, from government and enterprise sectors

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table A5.2. Tabular Presentation of the Definitions of Remittances

Total Remittances and Transfers to NPISHs: a+b+c+d+e+f

Total Remittances: a+b+c+d ef

__________________________________________________________________________

Personal Remittances: a+b+c d

____________________________________________________________

abc

Personal transfers (part Compensation of Capital transfers Social benefits Current transfers Capital transfers

of current transfers) employees less taxes, between households to NPISHs to NPISHs

social contributions,

transport, and travel

Note: Personal transfers is a standard item; other items are supplementary.

275

to charitable organizations in another economy. There-

fore it has a very wide definition that is not closely

linked to migration. In fact, much private and official

aid as well as cross-border sponsorship of educational

and cultural activities (including scholarships) will be

included in this item. Current transfers received by

NPISHs and to NPISHs are supplementary items under

secondary income, whereas capital transfers received

by NPISHs and to NPISHs are supplementary items

under the capital account.

A5.16 The identification of NPISHs is not without

problems. Whereas NPISHs are part of the wider house-

hold sector, nonprofit institutions serving other sectors

are not. Although compilers will be able to appropri-

ately identify the NPISHs resident in their economy,

they will find it more problematic to identify NPISHs

in partner economies. This makes the compilation of

debit transactions of “total remittances and transfers to

NPISHs” particularly challenging because the defini-

tion is partially based on identifying the sector of the

transacting party in the partner economy. “Total remit-

tances and transfers to NPISHs” is a supplementary

item in the balance of payments statement.

D. Related Data Series

1. Investment by migrants

A5.17 Migrants frequently invest in their economy

of origin, whether they intend to return or have left per-

manently.

Sometimes the attachment to the economy of

origin, and the willingness to invest there, carries over

to subsequent generations of the migrants. Such invest-

ments can take numerous forms, but financial invest-

ments (notably bank deposits and portfolio investment)

and investments in real estate are probably most com-

mon. Small enterprises, located in the economy of origin

and sometimes managed by relatives, can also benefit

from investments by migrants. These transactions are

considered cross-border investments and are therefore

Of the new supplementary remittance aggregates in the inter-

national accounts, some data users consider “total remittances and

transfers to NPISHs” to most closely match the economic concept

of remittances (see Section A). This measure is broader than the

other remittance aggregates, because it includes current and capital

transfers to NPISHs from any sector of the sending economy (house-

holds, corporations, governments, and nonprofit institutions). Thus,

unlike the other supplementary remittance aggregates, it includes

funds and noncash items that flow indirectly to households, through

nonprofit institutions.

In this appendix, the term “migrant” refers to a person who

emigrates from an economy of origin and becomes a resident in

another economy.

included in the financial account. Although these invest-

ment flows are of analytical interest in the context of the

economic effects of migration, they are not remittances

in the balance of payments framework.

A5.18 However, in some cases, investment transac-

tions by migrants may be vehicles for the provision

of remittances. When a migrant deposits funds in an

account in the economy of origin, and relatives have

access to these funds, this can be a personal transfer.

For joint accounts a transfer can be recorded when

the funds move across borders rather than when they

are withdrawn (see paragraph 4.145). When a migrant

purchases real estate and relatives occupy it without

paying market rents, or when a migrant sets up an

enterprise and relatives are employed and paid above-

market incomes by this enterprise, personal transfers

could be imputed. In the individual case, the value

of the transfers would be calculated as the difference

between actual transactions and market equivalent val-

ues. In practice, it is difficult to identify such transfers

and calculate their value. If larger patterns are known

to compilers—if, for example, there are large numbers

of migrants buying real estate for use by their relatives

in the home economy—estimates can be made on the

basis of aggregate transactions data and benchmarks.

2. Travel

A5.19 Travel refers to the acquisition of goods and

services in an economy by individuals who are visit-

ing but not resident in that economy. Acquisitions of

goods and services by border, seasonal, and other short-

term workers in their economy of employment are also

included in travel (paragraph 10.89). But travel excludes

the acquisition of valuables, consumer durables, and

other consumer purchases that are included in general

merchandise (paragraph 10.90). The compilation of

the supplementary definitions of remittances requires

that the travel expenses of border, seasonal, and other

short-term workers are subtracted from compensation

of employees. In practice, it may be difficult to separate

travel related to employment from all other travel.

E. Concepts

1. Residence

A5.20 The balance of payments and national accounts

frameworks rest on the identification of residents and

nonresidents respective to each reporting economy.

Because the concepts of personal transfers and remit-

tances are based on the concept of residence rather than

Appendix 5 g Remittances

276

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

migration status, the concept of migration is not defined

in the balance of payments. This is consistent with the

use of residence criteria elsewhere in the balance of pay-

ments and national accounts frameworks.

A5.21 The residence of households is determined

according to the center of predominant economic

interest of its members. The general guideline for

applying this principle—being present for one year

or more in a territory or intending to do so—is suf-

ficient to qualify as being a resident of that economy

(paragraph 4.117). Short trips to other economies—

for recreation or work—do not lead to a change of

residence, but going abroad with the intention of

staying one year or longer does. “If a member of

an existing household ceases to reside in the terri-

tory where this household is resident, the individual

ceases to be a member of that household” (para-

graph 4.118). Migrants going abroad to work thus

become residents of the host economy (assuming they

plan to stay for a year or longer), but they can join

their original household on return. In addition, there

are guidelines for the residence of specific cases of

students, medical patients, and ships’ crews as well

as diplomats, military personnel, and civil servants

employed abroad in government enclaves. Regardless

of the length of stay in a host economy, these groups

are considered residents of the originating economy

(see paragraphs 4.120–4.123).

A5.22 Residence is important for remittance data

because transactions are recorded differently depend-

ing on the residence status of the individual in his or

her host economy. Border, seasonal, and other short-

term workers are not resident in the economy where

they work and their gross income is recorded as “com-

pensation of employees.” There are no entries in the

balance of payments for the wages of migrant workers

who stay for at least a year and thus are residents of the

same economy as their employer (assuming that their

employer is a resident entity). However, when they send

remittances to a household in another economy, these

are recorded as “personal transfers.”

A5.23 In many cases, it is assumed that the entities

employing workers are resident in the economy where

the work is performed. However, nonresident employ-

ers can have a substantial impact on remittance data.

Nonresident employers include embassies and other

diplomatic missions, international organizations, and

numerous enterprises (see paragraphs 4.131–4.144).

When resident workers work for nonresident employers,

their wages and other benefits are recorded as “compen-

sation of employees.”

A5.24 In addition to current and capital transfers,

some other resource flows may be of analytical inter-

est. While migrant workers reside in a host economy,

their remittances will be recorded as current or capital

transfers. These include gifts in cash and kind to their

household of origin. When returning home to reside,

many migrants bring goods or own assets that will, on

return, be owned by their household of origin. How-

ever, assets that migrants bring with them on return are

excluded from balance of payments transactions, and

so are not transfers. Rather, because the residence of

the owner changes but not the ownership, the change

in assets (such as bank balances and real estate owner-

ship) between economies is recorded as a reclassifica-

tion change, not a transaction.

A5.25 Although the distinction between a transac-

tion and a reclassification of residence is important

for the structure of the system, the effect on the asset

position of households and economies is much the

same whether the resources come through remittances

or through migrants returning home. Data users who

are interested in understanding all contributions that

migrant workers may make to their households and

economies of origin should note this potential mis-

alignment of their data needs and balance of payments

definitions, and should seek to make appropriate addi-

tional estimations.

2. Valuation

A5.26 All valuations in the balance of payments frame-

work are based on market values (paragraph 3.68).

A5.27 Compensation of employees comprises wages

and salaries in cash, wages and salaries in kind, and

employers’ social contributions. Also included are all

forms of bonuses and allowances (paragraphs 11.18–

11.19). All transactions in kind should be valued at cur-

rent market prices, that is, the current exchange value.

A5.28 Transfers in kind should be valued at the

market value of the goods or services provided to the

recipient (see paragraphs 3.71–3.72). The valuation of

cash transfers is clear while transfers of other financial

assets should be recorded at market value.

3. Timing

A5.29 Compensation of employees is recorded on

an accrual basis (paragraph 11.16). Transfers are also

recorded on an accrual basis (discussed in paragraph

3.50). In the case of voluntary transfers, accrual and

settlement are often identical (paragraph 3.52 pro-

277

vides details on the time of recording of transfers).

However, this is not the case with involuntary trans-

fers (such as taxes or alimony) and they should in

principle be recorded when accrued, although this

can be difficult in practice. Remittances are mostly

voluntary transfers.

F. Data by Partner Economy

A5.30 Reporting of remittance flows to and from

major partner economies in balance of payments data

may be provided on a supplementary basis, especially

for major “corridors.”

Appendix 5 g Remittances

278

APPENDIX

Topical Summa r y —

Direct Investment

A. Purpose of Topical Summaries

A6a.1 Appendixes 6a–6c bring together topics that

cut across different chapters. They seek to give an over-

view of these topics, in contrast to the main part of

the Manual, which is organized according to accounts

rather than topics. These appendices are designed in a

“signpost” style—that is, they give only a brief intro-

duction and give references as to where more informa-

tion is available in the chapters, rather than duplicate

that information.

B. Overview of Direct Investment

Reference:

OECD Benchmark Definition of Foreign Direct Invest-

ment, fourth edition.

A6a.2 Direct investment arises when an investor

resident in one economy makes an investment that

gives control or a significant degree of influence on the

management of an enterprise that is resident in another

economy. Direct investment refers to the flows and

positions that arise between parties in a direct invest-

ment relationship.

A6a.3 In operational terms, a direct investment rela-

tionship is defined as arising when an entity has equity

that gives it voting power of 10 percent or more in the

enterprise (paragraph 6.12). The definition also spells

out how control or a significant degree of influence

may be achieved by immediate ownership or indirect

ownership, by a chain of ownership of enterprises that

in turn own other enterprises (paragraph 6.12).

A6a.4 Direct investment relationships and associ-

ated concepts are defined in paragraphs 6.8–6.24. More

details are available in the Framework for Direct Invest-

ment relationships in the OECD Benchmark Definition

of Foreign Direct Investment. Some important terms

are defined briefly in Box A6a.1.

A6a.5 Whereas a direct investment relationship is

defined in terms of voting power, most flows and posi-

tions between the entities, including loans and trade

credit, are classified as direct investment (paragraphs

6.25–6.36). The only financial flows and positions

excluded are debt between selected affiliated financial

corporations and financial derivatives (paragraphs 6.28–

6.29). Debt included in direct investment is called “inter-

company lending” (paragraph 6.26). “Funds in transit”

or “pass-through funds” refer to funds that pass through

an enterprise in one economy to other affiliates, with

the funds not staying in that economy. Unless classified

as debt between affiliated financial intermediaries, such

debt is included in direct investment data but may be

identified separately (paragraphs 6.33–6.34).

A6a.6 The typical direction of direct investment is

from the direct investor to its direct investment enter-

prise. However, there may also be flows in the reverse

direction, and between fellow enterprises, as discussed

in paragraphs 6.39–6.41. Whereas the primary presen-

tation of data in this Manual is according to whether

the item relates to an asset or liability, an alternative

presentation called the directional principle, based on

the direction of the direct investment relationship, can

be derived from the components and is of analytical

interest—see paragraphs 6.42–6.45 and Box 6.4.

A6a.7 Issues associated with direct investment posi-

tions are discussed in paragraphs 7.14–7.25. Valuation

of equity not listed on a market is discussed in para-

graphs 7.15–7.19. Entities that borrow on behalf of their

affiliates are discussed in paragraphs 7.20–7.22.

A6a.8 Issues associated with financial account trans-

actions in direct investment are discussed in Chapter 8.

Reinvestment of earnings is the corresponding entry to

reinvested earnings in the primary income account, and

is discussed in paragraphs 8.15–8.16. The possibility of

imputed direct investment flows arising from goods,

services, or other items supplied above or below value

or with no payment is discussed in paragraph 8.17. Cor-

279

porate inversion and other restructuring are discussed

in paragraphs 8.19–8.22.

A6a.9 Issues associated with income on direct invest-

ment are discussed in Chapter 11. Reinvested earnings

are discussed in paragraphs 11.33–11.36, 11.40–11.47,

and 11.96–11.102.

A6a.10 In addition, the general accounting princi-

ples, issues of units and residence, and classification

of instruments are also applicable to direct investment.

They are dealt with in Chapters 3, 4, and 5 respectively.

The case of transfer pricing between affiliated enter-

prises is discussed in paragraphs 3.77–3.78.

A6a.11 The identification of institutional units in

the case of branches; notional resident units for own-

ership of land, other natural resources, or buildings;

multiterritory enterprises; joint ventures; quasicor-

porations identified prior to incorporation; trusts;

and special purpose entities are dealt with in para-

graphs 4.26–4.52 and pertain particularly to direct

investment.

A6a.12 Standard components and selected supple-

mentary items are shown in Appendix 9. Because of

interest in different types of direct investment, addi-

tional breakdowns could be provided on a supplemen-

tary basis for components of particular relevance to an

economy. Examples include partner data, mergers and

acquisitions, funds in transit, industry data, and private

equity. Industry classification is discussed in paragraph

6.50. Identification of mergers and acquisitions is dis-

cussed in paragraph 8.18.

A6a.13 Direct investment data may be classified by

partner economy, as discussed in paragraphs 4.156–

4.157. The partner may be on the basis of the immediate

investor or the ultimate investor or host economy.

A6a.14 Whereas balance of payments and interna-

tional investment position data show the international

flows and positions, another aspect of the impact of

direct investment is on domestic variables, such as

employment, sales, value added, and gross fixed capital

formation. These statistics are called Activities of Multi-

national Enterprises and are discussed in Appendix 4.

Direct investment: is a category of cross-border

investment associated with a resident in one economy

having control or a significant degree of influence on the

management of an enterprise that is resident in another

economy. As well as the equity that gives rise to control

or influence, direct investment also includes associated

debt (except debt between affiliated financial interme-

diaries, specified in paragraph 6.28) and other debt and

equity between enterprises that have the same direct

investor.

Direct investment relationship: A direct investment

arises when an investor resident in one economy makes

an investment that gives control or a significant degree

of influence on the management of an enterprise that

is resident in another economy (paragraph 6.9). Direct

investment covers positions and transactions in equity

and selected debt instruments between entities in a direct

investment relationship.

Direct investor: An entity or group of related entities

that is able to exercise control or a significant degree of

influence over another entity that is resident of a different

economy (paragraph 6.11).

Direct investment enterprise: An entity subject to con-

trol or a significant degree of influence by a direct inves-

tor is called an direct investment enterprise (paragraph

6.11). A direct investment enterprise is either a subsidiary

or an associate (paragraph 6.15).

Control and influence: Control is determined to exist

if the direct investor owns more than 50 per cent of the

voting power in the direct investment enterprise. Such a

direct investment enterprise is a subsidiary. A significant

degree of influence is determined to exist if the direct

investor owns from 10 to 50 percent of the voting power

in the direct investment enterprise. Such a direct invest-

ment enterprise is an associate. The control or influence

may be immediate (through ownership of voting power)

or indirect (through ownership of enterprises that in turn

have voting power). More detail on the identification of

control and influence is given in paragraphs 6.11–6.14.

Fellow enterprise: An enterprise is a fellow enterprise

of another if the two enterprises have the same immediate

or indirect direct investor, but neither is an immediate or

indirect direct investor in the other (paragraph 6.17).

Affiliate: Entities in an immediate or indirect direct

investment relationship with each other, or that have the

same immediate or indirect direct investor are all affil-

iates of each other. That is, affiliates of an enterprise

consist of its immediate or indirect direct investor(s), its

immediate or indirect direct investment enterprise(s), and

its fellow enterprise(s).

Reverse investment: Reverse investment arises when

a direct investment enterprise owns some, but less than

10 percent of the voting power in, or has lent funds to, its

immediate or indirect direct investor (paragraph 6.40).

Box A6a.1. Direct Investment Terms

Appendix 6a g Topical Summary—Direct Investment

280

APPENDIX

Topical Summa r y —

Financial Leases

Reference:

2008 SNA, Chapter 17, Cross-Cutting and Other Spe-

cial Issues.

A6b.1 A financial lease is a contract under which

the lessor as legal owner of an asset conveys sub-

stantially all the risks and rewards of ownership of

the asset to the lessee. The economic nature of the

arrangement is that the lessor is providing a loan to

allow the lessee to acquire the risk and rewards of

ownership, but the lessor retains legal title as col-

lateral for the loan. Therefore, a financial lease is an

example of where economic ownership differs from

legal ownership. The arrangement is treated as a trans-

action in the relevant asset financed by a loan, which

is repaid in full or in most part by payments by the

lessee. Financial leases are also called finance leases

or capital leases. For further details of the definition,

see paragraphs 5.56–5.57.

A6b.2 Financial leases are distinguished from oper-

ating leases (see paragraphs 10.153–10.157), in which

neither legal nor economic ownership changes, and the

rentals are recorded as services. In terms of underly-

ing economic processes, although both operating and

financial leases have similar forms, the essence of a

financial lease is seen as being a loan, whereas the

operating lease is seen as providing a service. That is,

the operating lease provider has a stock of assets, which

it wants to provide to other entities, and provides vary-

ing degrees of backup support. In contrast, the financial

lease provider is usually a financier and operates a lot

like a lender except that the lessor has the additional

collateral of legal ownership of the assets. Accounting

standards also recognize this distinction.

A6b.3 As a result of this treatment, a cross-border

financial lease will give rise to the following entries in

different accounts:

• A loan liability of the lessee and a loan asset of the

lessor are recorded to the total value of the asset

acquired. The outstanding amount is shown in the

IIP (see paragraph 7.57);

• The creation of the loan and the subsequent repay-

ments of the loan (including, at maturity, the return

of the asset to the lessor or its purchase by the

lessee) are recorded under loan transactions in the

financial account;

• The asset subject to the lease is regarded as being

purchased by the lessee, so there is a change of eco-

nomic ownership of the asset (usually goods) from

the lessor to lessee. If cross-border and involving a

produced asset, this change of ownership is shown

in the goods and services account (see paragraph

10.17(f)). If the produced asset is returned to the

lessor at the maturity of the contract, there is a

change of economic ownership from the lessee

281

to lessor, which is also recorded in the goods and

services account;

• Explicit fees and FISIM are incurred on the loan

if the lender is a financial corporation and these

amounts are included in “financial services” (see

paragraphs 10.118–10.136); and

• Interest is accrued on the loan (see paragraph

11.73).

A piece of imported equipment worth 1,000 is pro-

vided under a financial lease from a nonresident financial

corporation. The lease begins on January 1, an annual

payment of 140 is made on December 31 each year for 10

years, at which time the lessee has the option to purchase

the equipment at an agreed price. The contract is based

on an interest rate of 7 percent per annum, while the refer-

ence rate of interest is 5 percent per annum.

For the economy of the lessee, the following entries

are made in the first two and final years:

Year 1 Credit Debit

Current Account:

Goods 1,000

Services—Financial services (FISIM) 20

Primary Income—Investment income 50

Financial Account:

Other investment—Loans 1,000 70

Other investment—Currency and

deposits 140

___________________________________________________

Accrued interest is 70, of which 20 is FISIM and 50

is pure interest. The value of the loan debt is 930 at the

end of year 1 (1000 + 20 + 50 – 140)

Year 2 Credit Debit

Current Account:

Services—Financial services (FISIM) 18.6

Primary Income—Investment income 46.5

Financial Account:

Other investment—Loans 74.9

Other investment—Currency and

deposits 140

___________________________________________________

Box A6b.1. Numerical Example of Financial Lease

Accrued interest is 65.1, of which 18.6 is FISIM and

46.5 is pure interest. The value of the loan debt is 855.1

at the end of year 2 (930 + 18.6 + 46.5 – 140)

. . .

Year 10 Credit Debit

Current Account:

Goods 32.8

Services—Financial services (FISIM) 3.2

Primary Income—Investment income 8.1

Financial Account:

Other investment–Loans 161.55

Other investment–Currency and

deposits 140

___________________________________________________

Accrued interest is 11.3, of which 3.2 is FISIM and

8.1 is pure interest. The residual value of the good pur-

chased is 32.8, which is recorded as a goods transaction

if the good is returned to the lessor (as in the example)

rather than the lessee purchasing it.

Appendix 6b g Topical Summary—Financial Leases

282

APPENDIX

Topical Summary—Insurance,

Pension Schemes, and

Standardized Guarantees

A. General Issues

Reference:

2008 SNA, Chapter 17, Cross-Cutting and Other Spe-

cial Issues.

A6c.1 Insurance provides individual institutional

units exposed to certain risks with financial protection

against the consequences of the occurrence of specified

events. In addition, insurers often act as financial inter-

mediaries who invest funds collected from policyhold-

ers in financial or other assets to meet future claims.

A6c.2 Pension schemes are established for the pur-

pose of providing benefits for retirement or for invalid-

ity of specific groups of employees. Pension schemes

may be operated by a separately constituted fund or

by a fund that is part of the employer, or be unfunded.

Pension funds are similar to insurance in that they act

as intermediaries for investing the funds for their ben-

eficiaries and redistribute some risks.

A6c.3 Insurance and pension fund operation have com-

mon features, but can be distinguished in that life insur-

ance and pension funds include a large saving component,

whereas the objective of nonlife insurance (including term

life insurance) is largely undertaken to pool risk.

A6c.4 The transactions undertaken by insurers

include charging premiums, paying claims, and invest-

ing funds. Similarly, pension funds’ transactions include

receiving contributions, paying benefits, and investing

funds. To analyze the underlying economic nature of

these operations, it is necessary to rearrange these pro-

cesses to derive the service, investment income, transfer,

and investment elements. Users may also be interested in

supplementary data on insurance transactions before the

In the context of insurance, a claim is the obligation of an insur-

ance company to pay the policyholder under the terms of the policy

because an insured event has occurred. “Claim” is also used in this

Manual to mean financial asset.

adjustments discussed in this section, particularly data on

premiums and claims. (Box A6c.1 provides a numerical

example to show the calculation of the derived items for

service, investment income, transfers, and investment.)

A6c.5 Aspects of insurance are dealt with in several

chapters:

• Insurance corporations and pension funds are

defined as institutional subsectors in paragraphs

4.88–4.89;

• Insurance reserves, pension entitlements, and pro-

visions for standardized guarantees are defined as

financial instruments in paragraphs 5.62–5.68 and

as part of the other investment functional category

in paragraph 6.61;

• The measurement of insurance reserves in the IIP

is discussed in paragraphs 7.63–7.68;

• Financial account entries are discussed in para-

graphs 8.46–8.49;

• Other changes in volume associated with insurance

reserves and provisions are discussed in paragraph

9.24;

• Insurance and pension services are discussed in

paragraphs 10.109–10.117;

• The investment income accruing to policyhold-

ers and contributors is discussed in paragraphs

11.77–11.84; and

• The transfers associated with these schemes are

discussed in paragraphs 12.41–12.46 and 13.24.

A6c.6 Cross-border insurance is particularly com-

mon in specialized areas such as reinsurance and high-

value items such as insurance of ships and aircraft. For

some small economies, the small size of their risk pool

means that a wider range of items tends to be insured

with nonresidents. With international mobility of popu-

lation, life insurance and pensions can also occur cross-

border on a significant scale.

283

B. Nonlife Insurance

Reference:

2008 SNA, Chapter 17, Cross-Cutting and Other Spe-

cial Issues, Part 1.

1. Types of nonlife insurance

A6c.7 Types of nonlife insurance include accident

and health; term life; marine, aviation, and other trans-

port; fire and other property damage; pecuniary loss;

general liability; and credit insurance.

A6c.8 Direct insurance is between an insurance

company and the public. Reinsurance is insurance

where both parties to the policy are providers of insur-

ance services. That is, reinsurance allows insurance

risk to be transferred from one insurer to another. Many

insurers act as both direct insurers and reinsurers. There

may be chains of transferring risk, from insurer to rein-

surer to secondary reinsurer and so on. Reinsurance

companies and their policyholders are often residents

of different economies because of the specialized func-

tions of reinsurance and the objective to spread risk. A

direct insurer may pass on an entire set of risks (i.e., the

Appendix 6c g Insurance, Pension Schemes, and Standardized Guarantees

1. Basic information

This example covers policies of resident insurers with nonresident policyholders; the same

principles apply for nonresident insurers with resident policyholders, although the availabil-

ity of data is less in practice, so that ratios may be needed for some items, as discussed in

Box 10.4.

Gross premiums receivable from abroad = 135

Gross premiums received from abroad = 150

Reserves relating to prepayments—beginning of period = 40

Reserves relating to prepayments—end of period = 55

Net increase in reserves relating to prepayments = 15

Investment income attributable to nonresident policyholders = 8

Claims payable abroad = 160

Claims paid to abroad = 155

Reserves relating to claims incurred—beginning of period = 10

Reserves relating to claims incurred—end of period = 15

Net increase in reserves for claims incurred but not paid = 5

Adjustment for volatility in claims payable = –40

(i.e., expected long-term level of claims would be 120, that is 160 – 40)

2. Derived items

Goods and services account:

Insurance service (credits)

=gross premiums receivable plus premium supplements less expected claims (i.e.,

expected claims is derived as actual claims payable plus adjustment for volatility

= 135 + 8 – 120

= 23

(Note: not taking into account the volatility would lead to a negative value of services: –17.)

Primary income account:

Investment income attributable to policyholders (debits) = 8

Secondary income account:

Net premiums receivable (credits)

= gross premiums receivable less service = 135 + 8 – 23 = 120

Claims payable (debits) = 160

Financial account:

Insurance reserves (increase in liabilities to policyholders) = 20 (= 15 + 5)

Currency and deposits (increase in assets of resident insurers) = –5 (= 150 – 155)

IIP—Liabilities

Insurance reserves (prepayments and claims incurred)—beginning of period = 50 (= 40 + 10)

Insurance reserves (prepayments and claims incurred)—end of period = 70 (= 55 + 15)

Box A6c.1. Numerical Example of Calculations for Nonlife Insurance

284

direct insurer is like a retailer), a proportion of risks, or

the risk of claims being more than a specified amount

(e.g., arising from a catastrophic loss) to a reinsurer.

Because it is often used as protection against exposure

to large losses, reinsurance is particularly likely to be

subject to lumpy transactions.

A6c.9 The principles for measurement of reinsur-

ance and direct insurance services are the same. They

are shown as separate items on a supplementary basis,

as can other components such as auxiliary services and

standardized guarantees.

A6c.10 Freight insurance is a form of nonlife

insurance that raises particular issues for valuation

of goods. Like freight transport, as discussed in para-

graph 10.78, the identification of who pays the insur-

ance and whether it is included in the price of the

good is determined by the FOB valuation concept, as

discussed in paragraph 10.116.

A6c.11 Nonlife insurance is distinguished from life

insurance in that it pays benefits only if an insured

event occurs. That is, nonlife insurance is designed

primarily for pooling risk, rather than as an investment.

For that reason, nonlife insurance claims and net pre-

miums are recorded as transfers, while the equivalents

for life insurance are recorded in the financial account.

In contrast to life insurance, term life insurance ben-

efits are payable only on the death or incapacity of

the insured, and so term life insurance is included in

nonlife insurance.

2. Role of reserves in insurance

A6c.12 Insurance policies are paid in advance, while

claims are paid only after the insured events happen,

sometimes much later. Insurance technical reserves

represent the amounts identified by insurance compa-

nies to account for these prepayments of premiums and

claims incurred but not yet paid. That is, reserves can

be seen as the application of usual accrual accounting

principles. Reserves for claims reported but not yet

resolved, and estimates of claims incurred but not yet

reported, are correctly included, as they relate to insur-

able events that have already occurred.

A6c.13 Insurance corporations in some economies

may also set aside other reserves, such as amounts to

cover fluctuations in claims between periods (e.g., the

increase in claims in the event of a natural disaster).

However, if there is no entitlement by any counterparty

to these reserves, they cannot be recognized as an asset

of the policyholders.

