XI. THE FINANCIAL ACCOUNT
D. Accounting rules for financial transactions
1. Valuation
| 11.44. | Transactions in financial assets are recorded at the prices at which the assets are acquired or disposed of. These prices should exclude service charges, fees, commissions, and similar payments for services provided in carrying out the transactions; these should be recorded as payments for services. Taxes on financial transactions should also be excluded from the values recorded in the financial account and treated as taxes on services within taxes on products. In these respects, care should be taken that the same entry be recorded for both parties to the transaction. When a financial transaction involves a new issue of liabilities, the transaction should be recorded by both creditor and debtor at the amount of the liability incurred, i.e., exclusive of any fees, commissions, etc., and also exclusive of any prepaid interest that may be included in the price. Similarly, when a liability is reduced or extinguished, the entries in the financial account for both creditor and debtor must correspond to the reduction of the liability. When a security is issued at a discount, the proceeds to the issuer at the time of sale, and not the face value, are recorded in the financial account. The difference between the issue price and the face value is treated as interest that is accrued over the life of the instrument. A transaction in financial derivatives is recorded at its market value. When a financial derivative is settled in cash, a transaction in financial derivatives is recorded equal to the cash value of the settlement and no transaction in the underlying item is recorded (see also paragraph 11.36). When the underlying asset is delivered, a transaction in financial derivatives is recorded equal in value to the difference between the prevailing market price of the underlying asset and the strike price indicated in the derivative contract, times the quantity. The underlying asset is valued at the prevailing market price. | | | | |  This paragraph has been revised. Click here to see the original version |
| 11.45. | Financial transactions with respect to proprietors' net additions to the accumulation of quasi-corporate enterprises and changes in households' claims on insurance enterprises and pension funds raise complex issues of valuation that are treated in the relevant item under classification of these categories (paragraphs 11.86 and 11.89 to 11.95 below, respectively). |
| 11.46. | When securities are marketed by issuers through underwriters or other intermediaries and then sold at higher prices to final investors, the assets and liabilities should be recorded at the values paid by the investors. The differences between the amounts paid by the investors and those received by the issuers should be treated as service payments paid by the issuers to the underwriters. |
2. Time of recording
| 11.47. | In principle, the two parties to a financial transaction should record the transaction at the same point in time. When the counterpart to an entry in the financial account is non-financial, the time of recording of financial claims is to be aligned with the time of recording, in the other accounts of the SNA, the transactions that gave rise to the financial claim. For example, when sales of goods or services give rise to a trade credit, the entries in the financial accounts should take place when the entries are made in the relevant non-financial account, i.e., when ownership of the goods is transferred or when the service is provided. Similarly, when accounts receivable/payable arise from transactions related to taxes, compensation of employees, and other distributive transactions, the entries in the financial account should take place when the entries are made in the relevant non-financial account. |
| 11.48. | When all entries relating to a transaction pertain only to the financial account, they should be recorded when the ownership of the asset is transferred. This point in time is usually clear when the transaction involves the sale of existing financial assets. When the transaction involves the incurrence or redemption of a liability, both parties should record the transaction when the liability is incurred or redeemed. In most cases, this will occur when money or some other financial asset is paid by the creditor to the debtor or repaid by the debtor to the creditor. |
| 11.49. | In practice, the two parties of a financial transaction may perceive the transaction as being completed at different points in time. This is especially true when trade credits or other accounts payable/receivable are extinguished by final payments and there is a lag (float) between the point in time when payments are made and received. There are several stages at which creditors and debtors could record a transaction. The debtor could record the liability as being extinguished when the check or other means of payment is issued to the creditor. A substantial period of time may elapse before the creditor receives the means of payment and records the payment in his accounts. There may then be further time-lags between presentation of a cheque to a bank, cheque clearance, and final settlement of the transaction. Asymmetries in time of recording of this transaction are, therefore, likely to emerge unless the debtor records his transaction on a "cheques cleared" basis, a fairly uncommon accounting procedure. A financial claim exists up to the point that the payment is cleared and the creditor has control of the funds; this would be the optimal point in time for recording the transaction. The float, in practice, may be very large and may affect, in particular, transferable deposits, trade credits, and other accounts receivable; this effect is especially pronounced in countries where the postal system and bank clearing procedures are weak. When the float is significant and accounts for large discrepancies in reporting, it will be necessary to develop estimates of the size of the float in order to adjust the accounts. |
3. Basis of recording-netting and consolidation
| 11.50. | The degree of netting at which transactions in financial assets and liabilities should be recorded depends to a great extent on the analysis for which the data are to be used. In practice, the degree of netting will depend on how data can be reported, and reporting may vary substantially for different classes of institutional units. If detailed information on financial transactions is maintained and reported, gross presentations are possible; if transactions must be inferred from balance sheet data, a certain level of netting is inevitable. A number of degrees of netting can be identified:
(a) No netting or fully gross reporting in which purchases and sales of assets are separately recorded, as are incurrences and repayments of liabilities;
(b) Netting within a given specific asset, such as subtracting sales of bonds from acquisition of bonds and redemption of bonds from new incurrences of liabilities in the form of bonds;
(c) Netting within a given category of assets, such as subtracting all sales of securities other than shares from all purchases of such assets;
(d) Netting transactions in liabilities against transactions in assets in the same asset category; and
(e) Netting transactions in groups of liability categories against transactions in assets in the same groups. |
| 11.51. | In the SNA, transactions are recorded in the financial account as net acquisition of assets and net incurrence of liabilities. As the financial account is broken down by main categories of financial assets, the desirable degree of netting would correspond to paragraph 11.50 (c) above, netting within a given category of assets. However, it is clear that, when data are collected on as gross a basis as possible, they can be netted to whatever degree is necessary for a particular use; when data are collected net, they cannot be grossed up. In general, netting beyond the level described in paragraph 11.50 (c) above would hinder the usefulness of the financial accounts for tracing how the economy mobilizes resources from institutional units with positive net lending and transmits them to net borrowers. For detailed flow of funds analysis, gross reporting or netting at level paragraph 11.50 (b) above would be desirable, particularly for analysis of securities, but netting at level paragraph 11.50 (c) above would still provide useful information on financial flows. |
| 11.52. | Consolidation in the financial account refers to the process of offsetting transactions in assets for a given grouping of institutional units against the counterpart transactions in liabilities for the same group of institutional units. Consolidation can be performed at the level of the total economy, institutional sectors, and subsectors. Different levels of consolidation will be appropriate for different types of analysis. For example, consolidation of the financial accounts for the total economy emphasizes the economy's financial position with the rest of the world since all domestic financial positions are netted on consolidation. Consolidation for sectors permits the tracing of overall financial movements between sectors with positive net lending and those with net borrowing and the identification of financial intermediation. Consolidation only at the subsector level for financial corporations can provide much more detail on intermediation and allow, for example, the identification of the central bank's operations with other financial intermediaries. |
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