Balance of payments reporting updates
Balance of Payments Manual 6
Why new rules for compiling the balance of payments and the international investment Position?
In order to ensure international data comparability, the OeNB has to follow international standards for external statistics in respect of form, scope and structure, as laid down in the Balance of Payments Manual (BPM) issued by the International Monetary Fund (IMF) for all countries of the world. Based on these benchmarks, external statistics in Europe are regulated in detail for EU Member States by the European Commission via a regulation and by the ECB via a guideline on external statistics.
Since the last edition of the Manual, the 5th edition, which was released in 1994, the world economy has undergone considerable change due to new information technologies and the liberalization of capital flows. These phenomena, which can be summarized under the term “globalization” and have transformed both world trade and international capital movements, have been reflected in the 6th edition of the Balance of Payments Manual. The relevant legal acts in Europe were amended accordingly by the ECB in 2011 and by the European Commission in 2012.
In contrast to BPM5, the 6th edition covers not only balance of payments transactions but also the international investment position. The most relevant presentational changes related to foreign direct investment (FDI) and to goods and services. Several nomenclature changes were introduced mostly to increase consistency with national accounting practices and to better reflect reality. Moreover, the list of financial assets/liabilities was expanded somewhat.
In the EU, the move to BPM6 took place in the course of 2014. The OeNB started publishing data according to the new standards with the reporting period 2014 Q2 at the end of September 2014. This changeover coincided with the implementation of the 2010 version of the European System of Accounts (ESA 2010).
Changes to goods and services
The biggest changes resulting from the implementation of BPM6 concerned the goods and services account. For some kinds of services, the IMF introduced more detailed breakdowns. These requirements serve the needs of both GATS negotiations with the WTO and of national accounts compilation, as the balance of payments is the main source for the rest-of-the-world account in GDP compilation. Corporate economic activities are now better matched to the type of service, and e-commerce transactions are now reflected more adequately. “Charges for the use of intellectual property not included elsewhere” replaced the term “royalties and license fees” in the services account, and the outright purchase or sale of patents and licenses was moved from the capital account to R&D services. Moreover, charges for the use of intellectual property must now be specified according to the underlying type of intellectual property (trademarks and franchising contracts, computer software, results stemming from R&D activities, artistic rights).
Additional changes expected to have a major impact are:
In BPM 6, “offshoring” – i.e., the relocation of a business process from one country to another – is accounted for as a key feature of globalization. In those instances where part of the production process has been moved abroad (“Manufacturing services on physical inputs owned by others”), the subsequent export and import of the merchandise used to be recorded under goods in BPM5. Under the new regime, this business case is classified as a fee for the rendering of processing services, because the goods do not change economic ownership. A similar treatment was adopted for the cross-border repair of goods (e.g. maintenance of airplanes). The treatment in BPM6 reduced gross exports and imports of goods, and increased exports or imports of services.
In contrast to the treatment of goods for processing, merchanting of goods was reclassified from services to goods. The purchase of goods was classified as a negative export of goods from the merchant’s economy, and the sale of goods was classified as a positive export of goods, with the difference between sales and purchases having the same effect on the total current account as before.
Cross-border insurance and pension services are recognized more explicitly in BPM6. Cross-border services in this area used to be treated in a more simplified way than domestic services. The more sophisticated method introduced by BPM6 entails a more detailed breakdown of the value added of different insurance branches as well as a more detailed compilation of financial assets and liabilities (e.g. insurance technical reserves) based on balance sheet data.
With regard to the treatment of financial sector transactions, the IMF continued to harmonize the balance of payments and national accounts concept. Specifically, implicit charges for loans and deposits (financial intermediation services) were separated from interest income and shifted to financial services; the same applies to the margins of financial dealers and market-makers. Dealers in financial instruments may charge, in full or part, for their services by using a spread between their buying and selling prices. In the past, these spreads were typically not recognized as a form of service charge transactions.
BPM6 also takes into account trade in CO2 emission rights, which have to be recorded as a transfer of assets.
Changes to financial account, international investment position (IIP) and income frameworks
Several nomenclature changes were introduced mostly to increase consistency with national accounting practices, such as the new terms “primary income” and “secondary income.” “Primary income” corresponds to the concept of ‘income’ plus some BPM5 ‘current transfers’ items (taxes on production and imports, subsidies and rents), whereas “secondary income” corresponds broadly to ‘current transfers’ in BPM5 plus ‘personal transfers,’ which includes all current transfers in cash or in kind between resident households and nonresident households, independent of the source of income and the relationship between the households.