A6c.14 Insurance companies hold assets to meet the

liabilities to policyholders represented by the reserves.

The management of these financial and nonfinancial

assets is an integral part of the business of insurance.

The income generated by these investments has a consid-

erable influence on the level of premiums that insurance

enterprises need to charge (indeed, in some cases, they

have allowed claims to exceed gross premiums earned).

Consequently, the income earned on the investment of

the reserves is treated as being receivable by the poli-

cyholders who are then treated as paying it back to the

insurance enterprises as premium supplements.

3. Value of insurance service output

A6c.15 Premiums and investment income repre-

sent the inflow of resources to the insurance company,

whereas the claims due are the resources allocated to

the policyholders. The margin between these inflows

and outflows is the amount available to the insurance

company to cover its costs and provide an operating

surplus. This margin represents the value of insurance

services provided.

A6c.16 The value of output of nonlife insurance ser-

vices can be expressed with the following formula:

Gross premiums earned;

+ Premium supplements;

–Claims payable;

– Adjustment for claims volatility, if necessary.

a. Gross premiums earned

A6c.17 “Gross premiums earned” refers to those parts

of the premiums payable in the current or previous peri-

ods that cover the risks incurred during the accounting

Alternatively, the formula can be expressed as:

Gross premiums earned;

+Premium supplements;

– Expected claims;

where expected claims are based on longer term measures of claims,

taking out the effects of volatility.

The formula can also be expressed in terms of payments:

Gross premiums paid;

+Premium supplements;

– Claims paid;

– Net increase in technical reserves (including

reserves for claims volatility);

where the technical reserves account for prepayments of premiums

and delays in paying out claims as well taking out the effects of

volatility.

See Box A6c.1 for a numerical example of these calculations.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

285

period. Premiums earned are on an accrual basis, so dif-

fer from premiums received because insurance policies

are usually paid in advance. In the case of a reinsurer

accepting risks on proportional reinsurance contracts,

gross premiums earned are recorded after deducting the

reinsurance commissions payable to the direct insurer.

Similarly, other gross premiums should be calculated by

deducting any rebates payable to the policyholder.

A6c.18 Insurance premiums are normally paid in

advance, so a measure on an accrual basis differs from

premiums paid by the deduction of prepayments for

insurance cover in future periods and adds back cover for

the current period that was prepaid in previous periods.

b. Premium supplements

A6c.19 Investment income earned on the assets

invested to meet insurance companies’ provision liabili-

ties is attributable to insurance policyholders. The income

is recorded in the primary income account as discussed

in paragraphs 11.77–11.84 and A6c.26. The same value

is then treated as being paid back to the insurance com-

panies as premium supplements. Premium supplements

are added to premiums in the calculation of the value of

insurance services, as shown in Box A6c.1.

c. Claims payable

A6c.20 Claims payable are claims for events that

occurred within the accounting period. Claims pay-

able include claims paid within the accounting period

plus changes in the reserves against outstanding claims.

That is, claims on an accrual basis are recognized as

due when an event takes place that gives rise to a valid

claim, whether or not paid, settled, or reported during

that period.

d. Adjustments for claims volatility

A6c.21 Adjustments for claims volatility should be

included in the calculation for lines of insurance sub-

ject to fluctuations. For example, major catastrophes

such as earthquakes and hurricanes may be expected

to occur, on average, once in each several years. If only

claims incurred during a single accounting period are

used in the formula, the resulting values of insurance

services could be erratic, and even negative in cata-

strophic periods, and so are an inadequate measure of

the production and pricing of insurance. In such cases,

an adjustment to claims due should be made, to reflect a

longer-term view of claims behavior, in line with insur-

ance decision making. In periods when large values of

claims are incurred, the adjustment would be negative

(thus causing an increased value of the service), while

in other periods, the adjustment would be positive (thus

reducing the value of the service). However, for some

types of insurance, there is limited volatility and no

adjustment is necessary.

A6c.22 The adjustments for claims volatility show

the difference between actual claims in a particular

period and a normally expected level of claims. The

expected level of claims may be calculated according

to one of the following methods:

(a) The expectations approach is based on an esti-

mate of expected claims, using smoothed past

figures of gross claims incurred or smoothed past

ratios of gross claims incurred over premiums,

applied to current premiums. It replicates the ex

ante model used by insurers to price their pre-

miums on the basis of their expectations. When

accepting risk and setting premiums, insurers

consider their expectation of loss;

(b) The accounting approach is based on changes

in insurers’ equalization reserves and changes

in own funds to account for the volatility of

claims. In contrast to the expectation approach,

the accounting approach uses ex post data, that

is, observed claims incurred. It is to be noted

that if changes in own funds are introduced in

one given period to dampen the volatility of a

claim in case of catastrophe, the rebuilding of

own funds after this period will also intervene

(with an inverse sign) in the formula for the next

periods. Practices for calculation of equalization

reserves vary, so they may not be sufficient to

cover all volatility in claims; or

consists in obtaining a measure of output as

the sum of costs plus an estimate of “normal”

profit. The estimate of “normal” profit generally

implies the use of smoothed past actual profits.

Thus this approach is, in practice, similar to the

expectation approach. “Normal” profit is indeed

equal to premiums + adjusted premium supple-

ments – adjusted claims – costs.

e. Reinsurance

A6c.23 As explained in paragraph A6c.8, reinsur-

ance allows insurance risk to be transferred from one

insurer to another. The transactions between the direct

insurer and the reinsurer are recorded as an entirely

Appendix 6c g Insurance, Pension Schemes, and Standardized Guarantees

286

separate set of transactions and no consolidation takes

place between the transactions of the direct insurer

as issuer of policies to its clients on the one hand and

the holder of a policy with the reinsurer on the other.

The output of reinsurance is measured in a way simi-

lar to that for direct nonlife insurance. However, there

are some payments peculiar to reinsurance. These are

commissions payable to the direct insurer under pro-

portionate reinsurance and profit sharing in excess of

loss reinsurance. Once these are taken into account the

output of reinsurance can be calculated as:

Total actual premiums earned less commissions

payable;

+ Premium supplements;

– Adjusted claims incurred and profit sharing.

4. Exports and imports of insurance services

A6c.24 The formula for total production of insur-

ance services stated in paragraph A6c.16 includes ele-

ments that may only be able to be observed by insurers

in aggregate. For exported and imported insurance ser-

vices, which represent the output provided to a subset

of policyholders, additional methods are required to

allocate totals.

A6c.25 Usually, ratios will be able to be used to

make estimates. The case of imports is particularly

difficult, as the insurance companies are not residents

in the economy of compilation and so data collection

is constrained. In each case, the objective is to find

a result consistent with the overall method, after tak-

ing into account which information is available in the

circumstances. Possible methods are discussed in para-

graph 10.114 and Box 10.4.

5. Investment income attributable to

insurance policyholders (primary income

account)

A6c.26 Investment income earned on the assets

invested to meet insurance companies’ provision lia-

bilities is attributable to insurance policyholders. The

income is recorded in the primary income account as

discussed in paragraphs 11.77–11.84. The same value is

then treated as being paid back to the insurance com-

panies as premium supplements in the calculation of

the value of insurance services, as shown in paragraph

A6c.19 and Box A6c.1 (and consequently increases the

value of net premiums, which is gross premiums less

the value of insurance services).

6. Net insurance premiums (secondary

income account)

A6c.27 Net insurance premiums are gross premi-

ums earned less the service charge. (Gross premiums

were discussed in paragraph A6c.17 in the context of

deriving the service charge.) Net insurance premiums

are shown as current transfers. They are discussed in

paragraphs 12.41–12.42.

7. Claims receivable or payable (secondary

income account)

A6c.28 Claims incurred during the period are gener-

ally shown as current transfers. They are discussed in

paragraphs 12.44–12.46 and in paragraph A6c.20 in the

context of deriving the service charge. In exceptional

cases, they may be classified as capital transfers, as dis-

cussed in paragraph 13.24. The stock of claims outstand-

ing is recognized as a financial asset or liability and is

shown in the IIP (see paragraphs 5.64 and 7.63–7.68).

C. Life Insurance and Annuities

Reference:

2008 SNA, Chapter 17, Cross-Cutting and Other Spe-

cial Issues, Part 1.D.

A6c.29 Life insurance is distinguished from nonlife

insurance in paragraph A6c.11. Life insurance involves

a stream of payments by the policyholder in return for

a lump sum at the end of the policy. Annuities are the

reverse, where a stream of payments is made by the

insurer in return for a lump sum at the beginning of the

policy. Both direct insurance and reinsurance also exist

for life insurance and annuities.

A6c.30 The principles for the measurement of life

and nonlife insurance are similar. However, in the case

of life insurance, the net premiums and payments of ben-

efits are recorded in the financial account, rather than

the secondary income account. This treatment follows

from the role of life insurance as paying benefits even

without an insured event occurring, and therefore operat-

ing mainly as a way for policyholders to build assets; in

contrast, nonlife insurance operates to redistribute costs

among policyholders by transfers. Because life insurance

is based on managing large values of assets, the premium

supplements can be relatively large.

A6c.31 The value of output of life insurance and

annuity services can be expressed with the following

formula:

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

287

Grosspremiumsearned;

+ Premium supplements;

– Benefits due;

– Increases (+ decreases) in life insurance reserves

(actuarial reserves and reserves for with-profits

insurance).

The formula is basically the same as for nonlife insur-

ance,exceptthatthepaymentstopolicyholdersare

calledbenefitsinsteadofclaims,andreservesare

added to account for the accrual of future benefits.

Also, changes in reserves are taken into account.

A6c.32 Theitemforactuarialreservesinthefor-

mulaforlifeinsurancereflectstheamountsthatare

payableattheendofthepolicy,ratherthanclaimsin

thecurrentperiod.Theyareshownasaccruingtopar-

ticular policyholders because they consist of allocations

to the actuarial reserves and reserves for with-prof-

its insurance policies to build up the sums guaranteed

under these policies. Changes in the actuarial reserves

and reserves for with-profits insurance include the pro-

vision made for bonuses payable in future.

A6c.33 It is common with life insurance policies for

amountstobeexplicitlyattributedbytheinsurancecor-

poration to the policyholders in each year. These sums

are often described as bonuses. The sums involved are

notactuallypaidtothepolicyholdersbuttheliabilities

oftheinsurancecorporationtowardthepolicyhold-

ers increase by this amount. This amount is shown as

investment income attributed to the policyholders. The

factthatsomeofitmayderivefromholdinggainsdoes

not change this designation; as far as the policyholders

areconcerneditisthereturnformakingthefinancial

asset available to the insurance corporation. In addi-

tion,alltheincomefromtheinvestmentofnonlife

reserves and any excess of income from the investment

of life reserves over any amounts explicitly attributed

to the policyholders are shown as investment income

attributed to policyholders, regardless of the source of

the income.

A6c.34 In the case of annuities, the same principles

apply, but the calculation is different because of the

opposite cash flow, and is elaborated in 2008 SNA,

Chapter 17, Cross-Cutting and Other Special Issues.

A6c.35 In the current account, in addition to ser-

vices, life insurance gives rise to investment income

attributable to policyholders, as discussed in paragraph

11.81, of equivalent value to premium supplements. For

life insurance, net premiums and benefits are shown as

increases and reductions in insurance reserves in the

financial account. (In contrast, for nonlife insurance,

netpremiumsandclaimsareshownastransfers.)

A6c.36 Life insurance technical reserves are defined

as a financial instrument in paragraph 5.65. They are

classified as other investment in the functional classifi-

cation;seeparagraph6.61.Moredetailsareprovidedon

recording them in the IIP in paragraphs 7.63–7.64, the

financial account in paragraph 8.48, and other changes

in volumes in paragraph 9.24.

D. Pension Schemes

Reference:

2008 SNA,Chapter17,Cross-CuttingandOtherSpe-

cial Issues, Part 2.J.

A6c.37 Pension schemes include those operated

withanautonomousfundaswellasfundsthatarenot

separate units and unfunded pension schemes. Pensions

maybeprovidedbysocialsecurityschemes,employer-

relatedschemesotherthansocialsecurity,andsocial

assistance schemes.

A6c.38 Social contributions to social security

schemes are discussed in paragraphs 12.32–12.33.

Social benefits under social security and social assis-

tance schemes are dealt with in paragraph 12.40. These

schemes operate through transfers and do not have

financial account entries because an obligation to pay is

notrecognized.Forfurtherinformationonsocialsecu-

rityandsocialassistanceschemes,andforemployer-

related schemes through social security schemes, see

2008 SNA, Chapter 17. The remainder of this section

dealswithemployer-relatedschemesotherthansocial

security.

A6c.39 Pension funds are defined as an institutional

subsector in paragraphs 4.89–4.90. Pension entitlements

are defined as a financial instrument in paragraphs

5.66–5.67. These entitlements may be liabilities of pen-

sionfundsorunfundedschemes.Theyareclassified

as other investment in the functional classification; see

paragraph 6.61. The valuation of pension entitlements

intheIIPisdiscussedinparagraph7.65.Financial

account entries are discussed in paragraphs 8.48–8.49.

Changes to pension entitlements as a result of changes

inmodelassumptionsareshownasotherchangesin

volume,whereaschangesnegotiatedbetweenthepar-

tiesaretransfers,asdiscussedinparagraph9.24.Insur-

ance and pension services are discussed in paragraphs

10.109–10.117.

Appendix 6c g Insurance, Pension Schemes, and Standardized Guarantees

288

A6c.40 There may be explicit or implicit service

charges for pension schemes. If the charges are implicit,

they are measured in a similar way to those for life

insurance and annuities, namely:

Gross contributions;

+ Contribution supplements;

–Benefits payable;

– Adjustment for change in pension entitlements.

A6c.41 Investment income is attributable to benefi-

ciaries of pension schemes and is repaid to the pension

fund as contribution supplements, as discussed in para-

graph 11.82. The investment income payable

(a) for defined contribution schemes is equal to

the investment income on the funds plus any

net operating surplus earned by renting land or

buildings owned by the fund; and

(b) for defined benefit schemes, is equal to the

increase in benefits payable because the date

when the entitlements become payable is closer.

The amount of the increase is not affected by

whether the pension scheme actually has earned

sufficient income to meet its obligations.

The adjustment for change in pension entitlements is

discussed in paragraph 12.38.

A6c.42 Social contributions to pension schemes are

discussed in paragraphs 12.32–12.37. Social benefits are

the amounts payable to the beneficiaries and are discussed

in paragraph 12.40. In the SNA, social contributions are

viewed as both transfers and an investment in the scheme;

similarly, social benefits are viewed as both transfers

and a withdrawal of investment from the scheme. These

different views require an entry for change in pension

entitlements, discussed in paragraphs 12.38–12.39.

E. Standardized Guarantees

Reference:

2008 SNA, Chapter 17, Cross-Cutting and Other Spe-

cial Issues, Part 3.

A6c.43 Standardized guarantees are issued in

large numbers along similar lines. Examples include

export credit guarantees and student loan guarantees.

Standardized guarantees are contrasted with other

guarantees in paragraph 5.68. The guarantors are usu-

ally general government units or financial corpora-

tions. Because the guarantor provides large numbers

of guarantees, it is possible to estimate the risk of

default. A guarantor operating on a commercial basis

will charge fees, meet claims, and earn investment

income in a way parallel to nonlife insurance, and the

value of services, income, and provisions are calcu-

lated in the same way as described for nonlife insur-

ance in Section B of this appendix.

A6c.44 Provisions for calls under standardized

guarantees are defined as a financial instrument and

contrasted with one-off guarantees and financial

derivatives in paragraph 5.68. They are classified as

other investment in the functional classification; see

paragraph 6.61. Changes to provisions for calls under

standardized guarantee schemes not resulting from

transactions are shown as other changes in volume and

are discussed in paragraph 9.24.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

289

APPENDIX

Relationship of the SNA Accounts

for the Rest of the World to

the International Accounts

Introduction

References:

2008 SNA, Chapter 26, The Rest of the World Accounts

(external transactions accounts).

IMF and others, External Debt Statistics: Guide for

Compilers and Users, Appendix IV, Relationship

Between the National Accounts and the Interna-

tional Investment Position (IIP).

A7.1 International accounts are closely linked to the

SNA. This linkage is reinforced by the fact that, in most

countries, data on the balance of payments and the IIP

are compiled first and subsequently incorporated in

relevant external account components of the SNA rest

of the world account. There is complete concordance

between the SNA and this Manual with respect to the

delineation of resident units, valuation, time of record-

ing, conversion procedures, and coverage of goods, ser-

vices, income, capital transfers, and foreign financial

assets and liabilities.

Accounting System

A7.2 The SNA uses an underlying accounting system

similar to that used for the balance of payments. How-

ever, the entries for both parties to a transaction (such

as a resident and a nonresident) are included in the SNA,

rather than just one party (the resident) as in the balance

of payments. As a result, each transaction gives rise to four

entries in the SNA, that is, two entries for each party.

A7.3 Credits in the balance of payments are called

resources in the SNA, and debits are called uses. The

SNA rest of the world accounts are presented from the

point of view of the nonresident units, whereas the bal-

ance of payments presents the same transactions from

the point of view of resident units. As an illustration,

imports of an economy are shown as resources in the

SNA, that is, an outflow from the rest of the world and

an inflow or use for the resident units.

Classification

A7.4 In general, the classification system is the same

in the SNA and the Manual. The coverage and terminol-

ogy of major aggregates have been fully harmonized.

There is a major presentational difference in that the

international accounts use functional categories as the

primary level of classification for investment income,

the financial account, and the IIP, whereas the SNA

uses instruments and sectors. The functional categories

are not applicable to domestic relationships. However,

the instrument and institutional sector detail in the

international accounts allows the data to be converted

or compared with SNA data. In addition, differences in

classification or level of detail exist between the rest of

the world accounts and international accounts. These

reflect differences in analytical requirements and the

necessity of using, in the SNA, a uniform classifica-

tion scheme for all sectors of the economy. Because

of the use of consistent terminology, links can be seen

between international accounts items and the corre-

sponding SNA items. In addition, to assist in compari-

sons or linking, the listing of standard components in

Appendix 9 includes SNA codes. (Because of the use

of functional categories as the primary classification in

the international accounts, a letter has been added to the

SNA codes for investment income, financial account,

and IIP items to denote the functional category.)

Linkages between Accounts

A7.5 The terminology of the SNA rest of the world

accounts and the international accounts is the same,

except for some minor differences (e.g., the SNA uses

the external account of goods and services for the goods

and services account, and external assets and liabilities

for the IIP).

A7.6 The SNA coverage of exports and imports of

goods and exports and imports of services is identi-

cal to balance of payments coverage of corresponding

290

items. In balance of payments statistics, exports and

imports of services are disaggregated in more detail

to provide data for analysis and policy decisions—

particularly for negotiations in international trade in ser-

vices within the framework of international agreements.

The services identified in the balance of payments are

consistent with those of the Central Product Classification

(CPC)—except for the transactor-based items for travel,

construction, and government goods and services n.i.e.

A7.7 Compensation of employees, property income,

and current transfers are defined identically, although

the functional category is used for disaggregation of

investment income in the international accounts. The

major elements of the capital account of the external

accumulation accounts are identical with the capital

account of the balance of payments. The balancing item

net lending/net borrowing in account is identical to the

balance of payments item.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table A7.1. Correspondence between SNA and International Accounts Items

(Financial Account and IIP)

2008 SNA Classification of Financial Instruments SNA Code BPM6 Classification of Financial Instruments

Monetary gold and special drawing rights F1

Monetary gold F11 Monetary gold (RA)

Special drawing rights F12 Special drawing rights (assets-RA; liabilities-OI)

Currency and deposits F2 Currency and deposits (DI, OI, RA)

Currency F21

Transferable deposits F22

Interbank positions F221 Interbank positions (OI)

Other transferable deposits F229

Other deposits F29

Debt securities F3 Debt securities (DI, PI, RA)

Short-term F31 Short-term (DI, PI, RA)

Long-term F32 Long-term (DI, PI, RA)

Loans F4 Loans (DI, OI, RA)

Short-term F41 Short-term (DI, OI, RA)

Long-term F42 Long-term (DI, OI, RA)

Equity and investment fund shares F5 Equity and investment fund shares (DI, PI, OI, RA)

D43 Reinvestment of earnings (DI, PI, OI, RA)

Equity F51 Equity (DI, PI, OI, RA)

Reinvestment of earnings (DI, PI, OI)

Investment fund shares/units F52 Investment fund shares/units (DI, PI, OI, RA)

Reinvestment of earnings (DI, PI, OI)

Money market fund shares/units F521 Money market fund shares/units (DI, PI, OI, RA)

Other investment fund shares/units F529 Other investment fund shares/units (DI, PI, OI, RA)

Insurance, pension, and standardized guarantee schemes F6 Insurance, pension, and standardized guarantee schemes

(DI, OI)

Nonlife insurance reserves F61 Nonlife insurance reserves (DI, OI)

Life insurance and annuity entitlements F62 Life insurance and annuity entitlements (DI, OI)

Pension entitlements F63 Pension entitlements (OI)

Claims of pension funds on pension managers F64 Claims of pension funds on pension managers (DI, OI)

Entitlements to nonpension benefits F65 Entitlements to nonpension benefits (OI)

Provisions for calls under standardized guarantees F66 Provisions for calls under standardized guarantees (DI, OI)

Financial derivatives and employee stock options F7 Financial derivatives and employee stock options (FD, RA)

Financial derivatives F71 Financial derivatives (FD, RA)

Employee stock options F72 Employee stock options (FD)

Other accounts receivable/payable F8 Other accounts receivable/payable (DI, OI)

Trade credits and advances F81 Trade credits and advances (DI, OI)

Other accounts receivable/payable - other F89 Other accounts receivable/payable–other (DI, OI)

Note: DI—direct investment; PI—portfolio investment; FD—financial derivatives (other than reserves) and employee stock options; OI—other invest-

ment; RA—reserve assets. Supplementary items are in italics. SNA codes are for financial account items; codes for balance sheets/IIP have an initial A, but are

otherwise the same (e.g., financial account entries for currency and deposits are F2, while the corresponding asset and liability positions are AF2). In addition,

reinvestment of earnings is not applicable in the IIP.

291

A7.8 The coverage of the SNA financial account

is identical with that of the financial account in the

balance of payments, although the level of detail is

different. Similarly, the coverage of the SNA external

assets and liabilities account is identical with that of

the IIP. However, in the SNA, financial assets are clas-

sified primarily by type of instrument. In the balance

of payments, financial items are classified primarily by

functional category: direct investment, portfolio invest-

ment, financial derivatives (other than reserves) and

employee stock options, other investment, and reserve

assets. The financial instruments classification used in

the SNA and its relationship with the functional cat-

egories and their instrument components used in the

international accounts are set out in Table A7.1.

A7.9 In addition to categories identifying types of

financial instruments, the balance of payments con-

tains an abbreviated sector breakdown (central bank,

other deposit-taking corporations, general government,

other financial corporations, and other sectors) to pro-

vide links with other bodies of economic and finan-

cial statistics such as money and banking, government

finance, international banking, and external debt.

Appendix 7 g Relationship of the SNA Accounts

292

APPENDIX

Changes from BPM5

A detailed list of individual changes made in this

edition of the Manual is provided below. The compari-

son is with BPM5, as amended by The Recommended

Treatment of Selected Direct Investment Transac-

tions (1999), Financial Derivatives, a Supplement to

the Fifth Edition (1993) of the Balance of Payments

Manual (2002), and IMF Committee on Balance of

Payments Statistics Annual Report (2001). The main

themes behind the changes in BPM6 are discussed in

paragraphs 1.32–1.35.

Chapter 1. Introduction

The title of the Manual is changed to Balance of

Payments and International Investment Position Man-

ual (paragraph 1.1).

Procedures are introduced for updating the Manual

(paragraphs 1.37–1.41).

A research agenda for future work is identified (para-

graph 1.43).

Chapter 2. Overview of the Framework

The definition of balance of payments statistics is

limited to transactions between residents and nonresi-

dents (paragraph 2.2; however, practical dimensions

are discussed in paragraphs 3.7–3.8 and 4.152–4.154;

BPM5 paragraphs 13–14).

The Data Quality Assessment Framework, metadata,

and dissemination issues are introduced (paragraphs

2.37–2.39).

Time series issues are discussed explicitly (para-

graphs 2.40–2.41).

Explicit recognition is given to the use of satellite

accounts and other supplemental presentations (para-

graphs 2.42–2.43).

Chapter 3. Accounting Principles

Transactions in external assets between two resident

institutional units and transactions in external liabili-

ties between two nonresidents are not recorded in the

balance of payments as transactions. However, it is

clarified that these transactions can affect sectoral posi-

tions; these changes are reflected through reclassifica-

tion (paragraphs 3.7–3.8; BPM5 paragraphs 485–487).

Imputed transactions are clarified and specified

(paragraph 3.18).

Changes in financial assets and liabilities due to change

in residence of individuals are treated as other changes in

the volume of assets (reclassifications) rather than as trans-

actions (paragraph 3.21; BPM5 paragraphs 352–353).

Bookkeeping conventions (vertical double-entry

bookkeeping, horizontal double-entry bookkeeping,

and quadruple-entry bookkeeping) are explained in

the context of international accounts (paragraphs 3.26–

3.29; BPM5 paragraphs 16–19).

The financial account uses the headings “net acquisi-

tion of financial assets” and “net incurrence of liabilities”

instead of “debits” and “credits” (paragraph 3.31).

The term “economic ownership” is introduced (para-

graph 3.41; BPM5 paragraph 114).

The time of recording of dividends is defined as

when the stocks or shares go ex-dividend (paragraph

3.48, also paragraph 11.31; BPM5 paragraph 121).

According to the accrual basis, repayments of debts are

recorded when they are extinguished (when they are paid,

or rescheduled, or forgiven by the creditor) rather than

when due (paragraphs 3.54–3.57; BPM5 paragraph 123).

The time of recording of flows arising from activation

of one-off guarantees is clarified (paragraph 3.58).

Definitions of domestic and foreign currencies are

provided (paragraphs 3.95–3.97).

293

Currency union issues related to definition of domes-

tic and foreign currency are discussed (paragraph 3.95

and Appendix 3).

Currency conversion is clarified for exchanges; con-

tinuous transactions; other flows, including revalua-

tions; and positions (paragraphs 3.104–3.105; BPM5

paragraphs 132–133).

Terms “currency of denomination” and “currency

of settlement” are introduced and their use explained

(paragraphs 3.98–3.103).

Income flows arising from reverse investment where

the direct investment enterprise owns less than 10 per-

cent of the voting power of its direct investor are also

to be recorded on a gross basis (paragraph 3.113, also

paragraph 11.97; BPM5 paragraph 276).

All capital account transactions are to be recorded on

a gross basis (paragraph 3.113; BPM5 paragraph 312).

Currency union issues related to consolidated regional

international accounts are discussed (paragraph 3.121).

Symmetry of reporting and derived measures are

dealt with explicitly (paragraphs 3.122–3.129).

Chapter 4. Economic Territory,

Units, Institutional Sectors, and

Residence

The definition of economic territory no longer has

the requirement that persons, goods, and capital circu-

late freely (paragraph 4.4; BPM5 paragraph 59).

Currency and economic unions are considered as

economic territories (paragraph 4.4 and Appendix 3).

Special zones should not be omitted but separate

data may be prepared for zones and the remainder of

the economy (paragraph 4.8).

Treatments for changes of sovereignty (paragraph

4.9) and joint administration zones (paragraph 4.10)

are provided.

A discussion of units provides a basis for links with

micro statistics and other macroeconomic statistics

(paragraphs 4.13–4.56).

The requirements for recognizing a branch as a sepa-

rate unit are amended (paragraph 4.27; BPM5 para-

graphs 75 and 80).

There is no imputed institutional unit for the

employment of staff of nonresident enterprises or

technical assistance personnel resident in the recipi-

ent economy. Therefore, technical assistance person-

nel should be treated as employed by the institutional

unit that actually employs them, which may be the

donor, a contractor, or the recipient; see paragraph

4.30 for general principles, also Box 10.6. (Previ-

ously, units may have been imputed; see BPM5 para-

graph 69.)

