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 classified into (a) those that are associated with transactions and (b) other flows.

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, positions 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 financial claims and, by convention, monetary gold held in the form of gold bullion (including gold held in allocated 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 liability. 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 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.

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 transactor. 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 economy. 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 liabilities provides net worth. In the international accounts, net international investment position provides a measure of net financial claims with nonresidents plus gold bullion 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 bookkeeping is useful for compiling accounts that reflect the mutual economic relationships between different institutional 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 consistency 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 vertical and horizontal double-entry bookkeeping results in a quadruple-entry bookkeeping, which is the accounting system underlying the recording of transactions in the national accounts and international accounts. Additionally, definitions, classifications, and accounting 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 bookkeeping, 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 inconsistencies 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 transactions in the international accounts is needed for bilateral 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 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 acquisitions 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 liabilities. 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, consolidation, and netting assets against liabilities are described in Section F.

1. Alternative recording bases

3.34 Broadly, the time of recording could be determined 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 statistical 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, irrespective of whether cash was received or paid or was due to be received or paid. When an economic event is accompanied 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 financial 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 timing of the events giving rise to the actual resource flows. With the cash basis, the time of recording would potentially 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 transactions 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 comprehensive information because all resource flows are recorded, including nonmonetary transactions, imputed transactions, 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 borrowing) are defined. It is also close to business accounting.

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 merchandise trade statistics may be necessary because these statistics may not reflect changes in economic ownership. Moreover, they may not always reflect physical movements 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 possible difference of one or more months between the shipment or receipt of goods and the change of ownership 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 practices, 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 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, preferably 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 provides 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 transactions. Alternative information should be used routinely to verify or adjust selected transaction categories. Compilers using an exchange record system should check each large settlement transaction. Information on interest from either the payments records or debt service schedule may not be appropriate for accrual accounting. Other possibilities of deriving interest accrual, such as using the data on positions and contractual interest rates, should be explored and implemented.

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 definition, a market price refers only to the price for one specific exchange under the stated conditions. A second exchange of an identical unit, even under circumstances 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 supposedly identical exchanges rather than a price actually applying to a specific exchange. Furthermore, a market price should not necessarily be construed as equivalent to a free market price—that is, a market 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 liabilities are recorded according to the general principles described in paragraph 3.68. In particular, transactions in loans, deposits, and other accounts receivable/payable also should be valued at market prices. Transactions 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 financial asset and liability, under appropriate categories. The valuation of transactions in financial instruments, which excludes commission charges (recorded as transactions in services), differs from the valuation of nonfinancial 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 currently 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 adjustments for quality and other differences.

3.72 Some cases in which market prices are not available or pose specific problems include barter transactions, 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 market price of the goods or services at the time of transfer. Cost of acquisition also may be used in certain situations, 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 estimated written-down current acquisition values of fixed assets or the present value of expected future returns.

3.73 Market valuation also poses problems for transactions in goods in which the contracts establish a quotation 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 transactions in reinvested earnings are derived from the direct investors’ shares in the net saving of the direct investment enterprise before reinvested earnings are distributed. 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 government 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 transactions 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. Therefore, 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 transactions between affiliated enterprises. In some cases, transfer pricing may be motivated by income distribution 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 treatment of transfer pricing between affiliated enterprises is elaborated in paragraphs 11.101–11.102.

3.78 The exchange of goods between affiliated enterprises often may be one that does not occur between independent parties (e.g., specialized components that are usable only when incorporated in a finished product). Similarly, the exchange of services, such as management 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 entities not engaged in purely commercial undertakings are often subject to noncommercial considerations. Transfers 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 transactions captured in the single exchange need to be partitioned (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 conversion. 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 capture changes in the international investment position of financial assets and liabilities that are not due to transactions. Holding gains and losses arise from changes in market values of positions of financial assets and liabilities. 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 during 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 values 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 financial instruments that are valued at nominal values, the value recorded in the other changes in financial assets and liabilities account should correspond to their nominal value prior to being written off. For all reclassifications of assets and liabilities, values of both the new and old instruments should be the same.

3. Valuation of positions of financial assets and liabilities

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).

3.85 Valuation according to the market-value equivalent is needed for valuing financial assets and liabilities that are not traded in financial markets or that are traded only infrequently. For these assets and liabilities, 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 pragmatic concerns about data availability and the need to maintain symmetry between debtors and creditors. In addition, because loans are not intended for negotiability, 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 estimate. It is recognized that nominal value provides an incomplete view of the financial position, particularly when the loans are nonperforming. Therefore, information on the nominal value of nonperforming loans should be included as a memorandum or supplementary item (see paragraph 7.50 for the definition of nonperforming 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 corporations 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.

1. 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.

2. Nominal value refers to the outstanding amount the debtor owes to the creditor, which is composed of the outstanding principal amount including any accrued interest. So the nominal value reflects the sum of funds originally advanced, plus any subsequent advances, plus any interest that has accrued, less any repayments (which includes any payments covering interest accrual).⁴ Nominal value in domestic currency of a debt instrument denominated in foreign currency also includes holding gains or losses arising from exchange rate changes.

3. Amortized value of a loan reflects the process 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.

4. 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 market value of a bond may be greater or less than face value, depending on the interest rate payable 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).

5. 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.

6. 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 accounting standards that do not fully reflect the market 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 service of the dealer, paid by buyers and sellers (see paragraphs 10.122–10.123). Similarly, positions in financial assets and liabilities denominated in foreign 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 financial 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