Balance of Payments

International Accounting Conventions

According to international accounting convention set by the IMF's "Balance of Payments and International Investment Position Manual":

In the Current Account;

  • Credit denotes entries from exports, primary income receivable, transfers receivable.
  • Debit is used to record entries for imports, primary income payable, transfers payable,
In the Capital Account;
  • Credit denotes entries from disposals of nonproduced nonfinancial assets.
  • Debit is used to record entries for acquisitions of nonproduced nonfinancial assets.
In the Financial Account;
  • Credit - an increase in an asset requires a positive entry, a decrease in a liability requires a negative entry.
  • Debit - an increase in a liability requires a positive entry, a decrease in an asset requires a negative entry.
I think that any international transaction should appear in one and only one of these accounts.

In line with international conventions the balance of payments breaks down as follows.

The BOP Current Account

The IMF Balance of Payments Manual defines international convention for the balance of payments. However summary descriptions are provided at;    
However these are infirior to that defined in the manual and can cause confusion.

The "current account" is all money transferred between national and international bodies in relation to transactions in;
  • Goods and Services
  • Salaries, Royalties and License fees
  • Investment income, i.e. dividends and interest
  • Taxes
  • Insurance claims
  • Unconditional transfers of money.
[para. 152 IMF Balance of Payments Manual] states:

Covered in the current account are all transactions (other than those in financial items) that involve economic values and occur between resident and nonresident entities. Also covered are offsets to current economic values provided or acquired without a quid pro quo. Specifically, the major classifications are goods and services, income, and current transfers.

The BOP Capital Account

The "capital account" is all money transferred between national and international bodies in relation to transactions in;
  • Physical material assets (with the exception of land and shares!)
[para. 175 IMF Balance of Payments Manual] states:

The major components of the capital account are capital transfers and acquisition/disposal of nonproduced, nonfinancial assets. Capital transfers consist of those involving transfers of ownership of fixed assets; transfers of funds linked to, or conditional upon, acquisition or disposal of fixed assets; or cancellation, without any counterparts being received in return, of liabilities by creditors. Capital transfers include two components: (i) general government, which is subdivided into debt forgiveness and other, and (ii) other, which is subdivided into migrants’ transfers, debt forgiveness, and other transfers. (See Chapter 15 for a discussion of the distinction between capital transfers and current transfers.)

Acquisition/disposal of nonproduced, nonfinancial assets largely covers intangibles—such as patented entities, leases or other transferable contracts, goodwill, etc. This item does not cover land in a specific economic territory but may include the purchase or sale of land by a foreign embassy. (See paragraph 312.)

This corresponds loosely to the changes i.e. debits and credits in the "Material Current Account" concept introduced in the four accounts above.
  • financial current account
  • financial credit/debt account
  • material current account
  • material credit/debt account
I think it fails in that it does not include land and because it does not include shares of enterprises both of which are material assets! 

The BOP Financial Account

This corresponds loosely to the changes i.e. debits and credits in the "Financial Credit/Debt Account" concept introduced in the four accounts above.
  • financial current account
  • financial credit/debt account
  • material current account
  • material credit/debt account
I think it fails in that it includes includes shares of enterprises which is a capital asset. It should only include credit and debt! 

The "financial account" is all money transferred between national and international bodies in relation to transactions in what are considered to be financial assets;
  • Direct investment - Shares where part of an enterprise is owned.
  • Portfolio investment - contracts secured on other assets (Equity and Debt securities)
  • Other investment - various contracts (i.e. financial instruments)
  • Reserve assets - monetary gold, Special Drawing Rights on the IMF, foreign exchange assets (currency, deposits, and
    securities), and other claims.
[para. 176 IMF Balance of Payments Manual] states:

The classification of standard components in the financial account is based on these criteria:

All components are classified according to type of investment or by functional subdivision (direct investment, portfolio investment, other investment, reserve assets).

For the category of direct investment, there are directional distinctions (abroad or in the reporting economy) and, for the equity capital and other capital components within this category, asset or liability distinctions.

For the categories of portfolio investment and other investment, there are the customary asset or liability distinctions.

Particularly significant for portfolio investment and other investment is the distinction by type of instrument (equity or debt securities, trade credits, loans, currency and deposits, other assets or liabilities). In this Manual, traditional and new money market and other financial instruments and derivatives are included in portfolio investment.

For portfolio investment and other investment, there are distinctions by sector of the domestic creditor for assets and by sector of the domestic debtor for liabilities. These distinctions serve to facilitate links with the income accounts, the international investment position, the SNA, and other statistical systems.

The traditional distinction, which is based on original contractual maturity of more than one year or one year or less, between long- and short-term assets and liabilities applies only to other investment. In recent years, the significance of this distinction has clearly diminished for many domestic and international transactions. Consequently, the long- and short-term distinction is accorded less importance in the SNA and in this Manual than in previous editions.

However, because the maturity factor remains important for specific purposes—analysis of external debt, for example—it is retained in this Manual for other investment.



© Tom de Havas 2011. The information under this section is my own work with the exception of the quoted work it may be reproduced without modification but must include this notice.







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