The treatment of notional units for land is elaborated

and its application extended to leases for long periods

(paragraphs 4.34–4.40; BPM5 paragraph 65).

Possible treatments of multiterritory enterprises are

stated (paragraphs 4.41–4.44; BPM5 paragraph 82).

The nature and treatment of special purpose entities

and other similar structures are discussed (paragraphs

4.50–4.52, 4.87, 4.93, and 4.134–4.135; BPM5 para-

graph 79).

The local enterprise group is identified and the impli-

cations of the use of different types of units are noted

(paragraphs 4.54–4.56).

The SNA institutional sector classification is adopted,

with a condensed version adopted for the standard com-

ponents (paragraph 4.59, Tables 4.1 and 4.2; BPM5

paragraphs 512–517).

The sector classification is amended to be consis-

tent with the SNA in the cases of the central bank and

deposit-taking corporations except the central bank,

although the continued use of monetary authorities is

endorsed in some cases (paragraphs 4.67–4.72; BPM5

paragraphs 514–516).

The classification of the financial sector is linked

to the treatment of debt between affiliated financial

intermediaries (paragraphs 4.63–4.90 and 6.28; BPM5

paragraph 372).

The sector classification of holding companies is

elaborated (paragraphs 4.84–4.85).

The definition of residence is expressed as “center of

predominant economic interest,” although this is not a

change in substance. The residence concept is applied to

institutional units, rather than production, ships, and so

forth (paragraph 4.113; BPM5 paragraphs 62, 78, 80–81).

Residence criteria are specified for various mobile indi-

viduals who do not spend or intend to spend a year in one

place (paragraphs 4.126–4.127; BPM5 paragraph 72).

The residence of entities with little or no physical

presence is to be determined from the jurisdiction of

Appendix 8 g Changes from BPM5

294

incorporation or registration (paragraphs 4.134–4.135;

BPM5 paragraph 79).

Additional guidance is provided on partner data

(paragraphs 4.146–4.164; BPM5 paragraphs 478–498).

Corporate migration is discussed (paragraphs

4.166–4.167).

Chapter 5. Classifications of

Financial Assets and Liabilities

The possibility of supplementary data on contingent

assets and liabilities is raised (paragraph 5.10).

The detailed classification of financial assets and

liabilities is harmonized with the SNA and MFSM

2000 in terms of detail and terminology (Table 5.3;

in the BPM5 standard components, instruments are

combined and different names for them are used in dif-

ferent places). These classifications are linked to broad

groups—equity, debt, and other (paragraph 5.17).

Equity may be split into listed shares, unlisted shares,

and other equity (paragraph 5.24).

Investment fund shares and money market fund shares

are separately identified (paragraphs 5.28–5.30).

SDR allocations represent a liability of the recipient

(paragraph 5.35, also paragraphs 6.61(g) and 7.70, and

applied to income in paragraphs 11.106 and 11.110;

BPM5 paragraph 440).

Interbank positions are shown as an additional

financial instrument category on a supplementary basis

(paragraph 5.42).

“Bonds and notes” and “money market instruments”

are replaced as terms by long-term and short-term debt

securities, respectively (paragraphs 5.44 and 5.103;

BPM5 paragraphs 390–391).

The conditions for traded loans to be reclassified as

securities are clarified (paragraph 5.45).

The treatment of loans involved in repos and gold

swaps is elaborated (paragraphs 5.52–5.55; BPM5 para-

graph 418).

Pension entitlements are recognized as a financial

instrument. The accrued obligations of unfunded pen-

sion schemes are also recognized as economic assets

and liabilities (paragraph 5.66).

Provisions for calls under standardized guarantees

are identified and treated similarly to insurance techni-

cal reserves (paragraph 5.68).

“Trade credit and advances” replaces the term “trade

credits” (paragraph 5.70; BPM5 paragraph 414).

Monetary gold is defined in terms of gold bul-

lion (which includes allocated gold accounts) and

unallocated gold accounts (paragraph 5.74; BPM5

paragraph 438).

The classification of unallocated and allocated gold

accounts is clarified (paragraphs 5.76–5.77).

The content of Financial Derivatives, a Supple-

ment to the Fifth Edition (1993) of the Balance of

Payments Manual (2002) is incorporated (paragraphs

5.80–5.95).

Margin payments where these are liabilities of

deposit-taking corporations are classified as deposits

or in other accounts receivable/payable (paragraph

5.94(a)).

Supplementary additional breakdowns of financial

derivatives are introduced (paragraph 5.95).

Employee stock options are recognized as an instru-

ment (paragraphs 5.96–5.98).

Arrears are identified as a supplementary category

of the original asset or liability, rather than in repay-

ment of the original liability and the creation of a

new short-term loan (paragraphs 5.99–5.102; BPM5

paragraph 458).

Details of currency composition and remaining matu-

rity are included for selected position data in memoran-

dum and supplementary tables (paragraph 5.104, also

Appendix 9 tables; BPM5 paragraph 338).

A classification by type of interest is included (para-

graphs 5.109–5.114).

Chapter 6. Functional Categories

The Framework for Direct Investment Relationships

is adopted for identifying direct investment relation-

ships (paragraphs 6.8–6.18).

Ownership of ordinary shares is removed from the

operational definition of direct investment and replaced

by ownership of equity that gives rise to voting power

(paragraphs 6.12 and 6.19; BPM5 paragraph 362).

The coverage of direct investment relationships due

to indirect voting power and fellow enterprises is elabo-

rated (paragraph 6.14; BPM5 paragraph 362).

Insurance technical reserves are potentially included

in direct investment (paragraph 6.27).

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

295

The exclusion of debt positions between affili-

ated financial corporations is specified as being for

deposit-taking corporations, investment funds, and

other financial intermediaries except insurance com-

panies and pension funds. Permanent debt between

affiliated financial intermediaries is treated in the

same way as nonpermanent debt (paragraph 6.28;

BPM5 paragraph 372).

The concept of pass-through funds is introduced

(paragraphs 6.33–6.34).

Direct investment is broken down into three cate-

gories—investment by a direct investor in its direct

investment enterprise, reverse investment, and invest-

ment between fellow enterprises; the final category

is added in this edition (paragraph 6.37; BPM5 para-

graphs 368 and 371).

The main presentation uses direct investment assets

and direct investment liabilities (so that, for example,

the netting of reverse investment is not built in). How-

ever, data on the basis of the directional principle are

explained (paragraphs 6.42–6.45 and Box 6.4; BPM5

paragraph 375). The treatment of fellow enterprises

in data on a directional basis is explained, with both

a preferred and practical alternative suggested (para-

graph 6.43). Data on a directional principle basis and

the details needed to compile these data are shown as

supplementary items in Appendix 9.

The functional category “financial derivatives” is

renamed. “(Other than reserves)” is added to distin-

guish it from the instrument classification financial

derivatives and employee stock options, which has

different coverage. Employee stock options are also

included (paragraph 6.58).

The content of the Financial Derivatives, a Supple-

ment to the Fifth Edition (1993) of the Balance of

Payments Manual (2002) is incorporated (paragraphs

6.58–6.60).

SDR allocation liabilities are included in other invest-

ment as a separate item; previously, no liabilities were

recognized (paragraph 6.61(g), also paragraphs 5.35

and 7.70; BPM5 paragraph 440).

Other equity not included in direct investment is

included in other investment as a separate item (para-

graph 6.62; BPM5 paragraph 422).

In the definition of reserve assets, “and/or other pur-

poses” replaced by “and for other related purposes”

(paragraph 6.64; BPM5 paragraph 424).

The concept of ready availability is clarified (para-

graphs 6.69–6.70; BPM5 paragraph 431).

The meaning of foreign currency for reserve assets

is elaborated (paragraphs 6.71–6.75; BPM5 paragraph

442). Convertibility (including treatment of curren-

cies of neighboring countries) is clarified (paragraphs

6.72–6.73).

The treatments of allocated and unallocated gold

accounts in reserve assets, and changes in the coverage of

monetary gold, are elaborated (paragraphs 6.78–6.80).

The treatments of gold lending (paragraph 6.81;

BPM5 paragraph 434), repos (paragraph 6.88), special-

purpose government funds (paragraphs 6.93–6.98),

pooled assets (paragraphs 6.99–6.101), central bank

swap arrangements (paragraphs 6.102–6.104), and

pledged assets (paragraphs 6.107–6.109) in reserve

assets are elaborated.

Frozen assets are discussed (paragraph 6.110).

The treatment of net creditor positions in regional

payment agreements is modified (paragraph 6.112).

Working balances of government agencies are not

included in reserve assets (paragraph 6.112; BPM5

paragraph 433).

Reserve-related liabilities are introduced as a clas-

sification (paragraphs 6.115–6.116).

Liabilities constituting foreign authorities’ reserves

are not shown as separate items (BPM5 paragraph 447).

Chapter 7. International Investment

Position

There is emphasis that the classification, netting, and

ordering in the IIP should be consistent with the equiv-

alent items for the financial account, primary income,

and other changes so as to facilitate reconciliation and

calculation of rates of return (paragraph 7.13; also para-

graph 8.5).

The main presentation uses direct investment

assets and direct investment liabilities (so that reverse

investment is not netted in totals) (Table 7.1; BPM5

paragraph 375).

Direct investment is valued at the best indicator of

market prices. (BPM5 adopted market valuation in

principle, while noting that book values “generally are

utilized” in practice.) For equity that is not regularly

Appendix 8 g Changes from BPM5

296

traded, proxy methods are identified for when book

values are inadequate and the limitations in the ana-

lytical usefulness of historic cost data are emphasized

(paragraphs 7.15–7.18; BPM5 paragraph 467).

A treatment for short positions is provided (para-

graph 7.28).

Traded loans are valued at nominal value in the IIP,

like other loans; in BPM5, they were recorded at trans-

action value by the creditor (paragraph 7.40; BPM5

paragraph 471).

Memorandum and supplementary items for the effect

of impaired loan assets are introduced, showing fair

values of loans, the values of nonperforming loans, and

loan loss provisions (paragraphs 7.45–7.54).

The treatment of overnight deposits (or sweep

accounts) is discussed (paragraph 7.62).

Insurance reserves and pension entitlements are

recognized as assets and liabilities (paragraphs 7.63–

7.68).

SDR allocations are recognized as liabilities (para-

graph 7.70, also paragraphs 5.35 and 6.61(g); BPM5

paragraph 440).

Reserve-related liabilities are introduced as a memo-

randum item (paragraph 7.71).

Significant off-balance-sheet commitments should

be recorded (paragraph 7.74).

Guidance on transactions and positions with the IMF

is provided (Annex 7.1).

Chapter 8. Financial Account

The column headings are changed to net acquisi-

tions of financial assets and net incurrence of liabilities

(instead of credits and debits, respectively) consistent

with their contents. Consequently, negative signs are

not used for an increase in assets and positive signs are

not used for a reduction in assets (paragraph 8.1, Table

8.1, also paragraph 3.31).

Financial account entries no longer use the word

“capital,” bringing consistency with the more restrictive

meaning used in the capital account (Table 8.1).

The balancing item for the financial account is called

“net lending/net borrowing” (paragraph 8.3).

The terminology for the financial account entry is

changed to “reinvestment of earnings” (to distinguish

it from reinvested earnings, which continues to be used

for the corresponding income item) (paragraph 8.15).

Mergers and acquisitions are discussed (paragraph

8.18).

The treatment for corporate inversion and other

corporate restructuring is stated (paragraphs 8.19–

8.22).

Superdividends are treated as a withdrawal of equity

(paragraph 8.23; BPM5 paragraph 290).

Special rules are introduced for entities owned or

controlled by general government when that entity is

resident in another territory and is used for fiscal pur-

poses (paragraphs 8.24–8.26).

Reinvestment of earnings in investment funds is

recorded in the financial account (paragraph 8.28 and

also paragraphs 11.37–11.39 for the corresponding

income entry; BPM5 paragraphs 277–278).

The treatment of debt defeasance is stated (para-

graphs 8.30–8.31).

The treatment of share buybacks is stated (paragraph

8.32).

A treatment of one-off guarantees and debt assump-

tion is included (paragraphs 8.42–8.45).

The allocation of SDRs is shown as a financial

account flow in other investment (paragraph 8.50;

BPM5 paragraph 440).

For liabilities in arrears, repayment and creation of

new liability are not imputed (paragraph 8.58; BPM5

paragraph 458).

Imputed financial account entries for trade credit

required by the imputed flows for goods for process-

ing are eliminated (as an implication of removing the

previous imputation of change of ownership; new treat-

ments shown in paragraphs 10.41–10.49; BPM5 para-

graph 205).

Chapter 9. Other Changes in Financial

Assets and Liabilities Account

The other changes in financial assets and liabili-

ties account is highlighted and explained (paragraphs

9.1–9.35).

A convention for distinction between write-offs and

debt forgiveness in commercial situations is introduced

(paragraph 9.10; BPM5 paragraph 348).

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

297

Financial assets and liabilities of entities chang-

ing residence are included as other changes in volume

(previously included as capital transfers) (paragraphs

9.21–9.23; BPM5 paragraphs 354–355).

The distinction between exchange rate and other

revaluations is elaborated (paragraphs 9.26–9.28;

BPM5 paragraph 466).

Chapter 10. Goods and Services

Account

Exceptions to the change of ownership principle are

eliminated (paragraphs 10.13, 10.22(b), 10.22(f), 10.24,

10.41–10.44; BPM5 paragraphs 119–120).

Goods procured in ports by carriers are included

under general merchandise rather than as a separate

item under goods (paragraph 10.17(d); BPM5 para-

graphs 156 and 201).

Goods for own use or to give away acquired by travel-

ers that are in excess of customs thresholds are included

in general merchandise, rather than travel (paragraphs

10.20 and 10.90; BPM5 paragraph 242).

Migrants’ personal effects are not included in gen-

eral merchandise or anywhere else in the international

accounts (paragraph 10.22(b); BPM5 paragraph 353).

The time of recording of transactions in high-value

capital goods such as ships, heavy machinery, build-

ings, and other structures that take several months or

years to complete is discussed (paragraph 10.28).

Re-exports are defined and introduced as a supple-

mentary item (paragraphs 10.37–10.39).

Merchanting of goods is classified under goods, with

both gross and net values shown, with net amounts

included in the goods aggregates. Changes in invento-

ries of goods under merchanting are no longer included

under imports of general merchandise (paragraphs

10.41–10.49; BPM5 paragraph 262).

A reconciliation table is introduced to show the

relationship between international merchandise trade

statistics and goods on a balance of payments basis

(paragraphs 10.55–10.56, Table 10.2).

Manufacturing services on physical inputs owned

by others are shown as a service in all cases. Previ-

ously, when the goods were supplied from the owner

and returned to the owner, the value of the service

was included in the value of goods. Previously,

when the goods were not supplied by the owner or

not returned to the owner, they were shown under

miscellaneous business, professional, and technical

services (paragraphs 10.62–10.71; BPM5 paragraphs

198–199).

Maintenance and repair services n.i.e. are renamed in

line with the CPC and included under services, rather

than goods, and the inclusion of maintenance of trans-

port equipment is clarified (paragraphs 10.72–10.73;

BPM5 paragraphs 200 and 240).

Transport services are renamed (previously “trans-

portation services”) in line with the CPC (paragraph

10.74; BPM5 paragraph 230).

Postal and courier services are included in transport

(paragraphs 10.82–10.85; BPM5 paragraph 253).

Treatments of alternative time-share arrangements

are stated (paragraph 10.100 and Table 10.3).

The classification of acquisition of goods and ser-

vices by nonresident construction enterprises in the

economy in which they are working is changed to show

separately construction abroad and construction in the

compiling economy on a supplementary basis. Goods

and services acquired locally are included under this

heading, previously under other business services. The

inclusion of buildings (excluding the land component)

is clarified as being under construction. As a result

of these changes, the title of the item is construction,

rather than construction services (paragraphs 10.101–

10.108, BPM5 paragraph 254).

The estimate of insurance claims used to derive the

value of insurance services is changed to adjust for

claim volatility. Premium supplements are taken into

account in deriving insurance services. Reinsurance

and direct insurance are treated consistently (paragraph

10.111; BPM5 paragraph 257).

Financial dealers’ margins are discussed under ser-

vices (previously only mentioned in the discussion

of the financial account) (paragraphs 10.122–10.123;

BPM5 paragraph 106).

Services of asset-holding entities to their owners,

where asset management costs are taken out of income,

are recognized (paragraphs 10.124–10.125).

FISIM and other implicit financial services have

been included in services, with a method for calculation

based on the reference rate (paragraphs 10.126–10.136;

footnote to BPM5 paragraph 258).

“Charges for the use of intellectual property n.i.e.”

replaces the term “royalties and license fees.” Also, its

Appendix 8 g Changes from BPM5

298

content and borderlines with computing and audiovisual

services have been clarified (paragraphs 10.137–10.140

and Table 10.4; BPM5 paragraph 260).

A grouping of telecommunications, computer, and

information services is introduced, involving a number

of items that had previously been separated (paragraph

10.141; BPM5 paragraphs 253 and 259).

The borderline between goods and services is elab-

orated for computer software (paragraph 10.143 and

Table 10.4; BPM5 paragraphs 259–260).

The results of research and development (such as pat-

ents, copyrights, and industrial processes) are treated as

produced assets included in research and development

services (previously treated as nonproduced assets and

shown in the capital account) (paragraph 10.148; BPM5

paragraph 358).

Environmental services such as carbon offsets and

sequestration, waste treatment, and handling of scrap

are discussed (paragraph 10.152, also 10.22(h)).

Merchanting of services is described and its treat-

ment explained (paragraph 10.160).

Audiovisual services are delineated from goods, and

the relationship between different kinds of licenses for

intellectual property is explained (paragraphs 10.162–

10.166 and Table 10.4; BPM5 paragraph 265).

The treatment of gambling services is described

(paragraph 10.171, also 12.25).

The coverage of government goods and services

n.i.e. is clarified (paragraphs 10.173–10.181; BPM5

paragraph 266).

A discussion of the treatment of government licenses,

permits, and so forth is provided (paragraphs 10.180–

10.181; BPM5 paragraph 300).

Additional guidance on the treatment of technical

assistance is provided (Box 10.6).

Chapter 11. Primary Income Account

The term “primary income” is introduced. Con-

sistency between international accounts and national

accounts is ensured. The meaning and relationship

of primary income, property income, and investment

income are clarified (paragraphs 11.1–11.3; BPM5

paragraph 267).

A detailed breakdown of investment income is intro-

duced to link with functional and instrument classi-

fications of financial instruments. Income on other

investment and income on reserve assets are shown

separately. Rent and taxes and subsidies on products

and production are included explicitly as primary

income items (Tables 11.1, 11.2, and 11.3; BPM5 para-

graph 281).

The employer-employee relationship is clarified to

distinguish between compensation of employees and

payments for services (paragraphs 11.11–11.13).

“Distributed income from quasi-corporations” as a

term subsumes distributed branch profits (paragraph

11.26; BPM5 paragraph 277).

Superdividends are defined and their treatment as

withdrawals of equity extended (paragraph 11.27; lim-

ited to liquidating dividends in BPM5 paragraph 290).

Dividends are recorded at the time the shares go ex

dividend (paragraph 11.31, also paragraph 3.48; BPM5

paragraph 282).

“Reinvested earnings” is used as a term for all

direct investment enterprises, and thus includes undis-

tributed branch profits (paragraph 11.35; BPM5 para-

graph 277).

Investment income attributable to the owners

of investment fund shares also includes reinvested

earnings (paragraphs 11.37–11.39; BPM5 paragraphs

277–278).

If branches do not distribute profits, the retained

earnings of the branch are considered to be reinvested

earnings. In BPM5, if distributed branch profits were

not identified, all branch profits were treated as being

distributed, not reinvested earnings (paragraph 11.42;

BPM5 paragraph 278).

When a chain of direct investment relationships exists,

it is clarified that reinvested earnings should be recorded

between the direct investor and directly owned direct

investment enterprises only (paragraph 11.47).

Debt instruments with both the amount to be paid

at maturity and periodic payments indexed to a for-

eign currency are classified and treated as if they are

denominated in foreign currency (paragraph 11.50(a)–

(b); BPM5 paragraph 397).

The treatment of index-linked debt instruments is

clarified and modified (paragraphs 11.50(c) and 11.59–

11.65; BPM5 paragraph 397).

Fees on securities lending and gold loans are clari-

fied and treated as interest (paragraphs 11.67–11.68).

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

299

Interest income is adjusted to remove the FISIM

component, that is, “pure interest.” “Actual interest” is

continued as a memorandum item (paragraphs 11.74–

11.75; footnote to BPM5 paragraph 258).

Rent is identified as a component of primary income

(paragraph 11.85; previously part of other investment

income).

Taxes and subsidies on products and production are

classed as primary income, not current transfers (para-

graphs 11.91–11.92; BPM5 paragraph 299).

Treatments of income on reverse investment and

investment between fellow enterprises are included.

Income arising from reverse investment is to be recorded

on a gross, rather than net, basis. Possible breakdowns

by type of direct investment relationship and associated

investment income flows are distinguished (paragraphs

11.97–11.100; BPM5 paragraph 276).

The treatment of transfer pricing is clarified (para-

graphs 11.101–11.102; BPM5 paragraph 97).

Income on reserve assets is identified separately

(previously other investment) (paragraph 11.109; BPM5

paragraph 281).

Consistent with the corresponding positions, interest

on SDR allocations and holdings are shown on a gross

basis (paragraph 11.110).

Chapter 12. Secondary Income

Account

The term “secondary income” is introduced (para-

graph 12.1; BPM5 paragraph 291).

More detailed classification of types of current trans-

fers are introduced on a supplementary basis (para-

graphs 12.20–12.58).

Refunds of taxes to taxpayers are treated as nega-

tive taxes, that is, the amount of taxes is reduced by

tax refunds instead of positive transfers by government

(paragraph 12.28; BPM5 paragraph 299).

The delineation between taxes and services is clari-

fied. Business licenses to fish, hunt, and so forth are no

longer automatically treated as taxes, but as services,

rent, taxes, or acquisition of a license asset, depending

on what is supplied in return (paragraph 12.30, also

10.180–10.181; BPM5 paragraph 300).

The treatment of social contributions and benefits is

specified (paragraphs 12.32–12.40).

The treatment of pension contributions and benefits

is aligned with the SNA and the adjustment for change

in pension entitlements is introduced (paragraph 12.39;

BPM5 paragraph 299).

The treatment of insurance claims and net premiums

and of standardized guarantees is specified (paragraphs

12.41–12.46; BPM5 paragraph 257).

Clarification is made on technical assistance as a

part of investment projects to be classified as capital

transfers (paragraph 12.50).

Concessional debt is discussed and introduced as

a supplementary item. In BPM5, a transfer could be

identified on government loans bearing lower interest

rates than those consistent with grace and repayment

periods, although the implementation of this principle

was not elaborated (paragraph 12.51; BPM5 paragraph

104).

The term “personal transfers,” which is broader than

workers’ remittances, is introduced (paragraph 12.21;

BPM5 paragraph 302).

The concepts of (1) personal remittances, (2) total

remittances, and (3) total remittances and transfers to

NPISHs are introduced (paragraph 12.27).

The treatment of gambling transfers is described

(paragraph 12.26).

Chapter 13. Capital Account

Debits and credits for acquisitions and disposals of

nonproduced nonfinancial assets are to be recorded

separately, not netted (paragraph 13.7, also paragraph

3.113; BPM5 paragraph 312).

The terminology for nonproduced assets is expanded,

to include “natural resources,” “contracts, leases, and

licenses,” and “marketing assets and goodwill” (para-

graphs 13.8–13.18; BPM5 paragraph 358).

Internet domain names are identified as possible eco-

nomic assets (paragraph 13.18).

Insurance claims may be treated as capital transfers

in the case of catastrophes (paragraph 13.24; BPM5

paragraph 257).

The personal effects, financial assets, and liabilities

of persons changing residence are no longer covered by

a capital transfer (paragraph 13.30, also 9.21–9.22 and

10.22(b); BPM5 paragraphs 352–353).

Appendix 8 g Changes from BPM5

300

Inheritance is treated as a capital transfer instead

of a current transfer (paragraph 13.31; BPM5 para-

graph 303).

Patents and copyrights are no longer treated as non-

produced assets, so no longer appear in the capital

account. (Patents and copyrights are classified as pro-

duced assets and appear under particular services, such

as research and development services; see Table 10.4.)

(BPM5 paragraph 358).

Chapter 14. Selected Issues in Balance

of Payments and International

Investment Position Analysis

The “analytic” presentation (paragraphs 14.16–14.17),

monetary presentation (paragraphs 14.20–14.22),

implications of a current account surplus (paragraphs

14.48–14.56), and balance sheet approach (paragraphs

14.57–14.66) are incorporated (BPM5 Appendix V).

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

301

APPENDIX

Standard Components and

Selected Other Items

BPM6 codes are shown before the name of item.

Codes used in the 2008 SNA are shown, where appli-

cable, in brackets after the item: B—balancing items,

P—products, D—distributive transactions, F—finan-

cial transactions, AF—financial positions, NP—trans-

actions in nonproduced assets, and X—supplementary

items. For details, see 2008 SNA, Annex 1, Classifi-

cation and Coding Structure of Accounting Entries.

Suffixes are added to SNA codes for the international

accounts functional categories: D—direct invest-

ment, P—portfolio investment, F—financial deriva-

tives (other than reserves) and employee stock options,

O—other investment; and R—reserve assets.

Supplementary items are shown in italics. Headings

and aggregates are shown in bold type. For definitions

of standard components, memorandum items, and sup-

plementary items, see paragraph 1.15.

A. Balance of Payments

Balance of payments Credits Debits

1. Current account

Current account balance (+ surplus; – deficit) (B12)

1.A Goods and services (P6/P7)

Balance on goods and services (+ surplus; – deficit) (B11)

1.A.a Goods (P61/P71)

Balance on trade in goods (+ surplus; – deficit)

1.A.a.1 General merchandise on a BOP basis

Of which: 1.A.a.1.1 Re-exports n.a.

1.A.a.2 Net exports of goods under merchanting n.a.

1.A.a.2.1 Goods acquired under merchanting (negative credits) n.a.

1.A.a.2.2 Goods sold under merchanting n.a.

1.A.a.3 Nonmonetary gold

1.A.b Services (P72/P82)

Balance on trade in services (+ surplus; – deficit)

1.A.b.1 Manufacturing services on physical inputs owned by others

1.A.b.1.1 Goods for processing in reporting economy—Goods returned (CR.),

Goods received (DR.) (see paragraph 10.67)

1.A.b.1.2 Goods for processing abroad—Goods sent (CR.), Goods

returned (DR.) (see paragraph 10.67)

1.A.b.2 Maintenance and repair services n.i.e.