In general, institutional sector and financial assets/liabilities classifications were aligned more broadly with the corresponding national accounts classifications (e.g. “bonds and notes” and “money market instruments” are now referred to as “long-term debt securities” and “short-term debt securities”). The subsectors of the financial corporations sector are a prime example of the more detailed classification of economic sectors.
Monetary Financial Institutions
- S.121 Central Bank
- S.122 Other Monetary and Financial Institutions
- S.123 Money market funds
Other Financial Institutions
- S.124 Non-Money-Market Investment Funds
- S.125 Other financial intermediaries
- S.126 Financial auxiliaries
- S.127 Captive financial institutions
Insurance corporations and pension funds
- S.128 Insurance corporations
- S.129 Pension Funds
In the financial sector context, holding companies without management activities were moved from the sector of nonfinancial corporations to the financial sector.
Foreign direct investment
The most relevant change in the recording of foreign direct investment (FDI) was the move to the “gross” (assets/liabilities) concept in the standard presentation of outward and inward FDI. This means that all direct investment assets are recorded separately from all direct investment liabilities, without any netting according to the direction of the investment. This increases both the net acquisition of financial assets and the net incurrence of liabilities.
Nevertheless, the old presentational style according to the directional principle, reflecting direct investments by the reporting country abroad and by nonresidents in the reporting country on a net basis, was retained as an instrument for more detailed analyses. The main difference between the two presentational styles stems from the treatment of “reverse investments,” e.g. receivables of a foreign subsidiary vis-à-vis the parent (in the reporting country). Under the assets/liabilities concept, these receivables add to the payables of the reporting country, whereas according to the directional principle, they are subtracted from outward FDI.
Financing between fellow enterprises was reclassified in BPM6 from other investment to direct investment. The concepts of direct investor and direct investment enterprise remain broadly unchanged, whereas ‘fellow enterprises’ are any entities under the control or influence of the same immediate or indirect investor which do not control or influence each other (i.e. they are not themselves in a direct investment relationship). According to the extended directional principle, the assets and liabilities between fellows were allocated to inward and outward direct investment depending on the residency of the ultimate parent.
Intercompany shares like minor equity positions of the parent held by subsidiaries or fellow enterprises have to be recorded under BPM6. With the exception of loan financing between fellow enterprises, only minor quantitative effects were expected to arise from these changes. Under BPM6, intercompany banking loans, intercompany derivatives and intercompany clearing accounts are the only items that will not be added to direct investments.
In order to enhance the analytical value of FDI data, special purpose entities (SPEs, aka special purpose vehicles, SPVs), i.e., entities owned by foreigners without economic activity whose majority of assets consists of foreign equity holdings, have to be recorded separately. Also, it is recommended that inward direct investments are recorded according to the ultimate beneficiary principle. Finally, it should be noted that mergers and acquisitions are distinguished from other forms of foreign direct Investments.
In the area of portfolio investment, a major change related to the treatment of accruals in case of mutual funds. All income generated through investment funds shares, irrespective of whether it is distributed or not, is recorded as attributable to shareholders, either as actually distributed income (dividends) or reinvested earnings. (In practice, the treatment of the income generated by investment funds shares is similar to that on foreign direct investment.)
Furthermore, the recording of maturities changed: BPM6 rules require both original and remaining maturities of bonds to be displayed. In addition to that, outward portfolio investments are to be recorded according to issue currency and economic sector of the foreign issuer.
The biggest change in other investment stems from the different treatment of fellow enterprises. As mentioned above, financing between fellow enterprises is to be recorded under direct investments according to BPM6 and not under other investments as before.
New allocations (or cancelations) of special drawing rights (SDRs) are recorded as ‘net incurrences of liabilities’ by monetary authorities. Transactions in other equity are not included in direct investment (e.g. equity participations in international organizations) but separately identified in other investment.
Moreover, receivables and payables from provisions for insurances (including reinsurances), pensions and standardized guarantees have to be recorded separately and in more detail. These items should have been recorded indistinctively under other assets/liabilities under BPM5. The same applies for the BPM6 item other equity (equity not part of direct or portfolio investment like participation in limited liability companies below 10% of voting rights).
No relevant changes were established with BPM6 on transactions in reserve assets. However, some clarifications were introduced regarding the treatment of gold accounts. The most important change was the breakdown between allocated and unallocated gold (i.e. physical gold vs. gold accounts).