1.A.b.3 Transport

1.A.b.3.1 Sea transport

1.A.b.3.1.1 Passenger

Of which: 1.A.b.3.1.1.1 Payable by border, seasonal and other

short-term workers

1.A.b.3.1.2 Freight

1.A.b.3.1.3 Other

1.A.b.3. 2 Air transport

1.A.b.3.2.1 Passenger

Of which: 1.A.b.3.2.1.1 Payable by border, seasonal and other

short-term workers

302

A. Balance of Payments (continued)

Balance of payments Credits Debits

1.A.b.3.2.2 Freight

1.A.b.3.2.3 Other

1.A.b.3.3 Other modes of transport

1.A.b.3.3.1 Passenger

Of which: 1.A.b.3.3.1.1 Payable by border, seasonal, and other

short-term workers

1.A.b.3.3.2 Freight

1.A.b.3.3.3 Other

1.A.b.3.4 Postal and courier services

For all modes of transport

1.A.b.3.0.1 Passenger

Of which: 1.A.b.3.0.1.1 Payable by border, seasonal, and other

short-term workers

1.A.b.3.0.2 Freight

1.A.b.3.0.3 Other

1.A.b.4 Travel

1.A.b.4.1 Business

1.A.b.4.1.1 Acquisition of goods and services by border, seasonal, and

other short-term workers

1.A.b.4.1.2 Other

1.A.b.4.2 Personal

1.A.b.4.2.1 Health-related

1.A.b.4.2.2 Education-related

1.A.b.4.2.3 Other

For both business and personal travel

1.A.b.4.0.1 Goods

1.A.b.4.0.2 Local transport services

1.A.b.4.0.3 Accommodation services

1.A.b.4.0.4 Food-serving services

1.A.b.4.0.5 Other services

Of which: 1.A.b.4.0.5.1 Health services

1.A.b.4.0.5.2 Education services

1.A.b.5 Construction

1.A.b.5.1 Construction abroad

1.A.b.5.2 Construction in the reporting economy

1.A.b.6 Insurance and pension services

1.A.b.6.1 Direct insurance

1.A.b.6.2 Reinsurance

1.A.b.6.3 Auxiliary insurance services

1.A.b.6.4 Pension and standardized guarantee services

1.A.b.7 Financial services

1.A.b.7.1 Explicitly charged and other financial services

1.A.b.7.2 Financial intermediation services indirectly measured (FISIM)

1.A.b.8 Charges for the use of intellectual property n.i.e.

1.A.b.9 Telecommunications, computer, and information services

1.A.b.9.1 Telecommunications services

1.A.b.9.2 Computer services

1.A.b.9.3 Information services

1.A.b.10 Other business services

1.A.b.10.1 Research and development services

1.A.b.10.2 Professional and management consulting services

1.A.b.10.3 Technical, trade-related, and other business services

1.A.b.11 Personal, cultural, and recreational services

1.A.b.11.1 Audiovisual and related services

1.A.b.11.2 Other personal, cultural, and recreational services

1.A.b.12 Government goods and services n.i.e.

1.A.b.0.1 Tourism-related services in travel and passenger transport

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

303

A. Balance of Payments (continued)

Balance of payments Credits Debits

1.B Primary income

Balance on primary income (+ surplus; – deficit)

1.B.1 Compensation of employees (D1)

1.B.2 Investment income

1.B.2.1 Direct investment

1.B.2.1.1 Income on equity and investment fund shares

1.B.2.1.1.1 Dividends and withdrawals from income of

quasi-corporations (D42D)

1.B.2.1.1.1.1 Direct investor in direct investment enterprises

1.B.2.1.1.1.2 Direct investment enterprises in direct investor

(reverse investment)

1.B.2.1.1.1.3 Between fellow enterprises

1.B.2.1.1.1.3.1 if ultimate controlling parent is resident

1.B.2.1.1.1.3.2 if ultimate controlling parent is nonresident

1.B.2.1.1.1.3.3 if ultimate controlling parent is unknown

1.B.2.1.1.2 Reinvested earnings (D43D)

Investment income attributable to policyholders in insurance, pension

schemes, and standardized guarantees, and to investment fund

shareholders (D44D)

Of which: Investment income attributable to investment fund

shareholders (D443D)

1.B.2.1.2 Interest (D41D)

1.B.2.1.2.1 Direct investor in direct investment enterprises

1.B.2.1.2.2 Direct investment enterprises in direct investor (reverse investment)

1.B.2.1.2.3 Between fellow enterprises

1.B.2.1.2.3.1 if ultimate controlling parent is resident

1.B.2.1.2.3.2 if ultimate controlling parent is nonresident

1.B.2.1.2.3.3 if ultimate controlling parent is unknown

1.B.2.1.2M Memorandum: Interest before FISIM

1.B.2.2 Portfolio investment

1.B.2.2.1 Investment income on equity and investment fund shares

1.B.2.2.1.1 Dividends on equity excluding investment fund shares (D42P)

1.B.2.2.1.2 Investment income attributable to investment fund shareholders

(D443P)

1.B.2.2.1.2.1 Dividends

1.B.2.2.1.2.2 Reinvested earnings

1.B.2.2.2 Interest (D41P)

1.B.2.2.2.1 Short-term

1.B.2.2.2.2 Long-term

1.B.2.3 Other investment

1.B.2.3.1 Withdrawals from income of quasi-corporations (D42O)

1.B.2.3.2 Interest (D41O)

1.B.2.3.2M Memorandum: Interest before FISIM

1.B.2.3.3 Investment income attributable to policyholders in insurance, pension schemes,

and standardized guarantee schemes

1.B.2.4 Reserve assets

1.B.2.4.1 Income on equity and investment fund shares (D42R)

1.B.2.4.2 Interest (D41R)

1.B.2.4.2M Memorandum: Interest before FISIM

1.B.3 Other primary income

1.B.3.1 Taxes on production and on imports (D2)

1.B.3.2 Subsidies (D3)

1.B.3.3 Rent (D45)

Balance on goods, services, and primary income (+ surplus; – deficit)

1.C Secondary income

Balance on secondary income (+ surplus; – deficit)

1.C.1 General government

1.C.1.1 Current taxes on income, wealth, etc. (D5) n.a.

Of which:1.C.1.1.1 payable by border, seasonal, and other short-term workers n.a.

1.C.1.2 Social contributions (D61) n.a.

Of which:1.C.1.2.1 payable by border, seasonal, and other short-term workers n.a.

Appendix 9 g Standard Components and Selected Other Items

304

A. Balance of Payments (continued)

Balance of payments Credits Debits

1.C.1.3 Social benefits (D62+D63) n.a.

1.C.1.4 Current international cooperation (D74)

1.C.1.5 Miscellaneous current transfers of general government (D75)

Of which: 1.C.1.5.1 Current transfers to NPISHs

1.C.2 Financial corporations, nonfinancial corporations, households, and NPISHs

1.C.2.1 Personal transfers (Current transfers between resident and nonresident

households)

Of which: 1.C.2.1.1 Workers’ remittances

1.C.2.2 Other current transfers

1.C.2.0.1 Current taxes on income, wealth, etc. (D5) n.a.

1.C.2.0.2 Social contributions (D61)

1.C.2.0.3 Social benefits (D62+D63)

1.C.2.0.4 Net nonlife insurance premiums (D71)

1.C.2.0.5 Nonlife insurance claims (D72)

1.C.2.0.6 Current international cooperation (D74)

1.C.2.0.7 Miscellaneous current transfers (D75)

Of which:1.C.2.0.7.1 Current transfers to NPISHs

1.C.3 Adjustment for change in pension entitlements (D8)

2 Capital account

Capital account balance (+ surplus; – deficit)

2.1 Gross acquisitions (DR.)/disposals (CR.) of nonproduced nonfinancial assets (N2)

2.2 Capital transfers (D9)

2.2.1 General government

2.2.1.1 Debt forgiveness

2.2.1.2 Other capital transfers

Of which:2.2.1.2.1 Capital taxes (D91)

2.2.2 Financial corporations, nonfinancial corporations, households, and NPISHs

2.2.2.1 Debt forgiveness

2.2.2.2 Other capital transfers

Of which: 2.2.2.2.1 Capital taxes (D91) n.a.

Of which: 2.2.2.0.1 Between households

Of which:

for each item in capital transfers:

Transfers to NPISHs

Net lending (+) / net borrowing (–) (balance from current and capital accounts) (B9)

Net acquisition of Net incurrence

Balance of payments financial assets of liabilities

3 Financial account

Net lending (+) / net borrowing (–) (from financial account) (B9)

3.1 Direct investment (FD)

3.1.1 Equity and investment fund shares (F5D)

3.1.1.1 Equity other than reinvestment of earnings

3.1.1.1.1 Direct investor in direct investment enterprises

3.1.1.1.2 Direct investment enterprises in direct investor (reverse investment)

3.1.1.1.3 Between fellow enterprises

3.1.1.1.3.1 if ultimate controlling parent is resident

3.1.1.1.3.2 if ultimate controlling parent is nonresident

3.1.1.1.3.3 if ultimate controlling parent is unknown

3.1.1.2 Reinvestment of earnings

Of which: 3.1.1.0.1 Investment fund shares/units (F52D)

Of which: 3.1.1.0.1.1 Money market fund shares/units (F521D)

3.1.2 Debt instruments

3.1.2.1 Direct investor in direct investment enterprises

3.1.2.2 Direct investment enterprises in direct investor (reverse investment)

3.1.2.3 Between fellow enterprises

3.1.2.3.1 if ultimate controlling parent is resident

3.1.2.3.2 if ultimate controlling parent is nonresident

3.1.2.3.3 if ultimate controlling parent is unknown

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

305

A. Balance of Payments (continued)

Net acquisition of Net incurrence

Balance of payments financial assets of liabilities

Of which: 3.1.2.0 Debt securities (F3D):

3.1.2.0.1 Direct investor in direct investment enterprises

3.1.2.0.2 Direct investment enterprises in direct investor (reverse investment)

3.1.2.0.3 Between fellow enterprises

3.1.2.0.3.1 if ultimate controlling parent is resident

3.1.2.0.3.2 if ultimate controlling parent is nonresident

3.1.2.0.3.3 if ultimate controlling parent is unknown

3.2 Portfolio investment (FP)

3.2.1 Equity and investment fund shares (F5P)

3.2.1.1 Central bank n.a.

3.2.1.1.9 Monetary authorities (where relevant) n.a.

3.2.1.2 Deposit-taking corporations, except the central bank

3.2.1.3 General government n.a.

3.2.1.4 Other sectors

3.2.1.4.1 Other financial corporations

3.2.1.4.2 Nonfinancial corporations, households, and NPISHs

3.2.1.0.1 Equity securities other than investment fund shares (F51P)

3.2.1.0.1.1 Listed (F511P)

3.2.1.0.1.2 Unlisted (F512P)

3.2.1.0.2 Investment fund shares/units (F52P)

Of which: 3.2.1.0.2.1 Reinvestment of earnings

Of which: 3.2.1.0.2.0.1 Money market fund shares/units (F521P)

3.2.2 Debt securities (F3P)

3.2.2.1 Central bank

3.2.2.1.1 Short-term

3.2.2.1.2 Long-term

3.2.2.1.9 Monetary authorities (where relevant)

3.2.1.1.9.1 Short-term

3.2.1.1.9.2 Long-term

3.2.2.2 Deposit-taking corporations, except the central bank

3.2.2.2.1 Short-term

3.2.2.2.2 Long-term

3.2.2.3 General government

3.2.2.3.1 Short-term

3.2.2.3.2 Long-term

3.2.2.4 Other sectors

3.2.2.4.0.1 Short-term

3.2.2.4.0.2 Long-term

3.2.2.4.1 Other financial corporations

3.2.2.4.1.1 Short-term

3.2.2.4.1.2 Long-term

3.2.2.4.2 Nonfinancial corporations, households, and NPISHs

3.2.2.4.2.1 Short-term

3.2.2.4.2.2 Long-term

3.3 Financial derivatives (other than reserves) and employee stock options (F7F)

555

3.3.1 Central bank

3.3.1.9 Monetary authorities (where relevant)

3.3.2 Deposit-taking corporations, except the central bank

3.3.3 General government

3.3.4 Other sectors

3.3.4.1 Other financial corporations

3.3.4.2 Nonfinancial corporations, households, and NPISHs

3.3.0.1 Financial derivatives (other than reserves) (F71F)

3.3.0.1.1 Options (F711F)

3.3.0.1.2 Forward-type contracts (F712F)

3.3.0.2.Employee stock options (F72)

3.4 Other investment (FO)

3.4.1 Other equity (F519O)

3.4.2 Currency and deposits (F2O)

3.4.2.1 Central bank

3.4.2.1.1 Short-term

3.4.2.1.2 Long-term

Appendix 9 g Standard Components and Selected Other Items

306

A. Balance of Payments (continued)

Net acquisition of Net incurrence

Balance of payments financial assets of liabilities

3.4.2.1.9 Monetary authorities (where relevant)

3.4.2.1.9.1 Short-term

3.4.2.1.9.2 Long-term

3.4.2.2 Deposit-taking corporations, except the central bank

3.4.2.2.0.1 Of which: Interbank positions

3.4.2.2.1 Short-term

3.4.2.2.2 Long-term

3.4.2.3 General government

3.4.2.3.1 Short-term

3.4.2.3.2 Long-term

3.4.2.4 Other sectors

3.4.2.4.0.1 Short-term

3.4.2.4.0.2 Long-term

3.4.2.4.1 Other financial corporations

3.4.2.4.1.1 Short-term

3.4.2.4.1.2 Long-term

3.4.2.4.2 Nonfinancial corporations, households, and NPISHs n.a.

3.4.2.4.2.1 Short-term n.a.

3.4.2.4.2.2 Long-term n.a.

3.4.3 Loans (F4O)

3.4.3.1 Central bank

3.4.3.1.1 Credit and loans with the IMF (other than reserves)

3.4.3.1.2 Other short-term

3.4.3.1.3 Other long-term

3.4.3.1.9 Monetary authorities (where relevant)

3.4.3.1.9.1 Credit and loans with the IMF (other than reserves)

3.4.3.1.9.2 Other short-term

3.4.3.1.9.3 Other long-term

3.4.3.2 Deposit-taking corporations, except the central bank

3.4.3.2.1 Short-term

3.4.3.2.2 Long-term

3.4.3.3 General government

3.4.3.3.1 Credit and loans with the IMF (other than reserves)

3.4.3.3.2 Other short-term

3.4.3.3.3 Other long-term

3.4.3.4 Other sectors

3.4.3.4.0.1 Short-term

3.4.3.4.0.2 Long-term

3.4.3.4.1 Other financial corporations

3.4.2.4.1.1 Short-term

3.4.2.4.1.2 Long-term

3.4.3.4.2 Nonfinancial corporations, households, and NPISHs

3.4.3.4.2.1 Short-term

3.4.3.4.2.2 Long-term

3.4.4 Insurance, pension, and standardized guarantee schemes (F6O)

3.4.4.1 Central bank

3.4.4.1.9 Monetary authorities (where relevant)

3.4.4.2 Deposit-taking corporations, except the central bank

3.4.4.3 General government

3.4.4.4 Other sectors

3.4.4.4.1 Other financial corporations

3.4.4.4.2 Nonfinancial corporations, households, and NPISHs

3.4.4.0.1 Nonlife insurance technical reserves (F61O)

3.4.4.0.2 Life insurance and annuity entitlements (F62O)

3.4.4.0.3 Pension entitlements (F63O)

3.4.4.0.4 Claims of pension funds on pension managers (F64O)

3.4.4.0.5 Entitlements to nonpension benefits (F65O)

3.4.4.0.6 Provisions for calls under standardized guarantees (F66O)

3.4.5 Trade credit and advances (F81O)

3.4.5.1 Central bank

3.4.5.1.1 Short-term

3.4.5.1.2 Long-term

3.4.5.1.9 Monetary authorities (where relevant)

3.4.5.1.9.1 Short-term

3.4.5.1.9.2 Long-term

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

307

A. Balance of Payments (continued)

Net acquisition of Net incurrence

Balance of payments financial assets of liabilities

3.4.5.2 General government

3.4.5.2.1 Short-term

3.4.5.2.2 Long-term

3.4.5.3 Deposit-taking corporations

3.4.5.3.1 Short-term

3.4.5.3.2 Long-term

3.4.5.4 Other sectors

3.4.5.4.0.1 Short-term

3.4.5.4.0.2 Long-term

3.4.5.4.1 Other financial corporations

3.4.5.4.1.1 Short-term

3.4.5.4.1.2 Long-term

3.4.5.4.2 Nonfinancial corporations, households, and NPISHs

3.4.5.4.2.1 Short-term

3.4.5.4.2.2 Long-term

3.4.6 Other accounts receivable/payable—other (F89O)

3.4.6.1 Central bank

3.4.6.1.1 Short-term

3.4.6.1.2 Long-term

3.4.6.1.9 Monetary authorities (where relevant)

3.4.6.1.9.1 Short-term

3.4.6.1.9.2 Long-term

3.4.6.2 Deposit-taking corporations, except the central bank

3.4.6.2.1 Short-term

3.4.6.2.2 Long-term

3.4.6.3 General government

3.4.6.3.1 Short-term

3.4.6.3.2 Long-term

3.4.6.4 Other sectors

3.4.6.4.0.1 Short-term

3.4.6.4.0.2 Long-term

3.4.6.4.1 Other financial corporations

3.4.6.4.1.1 Short-term

3.4.6.4.1.2 Long-term

3.4.6.4.2 Nonfinancial corporations, households, and NPISHs

3.4.6.4.2.1 Short-term

3.4.6.4.2.2 Long-term

3.4.7 Special drawing rights (F12) n.a.

3.5 Reserve assets (FR)

3.5.1 Monetary gold (F11) n.a.

3.5.1.1 Gold bullion

n.a.

3.5.1.2 Unallocated gold accounts

n.a.

3.5.2 Special drawing rights (F12) n.a.

3.5.3 Reserve position in the IMF n.a.

3.5.4 Other reserve assets n.a.

3.5.4.1 Currency and deposits n.a.

3.5.4.1.1 Claims on monetary authorities n.a.

3.5.4.1.2 Claims on other entities n.a.

3.5.4.2 Securities n.a.

3.5.4.2.1 Debt securities (F3R) n.a.

3.5.4.2.1.1 Short-term (F31R) n.a.

3.5.4.2.1.2 Long-term (F32R) n.a.

3.5.4.2.2 Equity and investment fund shares (F5R) n.a.

3.5.4.3 Financial derivatives (F7R)

n.a.

3.5.4.4 Other claims n.a.

3 Total assets/liabilities (F)

Of which: (by instrument):

3.0.1 Equity and investment fund shares (F5)

3.0.1.1 Equity (F51)

3.0.1.2 Investment fund shares (F52)

3.0.2 Debt instruments

3.0.2.1 Special drawing rights (F12)

3.0.2.2 Currency and deposits (F2)

Appendix 9 g Standard Components and Selected Other Items

308

A. Balance of Payments (concluded)

Net acquisition of Net incurrence

Balance of payments financial assets of liabilities

3.0.2.3 Debt securities (F3)

3.0.2.4 Loans (F4)

3.0.2.5 Insurance, pension, and standardized guarantee schemes (F6)

3.0.2.6 Other accounts receivable/payable (F8)

3.0.3 Other financial assets and liabilities

3.0.3.1 Monetary gold (F11) n.a.

3.0.3.2 Financial derivatives and ESOs (F7)

Credits Debits

Net errors and omissions

Memorandum Items—Exceptional Financing

1. Current and/or capital transfers

1.1 Debt forgiveness

1.2 Other intergovernmental grants

1.3 Grants received from IMF subsidy accounts

2. Direct investment

2.1 Equity investment associated with debt reduction

2.2 Debt instruments

3. Portfolio investment—liabilities

4. Other investment—liabilities

4.1 Drawings on new loans by authorities or by other sectors on behalf of authorities

4.2 Rescheduling of existing debt

5.Arrears

7, 8

5.1 Accumulation of arrears

5.1.1 Principal on short-term debt

5.1.2 Principal on long-term debt

5.1.3 Original interest

5.1.4 Penalty interest

5.2 Repayment of arrears

5.2.1 Principal

5.2.2 Interest

5.3 Rescheduling of arrears

5.3.1 Principal

5.3.2 Interest

5.4 Cancellation of arrears

5.4.1 Principal

5.4.2 Interest

(See end of IIP listing for footnotes.)

Short-term and long-term are defined on an original maturity basis in the standard components.

Additional items for balance of payments:

Direct investment:

Direct investment by instrument, maturity, and institutional sector for reconciliation with national accounts, monetary and financial statistics, and government

finance statistics (see paragraphs 2.32, 2.34, and 14.59)

Direct investment involving resident SPEs (SPEs according to national definitions) (see paragraphs 4.50 and 4.87)

Direct investment in the reporting economy and direct investment abroad (see Box 6.4)

Real estate investment (see paragraph 6.31)

Pass-through funds (see paragraphs 6.33–6.34)

Data by kind of economic activity (industry) (see paragraph 6.50)

Mergers and acquisitions (see paragraph 8.18)

Data for the money-issuing sector, i.e., the central bank plus other deposit-taking corporations plus other institutions covered in the definition of broad money (e.g.,

money market funds in some cases; see paragraph 4.72)

Financial account items for public corporations (see paragraph 4.108)

Data by partner economy (see paragraphs 4.146-4.148)

Detail for investment income to match the IIP, to facilitate rate of return calculations (see paragraphs 7.13 and 11.6)

Gross flows for financial account items (see paragraph 8.9)

Reconciliation table between merchandise source data and goods on a balance of payments basis (see Table 10.2)

Gross insurance premiums earned and unadjusted insurance claims (see paragraph 10.112)

Transfers implied by loans at concessional interest (see paragraph 12.51)

Personal remittances (XD5452PR) (see paragraph 12.27(a))

Total remittances (XD5452TR) (see paragraph 12.27(b))

Total remittances and transfers to nonprofit institutions serving households (see paragraph 12.27(c))

Insurance claims included in other capital transfers (see paragraph 13.24)

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

309

B. International Investment Position

International Investment Position Assets Liabilities

Net International Investment Position (B90)

1 Direct investment (AFD)

1.1 Equity and investment fund shares (AF5D)

1.1.1 Direct investor in direct investment enterprises

1.1.2 Direct investment enterprises in direct investor (reverse investment)

1.1.3 Between fellow enterprises

1.1.3.1 if ultimate controlling parent is resident

1.1.3.2 if ultimate controlling parent is nonresident

1.1.3.3 if ultimate controlling parent is unknown

Of which: 1.1.0.1 Investment fund shares/units (AF52D)

Of which: 1.1.0.1.1 Money market fund shares/units (AF521D)

1.2 Debt instruments

1.2.1 Direct investor in direct investment enterprises

1.2.2 Direct investment enterprises in direct investor (reverse investment)

1.2.3 Between fellow enterprises

1.2.3.1 if ultimate controlling parent is resident

1.2.3.2. if ultimate controlling parent is nonresident

1.2.3.3 if ultimate controlling parent is unknown

Of which: 1.2.0.1 Debt securities (AF3D):

1.2.0.1.1 Direct investor in direct investment enterprises

1.2.0.1.2 Direct investment enterprises in direct investor (reverse investment)

1.2.0.1.3 Between fellow enterprises

1.2.0.1.3.1 if ultimate controlling parent is resident

1.2.0.1.3.2 if ultimate controlling parent is nonresident

1.2.0.1.3.3 if ultimate controlling parent is unknown

2 Portfolio investment (AFP)

2.1 Equity and investment fund shares (AF5P)

2.1.1 Central bank n.a.

2.1.1.9 Monetary authorities (where relevant) n.a.

2.1.2 Deposit-taking corporations, except the central bank

2.1.3 General government n.a.

2.1.4 Other sectors

2.1.4.1 Other financial corporations

2.1.4.2 Nonfinancial corporations, households, and NPISHs

2.1.0.1 Equity securities other than investment fund shares/units (AF51P)

2.1.0.1.1 Listed (AF511P)

2.1.0.1.2 Unlisted (AF512P)

2.1.0.2 Investment fund shares/units (AF52P)

Of which: 2.1.0.2.1 Money market fund shares/units (AF521P)

2.2 Debt securities (AF3P)

2.2.1 Central bank

2.2.1.1 Short-term

2.2.1.2 Long-term

2.2.1.9 Monetary authorities (where relevant)

2.2.1.9.1 Short-term

2.2.1.9.2 Long-term

2.2.2 Deposit-taking corporations, except the central bank

2.2.2.1 Short-term

2.2.2.2 Long-term

2.2.3 General government

2.2.3.1 Short-term

2.2.3.2 Long-term

2.2.4 Other sectors

2.2.4.0.1 Short-term

2.2.4.0.2 Long-term

2.2.4.1 Other financial corporations

2.2.4.1.1 Short-term

2.2.4.1.2 Long-term

2.2.4.2 Nonfinancial corporations, households, and NPISHs

2.2.4.2.1 Short-term

2.2.4.2.2 Long-term

Appendix 9 g Standard Components and Selected Other Items

310

B. International Investment Position (continued)

International Investment Position Assets Liabilities

3 Financial derivatives (other than reserves) and employee stock options (AF7F)

3.1 Central bank

3.1.9 Monetary authorities (where relevant)

3.2 Deposit-taking corporations, except the central bank

3.3 General government

3.4 Other sectors

3.4.1 Other financial corporations

3.4.2 Nonfinancial corporations, households, and NPISHs

3.0.1 Financial derivatives (other than reserves) (AF71F)

3.0.1.1 Options (AF711F)

3.0.1.2 Forward-type contracts (AF712F)

3.0.2 Employee stock options (AF72)

4 Other investment (AFO)

4.1 Other equity (AF511O)

4.2 Currency and deposits (AF2O)

4.2.1 Central bank

4.2.1.0.1 Short-term

4.2.1.0.2 Long-term

4.2.1.9 Monetary authorities (where relevant)

4.2.1.9.1 Short-term

4.2.1.9.2 Long-term

4.2.2 Deposit-taking corporations, except the central bank

4.2.2.1 Short-term

4.2.2.2 Long-term

Of which: 4.2.2.0.1 Interbank positions (AF221O)

4.2.3 General government

4.2.3.1 Short-term

4.2.3.2 Long-term

4.2.4 Other sectors

4.2.4.0.1 Short-term

4.2.4.0.2 Long-term

4.2.4.1 Other financial corporations

4.2.4.1.1 Short-term

4.2.4.1.2 Long-term

4.2.4.2 Nonfinancial corporations, households, and NPISHs n.a.

4.2.4.2.1 Short-term n.a.

4.2.4.2.2 Long-term n.a.

4.3 Loans (AF4O)

4.3.1 Central bank

4.3.1.1 Credit and loans with the IMF (other than reserves)

4.3.1.2 Other short-term

4.3.1.3 Other long-term

4.3.1.9 Monetary authorities (where relevant)

4.3.1.9.1 Credit and loans with the IMF (other than reserves)

4.3.1.9.2 Other short-term

4.3.1.9.3 Other long-term

4.3.2 Deposit-taking corporations, except the central bank

4.3.2.1 Short-term

4.3.2.2 Long-term

4.3.3 General government

4.3.3.1 Credit and loans with the IMF

4.3.3.2 Other short-term

4.3.3.3 Other long-term

4.3.4 Other sectors

4.3.4.0.1 Short-term

4.3.4.0.2 Long-term

4.3.4.1 Other financial corporations

4.3.4.1.1 Short-term

4.3.4.1.2 Long-term

4.3.4.2 Nonfinancial corporations, households, and NPISHs

4.3.4.2.1 Short-term

4.3.4.2.2 Long-term

4.4 Insurance, pension, and standardized guarantee schemes (AF6O)

4.4.1 Central bank

4.4.1.9 Monetary authorities (where relevant)

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

311

B. International Investment Position (continued)

International Investment Position Assets Liabilities

4.4.2 Deposit-taking corporations, except the central bank

4.4.3 General government

4.4.4 Other sectors

4.4.4.1 Other financial corporations

4.4.4.2 Nonfinancial corporations, households, and NPISHs

4.4.0.1 Nonlife insurance technical reserves (AF61O)

4.4.0.2 Life insurance and annuity entitlements (AF62O)

4.4.0.3 Pension entitlements (AF63O)

4.4.0.4 Claims of pension funds on pension managers (AF64O)

4.4.0.5 Entitlements to nonpension benefits (AF65O)

4.4.0.6 Provisions for calls under standardized guarantees (AF66O)

4.5 Trade credit and advances (AF81O)

4.5.1 Central bank

4.5.1.1 Short-term

4.5.1.2 Long-term

4.5.1.9 Monetary authorities (where relevant)

4.5.1.9.1 Short-term

4.5.1.9.2 Long-term

4.5.2 General government

4.5.2.1 Short-term

4.5.2.2 Long-term

4.5.3 Deposit-taking corporations, except the central bank

4.5.3.1 Short-term

4.5.3.2 Long-term

4.5.4 Other sectors

4.5.4.0.1 Short-term

4.5.4.0.2 Long-term

4.5.4.1 Other financial corporations

4.5.4.1.1 Short-term

4.5.4.1.2 Long-term

4.5.4.2 Nonfinancial corporations, households, and NPISHs

4.5.4.2.1 Short-term

4.5.4.2.2 Long-term

4.6 Other accounts receivable/payable—other (AF89O)

4.6.1 Central bank

4.6.1.1 Short-term

4.6.1.2 Long-term

4.6.1.9 Monetary authorities (where relevant)

4.6.1.9.1 Short-term

4.6.1.9.2 Long-term

4.6.2 Deposit-taking corporations, except the central bank

4.6.2.1 Short-term

4.6.2.2 Long-term

4.6.3 General government

4.6.3.1 Short-term

4.6.3.2 Long-term

4.6.4 Other sectors

4.6.4.0.1 Short-term

4.6.4.0.2 Long-term

4.6.4.1 Other financial corporations

4.6.4.1.1 Short-term

4.6.4.1.2 Long-term

4.6.4.2 Nonfinancial corporations, households, and NPISHs

4.6.4.2.1 Short-term

4.6.4.2.2 Long-term

4.7 Special drawing rights (AF12) n.a.

5 Reserve assets (AFR) n.a.

5.1 Monetary gold (AF11) n.a.

5.1.1 Gold bullion

n.a.

5.1.2 Unallocated gold accounts

n.a.

Of which: 5.1.0.1 Monetary gold under swap for cash collateral n.a.

5.2 Special drawing rights (AF12) n.a.

5.3 Reserve position in the IMF n.a.

5.4 Other reserve assets n.a.

5.4.1 Currency and deposits n.a.

Appendix 9 g Standard Components and Selected Other Items

312

B. International Investment Position (concluded)

International Investment Position Assets Liabilities

5.4.1.1 Claims on monetary authorities n.a.

5.4.1.2 Claims on other entities n.a.

5.4.2 Securities n.a.

5.4.2.1 Debt securities (AF3R) n.a.

5.4.2.1.1 Short-term (AF31R) n.a.

5.4.2.1.2 Long-term (AF32R) n.a.

5.4.2.2 Equity and investment fund shares (AF5R) n.a.

Of which: 5.4.2.0.1 Securities under repo for cash collateral n.a.

5.4.3 Financial derivatives (AF7R)

n.a.

5.4.4 Other claims n.a.

_________________________________________________________________________________________________________________

Total assets/liabilities (AF)

_________________________________________________________________________________________________________________

Of which: (by instrument):

0.1 Equity and investment fund shares (AF5)

0.1.1 Equity (AF51)

0.1.2 Investment fund shares (AF52)

0.2 Debt instruments

0.2.1 Special drawing rights (AF12)

0.2.2 Currency and deposits (AF2)

0.2.3 Debt securities (AF3)

0.2.4 Loans (AF4)

0.2.5 Insurance, pension, and standardized guarantee schemes (AF6)

0.2.6 Other accounts receivable/payable (AF8)

0.3 Other financial assets and liabilities

0.3.1 Monetary gold (AF11) n.a.

0.3.1 Financial derivatives and ESOs (AF7)

_________________________________________________________________________________________________________________

As well as the additional items for the financial account (listed above for the balance of payments

standard components) that are also applicable to the IIP, the following are further additional items

for the IIP:

Reserve-related liabilities (see Table A9-V below; includes memorandum and supplementary items) n.a.

Loans—measures of impairment (see paragraphs 7.45–7.56):

fair value, nonperforming loans (XAF4_NNP)

loan loss (bad debt) provisions, arrears n.a.

for assets; for each institutional sector and maturity

Currency composition of assets and liabilities and institutional sector

See Table A9-I (memorandum) and Tables A9-II and A9-III (supplementary) below

Foreign currency assets of the monetary authorities: n.a.

Foreign currency deposits with deposit-taking corporations resident in the reporting economy

(see paragraph 6.65) n.a.

Foreign currency claims on neighboring economies (see paragraph 6.73) n.a.

Foreign assets of special purpose government funds not included in reserve assets (see paragraphs 6.93–6.98) n.a.

Pooled assets included in reserve assets (see paragraphs 6.99–6.101) n.a.

Pledged assets excluded from reserve assets (see paragraphs 6.1076.109) n.a.

Debt securities at nominal values (see paragraph 7.30)

Remaining maturity split for debt liabilities (see Table A9-IV below) n.a.

For each instrument and sector n.a.

Integrated IIP statement with positions, transactions and other changes in volume, exchange rate changes,

and other revaluations (as shown in Table 7.1)

by asset and liability category

changes in positions due to transactions by other parties (see paragraph 9.16)

Contingent assets/ liabilities (XAF11__CP) (see paragraph 5.10)

n.a. not applicable—no entries in this cell

Other sectors—other financial corporations, nonfinancial corporations, households, and NPISHs

Further detail in EBOPS, see MSITS Annex II, Extended Balance of Payments Services Classification.

Standard components for those countries that are unable (for example, for reasons of confidentiality) to provide the full breakdown by mode of transport;

otherwise supplementary, but can be derived by summing the standard components for each mode of transport.

If available for publication. If not available for publication, include in other investment-interest.

Assets and liabilities combined and reported as a net figure for assets less liabilities, included under assets.

Preferably assets and liabilities reported separately, but otherwise a net figure for liabilities less assets, included, by convention, under assets.

If available for publication.

Specify sector involved and standard component in which the item is included.

Arrears related to exceptional financing. Not a transaction, but included in the “analytic” presentation (see paragraphs 14.17 and A1.21).

Loans at fair value as a memorandum item, if feasible. Nonperforming loans at nominal value as a supplementary item (or memorandum if fair value of

loans is unavailable).

Construction abroad—Construction (CR.); Goods and services acquired (DR.). Construction in the reporting economy—(Goods and services acquired

(CR.); (Construction (DR.).

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

313

C. Additional Analytical Position Data

(a) Currency Composition

Table A9-1. Currency Composition of Assets and Liabilities (at a reference date)

Table A9-I-1a. Debt Claims on Nonresidents

Year . . . (latest year under review)

Deposit-taking

corporations,

Inter-

Central General except the

Other sectors

company

________________________

bank government central bank Total OFC Other lending

Total

Domestic currency

Foreign currency

U.S. dollar

Euro

Ye n

Other currencies

Unallocated

Of which one year or less

Domestic currency

Foreign currency

U.S. dollar

Euro

Ye n

Other currencies

Unallocated

_________________________________________________________________________________________________________________

Reserve assets

______________________________________________

In SDR basket

______________________________________________

Not in SDR basket

______________________________________________

Table A9-I-1b. Financial Derivative Positions with Nonresidents

Foreign Currency Derivatives: Notional Value of Contracts with Nonresidents

Deposit-taking

corporations,

Inter-

Central General except the

Other sectors

company

________________________

bank government central bank Total OFC Other lending Total

Receive foreign currency n.a.

U.S. dollar n.a.

Euro n.a.

Ye n n.a.

Other currencies n.a.

Table A9-I is a memorandum item.

Excluding reserve assets.

See paragraph 5.107 on when currency data is shown as unallocated.

Original maturity.

OFC = other financial corporations, Other = nonfinancial corporations (except intercompany lending), households, and NPISHs.

Data on debt instruments from the direct investment category. Intercompany lending (as defined in paragraph 6.26) is classified as long-term by convention.

Intercompany lending is excluded from data for the other sectors.

Total reserve assets.

Data on notional value of derivatives in this table should include those derivatives that swap foreign currency liabilities into domestic currency (e.g., if the

monetary authority issues a foreign currency bond and uses a foreign currency swap contract with a nonresident to swap the proceeds into domestic currency,

the notional value of the swap contract to receive foreign currency when the swap contract matures should be reported in the Table I-1b). For similar foreign

currency derivative transactions with residents, similar data on notional positions with other residents could be considered.

Appendix 9 g Standard Components and Selected Other Items

314

Table A9-I-2a. Debt Liabilities to Nonresidents

Year . . . (latest year under review)

Deposit-taking

corporations,

Inter-

Central General except the

Other sectors

company

________________________

bank government central bank Total OFC Other lending

Total

Domestic currency

Foreign currency

U.S. dollar

Euro

Ye n

Other currencies

Unallocated

Of which one year or less

Domestic currency

Foreign currency

U.S. dollar

Euro

Ye n

Other currencies

Unallocated

Table A9-I-2b. Financial Derivative Positions with Nonresidents

Foreign Currency Derivatives: Notional Value of Contracts with Nonresidents

Deposit-taking

corporations,

Inter-

Central General except the

Other sectors

company

________________________

bank government central bank Total OFC Other lending Total

Pay foreign currency n.a.

U.S. dollar n.a.

Euro n.a.

Ye n n.a.

Other currencies n.a.

Original maturity.

OFC = other financial corporations, Other = nonfinancial corporations (except intercompany lending), households, and NPISHs.

Data on debt instruments from the direct investment category. There is no original maturity breakdown for intercompany lending (as defined in paragraph

6.26); see also paragraph 5.103 on maturity for direct investment). Intercompany lending is excluded from data for the other sectors.

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

315

Table A9-II. Currency Composition of Assets and Liabilities (time series data)

Table A9-II-1a. Debt Claims on Nonresidents

All Sectors Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Total

Domestic currency

Foreign currency

U.S. dollar

Euro

Ye n

Other currencies

Unallocated

Of which one year or less

Domestic currency

Foreign currency

U.S. dollar

Euro

Ye n

Other currencies

Unallocated

________________________________________________________________________________________________________________

Reserve assets

In SDR basket

Not in SDR basket

Table A9-II-1b. Financial Derivative Positions with Nonresidents

Financial Derivatives: Notional Value of Foreign Currency Contracts with Nonresidents

Receive foreign currency

U.S. dollar

Euro

Ye n

Other currencies

Table A9-II is supplementary and covers time series data, not projections.

Excluding reserve assets.

Original maturity.

Appendix 9 g Standard Components and Selected Other Items

316

Table A9-II-2b. Financial Derivative Positions with Nonresidents

Financial Derivatives: Notional Value of Foreign Currency Contracts with Nonresidents

Pay foreign currency

U.S. dollar

Euro

Ye n

Other currencies

Table A9-III. Currency Composition by Sector and Instrument (at a reference date)

Table III-1a. Debt Claims on Nonresidents

Foreign Domestic

currency currency Unallocated Total

LONG-TERM

Central bank

Debt securities

Trade credit and advances

Loans

Currency and deposits

Other debt claims

General government

Debt securities

Trade credit and advances

Loans

Currency and deposits

Other debt claims

Deposit-taking corporations, except the central bank

Debt securities

Trade credit and advances

Loans

Currency and deposits

Other debt claims

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table A9-II-2a. Debt Liabilities to Nonresidents

All Sectors Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Total

Domestic currency

Foreign currency

U.S. dollar

Euro

Ye n

Other currencies

Unallocated

Of which one year or less

Domestic currency

Foreign currency

U.S. dollar

Euro

Ye n

Other currencies

Unallocated

Original maturity.

317

Table A9-III-1a (concluded)

Foreign Domestic

currency currency Unallocated Total

Other sectors

Debt securities

Trade credit and advances

Loans

Currency and deposits

Other debt claims

SHORT-TERM

Central bank

Debt securities

Trade credit and advances

Loans

Currency and deposits

Other debt claims

General government

Debt securities

Trade credit and advances

Loans

Currency and deposits

Other debt claims

Deposit-taking corporations, except the central bank

Debt securities

Trade credit and advances

Loans

Currency and deposits

Other debt claims

Other sectors

Debt securities

Trade credit and advances

Loans

Currency and deposits

Other debt claims

DIRECT INVESTMENT

Intercompany lending

Debt claims on direct investors

Debt claims on direct investment enterprises

Debt claims on fellow enterprises

TOTAL

Table A9-III is supplementary.

Excluding reserve assets.

A further breakdown for (i) other financial corporations, and (ii) nonfinancial corporations (except intercompany lending), households, and NPISHs is

encouraged.

There is no original maturity breakdown for intercompany lending (as defined in paragraph 6.26). Intercompany lending is excluded from data for the other

sectors.

Appendix 9 g Standard Components and Selected Other Items

318

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table A9-III-2a. Debt Liabilities to Nonresidents

Foreign Domestic

currency currency Unallocated Total

LONG-TERM

Central bank

Debt securities

Trade credit and advances

Loans

Currency and deposits

Other debt liabilities

General government

Debt securities

Trade credit and advances

Loans

Currency and deposits

Other debt liabilities

Deposit-taking corporations, except the central bank

Debt securities

Trade credit and advances

Loans

Currency and deposits

Other debt liabilities

Other sectors

Bond and notes

Trade credit and advances

Loans

Currency and deposits

Other debt liabilities

SHORT-TERM

Central bank

Debt securities

Trade credit and advances

Loans

Currency and deposits

Other debt liabilities

Table A9-III-1b. Financial Derivative Positions with Nonresidents

Financial Derivatives: Notional Value of Foreign Currency and Foreign-Currency-Linked Contracts

with Nonresidents

To Receive Foreign Currency

Central bank

Forwards

Options

General government

Forwards

Options

Deposit-taking corporations, except the central bank

Forwards

Options

Other sectors

Forwards

Options

Total

Forwards

Options

A further breakdown for (1) other financial corporations and (2) nonfinancial corporations (except intercompany lending), households, and NPISHs is

encouraged.

319

Table A9-III-2b. Financial Derivative Positions with Nonresidents

Financial Derivatives: Notional Value of Foreign-Currency and Foreign Currency-Linked Contracts

with Nonresidents

To pay foreign currency

Central bank

Forwards

Options

General government

Forwards

Options

Deposit-taking corporations, except the central bank

Forwards

Options

Other sectors

Forwards

Options

Total

Forwards

Options

A further breakdown for (i) Other financial corporations, and (ii) Nonfinancial corporations (except intercompany lending), households, and NPISHs is

encouraged.

Appendix 9 g Standard Components and Selected Other Items

Table A9-III-2a (concluded)

Foreign Domestic

currency currency Unallocated Total

General government

Debt securities

Trade credit and advances

Loans

Currency and deposits

Other debt liabilities

Deposit-taking corporations, except the central bank

Debt securities

Trade credit and advances

Loans

Currency and deposits

Other debt liabilities

Other sectors

Debt securities

Trade credit and advances

Loans

Currency and deposits

Other debt liabilities

DIRECT INVESTMENT

Intercompany lending

Debt liabilities to direct investors

Debt liabilities to direct investment enterprises

Debt liabilities to fellow enterprises

TOTAL

A further breakdown for (i) Other financial corporations, and (ii) Nonfinancial corporations (except intercompany lending), households, and NPISHs is

encouraged.

There is no original maturity breakdown for intercompany lending (as defined in paragraph 6.26). Intercompany lending is excluded from data for the other

sectors.

320

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

Table A9-V. Memorandum/Supplementary Items: Position Data (at a reference date)

Reserve-Related Liabilities

Memorandum Items

Reserve-related liabilities (RRL) to nonresidents

2.2. Short-term

2.2.1. Credit and loans from the IMF

2.2.2. Debt securities

2.2.3. Deposits

2.2.4. Loans

2.2.4.1. Repo loans

2.2.4.2. Other loans

2.2.5. Other short-term foreign currency liabilities to nonresidents

Supplementary Items

1. Reserve assets (Section I.A of Reserve Template)

2. Reserve-related liabilities (RRL) to nonresidents

2.1. Long-term

2.1.1. Credit and loans from the IMF

2.1.2. Debt securities

2.1.3. Deposits

2.1.4. Loans

2.1.4.1. Repo loans

2.1.4.2. Other loans

2.1.5. Other foreign currency liabilities to nonresidents

2.1.5.1. SDR allocation

2.1.5.2. Other long-term foreign currency liabilities

(b) Remaining Maturity

Table A9-IV. Remaining Maturity of Debt Liabilities to Nonresidents (at a reference date)

Specific Financial Instruments: Remaining Maturity of One Year or Less of Long-Term Debt

Instruments by Sector

Deposit-taking

corporations,

Central General except the

Other sectors

_________________________

bank government central bank Total OFC Other Total

Deb securities

Trade credit and advances

Loans

Currency and deposits

Other debt liabilities

Total

Table A9-IV is supplementary.

A further breakdown for (i) Other financial corporations, and (ii) Nonfinancial corporations (except intercompany lending), households, and NPISHs is

encouraged.

321

Table A9-V (concluded)

2.2. Short-term

2.2.1. Credit and loans from the IMF

2.2.2. Debt securities

2.2.3. Deposits

2.2.4. Loans

2.2.4.1. Repo loans

2.2.4.2. Other loans

2.2.5. Other foreign currency liabilities to nonresidents

2.2.5.2. Other short-term foreign currency liabilities

3. Reserve assets (1.) less short-term RRL to nonresidents (2.2.)

4. Other foreign currency assets

4.1. Long-term

4.2.1. Debt securities

4.2.2. Deposits

4.2.3. Loans

4.2.3.1 Repo loans

4.2.3.2. Other loans

4.2.4. Other foreign currency assets

4.2. Short-term

4.2.1. Debt securities

4.2.2. Deposits

4.2.3. Loans

4.2.3.1. Repo loans

4.2.3.2. Other loans

4.2.4. Other foreign currency assets

5. Other foreign currency liabilities

5.2.1. Long-term

5.2.1.1. Debt securities

5.2.1.2. Deposits

5.2.1.3. Loans

5.2.1.3.1. Repo loans

5.2.1.3.2. Other loans

5.2.1.4. Other foreign currency liabilities

5.2.2. Short-term

5.2.2.1. Debt securities

5.2.2.2. Deposits

5.2.2.3. Loans

5.2.2.3.1. Repo loans

5.2.2.3.2. Other loans

5.2.2.4. Other foreign currency liabilities

6. Foreign currency resources: 1 + 4

7. Foreign currency liabilities: 2 + 5

8. Net foreign currency resources: 6 – 7

Data for RRL are to be presented on a remaining maturity basis.

The inclusion of a repo loan within RRL depends on the treatment of repo transactions within reserves. If the security stays in reserve assets, the repo loan

is recorded as a liability within RRL. Otherwise the repo loan is excluded from RRL.

For comprehensiveness, this listing of supplementary items incorporates the memorandum items for short-term liabilities (2.2.). See paragraph 6.115 for

further information.

Data for RRL, other foreign currency assets and liabilities are to be presented on a remaining maturity basis.

The inclusion of a repo loan within RRL depends on the treatment of repo transactions within reserves. If the security stays in reserve assets, the repo loan

is recorded as a liability within RRL. If the security is reclassified to portfolio investment, the asset and the repo loan liability are included under other foreign

currency asset and other foreign currency liabilities respectively.

Other foreign currency assets and liabilities includes claims and liabilities of the monetary authorities and central government to both residents and non-

residents, other than those covered in reserve assets and RRL to nonresidents.This approach for other foreign currency assets and liabilities is consistent with

the approach in Sections 1.B and 2 of the Reserves Template. To support reconciliation with government finance statistics, a subsector split between central

government and the central bank could be included.

This item would include any net financial derivative positions of the central government and of the monetary authorities not included in reserve assets

nor RRL.

Appendix 9 g Standard Components and Selected Other Items

322

Index

Accounting principles

accounting system, 3.26–3.31

aggregation and netting, 3.109–3.121

derived measures, 3.126–3.129

flows and positions, 3.2–3.25

symmetry of reporting, 3.122–3.125

time of recording of flows, 3.32–3.66

valuation, 3.67–3.108

Accounting system

bookkeeping principles, 3.26–3.31

credit entries, 3.30

debit entries, 3.30

horizontal double-entry bookkeeping—counterpart

entries, 3.28

“net acquisition of financial assets,” 3.31

“net incurrence of liabilities,” 3.31

quadruple entries, 3.29

relationship of the SNA accounts for the rest of the

world to the international accounts, A7.2–A7.3

types of entries, 3.30–3.31

vertical double-entry bookkeeping—corresponding

entries, 3.27

Accounts receivable/payable. See also Other accounts

receivable/payable

interest on, 11.51

nonnegotiable instruments, 7.55

Accrual accounting

balance of payments use of, 14.38

compensation of employees recording, 11.16

interest recording, 11.49

rent recording, 11.89

services recording, 10.57

time of recording, 3.35, 3.39–3.40

Accumulation accounts

definition, 2.20

Acquisitions and disposals of nonproduced non-

financial assets

assets included, 13.8

contracts, leases, and licenses, 13.11–13.16

marketing assets (and goodwill), 13.17–13.18

natural resources, 13.9–13.10

time of recording, 13.6–13.7

Activities of multinational enterprises statistics by

activity and by product, A4.14–A4.16

attribution of variables, A4.13–A4.16

compilation issues, A4.17–A4.20

coverage, A4.6–A4.10

direct investment and, A4.1

economic variables for, A4.8–A4.10

FATS and, A4.1

General Agreement on Trade in Services and,

A4.4

geographic attribution, A4.13

importance of, A4.3

inward and outward statistics, A4.2

objective of, A4.1

recommendations for, A4.5–A4.20

statistical units, A4.11

time of recording, A4.12

universe or population and, A4.6–A4.7

valuation, A4.12

Affiliate

coverage of debt between, 6.26–6.28, 7.20

definition, 6.17, Box A6a.1

entities that borrow on behalf of their affiliates,

7.20 –7.22

Aggregation and netting

consolidation and, 3.120

definition (aggregates), 3.110

definition (net recording), 3.112

description, 3.109–3.111

gross recordings, 3.112

regional arrangements and, 3.121

Allocated gold account(s)

change in ownership of, 10.51

definition, 5.76

reserve assets and, 6.79, 6.82

AMNE statistics. See Activities of multinational

enterprises statistics

Amortized value

definition, 3.88

323

Analytic presentation of data

arrears, A1.22

borrowing for balance of payments needs, A1.14

debt assumption, A2.53

debt-for-equity swaps, A1.9–A1.13, A2.29–A.2.37

debt forgiveness, A1.5–A1.6, A2.8–A2.9

debt prepayment and debt buybacks, A1.19–A1.20,

A2.42–A2.47

debt rescheduling or refinancing, A1.16–A1.18,

A2.12–A2.22

debt service falling due between Paris Club minute

date and specified implementation date, A2.60

debt service moratoriums, A2.61–A2.62

description, 14.16–14.17, Table 14.1

new money facilities, A2.64

Ancillary corporations

classification by sector, 4.58

description and attributes, 4.19

Annuity entitlements. See Life insurance and annuity

entitlements

Arrears

accrual of (standard presentation), 3.56–3.57

accumulation of arrears—current period,

A1.21–A1.22

analytic presentation of data, A1.22, A1.23

creation of a new instrument and, 5.102

definition, 5.99

financial account reporting, 8.58–8.59

not related to exceptional financing, 5.101

reclassification of an existing instrument and, 5.102

related to exceptional financing, 5.100, A1.21–A1.23

repayment of, A1.23

subclassifications, 5.99–5.102

Asset-backed securities, 5.47

Associates

definition, 6.15

Audiovisual and related services

exclusions, 10.165

services included, 10.162–10.164, 10.166

Bailout

treatment of as capital transfers, 13.34

Balance of payments

accounting identities, 14.4–14.13

accrual accounting for, 3.39–3.60, 14.38

adjustment in response to a current account deficit,

14.39–14.47

alternative presentations of data, 14.14–14.24

analysis issues, 14.1–14.66

analytic presentation of data, 14.16–14.17, Table 14.1

balance sheet approach, 14.57–14.66

borrowing for balance of payments support,

A1.14–A1.15

currency unions and, A3.5–A3.48

debt forgiveness recording, 12.16–12.17, A1.5–A1.6,

A2.8–A2.9

debt rescheduling or refinancing recording,

A2.12–A2.14, A2.16–A2.18

definition, 2.12

depreciation of the exchange rate of the domestic

currency and, 14.43–14.44

double-entry basis of balance of payments

statistics, 2.12, 14.11, Box 2.1

excess of investment over saving and, 14.27

financial flow determinants and, 14.36

general framework, 14.4–14.13

impact of higher taxes, 14.9

monetary policy role, 14.46–14.47

monetary presentation of data, 14.20–14.22

partner economy analysis of data, 14.23–14.24

saving declines and, 14.28

sectoral analysis of data, 14.18–14.19

sources of financial vulnerability, 14.62

standard components and selected other items,

Appendix 9

transactions recorded in, 3.6

types of balance sheet mismatches, 14.63

Balance of Payments Manual, 5th edition

2008 revision of the Manual, 1.28–1.36

changes for the 6th edition, Appendix 8

Balance of Payments and International Investment

Position Manual, 6th edition

2008 revision, 1.28–1.36

analysis chapter overview, 1.13

appendixes overview, 1.14

changes from BPM5, Appendix 8

chapters and appendices overview, 1.8–1.15

history of, 1.17–1.27

institutional sector classification, 4.57–4.112,

Table 4.2

purposes of, 1.1–1.7

research agenda for future work, 1.43

standard components and memorandum items,

1.15–1.16, Appendix 9

structure of, 1.8–1.16

Balance of Payments Compilation Guide, 1.3, 1.26

Balance of Payments Textbook, 1.26

Balance sheet analysis

Manual revision theme, 1.33

Balance sheet approach

description, 14.57–14.66

Bank for International Settlements

Guide to the International Banking Statistics, 7.9

Index

324

Bankers’ acceptances

definition, 5.48

Black market currency exchange rates

description, 3.108

Book value

definition, 3.88

Borrowing for balance of payments support

analytic presentation of data, A1.14

short-term, A1.15

Branches

construction projects, 4.29

description, 4.26

features of, 4.27

mobile equipment and, 4.31

multiterritory pipelines, 4.32

notional resident units for land and other natural

resources owned by nonresidents and, 4.37–4.38

production delivered from a base, 4.30–4.33

reporting implications, 4.28

Brass plate companies

description, 4.50

Business services. See Technical, trade-related, and

other business services; also see Specific services

Business travel

border, seasonal, and other short-term workers and,

10.93

definition, 10.91

examples, 10.91

goods and services acquired for personal use and,

10.92

Buybacks. See Debt prepayment and debt buybacks

Cancellation of financial assets and liabilities

circumstances leading to, 9.8

uncompensated seizures of assets by governments,

9.11

unilateral cancellation by debtor, 9.10

Capital account

acquisitions and disposals of nonproduced non-

financial assets, 13.6–13.18

capital transfers, 13.19–13.35

compensation for extensive damages, 13.29

concepts and coverage, 13.1–13.7

debt forgiveness, 13.22–13.23

definition, 13.1

description, 2.16

investment grants, 13.25–13.26

net lending/net borrowing and, 13.5

nonlife insurance claims, 13.24

one-off guarantees and other debt assumption, 13.27

overview, 13.2–13.7, Table 13.1

regional arrangements, A3.71

taxes, 13.28

Capital transfers

assets of persons changing their economic territory

of residence, 13.30

bailouts, 13.34

capital contributions to international organizations

or nonprofit institutions, 13.32

cash transfers, 12.13–12.15

concessional lending, 13.33

debt forgiveness, 13.22–13.23

definition, 12.13, 13.19

household-to-household, 13.35

investment grants, 13.25–13.26

large gifts and inheritances, 13.31

major nonrecurrent payments in compensation for

damages, 13.29

nonlife insurance claims, 13.24

one-off guarantees, 13.27

size and frequency and, 12.13

taxes, 13.28

Captive financial institutions and money lenders

conduits, 4.86

definition, 4.82

financial corporations included, 4.83

financial intermediation services charges indirectly

measured and, 10.127

holding companies, 4.84–4.85, 10.127

wealth-holding entities, 4.87

Cash basis for recording flows

description, 3.38

Cash transfers

description, 12.13

transfers included, 12.14–12.15

Central banks. See also Deposit-taking corporations

activities of, 4.67, 4.69–4.70

definition, 4.67

general government performance of activities,

4.69–4.70

subsectors, 4.68

swap arrangements, 6.102–6.104

Change to the framework

update procedure, 1.41

Changes in residence

assets moved between entities, 4.166

change in residence of individuals, 4.165

entities other than persons, 4.167

CIF. See Cost, insurance, and freight

Civil servants. See Diplomats, military personnel, and

other civil servants employed abroad

Claim(s)

corresponding liabilities for, 5.7–5.8

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

325

definition, 5.6

gold bullion and, 5.6

nonlife insurance, 12.37–12.38, 13.24,

A6c.19–A6c.22, A6c.28

pooled assets, 6.99–6.100

Clarification beyond dispute

update procedure, 1.39

Classifications of financial assets and liabilities

arrears, 5.99–5.102

claims, 5.6–5.8

contingent assets and liabilities, 5.10–5.14

by currency, 5.106–5.108

debt instruments, 5.31–5.73

definitions of economic assets and liabilities,

5.2–5.16

economic asset classification, Table 5.1

employee stock options, 5.96–5.98

equity and investment fund shares, 5.19–5.30

financial assets, 5.9

financial derivatives, 5.80–5.95

financial instruments, 5.5

Islamic banking instruments, 5.16

by maturity, 5.103–5.105

monetary gold, 5.74–5.78

returns on financial assets and liabilities: financial

instruments and their corresponding type of

income, Table 5.2

securities, 5.15

SNA 2008 financial instruments classification with

corresponding BPM6 broad categories, Table 5.3

by type of instrument, 5.17–5.98

by type of interest rate, 5.109–5.114

Commitment basis for recording of flows, 3.37

Committee on Balance of Payments Statistics

establishment of, 1.25

revisions between editions of the Manual, 1.37–1.43

Compensation for damages

injuries or damages caused by natural disasters, 12.55

major nonrecurrent payments as capital transfers,

13.29

payments of compensation as transfers,

12.55–12.56

Compensation of employees

accrual basis for recording, 11.16

components of, 11.17–11.23

definition, 11.10

employer-employee relationship and, 11.11–11.13

employers’ social contributions, 11.22

recording of, 11.10, A5.6

relation to remittances, A5.6

wages and salaries in cash, 11.18

wages and salaries in kind, 11.19–11.21

Computer services

exclusions, 10.145

services included, 10.143, Table 10.4

software, 10.144, Table 10.4

Conduit

definition, 4.86

Construction

in compiling economy, 10.106

components included, 10.101–10.103

construction abroad, 10.105

existing buildings, 10.108

valuation of, 10.107

Consulting services. See Professional and management

consulting services

Contingent assets and liabilities

definition, 5.10

financial derivatives and, 5.83

letters of credit and, 5.13

one-off guarantees of payment, 5.12

value of future payments and, 5.11

Contracts. See also Specific types of contracts

capital account and, 13.11–13.16

Contractual terms

changes in, 8.54, 9.15

Control and influence

definition, Box A6a.1

direct investment and, 6.12–6.14, Box A6a.1

Convertible bonds

as debt securities, 5.46

financial account recording, 8.29

Coordinated Direct Investment Survey Guide, 1.27,

6.18, 7.9

Coordinated Portfolio Investment Survey Guide,

1.27, 7.9

Corporate inversion

definition, 8.19

financial account recording, 8.19–8.22

Corporations. See also Direct investment enterprises;

Quasi-corporations; specific types of

corporations

ancillary, 4.19, 4.58

artificial subsidiaries, 4.18–4.19

changes in residence, 4.167, 9.23

enterprises with little or no physical presence,

4.134–4.135

flexible corporate structures with little or no

physical presence, 4.50–4.52

as institutional units, 4.15–4.19

retained earnings and, 11.33–11.36

types of, 4.14

Cost, insurance, and freight

general merchandise valuation, 10.32, 10.33, 10.34

Index

326

Courier services. See Postal and courier services

Credit derivatives

definition, 5.93

Crews of ships, aircraft, oil rigs, space stations, or

other similar equipment

as residents, 4.122

Cross-border units. See Institutional units with cross-

border elements

Cross-border workers

employees included, 11.14–11.15

employer-employee relationship and, 11.11–11.13

as residents of households, 4.125, 11.15

travel services and, 10.89

CUCBs. See Currency union central banks

Cultural services. See Personal, cultural, and

recreational services

Currency

commemorative coins, 5.37

conversion principles, 3.104–3.108

currency of denomination, 3.98–3.103, 11.50

currency of settlement, 3.99

definition, 5.36

depreciation of the exchange rate of the domestic

currency and, 14.43–14.44

domestic versus foreign, 3.95–3.97, 5.106–5.108,

financial account reporting, 8.53

foreign currency in circulation, 5.38

gold coins, 5.37

multiple exchange rates, 3.107

parallel or black market rates, 3.108

unitary rates, 3.107

Currency composition by sector and instrument

debt claims on nonresidents, Appendix 9:

Table III–1a

debt liabilities to nonresidents, Appendix 9:

Table III–2a

financial derivative positions with nonresidents,

Appendix 9: Table III–1b, Appendix 9:

Table III–2b

Currency composition of assets and liabilities

debt claims on nonresidents, Appendix 9:

Table I–1a, Appendix 9: Table II–1a

debt liabilities to nonresidents, Appendix 9:

Table I–2a, Table II–2a

financial derivative positions with nonresidents,

Appendix 9: Table II–1b

foreign currency derivatives: notional value of

contracts with nonresidents, Appendix 9:

Table I–1b, Table I–2b

Currency union central banks

intra-currency union claims and liabilities,

A3.44–A3.48

transactions and positions of national agencies,

A3.32–A3.39

Currency unions

aggregation of national data and, A3.21–A3.23

allocation of seigniorage, A3.47

allocation of transactions in goods, A3.26–A3.28

application of core balance of payments concepts,

A3.17–A3.48

centralized and decentralized, A3.13–A3.15

common monetary areas and, A3.10

currency union central banks and, A3.9, A3.11

definition, A3.8–A3.10

definitional issues, A3.8–A3.48

description, A3.9, A3.11

distribution of profits, A3.48

domestic currency, A3.16

geographical allocation of stocks and flows,

A3.21–A3.28

institutional sector allocation, A3.20

multiterritory enterprises, A3.19

recording of trade transactions in currency and

economic unions, A3.26–A3.28, Box A3.1

regional organizations, A3.12

reserve assets and, A3.29–A3.30

residence and, A3.17–A3.19

single monetary policy for, A3.5–A3.6

statistical issues, A3.7

transactions and positions in banknotes, A3.42–A3.43

treatment of national agencies and reserve assets in

a decentralized CU, A3.40–A3.41

treatment of national agencies in a centralized CU,

A3.32–A3.39

Current account

definition, 2.14

financing a deficit in, 14.25–14.38

recording in regional statements, A3.71

surplus, 14.48–14.56

Current international cooperation

description, 12.47

external aid provided by government through a

nonresident entity, 8.24–8.26, 12.48

funding of technical assistance, 12.50

loans with concessional interest rates, 12.51

Current transfer(s)

calls under standardized guarantees, 12.46

cash transfers and, 12.15

current international cooperation, 12.47–12.51

current taxes on income, wealth, etc., 12.28–12.31

definition, 12.14

miscellaneous, 12.21–12.27, 12.52–12.58

net premiums on nonlife insurance and

standardized guarantees, 12.41–12.43

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

327

nonlife insurance claims, 12.43–12.46

other current transfers, 12.57–12.58

social benefits, 12.40

social contributions, 12.32–12.39

types of, 12.20

CUs. See Currency unions

Customs arrangements

description, A3.55–A3.57

designated agency levies, collects, and distributes

the proceeds from duties, A3.58–A3.60

designated agency levies duties but member

economies collect duties, A3.61–A3.63

member economies have collective rights to levy

and collect duties, A3.64–A3.66

member economies have collective rights to levy

the duty, but only one member collects the

duties, A3.67–A3.68

types of, A3.58–A3.68

Data by partner economies

agents, 4.149

basic principle for, 4.148

depository receipts, 4.161

description, 4.146–4.164

direct investment, 4.156–4.157, 6.49

financial instruments, 4.152–4.154

freight and insurance, 4.151

gold bullion included in monetary gold, 4.162

goods, 4.150

nominee accounts and custodians, 4.160

prepared for groups of economies or a mix of

groupings, 4.147, A3.21–A3.28

quasi-corporations, 4.164

remittances, A5.30

securities, 4.155

securities repurchase agreements, 4.159

special drawing rights, 4.163

stripped securities, 4.158

Data Quality Assessment Framework

quality dimensions and elements, 2.39, Box 2.2

Debt assumption

accounting for, A2.49–A2.53

definition, 8.42, A2.48

entries associated with different types of, Box 8.1

financial account reporting, 8.42–8.45

Debt concessionality

description, A2.67

one-off transaction recording of, A2.68

Debt conversion. See also Debt prepayment and debt

buybacks

accounting for, A2.27–A2.28

debt-for-development swaps, A2.38–A2.40

debt-for-equity swaps, A2.24, A2.29–A2.37

definition, A2.23

direct and indirect, A2.26

Debt defeasance

description, A2.65

portfolio investment and, 8.30–8.31

Debt-for-development swaps

description, A2.38

Debt-for-equity swaps

analytic presentation of data, A1.12

debt due for payment in the current period,

A2.30–A2.31

debt due for payment in the future, A2.33–A2.34

debt exchanged directly for equity investment, A1.10

debt in arrears, A2.32

description, A1.9

direct debt conversion, A2.29–A2.34

indirect, A1.11

market price valuation, A1.13

nongovernmental organizations and, A2.24

Debt forgiveness

analytic presentation of data, A1.6

debt write-off and, 13.23, A2.7

definition, 13.22, A1.5, A2.7

on obligations past due from previous periods, A1.6

recording of, A1.5, A2.8–A2.9

Debt instrument(s)

currency, 5.36–5.38

debt securities, 5.44–5.50

definition, 5.31

deposits, 5.39–5.43

equity and investment fund shares and, 5.32

insurance, pension, and standardized guarantee

schemes, 5.62–5.68

interest rate classification, 5.109–5.114

loans, 5.51–5.61

long-term maturity of, 5.103

maturity of, 5.103–5.105

other accounts receivable/payable, 5.69–5.73

short-term maturity of, 5.103

special drawing rights, 5.34–5.35

types of, 5.31

Debt liabilities

at the inception of financial leases, 5.59

to nonresidents, Appendix 9: Table I–2a

Debt payments on behalf of others

accounting for, A2.55–A2.57

description, A2.54

Debt prepayment and debt buybacks

accounting for, A2.42–A2.47

analytic presentation of data, A1.20, A2.43

Index

328

definition, A1.19, A2.41

description, A1.19

two-stage analysis, A2.44–A2.46

Debt reorganization

debt assumption and debt payments on behalf of

others, A2.48–A2.57

debt concessionality and, A2.67–A2.70

debt conversion and debt prepayment,

A2.23–A2.47

debt forgiveness, A2.7–A2.9

debt rescheduling and refinancing, A2.10–A2.22

debt service falling due between Paris Club agreed

minute date and specified implementation date,

A2.58–A2.60

debt service moratorium extended by creditors,

A2.61–A2.62

debt write-offs and, A2.66

defeasance and, A2.65

definition, A2.2

description, 9.29

failure to honor debt obligations and, A2.4

liquidity and, A2.3

new money facilities and, A2.63–A2.64

types of, A2.5

Debt rescheduling or refinancing

accounting for, A2.12–A2.14, A2.16–A2.22

analytic presentation of data, A1.17

definition, A1.16, A2.11, A2.15

elements of new terms, A2.11

market price valuation, A1.18

Debt restructuring. See Debt reorganization

Debt securities. See also Specific types of

securities

asset-backed securities, 5.47

bankers’ acceptances, 5.48

convertible bonds, 5.46, 8.29

definition, 5.44

with embedded derivatives, 11.66

examples of, 5.44

index-linked, 5.49, 11.59–11.65

interest on, 11.52–11.66

issued at a premium, 11.57

with known cash flows, 11.54–11.58

nonparticipating preferred stocks, 5.46

reclassification of traded loans as, 5.45

stripped securities, 5.50

Debt service moratoriums

natural disasters and, A2.61

purpose of, A2.62

Debt write-offs

compared with debt forgiveness, 13.23, A2.7

description, A2.66

Deep-discount bonds

interest, 11.56

international investment position, 7.32

Defined benefit schemes

amounts payable by employers, 9.24, 11.22

definition, 7.65

Defined contribution schemes

amounts payable by employers, 11.22

definition, 7.65

investment income attributable to policyholders

in, 11.82

Depollution services

services included and related services, 10.152

Deposit-taking corporations

definition, 4.71

liabilities of, 4.72

types of financial intermediaries included, 4.71

Depository receipts

data by partner economies, 4.161

definition, 5.23

Deposits

definition, 5.39, 6.86

indexed or linked to a commodity price, 5.39

interbank positions, 5.42

interest on, 11.51

international investment position, 7.55

loans and, 5.40

other deposits, 5.43

overnight, 7.62

as reserve assets, 6.86, 7.69

transferable, 5.41

Derived measures

description, 3.106, 3.126–3.128

measures derived as balances, 3.129

Diplomats, military personnel, and other civil servants

employed abroad

as residents of territories, 4.123

Direct insurance

definition, A6c.8

Direct investment

Activities of Multinational Enterprises and, 6.52,

A4.1–A4.19

affiliates, 6.17

analytical use of different presentations, 6.44–6.45

associates, 6.15

beginning and ending relationships, 6.36

borrowing for fiscal purposes, 8.24–8.26

breakdown of direct investment income, Table 11.2

control and influence issues, 6.126.14, Box A6a.1

corporate inversion and other restructuring,

8.19–8.22

coverage of flows and positions, 6.25–6.36

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

329

data by partner economies, 4.156–4.157

debt between selected affiliated financial

corporations and, 6.28

definition, 6.8, 7.14, Box A6a.1

derivation of data under the directional principle,

Box 6.4

direct investment enterprises, 6.11

direct investment relationships, 6.9–6.10

direct investors, 6.11

directional principle and, 6.42–6.43

domestic ownership links and, 6.35, Box 6.3

entities that borrow on behalf of their affiliates,

7.20–7.22, 8.24–8.26

examples of identification of direct investment

relationships under FDIR, Box 6.1

fellow enterprises, 6.17, 11.100

financial account recording, 8.14–8.26

financial instrument, maturity, and currency

classifications and, 6.48

flows in kind, 8.17

foreign-controlled corporations and, 6.53

immediate and indirect relationships, 6.12

intercompany lending and, 6.26–6.27

international investment position, 7.14–7.25

mergers and acquisitions, 8.18

partner data, 6.49, 4.156–4.157

“pass-through funds,” 6.33–6.34

primary income account and, 11.96–11.102

quasi-corporations, 7.23–7.25

reinvested earnings of a direct investment

enterprise, numerical example of calculation,

Box 11.5

reinvestment of earnings, 8.15–8.16, 11.40–11.47

relationships that resemble direct investment

relationships, 6.47

relationships with combination of investors, Box 6.2

requirements for a direct investment relationship,

6.19–6.24

reverse investment, 6.39–6.41, 11.99

round tripping, 6.46

subsidiaries, 6.15

superdividends, 8.23

topical summary, A6a.1–A6a.14

transfer pricing, 11.101–11.102

types of transactions and positions, 6.37–6.45, 11.97

ultimate source and host economy, 4.157

valuation of unlisted and other equity, 7.15–7.19

voting power and, 6.12–6.14, 6.19

Direct investment enterprise(s)

characteristics, 6.24

definition, 6.11, Box A6a.1

Direct investment relationship, 6.9–6.10, Box A6a.1

Direct investor(s)

characteristics of, 6.20

definition, 6.11, Box A6a.1

Directional principle

definition, 6.42

derivation of data under the directional principle,

Box 6.4

direct investment abroad and, 6.42

direct investment in the reporting economy, 6.42

fellow enterprises and, 6.43

Distributive transactions

timing of recording of, 3.48–3.52

Dividends

bonus shares and, 11.29

definition, 11.24

distributed income from quasicorporations and, 11.26

equity in investment funds and, 11.32

exceptional payments by corporations to

shareholders and, 11.27

link to instrument classification, 11.25

liquidating, 11.30

primary income account and, 11.24–11.32

recording, 3.48, 11.31

stock dividends, 11.28

Domestic currency

compared to foreign currency, 3.95–3.97

definition, 3.95

Double-entry bookkeeping. See also Horizontal

double-entry bookkeeping; Vertical double-entry

bookkeeping

basic principle of, 14.11

Due-for-payment

recording of flows and, 3.36

Duties. See Customs arrangements

Economic assets

classification system, 5.4

definition, 5.2

kinds of economic benefits that may be derived

from, 5.3

ownership of, 5.3

Economic territory

areas included, 4.5

changes in the scope of, 4.9

description, 4.3

households and, 4.117

international organizations, 4.7

joint zones, 4.10

legal jurisdiction dimension, 4.6

special zones, 4.8

types of, 4.4

Index

330

Economic unions

data requirement formulation, A3.49–A3.50

definition, A3.51

recording issues, A3.54

recording of trade transactions in currency and

economic unions, Box A3.1

residence issues, A3.52–A3.53

Economy

definition, 4.2, 4.11

EcUns. See Economic unions

Editorial amendments

update procedure, 1.38

Embedded derivatives

definition, 5.83

Emissions permits

treatment of, 13.14

Employee stock options

changes in volume, 9.12

definition, 5.96

direct investment and, 6.29

financial account reporting, 8.41

financial derivatives and, 5.96

functional category characteristics, 6.58–6.60

international investment position, 7.39

revaluations, 9.30

suppliers of goods and services and, 5.97

as wages and salaries in kind, 11.20–11.21

Employer-employee relationship

compensation issues, 11.11–11.13

tests for, 11.13

Enterprises. See also Direct investment enterprise;

Fellow enterprises

“arm’s length” transactions, 4.54

corporations with little or no physical presence,

4.134–4.135

definition, 4.23

deliveries between affiliated enterprises, 10.24

global enterprise groups, 4.54–4.55

international organizations and, 4.107

local enterprise groups, 4.54–4.56

multiterritory, 4.41–4.44

production delivered from a base, 4.136–4.137

quasi-corporations and, 4.133

residence of, 4.131–4.137

selected effects of the residence status of an

enterprise owned by a nonresident on the

statistics of the host economy, Table 4.4

single economy connection, 4.132

Environmental cleanup efforts

treatment of, 13.14

Equity. See also Debt-for-equity swaps

debt instruments and, 5.32

definition, 5.21

depository receipts and, 5.23

direct investment and, 6.32

distinguishing feature, 5.19

listed shares and, 5.24

other equity, 5.26, 6.61–6.62

ownership in legal entities, 5.22

unlisted shares and, 5.24

valuation of, 5.27

valuation of unlisted and other equity, 7.15–7.18

Errors and omissions

international accounts, 2.24–2.26

ESOs. See Employee stock options

Establishment(s)

breaking up of enterprises into one or more

establishments, 4.53

definition, 4.53

Exceptional financing transactions

above-the line items, A1.2

accumulation and repayment of debt arrears,

A1.21–A1.23

analytic presentation of, A1.1

balance of payments accounting for selected

exceptional financing transactions, Table A1.1

below-the-line items, A1.2

borrowing for balance of payments support,

A1.14–A1.15

debt-for-equity swaps, A1.9–A1.13

debt prepayment and debt buybacks,

A1.19–A1.20

debt rescheduling or refinancing, A1.16–A1.18

definition, A1.1

identification of, A1.1–A1.2

transfers, A1.5–A1.8

Exchanges

description, 3.13

External Debt Statistics: A Guide for Compilers and

Users, 1.27, 5.109, 6.26, 6.48, 7.9

Face value

definition, 3.88

Fair value

calculation of, 7.49

definition, 3.88, 7.48

valuation of positions of financial assets and

liabilities 3.85

FATS. See Foreign AffiliaTes Statistics

FDIR. See Framework for Direct Investment

Relationships

Fellow enterprises

definition, 6.17, Box A6a.1

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

331

directional principle and, 6.43

income on investment between, 11.100

Financial account

arrears, 8.58–8.59

bonus shares, 8.33

borrowing for fiscal purposes, 8.24–8.26

change of contractual terms, 8.54, 9.15

concepts and coverage, 8.1–8.13

convertible bonds, 8.29

corporate inversion and other restructuring, 8.19–8.22

corresponding entries, 8.2

currency, 8.53

debt defeasance, 8.30–8.31

definition, 8.1

description, of 2.17–2.18

direct investment, 8.14–8.26

direct investment flows in kind, 8.17

employee stock options, 8.41

entries associated with different types of debt

assumption, Box 8.1

financial derivatives, 8.34–8.40

financial derivatives (other than reserves) and

employee stock options, 8.34 – 8.41

gross recording on a supplementary basis, 8.9

institutional sectors and, 4.61

insurance technical reserves, pension fund

entitlements, and provision for calls under

standardized guarantees, 8.46–8.49

mergers and acquisitions, 8.18

net lending/net borrowing, 8.3

net recording, 2.19, 8.7–8.8

one-off guarantees and other debt assumption,

8.42–8.45

other investment, 8.42–8.54

overview of, Table 8.1

portfolio investment, 8.27–8.33

regional arrangements, A3.72

reinvestment of earnings, 8.15–8.16

reinvestment of earnings in investment funds, 8.28

reserve assets, 8.55–8.57

securities repurchase agreements and other reverse

transactions, 8.52

share and debt buybacks, 8.32

special drawing rights, 8.50–8.51

superdividends, 8.23

timing and valuation, 8.10–8.13

Financial assets. See also Classifications of financial

assets and liabilities; International investment

position; Other changes in financial assets and

liabilities account; Reserve assets

classification of, 5.17–5.18

currency denomination, 3.102

definition, 3.24, 5.9

financial instruments and, 5.9

link between financial assets classification and

functional categories, Table 6.1

net recordings, 3.114–3.119

timing of recording of, 3.54–3.59

transactions in existing assets, 9.16

valuation of, 3.84–3.91

Financial auxiliaries

classification of, 4.80

definition, 4.79

Financial corporation(s)

captive financial institutions and money lenders,

4.82–4.87

central bank, 4.67–4.70

classes of, 4.64

definition, 4.63

deposit-taking corporations, except the central

bank, 4.71–4.72

financial auxiliaries, 4.79–4.80

insurance corporations, 4.88

money market funds, 4.73

non-MMF investment funds, 4.74–4.75

other financial intermediaries, except insurance

corporations and pension funds, 4.76–4.78

pension funds, 4.89–4.90

subsectors of, 4.65

Financial derivatives

contingent assets and liabilities and, 5.83

credit derivatives 5.93

definition, 5.80, 6.58–6.60

direct investment and, 6.29

embedded derivatives and, 5.83

employee stock options and, 5.96–5.98

exclusions, 5.83

financial account recording, 8.34–8.40

fixed-price contracts for goods and services

and, 5.83

forward-type contracts, 5.88–5.90, 7.36

functional category characteristics, 6.58–6.60

inception 8.35

insurance and standardized guarantees and, 5.83

international investment position, 7.33–7.38

margins and, 5.94, 8.39

notional value, 7.37

offsetability, 5.81

ongoing servicing of contracts, 8.38

options, 5.85–5.87, 7.34

positions with nonresidents, Appendix 9:

Table I–1b, Table I–2b, Table II–1b,

Table II–2b, Table III–1b, Table III–2b

recording in reserve assets, 6.91

Index

332

revaluations in the other changes in financial

assets and liabilities account, 9.30–9.31

risk in, 5.81

sales of options in secondary markets, 8.37

settlement of, 8.40

settlement of by payments of net amounts in

cash, 5.82

swap contracts 5.91 – 5.92

timing delays and, 5.83

Financial innovation

definition, 1.34

Financial instrument(s)

balance of payments transactions,

4.153–4.154

definition, 5.5

direct investment and, 6.48

partner data on, 4.152–4.154

Financial intermediation services charges

indirectly measured (FISIM)

calculation of, 10.131–10.133

cross-border deposits and loans, 10.130, 10.133

exclusions, 10.136

financial lease, 10.132

interbank transactions, 10.132

interest and, 10.135

interest margins, 10.126

lending of own funds and, 10.126

loans by holding companies, special purpose

entities, and other captive financial institutions

to their affiliates and, 10.127

negative FISIM, 10.134

numerical example of calculation of,

Box 10.5

pure interest and, 11.74–11.75

rate variations, 10.128

reference rate, 10.129

repos 10.132

Financial leases

contracts, leases, and licenses distinguished

from 5.60

debt liability at the inception of, 5.59

definition, 5.56

examples of, 5.57

goods under 3.46

interest issues, 11.73

international investment position, 7.57

numerical example, Box A6b.1

operating leases distinguished from, 5.60,

10.155

resource leases distinguished from, 5.60

topical summary, A6b

treatment of, 5.58

Financial liabilities. See also Classifications of

financial assets and liabilities; International

investment position; Other changes in financial

assets and liabilities account

categories of, 5.17–5.18

currency of denomination, 3.102

link between financial assets and liabilities

classification and functional categories, Table 6.1

net recording, 3.114–3.118

time of recording of, 3.54–3.59

valuation of positions of, 3.84–3.91

Financial or finite risk reinsurance

definition, 5.61

Financial services. See also Financial intermediation

services charges indirectly measured

asset management costs taken out of income,

10.124–10.125

charges for, 10.119

coverage of, 10.118

dealer or market-maker service charges,

10.122–10.123

excluded from 10.136

explicit charges, 10.120–10.121

financial intermediation services charges indirectly

measured, 10.126–10.135

implicit asset management service charges 10.125

margins on buying and selling transactions,

10.122–10.123

Fines and penalties

late payment of taxes, 12.31

time of recording 3.51, 12.18

treatment of, 12.54

FISIM. See Financial intermediation services charges

indirectly measured

Flexible corporate structures with little or no physical

presence

features of, 4.50

purposes used for, 4.51

treatment of as separate institutional units, 4.52

Flows

definition, 3.2, 3.3

direct investment, 6.25–6.36

intellectual property, 10.138 Table 10.4

net recordings, 3.114–3.117

other flows, 3.19–3.22

time of recording of, 3.32–3.55

transactions, 3.4–3.18

FOB. See Free on board

Foreign AffiliaTes Statistics

AMNE statistics and, A4.1

Foreign currency

circulation, 5.38

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

333

currency conversion principles 3.104

debt instrument denominated in 3.88

derivatives: notional value of contracts with

nonresidents, Appendix 9: Table I–1b,

Appendix 9: Table I–2b

unit of account, 3.95–3.97

Foreign direct investment. See Direct investment

Forward-type contracts

credit derivatives, 5.93

definition, 5.88

futures, 5.89

inception of 5.90

international investment position, 7.36

issues associated with, 5.91–5.95

margins, 5.94

option contracts and, 5.86

swap contracts, 5.91–5.92

Framework for Direct Investment Relationships

(FDIR)

control and influence, 6.14

description, 6.8

domestic ownership links and, 6.35

identification of direct investment relationships

under FDIR, Box 6.1

investment funds and, 6.30

Free on board

freight services, 10.78–10.79

general merchandise valuation, 10.30, 10.32, 10.34

nonmonetary gold and, 10.50

Freight and insurance

data by partner economies, 4.151

Freight insurance

description, 10.116, A6c.10

Freight services

coverage and valuation, 10.78

numerical examples of the treatment of, Box 10.3

rerouting 10.79

time of recording 10.79

Frozen assets

description, 6.110

Functional categories

changes in, 9.17

description and features of, 6.1–6.7

direct investment, 6.8–6.53, 11.96–11.102

employee stock options, 6.58–6.60

financial derivatives (other than reserves),

6.58–6.60

link between financial assets and liabilities

classification and functional categories, Table 6.1

other investment, 6.61–6.63

portfolio investment, 6.54–6.57, 11.103–11.105

primary income account and, 11.95–11.110

reserve assets, 6.64–6.114

understanding cross-border financial flows and

positions and, 6.3

Gambling

estimating services of, 10.171

services included, 10.170

treatment of as transfers, 12.25–12.26

GATS. See General Agreement on Trade in

Services

General Agreement on Trade in Services

activities of multinational enterprises statistics

and, A4.4

General government

central bank activities performed by, 4.69–4.70

composition of, 4.92

definition, 4.91

government entities resident abroad, 4.93

principal functions, 4.91

residence issues, 4.138

restructuring agencies, 4.94–4.95

subsectors of, 4.92

General merchandise

customs data and, 10.18

definition, 10.13

deliveries between affiliated enterprises, 10.24

general trade, 10.25

goods for own use or to give away acquired by

travelers, 10.20

goods for resale acquired by travelers while on

visits, 10.19

goods on consignment 3.46, 3.65, 10.29

high-value capital goods 10.28

international merchandise trade statistics and,

10.14

items to be excluded because there is no

international transaction, 10.22

items to be excluded because they are included

elsewhere, 10.23

items to be included, 10.17–10.21

re-exports, 10.37–10.39

re-imports, 10.40

shuttle trade 10.19

special trade, 10.25

time of recording, 10.26–10.29

valuation, 10.30–10.36

Gifts

as capital transfers, 13.31

as current transfers, 12.57

as goods and services flow, 10.4

included in general merchandise 10.17, 10.21

Index

334

taxes on, 13.28

Global enterprise groups. See also Activities of

multinational enterprises statistics

description, 4.54–4.55

valuation, 7.16

Globalization

Manual revision theme, 1.32

Gold

gold bullion included in monetary gold, 4.162

gold coins and commemorative coins, 5.37

nonmonetary, 5.78, 10.49

Gold accounts

allocated, 5.76, 6.79, 6.82

unallocated, 5.77, 6.78–6.83

Gold bullion

claims and, 5.6

financial asset 5.9

monetary gold and, 4.162

monetization and demonitization of, 9.18

as reserve assets, 6.78–6.82

Gold swaps

definition, 5.55

Golden shares

control of corporations 4.109

Goods

definition, 10.7

financial lease arrangements, 3.46, 3.72

general merchandise, 10.13–10.40

geographic allocation of transactions in,

A3.26–A3.28

gold coins and commemorative coins, 5.37

goods under merchanting, 10.41–10.49

international merchandise trade statistics and,

3.45, 10.14–10.16

nonmonetary gold, 10.50–10.54

on consignment, 3.46, 3.65, 10.29

other goods, 10.41–10.54

reconciliation between merchandise trade

data and total goods on a balance of

payments basis, 10.55–10.56

residence of the seller or purchaser, 4.150

sent abroad for processing, 3.47

time of recording of transactions, 3.44–3.46

Goods and services account

distinction between goods and services,

10.6–10.10

e-commerce and, 10.10

overview of, 10.1–10.12, Table 10.1

price and volume data, 10.12

transactions between affiliated enterprises, 10.11

Government

direct investor, 6.22

goods and services supplied by and to government

and international organization enclaves,

10.174–10.177

investment grants and, 13.25–13.26

uncompensated seizures of assets by, 9.11

Government entities resident abroad

description, 4.93

Government finance statistics

international accounts and, 2.34

Government Finance Statistics Manual 2001

classification of taxes, 13.28

the Manual and, 1.6, 1.24

Government goods and services n.i.e.

borderline between taxes and payments for, 10.181

coverage 10.173

goods and services acquired by staff employed in

enclaves and their dependents, 10.178

goods and services supplied by and to government

and international organization enclaves,

10.174–10.177

other services supplied by and to governments,

10.179

technical assistance, Box 10.6

Government licenses and permits

services included, 10.180–10.181

Gross recording

definition, 3.112

financial account (supplementary basis) 8.9

Guest workers. See Highly mobile individuals

Guide to the International Banking Statistics, 1.27

Harmonized System

commodity classifications, 10.15

Hedge funds

description, 4.75

Highly mobile individuals

as residents of households, 4.126–4.127

Historic cost

definition, 3.88

Holding companies

activities, 4.84–4.85

description, 4.84

financial intermediation services charges indirectly

measured and, 10.127

Horizontal double-entry bookkeeping

description, 3.28

Households

change in residence of individuals, 4.165

crews of ships, aircraft, oil rigs, space stations, or

other similar equipment,, 4.122

cross-border workers, 4.125

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

335

definition, 4.14. 4.20, 4.96

diplomats, military personnel, and other civil

servants employed abroad, 4.123

family members and, 4.96

highly mobile individuals, 4.126–4.127

international organization staff, 4.124

nonprofit institutions serving. See Nonprofit

institutions serving households

patients, 4.121

refugees, 4.128

residence of, 4.116–4.130

residence principles applied to individuals, 4.129

selected effects of a household’s residence status

on the statistics of the host economy, Table 4.3

size and forms of, 4.97

students, 4.120

subsectors, 4.99

treatment in international accounts statistics, 4.130

HS. See Harmonized System

IIP. See International investment position

Illegal transactions

description, 3.5

Immediate direct investment

definition, 6.12

reinvested earnings on direct investment

and, 11.40

Imputation of transactions

description, 3.18

investment income attributable to

policyholders, 11.78

IMTS. See International merchandise trade statistics

IMTS: Concepts and Definitions, 10.14, 10.16, 10.25,

10.27, 10.32, 10.56

general merchandise data source, 10.14

In kind transactions

definition, 3.14

direct investment flows, 8.17

valuation of, 3.79

Index-linked instruments

classification by type of interest rate, 5.113

currency of denomination, 11.50

Index-linked securities

definition, 5.49

interest issues, 11.59–11.65

numerical example of calculation of interest

accrual on an index-linked bond—broad-based

index, Box 11.3

numerical example of calculation of interest

accrual on an index-linked bond—narrowly

based index, Box 11.4

Indirect direct investment

definition, 6.12

Inflation

interest under high inflation, 11.76

Influence. See Control and influence

Information services

services included, 10.146

Institutional sectors

BPM6 classification of, Table 4.2

currency unions and, A3.20

definitions of institutional sectors and subsectors,

4.62–4.112

economic objectives, 4.57

financial corporations, 4.63–4.90

general government, 4.91–4.95

general principles, 4.57–4.61

households, 4.96–4.99

nonfinancial corporations, 4.62

nonprofit institutions serving households, 4.100–4.101

public corporations, 4.108–4.112

rest of the world, 4.102–4.107

SNA classification of, Table 4.1

Institutional units with cross-border elements

branches, 4.26–4.33

flexible corporate structures with little or no

physical presence, 4.50–4.52

joint ventures, 4.45–4.46

multiterritory enterprises, 4.41–4.44

notional resident units for land and other natural

resources owned by nonresidents, 4.34–4.40

other unincorporated enterprises, 4.49

quasi-corporations identified prior to incorporation,

4.47

trusts, 4.48

Insurance, pension, and standardized guarantee

schemes

adjustments for claims volatility, A6c.21–A6c.22

claims payable, A6c.20

claims receivable or payable, A6c.28

definition, 5.62, A6c.1–A6c.3

exports and imports of insurance services,

A6c.24–A6c.25

gross premiums earned, A6c.17–A6c.18

investment income attributable to insurance

policyholders, A6c.26

investment income attributable to policyholders in,

11.77–11.84

life insurance and annuity entitlements, 5.65

net insurance premiums, A6c.27

nonlife insurance technical reserves, 5.64

pension entitlements, 5.66–5.67

premium supplements, A6c.19

Index

336

provisions for calls under standardized

guarantees, 5.68

reinsurance, A6c.8, A6c.23

role of reserves, A6c.12–A6c.14

services of, 10.109–10.116

topical summary, A6c.1–A6c.44

value of insurance service output, A6c.15–A6c.23

Insurance corporation(s)

classification of, 4.88

definition, 4.88

Insurance technical reserves

changes in the volume of, 9.24

financial account entries, 8.46–8.49

international investment position, 7.63–7.64

Integrated economic accounts, overview, Table 2.2

Intellectual property

charges for the use of, 10.137–10.140

time of recording, 10.139

treatment of, Table 10.4

Intercompany lending

definition, 6.26–6.27

Interest

classification of debt instruments (variable or

fixed) 5.109 – 5.114

currency of denomination, 11.50

debt securities, 11.52 – 11.66

definition, 11.48

fees on securities lending and gold loans, 11.67–11.68

financial intermediation services charges indirectly

measured and, 10.135

financial leases, 11.73

fixed-rate, 5.110–5.112

fixed-rate versus index-linked instruments, 11.50

high inflation and, 11.76

investment income accrued while securities are

under reverse transactions, 11.69

loans, deposits, and accounts receivable/payable,

11.51

nonperforming debt, 11.70–11.72

primary income account and, 11.48–11.76

pure interest (excluding FISIM), 11.74–11.75

recording on an accrual basis, 11.49

revaluations and, 9.34–9.35

variable-rate, 5.110, 5.112–5.114

International accounts

accrual accounting and, 3.39–3.40

accumulation accounts, 2.20–2.21

balance of payments, 2.12–2.13

capital account, 2.16

correspondence between SNA and international

accounts items, Table A7.1

current account, 2.14–2.15

Data Quality Assessment Framework, Box 2.2

financial account, 2.17–2.18

framework for, 2.2–2.7

government finance statistics, 2.34

gross and net recording, 2.19

integrated recording of positions and transactions,

2.22–2.23

international investment position, 2.8–2.11

link between instrument and functional categories,

Table 2.3

linkages and consistency with other data sets,

2.29–2.30

linkages within, 2.27–2.28

metadata, dissemination, standards, and data

quality, 2.37–2.39

monetary and financial statistics, 2.32–2.33

national accounts and, 2.31

net errors and omissions, 2.24–2.26

numerical example, 2.35–2.36

overview of, Table 2.1

overview of integrated economic accounts, Table 2.2

relationship of the SNA accounts for the rest of the

world to the international accounts, A7.1–A7.9

satellite accounts and other supplemental

presentations, 2.42–2.43

structure of, 2.2–2.36

time series, 2.40–2.41

International business companies

description, 4.50

International investment position

accounting identities, 14.4–14.13

analysis issues, 14.1–14.66

balance sheet approach, 14.57–14.66

balance sheet mismatches, 14.63

classification of, 7.12–7.13

concepts and coverage, 7.1–7.13

debt-for-development swaps, A2.39

debt-for-equity swaps, A2.36

debt prepayment and debt buybacks, A2.47

debt rescheduling or refinancing, A2.12, A2.19

definition, 2.8, 7.1

direct investment, 7.14–7.25

economic assets, 7.10–7.11

employee stock options, 7.33 – 7.34, 7.39

financial assets and liabilities and, 3.25

financial derivatives (other than reserves), 7.33–7.38

financial leases, 7.57

functional categories, 2.11

guidance on aspects of aspects of, 7.9

insurance technical reserves, 7.63–7.64

integrated international investment position

statement, Table 7.1

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

337

integrated statement, 2.10

international accounts element, 2.2

national balance sheet and, 2.9

new money facilities, A2.63

off-balance-sheet liabilities, 7.74

other investment, 7.40–7.68

overnight deposits, 7.62

overview of, Table 7.2

pension entitlements, 7.65–7.66

portfolio investment, 7.26–7.32

positions and transactions with the IMF, 7.75–7.83

presentation of data, 7.5–7.6

reserves, 7.69–7.73

reverse transactions, 7.58–7.61

securities repurchase agreement recording, 7.58–7.61

sources of financial vulnerability, 14.62

standard components and selected other items,

Appendix 9

standardized guarantees, 7.67–7.68

valuation of nonnegotiable instruments, 7.40–7.56

International Investment Position: A Guide to Data

Sources, 7.9

International merchandise trade statistics

general merchandise data source, 10.14

goods covered by, 10.16

reconciliation between merchandise source data

and total goods on a balance of payments basis,

Table 10.2

reconciliation with total goods on a balance of

payments basis, 10.55–10.56

International Monetary Fund. See also Special

drawing rights; specific publications

Committee on Balance of Payments Statistics, 1.25,

1.28–1.43

Coordinated Direct Investment Survey, 4.146

Coordinated Portfolio Investment Survey, 4.146

credit and loans from, 7.79–7.80

General Arrangements to Borrow, 6.85

Loans to, 6.85, 6.92

New Arrangements to Borrow, 6.85

No. 1 Account, 7.80, 7.82

No. 2 Account, 7.82

positions and transactions with, 7.75–7.83

Poverty Reduction and Growth Facility loans, 7.79

quotas, 7.75–7.76

remuneration of members on basis of reserve

tranche position, 7.81

reserve position in, 6.85, 7.77–7.78

reserve tranches, 6.85

Trust Accounts, 6.86, 6.92

International organizations

capital contributions to, 13.32

characteristics of, 4.103

direct investment and, 6.32

economic territory of, 4.7

enterprises and, 4.107

global or regional, 4.104

goods and services supplied by and to government

and international organization enclaves,

10.174–10.177

as institutional sectors, 4.106

investment grants and, 13.25–13.26

regional, 4.142–4.143

residence issues, 4.105, 4.139–4.141

staff as residents of households, 4.124

International Reserves and Foreign Currency

Liquidity: Guidelines for a Data Template,

1.27, 7.9

International Standard Industrial Classification of

All Economic Activities

Activities of multinational enterprises statistics,

A4.14

direct investment, 6.50

holding companies, 4.84–4.85

International Transactions in Remittances: Guide for

Compilers and Users, 1.27

Interpretation

update procedure, 1.40

InterSecretariat Working Group on National Accounts,

1.40–1.41

Investment fund(s)

definition, 5.28

direct investment and, 6.30

distinguishing feature, 5.19

feeder fund, 6.30

fund of funds, 6.30

investment income attributable to shareholders in,

11.37–11.39

master-feeder fund arrangements, 6.30

master fund, 6.30

money market funds, 5.28–5.29

non-money market funds, 5.28

reinvestment of earnings in, 8.28

specialized role in financial intermediation, 5.20

Investment grants

description, 13.25

installment payment of, 13.26

Investment income

accrued while securities are under reverse

transactions, 11.69

attributable to direct investors on their equity,

11.40

attributable to investment fund shareholders,

11.37–11.39

Index

338

attributable to policyholders in insurance,

standardized guarantees, and pension funds,

11.77–11.84

definition, 11.3

functional asset categories and, 11.95–11.110

imputation of, 3.18

interest, 11.48

ISIC. See International Standard Industrial

Classification of All Economic Activities

Islamic banking instruments

financial assets and liabilities and, 5.16

ISWGNA. See InterSecretariat Working Group on

National Accounts

Joint ventures

description, 4.45

as quasi-corporations, 4.46, 7.23as quasi-corporations, 4.46, 7.23, 7.23

Joint zones

as economic territories, 4.10

League of Nations

Balance of Payments and International Investment

Position Manual, 6th edition and, 1.18

Leases. See also Financial lease(s), operating lease(s)

capital account and, 13.11–13.16

as nonproduced nonfinancial assets, 13.11–13.16

Liabilities. See Financial liabilities

Licenses

capital account and, 13.11–13.16

charges for the use of intellectual property,

10.137

computer services, 10.143

government licenses, 10.189

as nonproduced nonfinancial assets, 13.11–13.16

Life insurance and annuities

compared with nonlife insurance, A6c.11,

A6c.29–A6c.30

description, A6.3

processes included, 10.110

services included, 10.109

supplementary breakdown of services, 10.112

total value of services, 10.111

value of insurance output, A6c.31–A6c.34

Life insurance and annuity entitlements

description, 5.65

investment income attributable to policyholders

in, 11.81

Loan loss provisions (bad debt), 7.54

Loans. See also Nonperforming loans

concessional interest rates, 12.51, A2.67–A2.68

current international cooperation and, 12.51,

A2.67–A2.68

definition, 5.51

deposits distinguished from, 5.40

examples of, 5.51

fees on securities lending and gold loans, 11.67–11.68

financial leases, 5.56–5.60

financial or finite risk reinsurance, 5.61

gold swaps, 5.55

interest on, 11.51

loans from IMF, 7.79–7.80

reclassification of traded loans as securities, 5.45

as reserve assets, 7.69

securities repurchase agreements, 5.52–5.54

tradable, 9.14

valuation, 3.70

Local enterprise groups

“arm’s length” transactions, 4.54

description, 4.54, 4.55

uses of, 4.56

Lotteries

services, 10.171

transfers, 12.25–12.26

Maintenance and repair services n.i.e.

services included, 10.72

value recorded for, 10.73

Manual. See Balance of Payments and International

Investment Position Manual, 6th edition

Manual on Statistics of International Trade in

Services, 1.27, 10.60, A4.5

Manufacturing services on physical inputs owned

by others

definition, 10.62

examples of processes, 10.63, Box 10.1

manufacturing of goods on own account and, 10.71

recording of related goods movements,

10.67–10.69

recording of related purchases and sales of goods,

10.65–10.66

value, 10.70

Margin(s)

calls in cash under a repo, 5.53

definition, 5.94

nonrepayable, 5.94

on buying and selling transactions, 10.122–10.123

repayable, 5.94

Market prices

definition, 3.67, 3.68

Maturity of debt instruments

classification by, 5.103 – 5.105

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

339

direct investment and, 6.48

long-term maturity, 5.103

original maturity, 5.104–5.105

remaining maturity, 5.104–5.105, Appendix 9:

Table IV

short-term maturity, 5.103

Memorandum items

definition, 1.15

Merchanting

definition, 10.41

examples of goods under merchanting and

manufacturing services on physical inputs

owned by others (processing services),

Box 10.1

of nonmonetary gold, 10.49

recording goods, 10.43

resale of goods to a resident of the same economy

and, 10.48

treatment of, 10.44–10.45

uses of, 10.42

Mergers and acquisitions

financial account recording, 8.18

Military personnel. See Diplomats, military

personnel, and other civil servants employed

abroad

Mining services

services included, 10.152

Miscellaneous current transfers

definition, 12.52

fines and penalties, 12.54

lotteries and other gambling, 12.25–12.26

to NPISHs, 12.53, A5.15–A5.16

payments of compensation, 12.55–12.56

personal transfers, 12.21–12.24, 12.27, A5.7–A5.8

MMFs. See Money market funds

Monetary and financial statistics

international accounts and, 2.32–2.33

Monetary and Financial Statistics Manual 2000,

1.6, 1.24, 1.33

Monetary authorities

definition, 6.66

Monetary gold

as a reserve asset, 6.76–6.78, 7.69

classifying unallocated gold accounts as, 9.19

definition, 5.74, 6.78

gold accounts, 5.76–5.77

gold bullion included in, 4.162, 5.75

relationship to nonmonetary gold, 5.78

Monetary transactions

definition, 3.14

Money lenders. See Captive financial institutions and

money lenders

Money market fund(s). See also Non-MMF

investment funds

definition, 4.73, 5.29

share transfers, 4.73

MSITS. See Manual on Statistics of International

Trade in Ser vices

Multinational enterprises. See Global enterprise groups

Multiterritory enterprises

currency unions and, A3.19

description, 4.41

prorating formulas for taxation, 4.43–4.44

Mutual agreements

description, 3.4, 3.9

illegal transactions and, 3.5

National accounts

international accounts and, 2.31

Natural disasters. See also Compensation for damages

current international cooperation and, 12.47

debt service moratoriums and, A2.61–A2.62

Natural resources

international transactions in land, 13.10

resources included, 13.9

Net recording. See also Aggregation and netting

definition, 3.112

Netting. See Aggregation and netting

New money facilities

accounting for, A2.63–A2.64

NGOs. See Nongovernmental organizations

1993 SNA. See System of National Accounts 1993

Nominal value

definition, 3.88

revaluations and, 9.33

uses for, 9.33

valuation and other flows, 3.83

Nominee accounts and custodians

data by partner economies, 4.160

Non-MMF investment funds

closed-ended, 4.74

definition, 4.74

hedge funds, 4.75

investment in other funds, 4.74

investment of proceeds, 4.74

open-ended, 4.74

Nonfinancial corporations

definition, 4.62

Nongovernmental organizations

debt-for-development swaps and, A2.38–A2.39

debt-for-equity swaps and, A2.24

Nonlife insurance

claims, 12.44–12.45, 13.24

Index

340

compared with life insurance, A6c.29–A6c.30

exports of services of, 10.113

freight insurance, 10.116

imports of services of, 10.114

investment income attributable to policyholders

in, 11.80

net premiums on, 12.41–12.43

numerical example of calculations for, Box A6c.1

numerical examples of the calculation of nonlife

insurance services, Box 10.4

reinsurance imports, 10.115, A6c.23

service charge calculation, 10.111

types of, A6c.7–A6c.11

value of insurance output, A6c.15 – A6c.22

Nonlife insurance technical reserves

description, 5.64

Nonmonetary gold

allocated gold accounts and, 10.51

forms of, 10.50

holdings of, 10.53

merchanting of, 10.49

recording of, 10.52

relationship to monetary gold, 5.78

unallocated gold accounts and, 10.51

Nonmonetary transactions

definition, 3.14

Nonnegotiable instruments

deposits and other accounts receivable/payable, 7.55

fair value and, 7.45, 7.48–7.49

loan loss (bad debt) provisions, 7.45, 7.54

metadata on indicators of impairment, 7.56

nominal value, 7.40–7.44

nonperforming loans, 7.45, 7.50–7.53

valuation of, 7.40 – 7.56

Nonparticipating preferred stocks

as debt securities, 5.46

Nonperforming loans

arrears on debt repayments, 11.71

definition, 7.50

interest issues, 11.70–11.72

loan loss provisions and, 7.54

replacement loans, 7.53

three-month (or 90-day) criterion, 7.52

valuation of, 7.51

Nonproduced nonfinancial assets

acquisition and disposal of, 13.8–13.18

assets included, 13.8

contracts, leases, and licenses, 13.11–13.16

emissions permits, 13.14

environmental cleanup efforts, 13.14

natural resources, 13.9–13.10

recording in the capital account, 13.1

time share arrangements, 10.100, 13.16

timing of recording of, 3.53

Nonprofit institutions serving households

capital contributions to, 13.32

current transfers to, 12.53

definition, 4.100

direct investment and, 6.23

examples of, 4.100

financing sources, 4.101

residence issues, 4.144

total remittances and transfers to, 12.27

treatment of flows between two NPISHs as

transfers, 12.10

Notional resident units for land and other natural

resources owned by nonresidents

branches and, 4.37–4.38

identification of for statistical purposes, 4.34

operations of, 4.36

rent and, 11.88

resource leases and, 4.35

time share accommodation arrangements,

4.40, 10.100

NPISHs. See Nonprofit institutions serving households

OECD. See Organization for Economic Cooperation

and Development

OECD Benchmark Definition of Foreign Direct

Investment, 1.27, 1.34, 4.55, 4.157

activities of multinational enterprises statistics, A4.5

direct investment, 6.8, 6.14, Box 6.1, 6.18, 6.49,

7.18, 8.18, A6a

international investment position, 7.9, 7.18

OECD Handbook on Economic Globalisation

Indicators, A4.5

Off-balance-sheet liabilities

not recognized as liabilities in the IIP, 7.74

One-off guarantees

accrual of interest, 11.72

capital transfers of, 13.27

contingent liabilities, 5.12,

definition, 5.68

explicit charges for, 10.120

financial account reporting, 8.42–8.45

Operating leases

capital account and, 13.12

characteristics of, 10.154

definition, 10.153

distinguished from, 10.155

dwellings and other buildings, 10.157

excluded from, 10.156

financial leases and, 5.60, 10.155

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

341

leases included under contracts and, 10.155

notional unit and, 11.88

resource leases and, 10.155

services included, 10.156

Option contracts

call option and, 5.85

credit derivatives, 5.93

definition, 5.85

financial account reporting, 8.35–8.3

forward-type contracts and, 5.86

margins, 5.94

other changes, 9.30

strike price and, 5.85

supplementary detail, 5.95

valuation of, 7.34–7.35

warrants, 5.87, 7.34

Organization for Economic Cooperation and

Development (OECD)

Commercial Interest Reference Rate, A2.67

Other accounts receivable/payable

definition, 5.69

income from, 11.68, 11.89, 11.106

other category, 5.73

trade credit and advances, 5.70–5.72

valuation of, 9.33

Other business services

“outsourcing” and, 10.160

professional and management consulting services,

10.149–10.150

research and development services, 10.147–10.148

technical, trade-related, and other business

services, 10.151–10.160

Other changes in financial assets and liabilities

account. See also Other flows concepts and

coverage, 9.1–9.6. See also Other changes in the

volume of financial assets and liabilities,

9.7–9.24, and Revaluation, 9.25–9.35

accumulation accounts, 2.20

definition, 3.19, 9.1

international investment position, 2.10, Table 7.1

overview, Table 9.1

time of recording of, 3.60

transactions between two resident institutional

units, 3.7, 9.16

valuation of, 3.81–3.83

Other changes in the volume of financial assets and

liabilities

cancellation and write-offs, 9.8–9.12

change in contractual terms, 9.15

definition, 9.7

financial assets and liabilities of persons and other

entities changing residence, 9.21–9.23

functional category changes, 9.17

insurance reserves, pension entitlements, and

provisions for standardized guarantee

schemes, 9.24

monetization and demonitization of gold

bullion, 9.18

reclassification of unallocated gold accounts,

9.19–9.20

reclassifications, 9.13–9.20

tradable loans, 9.14

transactions in existing assets, 9.16

Other current transfers

compulsory payments to international or

supranational authorities, 12.58

gifts and donations of a current nature, 12.57

Other deposits

definition, 5.43

Other equity

definition, 5.26

initial subscriptions to a CUCB’s capital, A3.44

rare cases of, 7.24

other investment category and, 6.61, 6.62

Other financial intermediaries, except ICPFs

captive financial institutions and money lenders

and, 4.82

classification of, 4.77

definition, 4.76

securitization, 4.78

Other flow(s). See also Other changes in financial

assets and liabilities account, 9.1–9.35

changes in net worth, 3.27

classification of, 3.20

definition, 3.19, 9.1

overview, Table 9.1

time of recording of, 3.60

valuation of, 3.81–3.83

Other investment

allocation of SDRs, 6.61, 8.50

capital subscriptions to international organizations

not readily available, 6.106

change of contractural terms, 8.54

classes of financial assets and liabilities

included, 6.61

credit and loans from the IMF, 7.79

currency and deposits, 5.36–5.43

definition, 6.61

exclusions from income, 11.107

financial account reporting, 8.42–8.54,

Table 8.1

financial leases, 7.57

“frozen” reserve assets, 6.110

income from, 11.106–11.108, Table 11.3

Index

342

insurance technical reserves, pension and annuity

entitlements, and standardized guarantee

reserves, 7.63–7.68, 8.46–8.49

international investment position, 7.40–7.68, Table 7.1

one-off guarantees and other debt assumption,

8.42–8.45

other accounts receivable/payable, 5.73

other equity and, 6.61, 6.62, 7.24

overnight deposits, 7.62

securities repurchase agreements and other reverse

transactions, 6.88, 7.58–7.61

trade credit and advances, 5.70–5.72

valuation of nonnegotiable instruments in position

data, 7.40–7.56

Overnight deposits

definition, 7.62

Parallel currency exchange rates

description, 3.108

Paris Club agreements

debt concessionality and, A2.67

debt rescheduling and refinancing and,

A2.10–A2.22

Heavily Indebted Poor Countries Initiative, A2.67

special cases, A2.58–A2.60

Partitioning transactions

description, 3.15–3.17

Partner data. See Data by partner economies

Partner economies. See Data by partner economies

Partnerships

other equity and, 5.26

other investment income, 11.107

public-private partnerships, 4.111

as quasi-corporations, 4.17, 11.26

Pass-through funds

definition, 6.33

direct investment and, 4.157, 6.33–6.34, 6.44

Passenger services

services included, 10.76–10.77

Patients

as residents of particular categories, 4.120–4.121

Pension entitlement(s). See also Pension fund(s)

adjustment for change in, 12.38–12.39

calculation of value, 7.66

changes in the volume of, 9.24

classification of, 5.62, 5.66, 6.61, A6c.39

contribution supplements and, 11.81, 12.34–12.39,

A6c.41

defined benefit schemes, 7.65

defined contribution schemes, 7.65

definition, A6c.39

description, 5.66

economy of residence and, 5.66

financial account reporting, 8.46, 8.48–8.49

investment income attributable to policyholders in,

11.77–11.84, A6c.41

recording of, 12.37

retained earnings and, 11.34

social security schemes and, 5.67

treatment of as financial assets, 12.37–12.38

Pension fund(s). See also Pension entitlement(s)

auxiliary insurance services, 10.117

definition, A6c.39

financial account reporting, 8.46–8.49

imputation, 3.18

institutional sectors, 4.89–4.90, 4.141

insurance and pension services, 10.109–10.113,

10.117, A6c.40

international investment position, 7.65–7.66

investment income attributable to policyholders in,

11.77–11.84, Table 11.1

social contributions to, 12.33–12.35, A6c.38

social security schemes and, 4.90

Periodical subscriptions. See Information services

Personal, cultural, and recreational services

audiovisual and related services, 10.162–10.166

education services, 10.169

exclusions from, 10.172

gambling services, 10.170–10.171

health services, 10.168

other personal, cultural, and recreational services,

10.167–10.172

overview, Table 10.1

services included, 10.161

Personal remittances. See also Personal transfers

definition, 12.27

description, A5.10

household-to-household transfers, A5.11

remittances included, A5.12–A5.13

supplementary items related to, A5.9

tabular presentation of, Table A5.2

Personal transfer(s). See also Personal

remittances

borderline to, 12.9

concept of residence, 12.23, A5.20

definition, 12.21, A5.7

funds sent abroad by individuals, 12.24

joint bank accounts and, 12.24

lotteries and other gambling, 12.26

overview, Table 12.1, Table A5.1

personal remittances, 12.27, A5.10–A5.13

tabular presentation of, Table A5.2

total remittances, 12.27, A5.14

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

343

total remittances and transfers to NPISHs, 12.27,

A5.15–A5.16

transfers included, 12.21

workers’ remittances and, 12.22, A5.8

Personal travel

definition, 10.94

subcomponents of, 10.94

Pledged assets

description, 6.107

examples of, 6.108

reserve assets and, 6.107–6.109

Pooled assets

as reserve assets, 6.99–6.101

Portfolio investment. See also Coordinated Portfolio

Investment Survey Guide

bonus shares, 8.33

buy-sell spread, 10.122

capital subscriptions to international organizations

not readily available, 6.106

convertible bonds, 8.29

debt defeasance, 8.30–8.31

debt-for-equity swap, A1.9–A1.13, A2.29–A2.37

debt instruments with accrued interest, 7.27

debt securities, 5.44–5.50

debt securities at nominal values, 7.30

deep-discount bonds, 7.32

definition, 6.54

description, 6.5, 6.55–6.56

equity and investment fund shares, 5.19–5.30

exclusions, 6.55

financial account recording, Table 8.1, 8.27–8.33

income from, Table 11.1, 11.103–11.105

international investment position, 7.26–7.32, Table 7.1

“intra” transactions in currency unions, A3.24

negotiability and, 6.54

presentation of data, 6.57

reinvestment of earnings in investment funds, 8.28

securities transferred under repurchase agreements,

6.88, 7.58–7.61

share and debt buybacks, 8.32

short positions, 7.28

unlisted debt and equity securities, 7.29

valuation of, 3.84–3.91

zero-coupon bonds, 7.31

Positions. See also International investment position

additional analytical position data, Appendix 9

definition, 3.2, 3.23

gross reporting, 3.119

other changes in financial assets and liabilities,

chapter 9

positions and transactions with the IMF, Annex 7.1

valuation of, 3.84–3.91

Postal and courier services

recording of, 10.85

services included, 10.82–10.84

transport, 10.74

Poverty Reduction and Growth Facility loans

purpose of, 7.79

PRGF loans. See Poverty Reduction and Growth

Facility loans

Primary income. See also Primary income account

adjustments for FISIM, 10.135

definition, 11.3

time of recording, 3.48

types of, 11.3, 11.8–11.94

Primary income account

compensation of employees, 11.10–11.23

direct investment income, 11.96–11.102

dividends and withdrawals from income of

quasi-corporations, 11.24–11.32

employers’ social contribution, 11.22

gross domestic product and gross national income

and, 11.4

income on investment between fellow enterprises,

11.100

income on reserve assets, 11.109–11.110

income on reverse investment, 11.99

interest, 11.48–11.76

investment income and functional categories,

11.95–11.110

investment income attributable to policyholders

in insurance, standardized guarantees, and

pension funds, 11.77–11.84

other investment income, 11.106–11.108

overview, 11.1–11.7, Table 11.1

portfolio investment income, 11.103–11.105

reinvested earnings, 11.33–11.47

rent, 11.85–11.90

secondary income account and, 11.5, 12.2

structure of, 11.6

taxes and subsidies on products and production,

11.91–11.94

transfer pricing, 11.101–11.102

types of primary income, 11.3, 11.8–11.94

Production

cross-border production arrangements, Box 10.2

definition, 10.3

delivered from a base, 4.136

residence of enterprises, 4.131–4.133

services and, 10.8

taxes and subsidies on products and production,

11.91–11.94

Professional and management consulting services

disguised dividends, 10.150

Index

344

other business services, 10.147–10.160

reimbursements of ancillary services, 10.150

services included, 10.149

Property income

asset management costs, 10.119

definition, 11.3

Public corporation

definition, 4.108

economy of location, 4.112

indicators for, 4.109–4.110

public-private partnerships, 4.111

Public-private partnerships

description, 4.111

Pure interest

adjustments for FISIM, 10.135

financial services and, 10.136

primary income account and, 11.74–11.75

Quadruple-entry bookkeeping

description, 3.29

symmetry of reporting by counterparties and,

3.122

Quasicorporations

definition, 4.16, 4.49

dividends and withdrawals from income of,

11.24–11.32, Table 11.2

identified prior to incorporation, 4.47

international investment position, 7.23–7.25

joint ventures, 4.46

notional resident units for land and other natural

resources owned by nonresidents and,

4.34, 4.39

other equity, 5.26, 7.24

partnerships, 4.17

production location and, 4.133

split into separate institutional units and, 4.164

types of, 4.16

valuation of equity in quasicorporations, 7.25

Quotas

International Monetary Fund, 7.75–7.76

Re-exports

definition, 10.37

price of, 10.37

recording of, 10.37–10.40, Box 10.2

state of the imported goods substantially

transformed, 10.38

supplementary item, 10.39

Re-imports

description, 10.40

Real estate investment

direct investment and, 6.31

Reclassifications

change in residence and, 9.21–9.23

conditions for, 9.13

“frozen” reserve assets, 6.110

Recreational services. See Personal, cultural, and

recreational services

Refinancing. See Debt rescheduling or refinancing

Refugees

as residents of households, 4.128

Regional arrangements

aggregation and netting, 3.121

centralized and decentralized currency unions,

A3.13–A3.15

currency unions, A3.5–A3.48

currency union central bank (CUCB), A3.11–A3.15

customs arrangements, A3.55–A3.68

economic unions, A3.49–A3.54

growth in, A3.1

methodological issues relevant for different types

of regional cooperation, Table A3.1

multilateral settlements, A3.73–A3.74

recording principles, A3.54, A3.70–A3.76

region selection, A3.75–A3.76

regional statements, A3.3, A3.69–A3.76

Reinsurance. See Insurance

Reinvested earnings. See also Retained earnings

adjustments for transfer pricing and, 11.102

with chain of ownership, 11.47, Box 11.1

direct investment and, 8.15–8.16, 11.40–11.47,

11.97, Table 11.2, Box 11.5

exclusions from, 11.44

implications of different treatments of retained

earnings, 9.32

imputation of retained earnings, 3.18

investment between fellow enterprises and, 11.100

negative, 11.39, 11.46

numerical example of calculation of reinvested

earnings of a direct investment enterprise,

Box 11.5

primary income account and, 11.33–11.47, Table 11.1

reinvested earnings on direct investment, 11.40–11.47

reinvestment of earnings, 8.15–8.16

reinvestment of earnings in investment funds, 8.28

retained earnings, 11.34

retained earnings of investment funds, 11.38

reverse investment and, 11.99

treatment in international accounts, 11.33–11.47

undistributed earnings of branches, 11.42

Remittances

compensation of employees, A5.6

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

345

components required for compiling remittance

items and their source, Table A5.1

data by partner economies, A5.30

economic concept of, A5.1–A5.8

importance of, A5.1–A5.8

investment by migrants, A5.17–A5.18

to NPISHs, 12.27, A5.15–A5.16

personal, 12.27, A5.10–A5.13

personal transfers, A5.7–A5.8

related data series, A5.17–A5.19

residence and, A5.20–A5.25

standard components, A5.5

supplementary data items, A5.9–A5.16

tabular presentation of the definitions of

remittances, Table A5.2

timing of recording, A5.29

total, 12.27, A5.14

travel and, A5.19

valuations, A5.26–A5.28

workers’ remittances, 12.22

Rent

accrual basis for recording, 11.89

definition, 11.85

distinction between rent and rental, 10.153, 10.157

examples of, 11.86

primary income account and, 11.85–11.90,

Table 11.1

resource leases, 11.85

Rerouting transactions

description, 3.16

Research and development services

CPC and Frascati definitions, 10.148

services included, 10.147

Reserve assets

analytic presentation, 14.16–14.17

analytic presentation of the balance of payments

Table 14.1

assets owned by the monetary authorities that do

not meet the criteria to be classified as, 6.113

availability for use and further clarification issues,

6.69–6.75, 6.113–6.114

avoiding double counting, 6.68

central bank swap arrangements, 6.102–6.104

classification of, 6.76–6.92

components of, Box 6.5

control conditions, 6.67–6.68

currency unions and, A3.29–A3.30, A3.41

currency unions and economies that adopt another

currency and, 6.114

data on income on, 11.109–11.110, Table 11.1

definition, 6.64

deposits, 6.86, 7.69

exceptional financing, A1

financial account reporting, 8.55–8.57, Table 8.1

financing a current account deficit and, 14.30,

14.33, 14.47, 14.53–14.55

foreign assets that do not qualify as, 6.105–6.112

“frozen” assets, 6.110

international investment position, Table 7.1,

7.69–7.70, 7.72–7.73

monetary authorities and, 6.66

monetary gold, 5.74–5.77, 6.78, 7.69 9.18–9.20

pledged assets and, 6.107–6.109

pooled assets, 6.99–6.101

positions and transactions with the IMF, Annex 7.1

purpose of, 6.71

reserve position in the IMF, 6.85, 7.72, 7.77–7.78

residence, 6.65

selected cases, 6.93–6.104

special drawing rights, 5.34, 6.84, 7.70, 7.83, 8.50

special purpose government funds, 6.93–6.98, 7.73

valuation of, 7.69

Reserve-related liabilities

components of, Box 6.5

definition, 6.115

liabilities included, 6.116

memorandum/supplementary items: position data,

Appendix 9: Table V

SDR allocations, 6.116

short-term, 6.115

Reserves. See Reserve assets

Residence

application of residence principles, 4.129–4.130

assets and liabilities held by groups that include

both residents and nonresidents, 4.145

changes in residence of institutional units,

4.165–4.168

currency unions and, A3.17–A3.19

data by partner economies, 4.146–4.164

definition, 4.113

economic unions and, A3.52–A3.53

enterprises, 4.131–4.137, Table 4.4

financial assets and liabilities of persons and other

entities changing residence, 9.21–9.23, 13.30

general government, 4.138

general principles, 4.113–4.115

households, 4.116–4.130, Table 4.3

international organizations, 4.139–4.141

international students and patients, 4.120–4.121

issues associated with, 4.145–4.168

nonprofit institutions serving households, 4.144

notional resident units, 4.34–4.40

other institutional units, 4.138–4.144

overview, 4.115

Index

346

regional international organizations, 4.142–4.143

remittances and, A5.20–A5.25

reserve asset and, 6.65

Resident artificial subsidiaries

description and attributes, 4.18–4.19

Resource lease(s)

definition, 11.85

description, 5.60

financial leases and, 5.60

natural resources, 13.9

operating leasing and, 10.155

Rest of the world

correspondence between SNA and international

accounts items, 2.31, Table A7.1

description, 4.102

international organizations, 4.103–4.107

relationship of the SNA accounts to the

international accounts, A7.1–A7.9

Restructuring agencies

description, 4.94

government funding and, 4.95

Retained earnings. See also Reinvested earnings

definition, 11.34

description of, 11.33–11.47

implications of different treatments of retained

earnings, 9.32

imputation of retained earnings, 3.18

retained earnings of a direct investment

enterprise, 11.45

retained earnings of investment funds, 11.38

Revaluations

approximation of, 9.28

changes in the value of derivatives and employee

stock options, 9.12, 9.30–9.31

common causes of, 9.25

debt reorganization, 9.29

definition, 3.20, 9.25

due to changes in market-yields, 9.34–9.35

example of calculation of revaluation due to

exchange rate changes, Box 9.1

exchange rate changes and other price

changes, 9.27

inconsistency between market and nominal

valuation, 9.33

separation of exchange rate and other price

changes, 9.28

treatment of retained earnings not imputed, 9.32

Reverse investment

data on, 6.41

definition, 6.40, Box A6a.1

directional principle and, 6.44, Box 6.4

examples of, 6.39

income on, 11.99, Table 11.2

Reverse transactions

definition, 7.58

financial account reporting, 8.52

international investment position, 7.58–7.61

investment income accrued while securities are

under reverse transactions, 11.69

Round tripping

definition, 6.46

Salaries. See Compensation of employees

Satellite accounts

definition, 2.43

SDRs. See Special drawing rights

Secondary income account

components and structure, 12.4, Table 12.1

components required for compiling remittance

items and, Table A5.1

concepts and coverage, 12.5–12.19

current account balance, 12.3

current transfers, 12.14

definition, 12.1

description, 12.1–12.58

distinction between current and capital transfers,

12.12–12.15

overview, 12.1–12.4, Table 12.1

primary income account and, 11.5, 12.2

recording and valuation of transfers, 12.16–12.19

transactions: exchanges and transfers, 12.6–12.11

transfers, 12.7

types of current transfers, 12.20–12.58

Sectors. See Institutional sectors

Securities. See also Debt securities

asset-backed securities, 5.47

definition, 5.15

fees on securities lending and gold loans, 11.67–11.68

included in, 6.87

investment income accrued while securities are

under reverse transactions, 11.69

legal ownership of, 5.15

lending, 5.54

negotiability, 5.15

reserve assets, 6.87–6.90

residence of the issuer, 4.155

securitization, 4.78

stripped securities, 4.158, 5.50

time of recording, 3.55

valuation of, 3.90

Securities repurchase agreements

definition, 5.52

description, 5.52–5.54

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

347

financial account reporting, 8.52

international investment position, 7.58–7.61

repos and reverse repos, 5.52, 6.89

reserve assets and, 6.88–6.90

reverse transactions, 7.58–7.61

voting power and, 6.19

Securitization

definition, 4.78

Services

agricultural, 10.152

borderline between taxes and payments of charges

for services, 10.181

charges for the use of intellectual property n.i.e.,

10.137–10.140, Table 10.4

classification, 10.61–10.181

concepts and coverage, 10.57–10.60

construction, 10.101–10.108

definition, 10.8

financial services, 10.118–10.136

gambling activities and, 10.170–10.171

government goods and services n.i.e.,

10.173–10.181

government licenses, permits, etc, 10.180

insurance and pension services, 10.109–10.117

maintenance and repair service n.i.e., 10.72–10.73

manufacturing services on physical inputs owned

by others, 10.62–10.71, Box 10.1, Box 10.2

other business services, 10.147–10.160

“outsourced” services, 10.59, 10.160

overview, Table 10.1

personal, cultural, and recreational services,

10.161–10.172

professional and management consulting services,

10.149–10.150

research and development services, 10.147–10.148

supplementary items, 10.67, 10.87, 10.93–10.96,

10.112, 10.160

technical, trade-related, and other business

services, 10.151–10.160

telecommunications, computer, and information

services, 10.141–10.146

time of recording transactions, 3.47, 10.57

transaction activities, 3.10

transport, 10.74–10.85

travel, 10.86–10.100

Shell companies

description, 4.50

Shuttle trade

definition, 10.19

Social benefits

concept of total remittances and, 12.24, A5.14

secondary income account recording, 12.40

Social contributions

accrued but not yet paid, 5.73

calculating the amount of, 12.33–12.34

concept of personal remittances and, 12.27, A5.10,

Table A5.1

as current transfers, 12.32–12.39

definition, 11.22, 12.32

employers’ actual and imputed contributions, 12.36

employers’ social contributions, 11.22–11.23

recording of, 12.32

rerouting and, 3.16

Social security schemes

general government operation of, 11.22

pension entitlements and, 5.67

pension funds and, 4.90

social contributions to, 12.33

Software. See Computer services

Sovereign wealth funds

as reserve assets, 6.93–6.98

supplementary item for foreign assets not included

in reserve assets, 7.73

Sovereignty zones. See Joint zones

Special drawing rights

allocation of, 6.116

counterparty to SDR holdings and SDR

allocations, 4.163

definition, 5.34, 6.84

financial account reporting, 8.50–8.51

holders of, 5.34–5.35

interest on, 11.110

international investment position, 7.69–7.72

as reserve assets, 6.84, Table 6.1, Box 6.5,

7.69–7.70

reserve-related liabilities, 6.115–6.116

valuation of, 7.69

Special purpose entities

description, 4.50

FISIM and, 10.127

pass-through funds and, 6.33

residence, 4.115, 4.134

as wealth-holding entities, 4.87

Special purpose government funds. See also Sovereign

wealth funds

international investment position, 7.73

as reserve assets, 6.93–6.98

supplementary item for foreign assets not included

in reserve assets, 7.73

Special zones

as economic territories, 4.8, Box 10.2

SPEs. See Special purpose entities

Standard components

balance of payments, Appendix 9

Index

348

definition, 1.15

international investment position, Appendix 9

Standard International Trade Classification

commodity classifications, 10.15

Standard presentation of data

in contrast to “analytical” presentation, 14.16

description, 14.15

satellite accounts and other supplemental

presentations and, 2.42

selected exceptional financing transactions and,

Table A1.1, A1, A2

Standardized guarantees

changes in the volume of, 9.24

claims payable under, 12.46

contrasted with, 5.68

definition, 5.68

examples of, 5.68, A6c.43

financial derivatives and, 5.83

guarantees that are financial derivatives, 5.68

insurance and pension services, 10.109

investment income attributable to policyholders

in, 11.77–11.84, Table 11.1

net premiums on, 12.41–12.43

one-off guarantees, 5.12, 5.68

provisions for calls under, 7.63, 7.67–7.68, 8.46,

8.48–8.49, 12.46, A6c.44

types of, 5.68

Stripped securities

case examples, 5.50

data by partner economies, 4.158

definition, 5.50

function of, 5.50

interest and, 11.58

official strips, 11.58

unofficial strips, 11.58

Students

as residents of households, 4.120

Subsidiaries

definition, 6.15

resident artificial subsidiaries, 4.18

Subsidies on products and production

primary income account and, 11.91–11.94, 12.8,

Table 11.1

Summaries. See Topical summaries

Superdividends

financial account recording, 8.23

Supplementary items

definition, 1.15

Swap arrangements

as reserve assets, 6.102–6.104

Swap contract

currency swaps, 5.92

definition, 5.91

Sweep accounts. See Overnight deposits

SWFs. See Sovereign wealth funds

Symmetry of reporting by counterparties

quadruple-entry accounting system and, 3.122

sectoral and national aggregates, 3.123

System of National Accounts 1993

harmonization of BPM5 with, 1.23

update of, 1.29

System of National Accounts 2008

correspondence between SNA and international

accounts items, Table A7.1

institutional sector classification, Table 4.1

international accounts and, 2.5–2.6, 2.29, 2.31,

2.35–2.36

numerical example, 2.35–2.36, Table 2.1, Annex 2.2

overview of, Figure 2.1

relationship of the SNA accounts for the rest of the

world to the international accounts, A7.1–A7.9

the Manual and, 1.6, 1.35

Taxes

capital taxes, 13.28

current taxes on income, wealth, etc., 12.28–12.31

fines or penalties on late payment of, 12.31

impact of higher taxes, 14.9

primary income account and, 11.91–11.94, 12.8

refunds of taxes to taxpayers, 12.28

taxes and subsidies on products and production,

11.91–11.94

taxes other than those on products and production,

12.8

time of recording of, 3.50, 12.18

Technical, trade-related, and other business services

services included, 10.151

Technical services

waste treatment and depollution, agricultural, and

mining services, 10.152

Telecommunications services

services included, 10.142

telecommunications, computer, and information

services, 10.141

Time of recording

acquisitions and disposals of nonproduced

nonfinancial assets, 3.53, 13.6–13.7

alternative recording bases, 3.34–3.38

cash basis, 3.38

commitment basis, 3.37

determining the timing, 3.32–3.33

due-for-payment basis, 3.36

financial assets, 3.54–3.59

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

349

flows

other flows, 3.60

primary income, 3.48–3.49

remittances, A5.29

services, 3.47

taxes, 3.50, 12.18

timing adjustments, 3.61–3.66

transactions, 3.41–3.59

transactions involving general merchandise,

3.44–3.46, 10.28–10.29

transfers, 3.50–3.52, 12.17–12.18, 13.6

use of accrual basis in the international accounts,

3.39–3.60

Time series

international accounts, 2.40–2.41

seasonal adjustment of monthly and quarterly data,

2.41

Time share accommodation arrangements

capital account and, 13.16

notional resident units and, 4.40

range of, 10.100

treatment of alternative time-share arrangements,

Table 10.3

Topical summaries

direct investment, A6a.1–A6a.14, Box A6a.1

financial leases, A6b.1–A6b.3

insurance, pension schemes, and standardized

guarantees, A6c.1–A6c.44

Tourism Satellite Account: Recommended

Methodological Framework, 10.95

Tradable loans

conditions for, 5.45, 9.14

Trade credit and advances

definition, 5.70

description, 5.71

exclusions, 5.72

other investment income, 11.106

timing of recording, 8.10

Trade-related services

services included, 10.151, 10.158

Transactions

agents and, 4.149

aggregation and netting of, 3.109–3.121

balance of payments recording, 3.6

changes in financial positions other than, 9.1–9.35

classification of, 3.4

credit entries for, 3.11, 3.30

debit entries for, 3.11, 3.30

definition, 3.4

domestic, 3.7

exchanges or transfers, 3.13

in existing assets, 9.16

illegal, 3.5

imposed by operation of law, 3.4

imputation of, 3.18, 3.74

institutional sectors and, 4.60

monetary or nonmonetary transactions, 3.14

mutual agreements, 3.4, 3.9

partitioning, 3.17

rearranging for statistical purposes, 3.15–3.18

rerouting, 3.16

service activities, 3.10

time of recording, 3.41–3.59

types of, 3.12–3.14

valuation of, 3.68–3.80

Transfer pricing

direct investment and, 11.101–11.102

Transferable deposits

definition, 5.41

Transfers

borderline between transfers and exchanges,

3.13, 12.9

cash transfers, 12.7

commercial entities and, 12.11

contingent future benefits and, 12.8

debt forgiveness, A1.5–A1.6

definition, 12.7

distinction between current and capital transfers,

12.12–12.15

exceptional financing transactions, A1.5–A1.8

flows between two NPISHs, 12.10

other intergovernmental transfers, A1.7

recording and valuation of, 12.16–12.19

time of recording of, 12.17–12.18

transfers in kind, 12.7, 12.19

types of current transfers, 12.20

Transport

definition, 10.74

Transport services

classification of, 10.74

exclusions, 10.81

freight services, 10.78–17.79, Box 10.3

other transport services, 10.80

overview, Table 10.1

passenger services, 10.76–10.77

postal and courier services, 10.82–10.85

subcontracting to use the services of other

operators, 10.75

Travel credits

definition, 10.86

Travel debits

definition, 10.86

Travel services

arranged through providers, 10.98

Index

350

border, seasonal, and other short-term cross-border

workers, 10.89

business travel, 10.91–10.93

components of, 10.87–10.88

education or medical care and, 10.89

exclusions, 10.90

international students, patients and, 10.89

length of stay and, 10.96

nonresident owners of land and buildings and,

10.99, 11.88

overview, Table 10.1

personal travel, 10.94

remittances and, A5.19

services acquired during the visit but paid for

earlier or later, 10.97

supplementary items, 10.93, 10.95–10.96

time share arrangements, 10.100, Table 10.3

Trusts

2008 SNA. See System of National Accounts

2008

description, 4.48

other equity and, 5.26

nonprofit institutions serving households

(NPISHs), 4.100

wealth-holding entities, 4.87

Unallocated gold accounts

accounts indexed to gold and, 6.79

classification of, 9.19–9.20

definition, 5.77

deposit of gold bullion to, 6.80, 10.51

interest on, 11.109

out on swap by monetary authorities, 6.82

reclassification of, 9.19–9.20

reserve assets and, 6.79–6.83, Box 6.5

unallocated accounts for precious metals, 5.39

Unit of account

valuation of, 3.92–3.94

United Nations

IMTS: Concepts and Definitions, 10.16

Tourism Satellite Account: Recommended

Methodological Framework, 10.95

United Nations World Tourism Organization

International Recommendations for Tourism

Statistics, 10.95

Units

branches, 4.26–4.33

construction projects, 4.29

corporations, 4.14, 4.15–4.19

enterprises, 4.23

establishments, 4.53

flexible corporate structures with little or no

physical presence, 4.50–4.52

general principles, 4.13–4.24

identification of institutional units with cross-

border elements, 4.25–4.52

joint ventures, 4.45–4.46

local and global enterprise groups, 4.54–4.56

main attributes of, 4.13

multiterritory enterprises, 4.41–4.44

notional resident units for land and other natural

resources owned by nonresidents, 4.34–4.40

other unincorporated enterprises, 4.49

production delivered from a base, 4.30–4.33

quasi-corporations identified prior to

incorporation, 4.47

splitting and combining legal entities, 4.20–4.22

statistical units other than institutional units and

enterprises, 4.53–4.56

trusts, 4.48

types of, 4.14

variation from institutional unit definitions in

practice, 4.24

Valuation. See also International investment position

activities of multinational enterprises statistics,

A4.12

amortized value, 3.88

book value, 3.88

of construction, 10.107

currency conversion principles, 3.104–3.108

currency of denomination and currency of

settlement, 3.98–3.103

debt-for-equity swaps, A1.13

debt rescheduling or refinancing, A1.18

domestic versus foreign currency, 3.95–3.97

face value, 3.88

fair value, 3.88

general merchandise, 10.30–10.36

historic cost, 3.88

inconsistency of valuation between transactions

and positions, 9.33

market price as basis for, 3.67

nominal value, 3.88

nonnegiotable instruments, 7.40–7.56

other flows, 3.81–3.83

positions of financial assets and liabilities, 3.84–3.91

remittances, A5.26–A5.28

revaluation, 9.25–9.35

transactions, 3.68–3.80

transfer pricing, 3.77

transfers, 12.16–12.19

BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION MANUAL

351

unit of account, 3.92–3.94

unlisted and other equity, 7.15–7.19

Vertical double-entry bookkeeping

description, 3.27

Wages. See Compensation of employees

Warrants

description, 5.87

direct investment and, 6.19

Waste treatment services

services included, 10.152

Wealth-holding entities

description, 4.87

special purpose entities and, 4.87

trusts and, 4.87

Write-offs

changes in claims resulting from, 9.9

debt write-off, A2.66

debt write-off compared with debt forgiveness,

9.10, 13.23, A2.7

Zero-coupon bonds

international investment position, 7.31

numerical example of calculation of interest

accrual on, 11.55, Box 11.2

stripped securities and, 5.50

Index

Balance of

Payments and

International

Investment

Position Manual

Sixth Edition (BPM6)

Balance of Payments and International Investment Position Manual

Sixth Edition (BPM6)

Balance of Payments and International Investment Position Manual

IMF

Sixth Edition (BPM6)

2009

INTERNATIONAL MONETARY FUND